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Equity Evaluation -Mentor

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By kitkatklub
March 19, 2003

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This is an analysis of Mentor Corp. It also includes a detailed look at the way the discounted cash flow evaluation was done as outlined by the DAM lectures. It is divided into several parts, so you may skip anything that is not interesting (assuming it is interesting in the first place!)

The first part is a description of the company and the officers

The Why, What, How and When

Why?
After spending several months with this evaluation, I came upon an article in the Wall Street Journal entitled How Much Is Your Time Worth? They suggested that you calculate how much per hour your time is worth based on your salary and then out source all the jobs that cost you more to do yourself than it costs to pay to have someone do the job for you. At that rate this evaluation cost me thousands of dollars and will never pay for itself. I would have been further ahead to spend a few more hours at the office and buy an index fund. So why do it? Because I learned something I thought I was unable to understand. That is something that has only happened a handful of times in my life and it made every hour invested worthwhile.

Perhaps arguing with the phone company for hours over a $10 mistake gives you satisfaction in voicing your own complaint or cleaning your house gives you a sense that the job has been done right and not just eliminated for a price. In evaluating equities, it is the entire process of finding out what a company does and how well they do it that can be rewarding, whether or not you end up buying the stock or whether it is a cost effective way to manage your time.

What the Business Is
Mentor Corporation
Recent price $15.73
Market Cap.$millions:$729.24
Industry: Medical Equipment
Sector: Healthcare
Shares outstanding in millions:46.36 (Split 1/21/03 2:1)
Nasdaq: MNTR

The Business: Overview
Mentor develops, manufactures and markets a broad range of products for the medical specialties of aesthetic surgery, general surgery(plastic and reconstructive) and urology. Aesthetic and general surgery products include surgically implantable prostheses for plastic and reconstructive surgery and capital equipment used in soft tissue aspiration. Surgical urology products include surgically implantable prostheses for the treatment of impotence and brachytherapy seeds for the treatment of prostate cancer. Clinical and consumer healthcare products include catheters and other products for the management of urinary incontinence and retention.

Principal Products and Markets
The company produces a broad line of mammary prostheses, including saline-filled implants and silicone gel-filled implants. In fiscal 2002,approximately 85% of aesthetic and general surgery revenues were from sales of mammary prostheses. Saline-filled breast implants accounted for 67% of these sales. Mammary prostheses have applications for both cosmetic elective procedures and in reconstructive procedures. The elective market caters to augmentation and shaping of the breast. Breast reconstruction following mastectomy is a surgical option for many women.

Silicone breast implants have been a product with a controversial background. Dow Corning filed for bankruptcy protection in 1997 after paying $2.4 billion to settle claims. Suits were initiated at that time due to presumed increased risk of connective tissue diseases such as lupus from silicone exposure. This has been disproved in recent years and in 2000,the Institute of Medicine reported women with silicone implants showed no increased risk for connective tissue disease. They are still banned from use for women seeking first-time cosmetic breast enlargement. They are available to women who wish to replace an existing implant or to mastectomy patients. They are preferred over saline implants for their natural feel. Inamed,a Mentor competitor is currently filing for clearance by the FDA to begin marketing silicone breast implants without restriction. Mentor is also filing, but is several months behind Inamed. Both applications may be reviewed at the same time and approved. Silicone breast implants are now made to be more durable and less likely to leak. They are also more expensive and tend to generate better profit margins for the company. The American Society of Aesthetic Plastic Surgeons says more than 210,000 breast enlargement surgeries were done in 2001, up from 187,755 a year earlier. Roughly 80,000 breast reconstruction implants ere done in 2001. It is a very large market. It is felt silicone breast implant approval could increase this already valuable market by $100 million or more.

The company also offers a line of tissue expanders. Tissue expansion is a technique to create extra tissue for filling in large surgical defects, burn repair and post-mastectomy breast reconstruction. The technique involves saline-filled implants that are filled with increasing amounts of fluid over several months to create increased skin surface area for repairs.

