MENTOR CORPORATION
5425 Hollister Avenue
Santa Barbara, California 93111
Telephone: (805) 681-6000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 12, 1996
NOTICE IS HEREBY GIVEN THAT the Annual Meeting of Shareholders of
Mentor Corporation, a Minnesota corporation (the "Company") will be held
Thursday, September 12, 1996 at 10:00 a.m. (Central Daylight Time) at the
Radisson Plaza Hotel, 35 South 7th Street, Minneapolis, Minnesota, to consider
and take action upon the following matters:
1. To elect a Board of Directors to serve until the next Annual
Meeting, or until their successors are elected;
2. To approve an amendment to the Company's 1991 Stock Option
Plan (the "Option Plan") to increase the total number of
authorized shares of Common Stock, par value $.10 per
share, reserved under the Option Plan, from 2,000,000 shares
to 5,000,000 shares;
3. To ratify the appointment of Ernst & Young LLP to act as
independent auditors of the Company for the fiscal year
ending March 31, 1997; and
4. To transact such other business that may properly come before
the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on July 16, 1996
as the record date for the determination of the shareholders entitled to vote at
the meeting or any adjournment thereof. A list of stockholders entitled to vote
at the Annual Meeting will be available for inspection at the executive offices
of the Company.
BY ORDER OF THE BOARD OF DIRECTORS
Anthony R. Gette
Secretary
Dated: August 7, 1996
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. HOWEVER, WHETHER OR NOT YOU
PLAN TO BE PERSONALLY PRESENT AT THE MEETING, PLEASE MARK, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY REVOKE
YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING. IF YOU ATTEND THE ANNUAL
MEETING AND VOTE BY BALLOT, YOUR PROXY WILL BE REVOKED AUTOMATICALLY AND ONLY
YOUR VOTE AT THE ANNUAL MEETING WILL BE COUNTED.
MENTOR CORPORATION
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PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 12, 1996
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SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished to the shareholders of Mentor
Corporation (the "Company"), in connection with the solicitation by the
Company's Board of Directors of the enclosed proxy for use at the Annual Meeting
of Shareholders to be held Thursday, September 12, 1996, at 10:00 a.m. (Central
Daylight Time) at the Radisson Plaza Hotel, 35 South 7th Street, Minneapolis,
Minnesota, or at any adjournment(s) thereof (the "1996 Annual Meeting") for the
purposes set forth in the Notice of Annual Meeting of Shareholders. All Common
Stock represented by proxies in the form solicited will be voted, but proxies
may be revoked at any time before being exercised by delivery to the Secretary
of the Company of a written notice of revocation of the proxy's authority or a
duly executed proxy bearing a later date. You may also revoke your proxy by
attending the Annual Meeting and voting in person. A shareholder who attends the
Annual Meeting need not revoke his or her proxy and vote in person, unless he or
she wishes to do so.
Expenses in connection with the solicitation of proxies will be paid by
the Company. Proxies are being solicited primarily by mail, but, in addition,
directors, officers and regular employees of the Company may solicit proxies
personally, by telephone or by special letter.
So far as the management of the Company is aware, no matters other than
those described in this Proxy Statement will be acted upon at the meeting. In
the event that any other matters calling for a vote of shareholders properly
come before the Annual Meeting, the persons named as proxies in the enclosed
form of proxy will vote in accordance with their judgment on such other matters.
The Annual Report of the Company, including financial statements, for
the fiscal year ended March 31, 1996 is being furnished to each shareholder with
this Proxy Statement.
The principal executive offices of the Company are located at 5425
Hollister Avenue, Santa Barbara, California 93111. The approximate mailing date
of this Proxy Statement and the accompanying form of proxy is August 7, 1996.
RECORD DATE AND VOTING OF SECURITIES
The Common Stock of the Company, par value $.10 per share, is the only
authorized voting security of the Company. Only the holders of the Company's
Common Stock whose names appear of record on the Company's books on July 16,
1996 will be entitled to notice of, and to vote at, the 1996 Annual Meeting. At
the close of business on July 16, 1996, a total of 24,914,692 shares of Common
Stock were outstanding, each entitled to one vote. Holders of Common Stock do
not have cumulative voting rights. Abstentions and broker non-votes are each
included in the number of shares present for quorum purposes. All votes will be
tabulated by the inspector of election appointed for the meeting, who will
separately tabulate affirmative and negative votes, abstentions and broker
non-votes. Abstentions, which may be specified on all proposals other than the
election of directors, are counted in tabulations of the votes cast on proposals
presented to shareholders and will have the same effect as negative votes;
whereas broker non-votes are not counted for purposes of determining whether a
proposal has been approved.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be
presented by such stockholders at the Company's 1997 Annual Meeting must be
received no later than March 21, 1997, in order that they may be included in the
proxy statement and form of proxy relating to that meeting.
MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL 1: ELECTION OF DIRECTORS
Nominees
The Company's By-Laws provide that the Board of Directors must consist
of not less than three directors, with the number to be determined by a
resolution of the shareholders. Each director is elected at the Annual Meeting
of Shareholders to hold office until the Annual Meeting of Shareholders next
held after his or her election or until his or her successor has been elected
and qualified. The Board of Directors has recommended that the number of
directors to be elected for the ensuing year be set at seven.
It is intended that the persons named as proxies in the enclosed form
of proxy will vote the proxies received by them for the election as directors of
the nominees named in the table below unless specifically directed otherwise.
Each nominee has indicated a willingness to serve, but in case any nominee is
not a candidate at the meeting, for reasons not now known to the Company, the
proxies named in the enclosed form of proxy may vote for a substitute nominee in
their discretion. Information regarding these nominees is set forth in the table
below.
Director Principal Occupation and Business
Name (Age) Since Experience for Last Five Years
Christopher J. Conway (57) 1969 Founder, Chairman of the Board and Chief Executive Officer
since 1969; President from 1969 to April 1987.
Anthony R. Gette (40) 1988 President and Chief Operating Officer since April 1987;
Secretary since March 1986; Executive Vice President from
September 1986 to April 1987; Vice President, Finance from
September 1983 to September 1986; Director of Rehabilicare,
Inc.(1)
Eugene G. Glover (52) 1969 Private investor since October 1986; Founder & Vice
President, Engineering of the Company from 1969 to October
1986.
Walter W. Faster (61) 1980 Employed by General Mills, Inc.(2) in various marketing and
finance capacities since 1963, currently as Vice President,
Corporate Growth and Development.
Michael Nakonechny (67) 1980 President of NAK Associates Corp.(3) since 1981; Chairman
of the Board and Secretary of Transducer Systems, Inc.(4)
from November 1968 to January 1989.
Byron G. Shaffer (62) 1978 Private investor since 1970.
