**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-QSB**

 

| **(Mark  One)**                                                                                                                                                           |   |                                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|                                                                                                                                                                      |
| **For the Quarterly Period Ended December 31, 2003**                                                                                                                 |
|                                                                                                                                                                      |
| **or**                                                                                                                                                                    |
|                                                                                                                                                                      |   |                                                                                                               |
| **o**                                                                                                                                                                     |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                      |
| **For the transition period  from           to           ** |

 

**Commission file number 000-50442**

 

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| **MEDICOR  LTD.**                                                  |
|--------------------------------------------------------------------|
| (Exact  name of small business issuer as specified in its charter) |
|                                                               |   |   |
| **Delaware**                                                       |   | **14-1871462** |
| (State  or other jurisdiction  of incorporation or organization)   |   | (IRS  Employer Identification No.) |
|                                                               |   |   |
| **4560 S. Decatur Blvd., Suite 300  Las Vegas, Nevada**            |   | **89103** |
| (Address  of principal executive offices)                          |   | (Zip  Code) |
|                                                               |   |   |

 

**(702) 932-4560**

(Issuer’stelephone number)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.  Yes ýNo o

 

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OnFebruary 12, 2004, there were 17,604,113 shares of common stockoutstanding.

 

TransitionalSmall Business Disclosure Format (Check one): Yes **o** No**ý**

 

 

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**MEDICOR LTD.**

 

# **INDEX**

 
| Part I. Financial Information |                                                                                             |
|-------------------------------|--------------------------------------------------------------------------------------------------|
|                          |                                                                                             |
| Item  1.                      | Consolidated  Financial Statements (Unaudited)                                                   |   |
|                          |                                                                                             |   |
|                          | Consolidated Balance Sheet –  December 31, 2003                                        |   |
|                          |                                                                                             |   |
|                          | Consolidated Statements of Operations –  Three Months Ended December 31, 2003 and 2002 |   |
|                          |                                                                                             |   |
|                          | Consolidated Statements of Operations - Six  Months Ended December 31, 2003 and 2002        |   |
|                          |                                                                                             |   |
|                          | Consolidated Statements of Cash Flows - Six  Months Ended December 31, 2003 and 2002        |   |
|                          |                                                                                             |   |
|                          | Notes to Consolidated Financial  Statements – December 31, 2003                        |   |
|                          |                                                                                             |   |
| Item  2.                      | Management’s  Discussion and Analysis or Plan of Operation                                  |   |
|                          |                                                                                             |   |
| Item 3.                       | Controls and Procedures                                                                          |   |
|                          |                                                                                             |   |
| Part II. Other Information    |                                                                                             |
|                          |                                                                                             |
| Item 1.                       | Legal Proceedings                                                                                |   |
|                          |                                                                                             |   |
| Item  2.                      | Changes  in Securities                                                                           |   |
|                          |                                                                                             |   |
| Item 3.                       | Defaults upon Senior  Securities                                                                 |   |
|                          |                                                                                             |   |
| Item 4.                       | Submission of Matters to a  Vote of Security Holders                                             |   |
|                          |                                                                                             |   |
| Item 5.                       | Other Information                                                                                |   |
|                          |                                                                                             |   |
| Item  6.                      | Exhibits  and Reports on Form 8-K                                                                |   |
|                          |                                                                                             |   |
|                          | Signatures                                                                                       |   |

 

2

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***PART I – FINANCIALINFORMATION***

 

***ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)***

 

MediCor Ltd.Consolidated Balance SheetDecember 31, 2003(Unaudited)