In September 1997, the company began to market the Contour Genesis System, an ultrasound-assisted product used for aspiration of soft tissue in general surgery and cosmetic surgery applications. The company has completed clinical trials order to expand the labeling of the product to include liposuction. Approval was granted in October 2001. In December 2001,the acquisition of Byron Medical expanded the company's selection liposuction products. Mentor also acquired former competitor LySonix to help the company become a broad line supplier to the liposuction market.

The company's surgical urology products fall into three general categories: erectile dysfunction products, urinary care and pelvic floor products and cancer treatment products. Erectile dysfunction products consist of a line of penile implants for the treatment of male sexual impotence. These implants are indicated for men who have not responded to less invasive therapies such as Viagra. Urinary care products include the Suspend Sling for women who are experiencing stress incontinence. Pelvic floor reconstruction to repair prolapse are accomplished with Suspend tissue. In February 2002, Mentor introduced Axis, a dermal based tissue, which like Suspend is treated using the patented Tutoplast process to provide the surgeon with additional tissue choices.

Cancer treatment products include brachytherapy seeds for prostate cancer. Mentor is no longer a marketing partner with North American Scientific (NASI). NASI manufactures and ships IoGold Pd-103 brachytherapy seeds.

On January 8, 2003 Mentor Corporation announced that it had reached a nonexclusive agreement to distribute Best� Palladium-103 brachytherapy seeds for treatment of prostate cancer. Based in Springfield, Virginia, privately held Best Medical was founded in 1977 and has its 26 years of manufacturing experience, distributing and servicing the radiation oncology and physics communities through its broad line of radiation therapy products. Best Medical currently manufactures Iridium-192 sources for cardiology applications for Cordis Corporation, a Johnson & Johnson company. Best also manufacturers and directly distributes Pd-103, I-125, Ir-192, Au-198 and other isotopes and products for the brachytherapy market. Mentor believes that Best's patented double wall seed design, excellent visualization, and 5mm length make it a unique and valuable seed.

In January 2001 the company announced the acquisition of South Bay Medical for the purpose of acquiring its technology. That included a computer-based work station and automated cartridge-based needle loading system used in brachytherapy procedures. It is currently being evaluated by the FDA and approval is expected in the second quarter of fiscal 2003.

Mentor markets a line of male external catheters for incontinence and a line of disposable catheters for men, women and children to treat urinary retention. In February 2001 the company acquired Porges SA, a French company, specializing in urological disposables, including diagnostic tools and various devices for surgery and postoperative follow-up.

The company also markets variety of disposable products used in the management of urinary incontinence and cancer. These include leg bags, urine collection systems, organic odor eliminators and moisturizing skin creams. In April 2001 the company began to distribute the BTA Stat point of care bladder cancer screening test manufactured by Polymedco Inc. under an exclusive supply and distribution agreement.

It is clear from this overview of the company that they are diversified, but in a cohesive and reasonable way. They have not entered fields where they are not competent and their acquisitions have been planned to augment their business in a way that is complementary to their existing products.

International Operations
Mentor exports most of its product lines principally to Canada and western Europe. Products are sold both to independent distributors and directly through the company's sales offices in Canada, the United Kingdom, Germany, France, Japan, Benelux, Australia, Spain, Portugal and Italy. Other than sales made through the company's international sales offices, export sales have been made in US dollars and currency fluctuations have not significantly affected operating earnings. The company does not use derivative instruments to hedge its foreign currency transactions.

Competition
Mentor believes it is one of the leading suppliers in the US of penile implants, cosmetic and reconstructive surgery products and disposable catheter products. This is based on information developed internally, public information sources and information from independent research studies of market share. The company competes with one other company in the domestic breast implant market, McGhan Medical Corporation, a subsidiary of INAMED, Inc. American Medical Systems is the only competition in the inflatable penile implant market. Several companies produce malleable implants. Amersham Health Care,C.R.Bard,Theragenics and others produce brachytherapy seeds. Mentor believes it is second in this market and the recent acquisition of South Bay Medical will improve its position. Competition for catheters and disposable urinary incontinence products comes from C.R.Bard, Hollister, Inc., Kendall and Coloplast.