Dr. Richard W. Young (68) 1990 Private investor since April 1992; Consultant to Mentor O & O,
Inc.(5) from April 1990 to 1992; Chairman and Chief
Executive Officer of Mentor O & O, Inc. from April 1985 to
1990; Employed as President of Houghton Mifflin Company(6)
from 1982 to 1985; Employed by Polaroid Corporation(7) in
various marketing and research capacities from 1962 to
1982; Director of Mentor O & O, Inc. and of Instron
Corporation.(8)
(1) Rehabilicare, Inc. is a manufacturer of electromedical rehabilitation
and pain management products.
(2) General Mills, Inc. is a major manufacturer of packaged foods and othe
consumer goods.
(3) NAK Associates Corp. is a closely-held company engaged in consulting
engineering.
(4) Transducer Systems, Inc. is a manufacturer of electro-mechanical
transducers.
(5) Mentor O & O, Inc. was acquired by the Company in April 1990. It is a
manufacturer of ophthalmic surgical and diagnostic equipment.
(6) Houghton Mifflin Company is a major publishing firm.
(7) Polaroid Corporation is a major manufacturer of photographic equipment
and supplies.
(8) Instron Corporation is a manufacturer of materials testing instruments,
systems, software and accessories.
The Board of Directors recommends that the shareholders vote FOR the
election of the nominees named above to serve as directors of the Company until
the next annual meeting following the 1996 Annual Meeting or until their
respective successors have been elected and qualified.
Board Meetings and Committees
During the fiscal year ended March 31, 1996, the Board of Directors met
or adopted resolutions by unanimous written consent on seven occasions. No
director attended less than 75% of the aggregate number of Board of Directors
meetings and meetings of committees on which he served (including actions taken
by written consent).
The Company has an Audit Committee, currently consisting of Messrs.
Faster, Glover, Nakonechny, Shaffer and Young. The principal functions of the
audit committee are to (i) recommend to the Board of Directors the independent
public accountants to act as the Company's independent auditors; (ii) discuss
with the independent auditors the scope of their audit; (iii) discuss with the
independent auditors and the Company's executive officers the Company's
accounting principles, policies and practices; and (iv) discuss with the
independent auditors the adequacy of the Company's accounting, financial and
operating controls.
The Audit Committee has adopted procedures providing for its prior
review and consideration of the effect of non-audit services on the independence
of Ernst & Young LLP and the approval of the types of, and estimated fees for,
professional services which are expected to be performed by Ernst & Young LLP
during the forthcoming fiscal year.
The Audit Committee met twice during the fiscal year ended March 31,
1996 with all committee members present.
The Company has a standing Compensation Committee, currently consisting
of Messrs. Faster, Glover, Nakonechny, Shaffer and Young. The principal
functions of the Compensation Committee are to review and recommend compensation
for executive personnel. The Compensation Committee met once during the fiscal
year ended March 31, 1996 with all members present.
The Company has a Stock Option Committee, currently consisting of
Messrs. Faster, Glover, Nakonechny, Shaffer and Young. The principal functions
of the Stock Option Committee is to administer the Company's stock option plans.
The Stock Option Committee met twice during the fiscal year ended March 31, 1996
with all members present, and once during the fiscal year ended March 31, 1996
with four members present.
Nominating Procedures
The Company does not have a separately constituted committee to
nominate candidates for election to the Board of Directors of the Company. Such
candidates are chosen by the existing Board after taking into consideration the
recommendations of the Company's executive officers and shareholders.
Shareholders wishing to submit recommendations for nomination should send them
in writing to the attention of the Company's Chairman at the Company's principal
executive office within sixty days after the end of the Company's fiscal year.
Compensation of Directors
Board members who are employees of the Company do not receive
compensation for their services as directors. During the Company's fiscal year
ended March 31, 1996 and currently, individual non-employee Board members
received an annual fee of $20,000. In addition, each person who is a
non-employee director on the date of an annual meeting of shareholders is
entitled to receive an automatic option grant under the Company's 1991 Stock
Option Plan (the "Option Plan") of options to purchase 6,000 shares of Common
Stock at an exercise price equal to the fair market value per share of the
Common Stock on the date of such grant. These options have a term of ten years
and become exercisable in four equal annual installments over the optionee's
period of Board service, beginning one year after the grant date. Under the
Option Plan, each person who is newly elected or appointed as a non-employee
director will receive, on the date of election or appointment, an automatic
option grant to purchase 20,000 shares of Common Stock. The maximum number of
shares of Common Stock that a non-employee director currently may receive under
the Option Plan is 90,000, less the number of shares granted to the director
under any prior option plan of the Company, taking into account adjustment for
the Company's 2 for 1 stock split effectuated in September 1995.
PROPOSAL 2: APPROVAL OF AMENDMENT TO THE COMPANY'S 1991 STOCK
OPTION PLAN TO INCREASE THE TOTAL NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 2,000,000
SHARES TO 5,000,000 SHARES.
Introduction
At the 1996 Annual Meeting, shareholders will be asked to approve an
amendment to the Mentor Corporation 1991 Stock Option Plan (the "Option Plan")
which will increase the maximum number of shares authorized for issuance under
the Option Plan from 2,000,000 to 5,000,000 shares. The changes to the Option
Plan effected by the amendment which is the subject of this Proposal 2 were
adopted by the Board on May 9, 1996.
The Option Plan was adopted by the Board on June 11, 1991 and approved
by the shareholders in September of 1991. The purpose of the Option Plan is to
enable Mentor Corporation (the "Company") to provide eligible individuals with
the opportunity to acquire a proprietary interest in the Company as an incentive
for them to remain in the service of the Company (or its parent or subsidiary
companies).
The Option Plan currently has only 200,000 shares remaining for
issuance to key employees. The Company has traditionally granted between 400,000
to 500,000 shares on an annual basis. The Company's management believes that its
key employees should be compensated by a combination of salary, annual bonus
plans and long term incentive programs, such as stock options, consistent with
industry practices. The Company believes that stock option grants help to induce
the employee to exert maximum effort to increase shareholder value. The proposed
increase in the maximum share amount will allow the Company to continue its
grants under the Option Plan for approximately five more years. Accordingly, the
purpose of the new amendment is to assure that the Company will continue to have
a sufficient reserve of Common Stock available under the Option Plan to attract
and retain the services of key individuals essential to the Company's long-term
growth and success.
The following is a summary of the principal features of the Option
Plan, together with the applicable tax and accounting implications, which will
be in effect if the amendment to the Option Plan is approved by the
shareholders. Since its approval by the shareholders, the Option Plan has not
been amended, except for an amendment adopted by the Directors on May 17, 1994
providing for (i) the addition of the limitation concerning the number of shares
that can be granted to an individual under the Option Plan, and (ii) the
addition of the one-time grant of options to non-employee members of the Board
as of May 17, 1994. All the share numbers which appear in the summary have been
adjusted to reflect the 2 for 1 split of the Common Stock which was effectuated
by the Company in September 1995. However, the summary does not purport to be a
complete description of all the provisions of the Option Plan. Any shareholder
of the Company who wishes to obtain a copy of the actual plan document may do so
upon written request to the Secretary of the Company at the corporate offices in
Santa Barbara, California.