 
| **Assets**                                                                                                                               |   |        |       |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|
|                                                                                                                                     |   |        |       |
| Current Assets:                                                                                                                          |   |        |       |
|                                                                                                                                     |   |        |       |
| Cash                                                                                                                                     |   | $           | 86,797     |   |
| Receivables, less allowance for doubtful accounts  of $3,384,999                                                                         |   | 151,048     |       |
| Inventories                                                                                                                              |   | 136,893     |       |
| Prepaid expenses and other current assets                                                                                                |   | 163,507     |       |
| Total Current Assets                                                                                                                     |   | 538,245     |       |
| Property, plant and equipment, net                                                                                                       |   | 297,571     |       |
| Goodwill and other intangibles, net                                                                                                      |   | 4,246,027   |       |
| Deposits                                                                                                                                 |   | 5,683,000   |       |
| Other assets                                                                                                                             |   | 91,982      |       |
| Total assets                                                                                                                             |   | $           | 10,856,825 |   |
|                                                                                                                                     |   |        |       |
| **Liabilities and Stockholders’  Equity**                                                                                           |   |        | ** ** |
|                                                                                                                                     |   |        |       |
| Current Liabilities:                                                                                                                     |   |        |       |
|                                                                                                                                     |   |        |       |
| Bank overdraft                                                                                                                           |   | $           | 16,558     |   |
| Short term convertible debentures                                                                                                        |   | 275,000     |       |
| Notes payable                                                                                                                            |   | 200,000     |       |
| Note payable to related party                                                                                                            |   | 9,369,942   |       |
| Accounts payable                                                                                                                         |   | 1,927,782   |       |
| Accrued expenses and other current liabilities                                                                                           |   | 1,374,745   |       |
| Payroll taxes payable                                                                                                                    |   | 105,124     |       |
| Interest payable to related party                                                                                                        |   | 422,197     |       |
| Interest payable                                                                                                                         |   | 27,277      |       |
| Total Current Liabilities                                                                                                                |   | 13,718,625  |       |
|                                                                                                                                     |   |        |       |
| Long-term convertible debentures                                                                                                         |   | 1,650,000   |       |
| Long-term accrued liabilities                                                                                                            |   | 1,429,367   |       |
| Total liabilities                                                                                                                        |   | 16,797,992  |       |
|                                                                                                                                     |   |        |       |
| Commitments and contingencies (Note R)                                                                                                   |   |        |       |
|                                                                                                                                     |   |        |       |
| Stockholders’ equity (deficit)                                                                                                      |   |        |       |
| Common shares, $.001 par value, 100,000,000 shares  authorized, 17,604,113 issued and outstanding, net of 20,298 treasury shares  at par |   | 17,604      |       |
| Capital in excess of par value                                                                                                           |   | 16,996,818  |       |
| Accumulated (deficit)                                                                                                                    |   | (22,955,589 | )          |
| Stockholders’ equity (deficit)                                                                                                      |   | (5,941,167  | )          |
| Total liabilities and stockholders’ equity                                                                                          |   | $           | 10,856,825 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

3

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MediCor Ltd.Consolidated Statements of OperationsThree Months Ended December 31, 2003 and 2002(Unaudited)

 
|                                                   |   | **2003**   |       | **2002**   |       |
|--------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                   |   |       |       |       |       |
| Net sales                                              |   | $          | 306,542    |       | $          | 412,884 |   |
| Cost of sales                                          |   | 64,482     |       | 137,758    |       |
| Return of consigned inventory previously written  down |   | (1,575     | )          | (192,150   | )          |
|                                                   |   |       |       |       |       |
| Gross profit                                           |   | 243,635    |       | 467,276    |       |
| Operating Expenses:                                    |   |       |       |       |       |
| Selling, general and administrative expenses           |   | 1,679,117  |       | 1,103,280  |       |
| Research and development                               |   | 424,826    |       | 187,625    |       |
|                                                   |   | (1,860,308 | )          | (823,629   | )          |
| Operating Loss                                         |   |       |       |       |       |
| Other income (expense):                                |   |       |       |       |       |
| Net interest expense                                   |   | (256,791   | )          | (77,168    | )          |
|                                                   |   |       |       |       |       |
| Loss before income taxes                               |   | (2,117,099 | )          | (900,797   | )          |
| Income taxes                                           |   | 1,737      |       | —     |       |
|                                                   |   |       |       |       |       |
| Net Loss                                               |   | (2,118,836 | )          | (900,797   | )          |
| Preferred dividends                                    |   | —     |       | 62,060     |       |
|                                                   |   |       |       |       |       |
| Net loss attributable to common stockholders           |   | $          | (2,118,836 | )          | $          | (962,857 | ) |
|                                                   |   |       |       |       |       |
| Earnings per share data:                               |   |       |       |       |       |
| Weighted average shares, basic and diluted             |   | 17,577,189 |       | 14,569,087 |       |
| Basic and diluted                                      |   |       | ** ** |       | ** ** |
| Net loss per share                                     |   | $          | (0.12      | )          | $          | (0.07 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