The Officers and Directors
Christopher J. Conway (63)
Mr. Conway is the President, CEO and Chairman of the board. He is the founder of the company and has served as Chairman of the board since 1969. He was CEO from 1969 to 1999 then resumed the position in 2000. He owns 929,066 shares or 3.9%. His salary in 2002 was $398,550 and he was granted a $369,564 bonus. He received no bonus in 2001 and his salary was $390,000. In 2000 his salary was $390,000 and he had $204,000 bonus.

Eugene G. Glover (59)
Mr. Glover is a founder of the company and has held the position of Vice President, engineering since 1969 to 1986. In October 2000 he was appointed senior Vice president, Advanced Development. His salary in 2002 was $255,481 and in 2001, $116,347 and he was given a bonus $123,600 in 2002. He owns 493,500 shares.

Joshua Levine (44)
Mr. Levine joined the company in October 1996 as Vice President Sales, Aesthetic products. In September of 1998 he was promoted to domestic vice president of sales and marketing aesthetic products. In January 2000, Mr. Levine resigned from the company briefly to join a start-up practice management organization, the Plastic Surgery Co., where he was the Chief Development Officer. He resigned the position in September 2000 to rejoin Mentor as Vice President of sales and marketing. In November 2001 Mr. Levine assumed global responsibilities for all aesthetic sales and marketing activities. He was promoted to Senior Vice President of sales and marketing in 2002. His salary for 2002 was $199,276 and he was granted a bonus of $112,476. He owns 7,821 shares of stock.

Adel Michael (58)
Mr. Michael joined the company in April 2000 as Senior Vice President, CFO and treasurer. He was promoted to Executive Vice President in 2001.From 1989 to 2000 he was CFO of Getz Brothers inc. and from 1983 to 1989 he was a group controller for the Marmon Group, Inc. His salary was $284,374 in 2002 and he had a bonus of $204,000. In 2001 he made $2235,385 in salary and $48,000 in bonus. He own 47,500 shares of stock.


Bobby K. Purkait (52)
Mr. Purkait joined the company in 1986 and has served in various research and development capacities. He was promoted to Vice President of science and technology in 1988.In 1998 he was appointed Senior Vice President. In January 2002 his responsibilities were changed to focus on identifying and assessing the value and feasibility of new technologies. He was paid a salary of $255,480 in 2002 and a bonus of $175,100. In 2001 he made $249,038 and no bonus. In 2000 he had a salary of $200,000 and a bonus of $104,000. He owns 128,000 shares.

Clarke Scherff (55)
Mr. Scherff joined the company in 1995 as Director of regulatory Affairs through the acquisition of Optical Radiation Corp. where he held the position of Group Vice President of Quality Assurance/Regulatory Affairs from 1991-1995. He was promoted to Vice President Quality and Regulatory Assurance in 1997 and to Vice President of Regulatory Compliance/Compliance Officer in 2000. From 1980 to 1993 Mr. Scherff held various positions of increasing responsibility for American Hospital Corp./ Baxter Health Care Corp., ultimately serving as the Director of Quality Assurance. Current salary is not given and he is not listed as a shareholder.

Peter Shepard (56)
Mr. Shepard joined the company in 1976 as a sales representative. In 1982 he was promoted to Vice President Sales and in 1992 to Vice President sales and marketing for surgical urology and healthcare products. Beginning in 1996 he was assigned to Vice President business development for the company. In October 2000 Mr. Shepard resumed the position of Vice President sales and marketing for urology and healthcare product lines. In May 2002 he became Senior Vice President of same. No current salary is given and he is not listed as a shareholder.

The salaries and bonuses for company officers are not excessive and in 2001,a poor year for the company, no bonuses were given.

Directors
Two of the directors are also officers and include Mr. Conway and Mr. Glover. They do not receive compensation. The other board members are paid $20,000 per year. They met 5 times.

*Walter Faster director since 1980 and serves no other boards.

*Michael Nakonechy since 1980 serves as President of NAK Assoc. since 1981 also.

*Dr. Richard Young since 1990 is also director of Bay Street Milling. He has been a consultant to Mentor and CEO of Mentor O&O in 1985-1990.

*Ronald Rossi is also president of LoJack Corp. and a director since 1999.

There are no family connections readily discernible between the directors and officers.

Total shares held by insiders: 8.3%

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