Plan Structure; Eligibility
The Option Plan is comprised of two parts: a discretionary option grant
program and an automatic option grant program. Under the discretionary option
grant program, options may be granted to employees (including officers) of the
Company or its parent or subsidiaries who contribute to the management, growth
and financial success of the Company or its parent or subsidiaries. Under the
automatic grant program, options are automatically granted to the non-employee
members of the Board.
As of June 28, 1996, approximately 1,000 employees (including seven (7)
executive officers), were eligible to participate in the Option Plan and five
(5) non-employee Board members were eligible for automatic option grants.
Administration
The Option Plan is administered by a committee appointed by the Board,
currently consisting of the five non-employee directors (the "Committee").
Administration of the Option Plan with respect to officers subject to Section 16
of the Securities Exchange Act of 1934 (the "Exchange Act") shall be by members
who are "disinterested persons" as that term is defined in Rule 16b-3 of that
Act, and shall comply with the applicable requirements of Rule 16b-3 under the
Exchange Act to the extent necessary to satisfy such rule.
The Committee has the exclusive authority, subject to the provisions of
the Option Plan, to determine the eligible individuals who are to receive
discretionary options under the Option Plan, the number of shares to be covered
by each granted option, the date or dates on which the option is to become
exercisable and the maximum term for which the option is to remain outstanding.
The Committee also has the authority to determine whether the granted option is
to be an incentive stock option under the Federal tax laws and to establish
rules and regulations for proper plan administration. The automatic grant
program is self-administering.
Issuable Shares
Stock subject to awards granted under the Option Plan is the Company's
authorized but unissued or reacquired common stock ("Common Stock"). The
aggregate number of shares available for issuance under the Option Plan may not
exceed 2,000,000 plus the number of shares that would have become available for
grant under the Company's Restated 1987 Stock Option Plan and the 1982 Incentive
Stock Option Plan (the "Prior Plans") by reason of lapse, expiration or
cancellation of options thereunder prior to exercise in full, provided that they
are not subject to subsequent grants under a Prior Plan. This amount is subject
to adjustment from time to time in the event of certain changes in the Company's
capital structure, as discussed below. If an option expires or terminates or is
forfeited or canceled for any reason without having been exercised in full, the
remaining shares covered by the option will again be available for grants under
the Option Plan.
In no event may any one individual be granted, over the life of the
Option Plan, options to acquire more than 600,000 of the shares of Common Stock
available for issuance under the Option Plan, subject to adjustment from time to
time in the event of certain changes in the Company's capital structure as
discussed below.
Option Price and Exercisability
The exercise price of options issued under the Option Plan will be the
fair market value of the Common Stock on the grant date and the maximum term of
the option shall be ten (10) years. If any employee to whom an incentive option
is to be granted under the Option Plan is on the grant date the owner of stock
(determined with application of the ownership attribution rules of Section
425(d) of the Internal Revenue Code) possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or a
parent or subsidiary thereof, then the option price per share of the Common
Stock subject to such incentive option shall not be less than one hundred ten
percent (110%) of the fair market value of the Common Stock on the grant date,
and the maximum term of the option shall be five (5) years.
Options issued under the Option Plan may become exercisable at such
time or times during the option term as is determined by the Committee. The
option price may be paid in cash or in shares of Common Stock valued at fair
market value on the exercise date, or in any combination of cash or shares of
Common Stock. Outstanding options may also be exercised through a same-day sale
program, pursuant to which a designated brokerage firm is to effect an immediate
sale of the shares purchased under the option and pay over to the Company, out
of the sales proceeds available on the settlement date, sufficient funds to
cover the option price for the purchased shares plus all applicable withholding
taxes.
The Committee may also assist any optionee (including an officer) in
the exercise of outstanding options under the discretionary option grant program
by authorizing a loan from the Company or permitting the optionee to pay the
option price in installments over a period of years. The terms and conditions of
any such loan or installment payment will be established by the Committee in its
sole discretion, but in no event may the maximum credit extended to the optionee
exceed the aggregate option price payable for the purchased shares plus any
federal and state income and employment taxes incurred by the optionee in
connection with the option exercise.
Valuation
For all valuation purposes under the Option Plan, the fair market value
of a share of Common Stock on any relevant date shall be determined in
accordance with the following provisions.
If the Common Stock is not at the time listed or admitted to trading on
any stock exchange but is traded in the over-the-counter market, the fair market
value shall be the mean between the highest bid price and lowest asked price
(or, if such information is available, the closing selling price) of one share
of Common Stock on the date in question in the over-the-counter market, as such
prices are reported on the NASDAQ system. If there are no reported bid and asked
prices (or closing selling price) on the date in question, then the fair market
value will be the mean between the highest bid price and lowest asked price (or,
if available, the closing selling price) on the last preceding date for which
such quotations exist.
If the Common Stock is at the time listed or admitted to trading on any
stock exchange, then the fair market value shall be the closing selling price of
one share of Common Stock on the date in question on the stock exchange
determined by the Committee to be the primary market for the Common Stock, as
such price is officially quoted on such exchange. If there is no reported sale
of Common Stock on such exchange on the date in question, then the fair market
value shall be the closing selling price on the exchange on the last preceding
date for which such quotation exists.
If the Common Stock is at the time neither listed nor admitted to
trading on any stock exchange or traded in the over-the-counter market, then the
fair market value shall be determined by the Committee after taking into account
such factors as the Committee shall deem appropriate.
If, however, the Committee determines that, as a result of
circumstances existing on any date, the use of the above rules is not a
reasonable method of determining fair market value on that date, the Committee
may use such other method as, in its judgment, is reasonable.
On June 28, 1996, the fair market value of the Common Stock was $25.50
per share.
Termination of Service
The Committee shall determine and shall set forth in each option
whether the option shall continue to be exercisable, and the terms and
conditions of such exercise, after an optionee ceases to by employed by the
Company or any of its subsidiaries.
Repurchase Rights
The shares of Common Stock purchased upon the exercise of options under
the discretionary grant program may be subject to repurchase by the Company (or
its assigns) upon the optionee's termination of employment. The Committee shall
have the discretion to set the terms and conditions of any such repurchase and
may provide for the expiration of such repurchase rights in one or more
installments. The Committee may provide that all shares subject to the Company's
repurchase rights under the discretionary grant program will immediately vest in
whole or in part upon a Change in Control (as defined below).
Assignability of Options
Options are not assignable or transferable other than by will or by the
laws of inheritance and, during the optionee's lifetime, the option may be
exercised only by the optionee.
Change in Control
All options under the Option Plan that have not expired will become
exercisable in full immediately prior to a Change in Control (as defined in the
Option Plan); provided that such Change in Control actually takes place and that
the optionee does not voluntarily terminate his or her position with the Company
prior to the Change in Control.