4

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MediCor Ltd.Consolidated Statements of OperationsSix Months Ended December 31, 2003 and 2002(Unaudited)

 
|                                                   |   | **2003**   |       | **2002**   |       |
|--------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                   |   |       |       |       |       |
| Net sales                                              |   | $          | 642,881    |       | $          | 832,280 |   |
| Cost of sales                                          |   | 142,695    |       | 283,735    |       |
| Return of consigned inventory previously written  down |   | (24,150    | )          | (192,150   | )          |
|                                                   |   |       |       |       |       |
| Gross profit                                           |   | 524,336    |       | 740,695    |       |
| Operating Expenses:                                    |   |       |       |       |       |
| Selling, general and administrative expenses           |   | 2,866,962  |       | 2,344,892  |       |
| Research and development                               |   | 433,951    |       | 209,300    |       |
|                                                   |   | (2,776,577 | )          | (1,813,497 | )          |
| Operating Loss                                         |   |       |       |       |       |
| Other income (expense):                                |   |       |       |       |       |
| Net interest expense                                   |   | (485,370   | )          | (95,301    | )          |
|                                                   |   |       |       |       |       |
| Loss before income taxes                               |   | (3,261,947 | )          | (1,908,798 | )          |
| Income taxes                                           |   | 1,737      |       | —     |       |
|                                                   |   |       |       |       |       |
| Net Loss                                               |   | (3,263,684 | )          | (1,908,798 | )          |
| Preferred dividends                                    |   | —     |       | 123,025    |       |
|                                                   |   |       |       |       |       |
| Net loss attributable to common stockholders           |   | $          | (3,263,684 | )          | $          | (2,031,823 | ) |
|                                                   |   |       |       |       |       |
| Earnings per share data:                               |   |       |       |       |       |
| Weighted average shares, basic and diluted             |   | 17,547,158 |       | 14,569,087 |       |
| Basic and diluted                                      |   |       | ** ** |       | ** ** |
| Net loss per share                                     |   | $          | (0.19      | )          | $          | (0.14 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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MediCor Ltd.Consolidated Statements of Cash FlowsSix Months Ended December 31, 2003 and 2002(Unaudited)