If the Committee determines in good faith that a Change in Control may
be imminent, the Committee may, but need not, take the following actions. If the
Change in Control is a merger or consolidation or a statutory share exchange,
the Committee may provide for the replacement of outstanding options with
options to purchase such shares of appropriate voting common stock of the
surviving corporation; or, of the parent corporation of the Company or such
surviving corporation ("Survivor's Stock") as the Committee deems equitable; or,
alternatively, such numbers of shares of the Survivor's Stock as have a fair
market value as of the date of the Change in Control equal to the product of (i)
the amount by which the Change in Control Proceeds per Share (as defined in the
Option Plan) exceeds the option exercise price per share times (ii) the number
of Common shares covered by the respective options.
At least ten (10) days prior to the Change in Control, the Committee
may provide that each outstanding option, whether or not then exercisable, will
be canceled at the time of the Change in Control (unless exercised prior to the
Change in Control) in exchange for a cash payment for each share covered by the
canceled option, equal to the amount (if any), by which the Change in Control
Proceeds per Share exceeds the exercise price per share covered by such option.
No such action by the Committee will in any way affect the acceleration
of the exercisability of options as described above, and each optionee will have
the right, preceding the Change in Control, to exercise his or her option as to
all or any part of the shares covered thereby.
A Change in Control occurs when:
(i) a person or group acquires or beneficially owns
twenty percent (20%) or more of the outstanding voting power of the
Company;
(ii) a majority of the Board consists of individuals other
than those for whom proxies were solicited by the Board or who were
appointed by the Board to fill either (A) vacancies caused by death or
resignation or (b) new directorship; or
(iii) there shall have occurred:
(A) a merger or consolidation of the Company with or
into another corporation (other than (1) a merger or
consolidation with a subsidiary of the Company or (2) a merger
or consolidation in which (aa) the holders of voting stock
immediately prior to the merger as a class continue to hold
immediately after the merger at least sixty percent (60%) of
all outstanding voting power of the surviving or resulting
corporation or its parent and (bb) all holders of each
outstanding class or series of voting stock of the Company
immediately prior to the merger or consolidation have the
right to receive substantially the same cash, securities or
other property in exchange for their voting stock of the
Company as all other holders of such class or series);
(B) a statutory exchange of shares for cash,
securities or other property;
(C) the sale or disposition of all or
substantially all of the assets of the Company; or
(D) the dissolution or liquidation of the
Company;
unless, as to any optionee, more than twenty-five percent (25%) of the voting
stock (or the voting equity interest) of the surviving corporation or the
corporation or other entity acquiring all or substantially all of the assets of
the Company (in the case of a merger, consolidation or disposition of assets) or
of the Company or its resulting parent corporation (in the case of a statutory
share exchange) is beneficially owned by such optionee or a Group that includes
such optionee.
A "Group" for purposes of the Option Plan shall mean any two or more
persons acting as a partnership, limited partnership, syndicate, or other group
acting in concert for the purpose of acquiring, holding or disposing of voting
stock of the Company.
Cancellation and New Grant of Options
The Committee has the authority to effect from time to time with the
consent of the affected optionees, the cancellation of outstanding options under
the discretionary program of the Option Plan or the Prior Plans and to grant
replacement options covering the same or different numbers of shares of Common
Stock but having an option price per share not less than the fair market value
of the Common Stock on the new grant date. It is anticipated that the option
price in effect under the replacement grant would in all instances be less than
the option price in effect under the canceled option.
Tax Withholding Election
The Committee may, in its discretion and subject to such limitations
and rules as it may adopt, permit an optionee under the discretionary option
program to satisfy any income and employment tax obligation incurred in
connection with the exercise of the options, in whole or in part, by delivering
shares of Common Stock already held by the optionee or by making an irrevocable
election that a portion of the total value of the shares of Common Stock subject
to the exercised option to be paid in the form of cash in lieu of the issuance
of Common Stock and that such cash payment be applied to the satisfaction of the
withholding obligations.
Changes in Capitalization
In the event any change is made to the Common Stock issuable under the
Option Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares, or other change in corporate
structure, then, unless such change results in the termination of all
outstanding options, the Committee shall make appropriate adjustments to (i) the
maximum number and/or class of securities issuable under the Option Plan, (ii)
the number and/or class of securities and price per share in effect under each
outstanding option (including all option grants incorporated from the Prior
Plans), (iii) the number of shares to be made the subject of subsequent
automatic option grants, and (iv) the maximum number of shares issuable to any
one individual under the Option Plan.
Option grants under the Option Plan will not affect the right of the
Company to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
Automatic Option Grant Program
The automatic option grant program under the Option Plan authorizes the
grant of non-statutory options to purchase shares of Common Stock to
non-employee members of the Board. Each non-employee Board member who first
becomes a non-employee Board member at any time after June 11, 1991 shall
automatically be granted at the time of such initial election or appointment,
provided they have not otherwise been in the prior employ of the Company (or any
parent of subsidiary), an option to purchase 20,000 shares of Common Stock. At
each Annual Meeting of Shareholders beginning with the 1992 Annual Meeting, each
individual who is at the time serving as a continuing non-employee Board member
or who is then newly elected or appointed as a non-employee Board member, will
automatically be granted options to purchase 6,000 shares of Common Stock on the
date of the Annual Meeting. In addition, each individual who was a non-employee
Board member on May 17, 1994, received an automatic option grant to purchase
30,000 shares at an exercise price of $6.88 per share. The maximum number of
shares of Common Stock that a non-employee Board member may receive under the
Option Plan is 60,000 plus the 30,000 shares granted on May 17, 1994 and less
the number of shares covered by options previously granted to that non-employee
Board member under the Prior Plans.
The option price per share for each automatic grant will be the fair
market value per share of Common Stock on the date of grant. The option price
for purchased shares will be payable in cash or shares of Common Stock held for
at least six (6) months.
Automatic option grants have a term of ten (10) years from the date of
grant and become exercisable in four 25% annual installments beginning one year
after the grant date, provided the non-employee Board member remains a member of
the Board through such date. Options with an automatic option grant date of May
17, 1994 will become exercisable in three 331/3 % annual installments beginning
one year after the grant date. However, full and immediate vesting will occur
upon a Change in Control and shall terminate to the extent unexercised if the
Common Stock ceases to exist or be publicly traded as a result of a Change in
Control, unless the options are expressly assumed or replaced by substitute
options by the entity that survives the Change in Control.
If the optionee ceases to serve as a director, the option may be
exercised, to the extent then exercisable and within its term, for a period of
ninety (90) days after the date of cessation (twelve (12) months if due to
disability or death). In the case of death, the option may be exercised within
such period by the estate of heirs of the optionee.
Modification of Options
The Committee shall have full power and authority to modify or waive
any or all of the terms, conditions, or restrictions applicable to any
outstanding option, to the extent not inconsistent with the Option Plan;
provided, however, that no such modification or waiver shall (1) without the
consent of the optionee, adversely affect the optionee's rights thereunder, or
(2) affect any outstanding option granted pursuant to the automatic option grant
program, except to the extent necessary to conform to any amendment to the
automatic option grant provisions of the Option Plan.
Amendment and Termination of the Option Plan
The Board may amend or modify the Option Plan in any or all respects
whatsoever; provided, however, that no such amendment may adversely affect the
rights of outstanding optionees without their consent, and the Board may not,
without the approval of the Company's shareholders: (i) increase the maximum
number of shares issuable under the Option Plan or the number of shares for
which automatic grants may be made to non-employee Board members, except in the
event of certain changes to the Company's capital structure as indicated above;
(ii) modify the eligibility requirements for option grants; or (iii) make any
other change for which the Board determines that shareholder approval is
required by applicable law or regulatory standards. Amendments that affect the
amount, price and timing of awards under the automatic option grant program may
not be made more than once every six (6) months other than to comport with
changes in the Internal Revenue Code or rules thereunder.
No option may be granted under the Option Plan after the earlier of (i)
June 10, 2001, or (ii) the date on which all shares available for issuance under
the Plan have been issued pursuant to the exercise of options.
Federal Income Tax Consequences
The following is a summary of the federal income taxation consequences
to the participant and the Company with respect to the options granted under the
Option Plan. The summary does not discuss the tax consequences of a
participants' death or the income tax laws of any city, state or foreign country
in which the participant may reside.
Options granted under the Option Plan may be either incentive stock
options which satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options which are not intended to meet such requirements.
Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to a business expense deduction equal to
the ordinary income recognized by an optionee on exercise of a non-statutory
option. The ordinary income recognized will generally equal the excess of the
fair market value of the purchased shares on the date of recognition over the
exercise price. Generally, the date of recognition will be the date the option
is exercised or, if later, the first date shares acquired on exercise are not
subject to a substantial risk of forfeiture.
Incentive Stock Options. No taxable income is recognized by the
optionee at the time of the option grant, and no taxable income is generally
recognized at the time the option is exercised. The optionee will, however,
recognize taxable income in the year in which the purchased shares are sold or
otherwise made the subject of a taxable disposition. For federal tax purposes,
dispositions are divided into two categories: (i) qualifying and (ii)
disqualifying. A qualifying disposition occurs if the sale or other disposition
is made after the optionee has held the shares for more than two years after the
option grant date and more than one (1) year after the exercise date. If either
of these two (2) holding periods is not satisfied, then a disqualifying
disposition will result.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to a business expense deduction, for
the taxable year in which such disposition occurs, equal to the excess of (i)
the fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the shares. In no other instance will the Company be
allowed a deduction with respect to the optionee's disposition of the purchased
shares.
If no disqualifying disposition is made of shares acquired under an
incentive stock option, any gain on the subsequent sale of those shares will
constitute long-term capital gains and the Company will not be entitled to any
deduction with respect to such shares.
To the extent that the aggregate fair market value (determined as of
the respective date or dates of grant) of shares with respect to which options
that would otherwise be incentive stock options are exercisable for the first
time by any individual during any calendar year exceeds $100,000, such options
will be treated as nonstatutory options.
Parachute Payments. If the exercisability of an option or stock
appreciation right is accelerated as a result of a change of control, all or a
portion of the value of the option or stock appreciation right at that time may
be a parachute payment for purposes of the excess parachute provisions of the
Internal Revenue Code. Those provisions generally provide that if parachute
payments exceed three times an employee's average compensation for the five (5)
tax years preceding the change of control, the Company loses its deduction and
the recipient is subject to a 20% excise tax for the amount of the parachute
payments in excess of one times such average compensation.
Limitation of Deductions for Executive Compensation. Recently enacted
Section 162(m) of the Internal Revenue Code limits federal income tax deductions
for compensation that is otherwise deductible for tax years beginning after 1993
with respect to the Company's Chief Executive Officer or any of the four other
most highly compensated officers to $1 million per year, but contains an
exception for performance-based compensation that satisfies certain conditions
and amounts payable pursuant to written binding contracts in effect on February
17, 1993.
The Company believes that options granted pursuant to the Option Plan
will qualify for the performance based-compensation exception and that options
granted before February 17, 1993 will qualify for the pre-existing binding
contract exception. Under the final Treasury regulations, options that are
intended to qualify as performance-based compensation must be granted pursuant
to a shareholder approved plan that includes a limit on the number of shares for
which a single individual may receive options over the life of the plan. At the
1994 Annual Meeting, the Company obtained shareholder approval for certain
amendments to the Company's Option Plan which were designed to assure that any
compensation deemed paid in connection with the exercise of stock options
granted under the Option Plan will qualify as performance-based compensation.
However, there can be no assurance that the options will so qualify. In
addition, future amendments to the Company's Option Plan may be necessary to
preserve such qualification in the future.
Accounting Treatment
Option grants with exercise prices less than the fair market value of
the shares on the grant date will result in a compensation expense to the
Company's earnings equal to the difference between the exercise price and the
fair market value of the shares on the grant date. Such expense will be
accruable by the Company over the period that the option shares are to vest.
Option grants at 100% of fair market value will not result in any charge to the
Company's earnings, but the Company must disclose, in footnotes to the Company's
financial statements, the impact that those options would have upon the
Company's reported earnings were the value of those options treated as
compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully-diluted basis.
New Plan Benefits
The following table contains information about options granted under
the Company's Option Plan during fiscal 1996 and from April 1, 1996 through June
28, 1996, respectively, to the named executive officers and directors and groups
indicated, on the basis of the 3,000,000-share increase to the Option Plan
provided in the amendment for which shareholder approval is sought, together
with the option exercise price payable per share. All of the options granted
during the period from April 1, 1996 through June 28, 1996 were granted on May
9, 1996, at an exercise price of $23.13.
MENTOR CORPORATION
1991 STOCK OPTION PLAN
Number of Shares Average Exercise Net Value Realized
Underlying Options Granted Price of Options From Exercised Awards
Name Granted
Christopher J. Conway:
Fiscal 1996 70,000 $11.50 $0
May 9, 1996 60,000 $23.13 $0
Anthony R. Gette:
Fiscal 1996 60,000 $11.50 $1,874,000
May 9, 1996 40,000 $23.13 $0
Dennis E. Condon:
Fiscal 1996 30,000 $11.50 $0
May 9, 1996 24,000 $23.13 $0
Gary E. Mistlin:
Fiscal 1996 16,000 $11.50 $646,000
May 9, 1996 14,000 $23.13 $0
Karen H. Edwards:
Fiscal 1996 16,000 $11.50 $363,800
May 9, 1996 14,000 $23.13 $0
Executive Group (8 persons)
Fiscal 1996 256,000 $11.50 $3,684,078
May 9, 1996 186,000 $23.13 $0
Non-Executive Director Group (5 persons)
Fiscal 1996 6,000 $23.38 $0
May 9, 1996 0 0 $337,800
Non-Executive Officer Employee Group (49
persons)
Fiscal 1996 241,100 $13.07 $1,590,803
May 9, 1996 192,800 $23.13 $483,603
Dr. Richard Young received options to purchase 6,000 shares pursuant to
the automatic option grant provisions of the Option Plan on September 13, 1995,
at an exercise price of $23.38.
Shareholder Approval
The affirmative vote of a majority of the outstanding shares of the
Company's voting Common Stock represented and voted at the 1996 Annual Meeting
is required for approval of the amendment to Option Plan. If such shareholder
approval is not obtained, the amendment will not be effective and the May 9,
1996 option grants to employees will be canceled. The Option Plan will, however,
continue to remain in effect, and option grants may continue to be made pursuant
to the provisions of the Option Plan until the available reserve of Common Stock
under the Option Plan as last approved by the shareholders is issued.
The Board of Directors recommends a vote FOR the approval of the amendment to
the Option Plan.
PROPOSAL 3: RATIFICATION OF INDEPENDENT AUDITORS
Pursuant to authority delegated to the Audit Committee by the Board of
Directors, the Audit Committee has appointed the firm of Ernst & Young LLP to
act as principal independent auditors for the Company for the fiscal year ending
March 31, 1997. This appointment will be submitted to the Company's shareholders
for ratification. This firm has audited the financial statements of the Company
for the fiscal year ended March, 31, 1996, and for prior years, and has advised
the Company that neither the firm nor any of its partners has any direct or
indirect material financial interests in the Company or its subsidiaries, nor
have they had any connection during the past three years with the Company or its
subsidiaries, in any capacity other than that of independent accountants and
auditors. Ernst & Young LLP will have representatives at the 1996 Annual Meeting
who will have an opportunity to make a statement and will be available to
respond to appropriate questions.
In the event the shareholders do not ratify the appointment of Ernst &
Young LLP, the selection of other independent auditors will be considered by the
Board of Directors.
The Board of Directors recommends that shareholders vote FOR
ratification of the appointment of Ernst & Young LLP to serve as the Company's
independent auditors for the fiscal year ending March 31, 1997.
OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the enclosed
form of Proxy to vote the shares they represent as the Board of Directors may
recommend. Discretionary authority with respect to such other matters is granted
by the execution of the enclosed Proxy.
MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The following table shows the ownership of the Common Stock of the
Company on July 16, 1996, (i) by each person who, to the knowledge of the
Company, owned beneficially more than five percent (5%) of such stock, (ii) by
each of the Company's directors, (iii) by each of the executive officers named
in the Summary Compensation Table below, and (iv) by all directors and executive
officers who served as directors or executive officers as of March 31, 1996 as a
group:
Amount and Nature
of Approximate
Name and Address (if Percentage of Shares Applicable) Beneficial Percent of
of Beneficial Owner Ownership (1) Class
5% Stockholders:
Putnam Investments, Inc. (20) 2,849,000 (2) 11.5%
One Post Office Square
Boston, Massachusetts 02109
Mellon Bank Corporation (3) 1,649,000 (3) 6.67%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Directors:
Christopher J. Conway (4) 875,100 3.3%
Eugene G. Glover 526,000 (5) 2.0%
Byron G. Shaffer 892,000 (6) 3.4%
Walter W. Faster 128,600 *
Michael Nakonechny 282,500 1.1%
Anthony R. Gette (4) 304,000 1.2%
Richard W. Young 64,200 *
Executive Officers:
Dennis E. Condon 200,580 (7) *
Gary E. Mistlin 117,000 *
Karen H. Edwards 131,000 *
All directors and executive officers
as a group (12 persons) 3,638,000 13.8%
* Less than 1%
(1) These shares, unless noted below, are subject to the sole voting and
investment power of the indicated person. The figures include options
to purchase Common Stock exercisable within sixty days and held by: Mr.
Conway, 337,500 shares; Mr. Glover, 80,000 shares; Mr. Shaffer, 80,000
shares; Mr. Faster, 80,000 shares; Mr. Nakonechny, 80,000 shares; Mr.
Gette, 277,000 shares; Dr. Young, 35,000 shares; Mr. Condon, 154,500
shares; Mr. Mistlin, 106,000 shares; Ms. Edwards, 131,000 shares; and
all directors and executive officers as a group, 1,478,000 shares.
(2) Includes 2,428,400 held by Putnam Investment Management, Inc. Includes
421,150 shares held by The Putnam Advisory Company. Putnam Investment,
Inc. has shared voting power with respect to 133,800 shares and shared
dispositive power with respect to 2,849,550 shares. Putnam Investment
Management, Inc. has shared dispositive power with respect to 2,428,400
shares. The Putnam Advisory Company, Inc. has shared voting power with
respect to 133,800 shares and shared dispositive power with
respect to 421,150 shares.
(3) Includes 78,000 shares held by Mellon Bank N.A. Includes 1,517,000
shares held by The Dreyfus Corporation. Mellon Bank Corporation has
sole voting power with respect to 1,649,000 shares, sole dispositive
power with respect to 133,000 shares and shared dispositive power with
respect to 1,517,000 shares. Mellon Bank N.A. has sole voting power
with respect to 1,595,000 shares, sole dispositive power with respect
to 78,000 shares and shared dispositive power with respect to 1,517,000
shares. The Dreyfus Corporation has sole voting power with respect to
1,517,000 shares, and shared dispositive power with respect to
1,517,000 shares.
(4) Also an executive officer named in the Summary Compensation Table.
(5) Includes 426,000 shares held by a trust of which Mr. Glover is the sole
trustee.
(6) Includes 115,800 shares owned by Mr. Shaffer's spouse and 120,000
shares owned by Mr. Shaffer as custodian for their children.
(7) Includes 540 shares owned by Mr. Condon's spouse.
Executive Compensation and Related Information
Executive compensation is determined by the Board of Directors based on
the recommendations of the Compensation Committee, which is composed entirely of
independent, outside directors. The following information relates to
compensation paid by the Company for services rendered during the three (3)
fiscal years ended March 31, 1996 for the Company's Chief Executive Officer and
each of the other four (4) most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Fiscal Bonus (1) Compensation Awards Options/ Payouts Compensation
Position Year Salary($) ($) ($) ($) SARs (#) ($) (2) ($)
(3)
Christopher J. Conway 1996 $340,900 $338,307 70,000 $5,013
Chairman and CEO 1995 $285,700 $189,409 - - 48,000 - $2,310
1994 $258,000 $107,820 - - 32,000 - $1,965
Anthony R. Gette 1996 $258,200 $256,236 60,000 $5,262
President, Secretary 1995 $234,300 $155,333 - - 40,000 - $2,310
and COO 1994 $206,600 $86,340 - - 24,000 - $2,275
Dennis E. Condon 1996 $180,000 $211,247 30,000 $4,100
President, Mentor H/S, Inc. 1995 $158,800 $124,069 - - 24,000 - $2,760
1994 $151,800 $50,615 - - 12,000 - $1,594
Gary E. Mistlin 1996 $157,000 $56,115 32,000 $3,503
Vice President of 1995 $138,500 $38,200 - - 24,000 - $2,048
Finance/Treasurer
1994 $130,900 $37,500 - - 12,000 - $1,616
Karen H. Edwards 1996 $153,200 $52,659 - - 32,000 - $3,672
Vice President Regulatory, 1995 $132,000 $36,100 - - 24,000 - $1,580
Quality
Assurance and Legal Affairs 1994 $125,600 $26,250 - - 12,000 - $930
(1) Annual bonus amounts are earned and accrued during the fiscal years
indicated, and paid subsequent to the end of the fiscal year.
(2) Represents matching amounts contributed by the Company on behalf of the
named individual under the terms of the Company's 401(k) Plan.
(3) All share references are after adjustment for the 2 for 1 stock split
effectuated by the Company in September 1995.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value
Securities at Assumed Annual
Underlying % of Total Rates of Stock Price
Options/ Options/SARs Appreciation For
SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) (1)(4) Fiscal Year ($/Share) (2) Date 5% 10%
Christopher J. Conway 70,000 13.9% $11.50 05/23/05 $506,261 $1,282,960
Anthony R. Gette 60,000 11.9% $11.50 05/23/05 $433,938 $1,099,680
Dennis E. Condon 30,000 6.0% $11.50 05/23/05 $216,969 $549,840
Gary E. Mistlin 16,000 3.2% $11.50 05/23/05 $115,717 $293,248
Karen H. Edwards 16,000 3.2% $11.50 05/23/05 $115,717 $293,248
(1) All of these options were granted under the 1991 Stock Option Plan on
May 23, 1995. Each option will become exercisable for the option shares
in four equal and successive annual installments over the optionee's
period of service with the Company, beginning one year after the grant
date. Each option has a maximum term of ten years, subject to earlier
termination immediately prior to a Change in Control (as defined in the
1991 Stock Option Plan); alternatively, the administrator of the 1991
Stock Option Plan may provide for replacement of outstanding options
with options to purchase shares of the surviving corporation, or for a
cash payment in exchange for the cancellation of outstanding options.
(2) The exercise price of each option is equal to the market value of the
Common Stock on the date of grant. The exercise price may be paid in
cash, in Common Stock or pursuant to a cashless exercise procedure
under which the optionee provides irrevocable instructions to a
brokerage firm to sell the purchased shares and to remit to the
Company, out of the sale proceeds, an amount equal to the exercise
price plus all applicable withholding taxes. The administrator of the
1991 Stock Option Plan may authorize a loan or loan guarantee from the
Company to help the optionee pay the exercise price or the
administrator may permit the optionee to pay the option price in
installments.
(3) Potential realizable value is based on an assumption that the market
price of the stock appreciates at the stated rate, compounded annually,
from the date of grant until the end of the ten year option term. These
values are calculated based on regulations promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price appreciation. There is no assurance that
the actual stock price appreciation over the ten year option term will
be at the assumed 5% or 10% levels, or at any other defined level.
(4) All share references are after adjustment for the 2 for 1 stock split
effectuated by the Company in September 1995.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Shares Number of Value of Unexercised
Acquired Value Securities Underlying Unexercised In-The-Money Options/SARs
on Exercise Realized Options/SARs at Fiscal Year End at Fiscal Year End (2)
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
Christopher J. Conway 0 - 288,000 134,000 $4,916,664 $1,932,250
Anthony R. Gette 100,000 $1,873,583 236,000 112,000 $3,962,581 $1,606,250
Dennis E. Condon 0 - 131,500 60,500 $2,270,063 $880,188
Gary E. Mistlin 30,000 $646,000 91,500 46,500 $1,528,188 $713,938
Karen H. Edwards 20,000 $363,766 111,500 46,500 $1,882,563 $713,938
(1) Value realized is based on the fair market value of the Company's
Common Stock on the date of exercise minus the exercise price and does
not necessarily indicate that the optionee sold such stock.
(2) An in-the-money option is an option which has an exercise price for the
Common Stock which is lower than the fair market value of the Common
Stock on a specified date. The fair market value of the Company's
Common Stock at March 31, 1996 was $23.38 per share.
(3) All share references are after adjustment for the 2 for 1 stock split
effectuated by the Company in September 1995.
Employment Contracts and Severance Arrangements
The Company has entered into an Employment Agreement with Spencer M.
Vawter, the President of Mentor Urology, Inc. The agreement provided for Mr.
Vawter to receive in fiscal 1994 (i) a base salary of $145,000, (ii) a bonus of
up to 40% of such base salary based on attainment of mutually designated
objectives, (iii) options to purchase 30,000 shares of Common Stock at an
exercise price not to exceed $6.00 per share with a vesting period of five
years, and (iv) a relocation expense allowance of $20,000. Beginning in fiscal
1995, Mr. Vawter's compensation was to be fixed annually by the Compensation
Committee. The agreement also provides that upon termination of Mr. Vawter's
employment by the Company without cause (as defined therein), Mr. Vawter will be
entitled to severance compensation equal to three months of base salary plus one
month of base salary for each complete year of service with the Company. Mr.
Vawter's employment with the Company ceased on September 30, 1995.
The Company has entered into an Employment Agreement with William M.
Freeman, the President of Mentor Ophthalmics, Inc. The agreement provided for
Mr. Freeman to receive in fiscal 1995 (i) a base salary of $150,000, prorated
from the date of employment, (ii) a bonus of up to 40% of such base salary based
on attainment of mutually designated objectives, (iii) options to purchase
30,000 shares of Common Stock, with a vesting period of five years, and (iv) a
relocation package to defray his costs of moving to Santa Barbara, California.
Beginning in fiscal 1996, Mr. Freeman's compensation is fixed annually by the
Compensation Committee. The agreement also provides that upon termination of Mr.
Freeman's employment by the Company without cause (as defined therein), Mr.
Freeman will be entitled to severance compensation equal to three months of base
salary plus one month of base salary for each complete year of service with the
Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") was established
in 1980 and is composed entirely of independent, outside members of the
Company's Board of Directors. The Committee reviews and approves each of the
elements of the executive compensation program and assesses the effectiveness
and competitiveness of the overall program.
Mentor's executive compensation program is designed to accomplish
several goals, including:
To attract, retain, and motivate employees of outstanding ability
To link changes in employee compensation to individual and
corporate performance To align the interests of management with
the interests of the Company's shareholders
To provide levels of compensation that are competitive with those
provided in the markets in which the Company competes for
executives.
Key Provisions of the Executive Compensation Program
The Company's executive compensation plan consists of three components:
base salary, annual incentive bonus, and long-term incentive in the form of
stock options. The Company has established a strong link between pay and
performance by emphasizing variable components of the plan, that is, annual
incentive bonus and stock options.
Base Salary
The Committee determines base salaries for executive officers on the
basis of a number of factors, including an assessment of competitive
compensation levels for similar-size manufacturing companies performed by an
independent consulting firm, the Company's financial condition, any changes in
job responsibilities, and the performance of each executive. Executive officer
base salaries generally are set to correspond to the 60th percentile of the
comparable competitive compensation data.
Annual Incentive Bonus
Executive officers are eligible to receive annual incentive
compensation equivalent to a specified percentage of their salaries under the
Company's bonus plan. The Company establishes bonus payout targets (ranging from
30% to 60% of base salary) that are designed to bring the level of total annual
cash compensation (base salary plus annual incentive bonus) to the 75th
percentile for comparable positions at similar-size manufacturing companies when
superior performance is achieved. Performance is measured at the corporate,
business unit, and individual level. The total potential bonus for each
executive is broken down into several factors as appropriate for that
executive's area of responsibility. Each factor is then weighted with emphasis
placed on profitability measures. These factors, and the relative weight given
to each factor, vary with each executive officer in the Committee's sole
discretion. For each factor, the Committee establishes a threshold, target and
outstanding goal. No bonus is paid for performance below threshold levels.
Bonuses for threshold performance are paid at 50% of the targeted levels.
Bonuses for outstanding performance are paid at 200% of targeted levels for the
Chief Executive Officer and President, and 150% of targeted levels for all other
executive officers. The total bonus paid each executive is thus a weighted
average of each factor, adjusted for performance against a predefined target for
that factor.
Long-term Incentive (Stock Options)
Generally, the Company awards stock options to executive officers on an
annual basis. Each grant is designed to align the interests of executive officer
with those of the shareholders and provide each individual with a significant
incentive to manage the Company from the perspective of an owner with an equity
stake in the business. Awards to specific employees, including the Chief
Executive Officer, are made on the basis of each employee's job responsibilities
and recommendations of the executive officers of the Company concerning the
individual's contributions (both historical and potential) to the success of the
Company, without regard to prior awards of stock option grants. These
recommendations also take into consideration competitive practice for stock
option grants as determined by an independent compensation consultant from
survey information. The survey information encompasses data on both competitive
grant levels for individual executives and total options granted as a percentage
of shares outstanding.
Compensation of Chief Executive Officer
Mr. Conway is a founder of the Company and has served as its Chief
Executive Officer and Chairman of the Board since its incorporation in 1969. Mr.
Conway's base salary and annual incentive bonus are set by the Committee using
the same policies and criteria used for other executive officers. In setting Mr.
Conway's salary for fiscal 1996, the Committee considered competitive
information for similar sized manufacturing companies provided by an independent
compensation consultant and the Company's financial performance. Mr. Conway is
currently paid at the targeted competitive position base salary, which has been
set by the Committee at the 60th percentile of the comparable competitive
compensation data.
Mr. Conway's bonus potential is designed to bring his total annual cash
compensation to the 75th percentile for comparable positions at similar sized
manufacturing companies. For Mr. Conway, this targeted bonus equated to 60%
of his base salary in fiscal 1996. Mr. Conway's fiscal 1996 bonus was based on
the achievement of two separate corporate goals: net sales (weighted 30%) and
corporate profitability (weighted 70%). The compensation plan for fiscal 1996
was designed to encourage aggressive operating profit growth over the prior
year. The Company exceeded its targeted performance in fiscal 1996. As a result,
Mr. Conway received a bonus above his targeted level of 60%.
Tax Limitation
As a result of federal tax legislation enacted in 1993, a publicly-held
company such as the Company will not be allowed a federal income tax deduction
for compensation paid to certain executive officers, to the extent that
compensation exceeds $1 million per officer in any year. It is not expected that
the compensation to be paid to the Company's executive officers for the 1996
fiscal year will exceed the $1 million limit per officer. Compensation which
qualifies as performance-based compensation will not have to be taken into
account for purposes of this limitation. At the 1994 Annual Meeting, the Company
obtained shareholder approval for certain amendments to the Company's Option
Plan which were designed to assure that any compensation deemed paid in
connection with the exercise of stock options granted under that plan will
qualify as performance-based compensation. As a result, the Company believes
that stock options granted to its executives qualify for the performance-based
exception to the deduction limit. However, there can be no assurance that the
options will so qualify. In addition, future amendments to the Company's Option
Plan may be necessary to preserve such qualification in the future.
The cash compensation paid to the Company's executive officers for the
fiscal 1996 year did not exceed the one (1) million dollar limit per officer,
nor is the cash compensation to be paid to the Company's executive officers for
the 1997 fiscal year expected to reach that level. Because it is very unlikely
that the cash compensation payable to any of the Company's executive officers in
the foreseeable future will approach the one (1) million dollar limitation, the
Compensation Committee has decided not to take action at this time to limit or
restructure the elements of cash compensation payable to the Company's executive
officers. The Compensation Committee will reconsider this decision should the
individual compensation of any executive officer ever approach the one (1)
million dollar level.
SUBMITTED BY THE
COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
- Eugene G. Glover
- Walter W. Faster
- Michael Nakonechny
- Byron G. Shaffer
- Dr. Richard W. Young
Stock Performance Graph
The following graph compares the yearly percentage changes in the cumulative
total shareholder return on the Company's Common Stock with the cumulative
total return on the NASDAQ Market Value Index and the Media General Financial
Services Medical Instruments and Supplies Index ("MG Index") during the five
fiscal years ended March 31, 1996. The comparison assumes $100 was invested on
March 31, 1991 in the Company's Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends.
COMPARISON OF 5-YEAR CUMULATIVE RETURN
Legend
Symbol Index 3/31/91 3/31/92 3/31/93 3/31/94 3/31/95 3/31/96
Company 100.0 37.6 46.3 51.1 99.7 175.7
NASDAQ Index 100.0 117.0 102.0 91.6 125.1 185.0
MG Index 100.0 105.4 118.0 136.3 144.6 194.5
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including this Proxy Statement,
in whole or in part, the preceding Compensation Committee Report on Executive
Compensation and the preceding Company Stock Performance Graph are not to be
incorporated by reference into any such filings; nor are such Report or Graph to
be incorporated by reference into any future filings.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is a former officer or employee of the
Company or any of its subsidiaries, except for Mr. Glover, who was Founder and
Vice President, Engineering of the Company from 1969 to October 1986.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, except that Mr.
Nakonechny and Ms. Edwards each filed a Form 4 late with respect to one
transaction.
CERTAIN TRANSACTIONS
In April 1991, the Company entered into a distribution agreement with
Rochester Medical Corporation ("Rochester"). Under the terms of the agreement,
the Company received an exclusive license, subject to annual minimum purchase
commitments, to market and distribute certain external catheter products
developed by Rochester, in exchange for a payment of $500,000. In addition, the
Company has a non-exclusive right to market and distribute certain additional
products currently under development by Rochester. The Company purchased
$525,000 under the agreement in fiscal year 1996.
Certain directors and executive officers of Rochester, a public
company, are siblings of Christopher J. Conway, the Chairman of Mentor
Corporation.
ADDITIONAL INFORMATION
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996 as filed with the Securities and Exchange Commission is
available without charge by writing to the Company's principal executive office.
Please mark, sign, date and return promptly the enclosed proxy
provided. The signing of a proxy will not prevent you from attending the meeting
in person.
BY ORDER OF THE BOARD OF DIRECTORS
Anthony R. Gette
Secretary
Dated: August 7, 1996