 
|                                                                             |   | **2003**   |       | **2002**   |       |
|----------------------------------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                                             |   |       |       |       |       |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       |   |       |       |       |       |
| Net loss                                                                         |   | $          | (3,263,684 | )          | $          | (1,908,798 | ) |
| Adjustments to reconcile net loss to net cash  utilized by operating activities: |   |       |       |       |       |
| Depreciation and amortization                                                    |   | 246,406    |       | 84,578     |       |
| Provision for doubtful accounts                                                  |   | 233,167    |       | 154,649    |       |
| Inventory write down                                                             |   | 24,150     |       | —     |       |
| Loss on disposal of property, plant and equipment                                |   | 22,928     |       | —     |       |
| Changes in operating assets and liabilities                                      |   |       |       |       |       |
| Receivables                                                                      |   | (190,581   | )          | (7,403     | )          |
| Notes receivable                                                                 |   | 27,384     |       | —     |       |
| Inventories                                                                      |   | (21,215    | )          | (10,593    | )          |
| Prepaid expenses and other current assets                                        |   | (57,279    | )          | (114,887   | )          |
| Other assets                                                                     |   | (48,100    | )          | (31,396    | )          |
| Bank overdraft                                                                   |   | (111,829   | )          | —     |       |
| Accounts payable                                                                 |   | (67,763    | )          | (534,658   | )          |
| Accrued expenses and other current liabilities                                   |   | (189,805   | )          | (85,293    | )          |
| Payroll taxes payable                                                            |   | 80,449     |       | 3,513      |       |
| Interest payable                                                                 |   | 118,949    |       | 81,394     |       |
| Long term accrued liabilities                                                    |   | 15,770     |       | (11,831    | )          |
| Net cash utilized by operating activities                                        |   | (3,181,053 | )          | (2,380,725 | )          |
|                                                                             |   |       |       |       |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |   |       | ** ** |       | ** ** |
| Purchases of property, plant and equipment                                       |   | (14,850    | )          | (6,017     | )          |
| Increase in deposits                                                             |   | (600,000   | )          | (1,350,000 | )          |
| Net cash utilized by investing activities                                        |   | (614,850   | )          | (1,356,017 | )          |
|                                                                             |   |       |       |       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |   |       |       |       |       |
| Proceeds from issuance of convertible debentures                                 |   | 1,350,000  |       | 410,000    |       |
| Proceeds from issuance of short term debt                                        |   | 2,598,600  |       | 3,991,936  |       |
| Payments on short term debt                                                      |   | (88,021    | )          | (544,314   | )          |
| Issuance of common stock                                                         |   | 11,489     |       | —     |       |
| Purchase of treasury stock                                                       |   | (39,999    | )          | —     |       |
| Issuance of preferred stock                                                      |   | —     |       | 53,154     |       |
| Dividends paid                                                                   |   | —     |       | (123,025   | )          |
| Net cash provided by financing activities                                        |   | 3,832,069  |       | 3,787,751  |       |
| Net decrease in cash                                                             |   | 36,166     |       | 51,009     |       |
| Cash at beginning of period                                                      |   | 50,631     |       | 17,249     |       |
| **CASH AT END OF PERIOD**                                                        |   | $          | 86,797     |       | $          | 68,258 |   |
|                                                                             |   |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURE OF  NON-CASH ACTIVITIES**                              |   |       |       |       |       |
| Conversion of short-term convertible debentures to  common stock                 |   | $          | 75,000     |       | —     |   |
|                                                                             |   |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION**                            |   |       |       |       |       |
| Cash paid during the six months for:                                             |   |       |       |       |       |
|                                                                             |   |       |       |       |       |
| Interest                                                                         |   | $          | 367,457    |       | $          | 48,750 |   |
| Taxes                                                                            |   | $          | 1,737      |       | $          | — |   |

 

Seeaccompanying notes to unaudited financial statements.

 

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**MEDICOR LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003**

**(Unaudited)**

 

**Note A -Business Activity**

 

MediCor Ltd. (the “Company”or “MediCor”) was incorporated in December 2000.  The Companyacquires, develops, manufactures and markets products for medical specialtiesin aesthetic plastic and reconstructive surgery, and dermatology markets. Products include surgically implantable prostheses for aesthetic plastic andreconstructive surgery and scar management products.  The Company’sproducts are sold worldwide to hospitals, surgery centers and physiciansthrough various distributors and direct sales personnel.

 

**Note B -Summary of Significant Accounting Policies**

 

**Basis ofPresentation**

 

On February 7, 2003, SCMerger Corp., Ltd., a British Virgin Islands company and wholly ownedsubsidiary of the Company, merged with and into International IntegratedIncorporated, a British Virgin Islands company (“III”), with III as thesurviving entity.  The February 7,2003 merger has been accounted for as a reverse acquisition.  In accordance with Statement of FinancialAccounting Standards No. 141, for accounting purposes III has been treated asthe continuing reporting entity that acquired Scientio, Inc. (the Company’sformer name).  Therefore, the reportsfiled by the Company after the reverse acquisition parallel the financialreporting required under generally accepted accounting principles as if IIIwere the legal successor to Scientio, Inc.’s reporting obligation as of the dateof the merger.  The Quarterly Report onForm 10-QSB is filed based on the fiscal year of III, the accounting acquirer.

 

**Principlesof Consolidation**

 

The consolidated financialstatements include the accounts of the Company and all of its subsidiaries inwhich a controlling interest is maintained. All inter-company accounts and transactions have been eliminated. Certain prior year amounts in previously issued financial statements have beenreclassified to conform to the current year presentation.  The consolidatedfinancial statements have been prepared in United States dollars.

 

**Use ofEstimates**

 

Financial statementsprepared in accordance with accounting principles generally accepted in theUnited States require management to make estimates and judgments that affectamounts and disclosures reported in the financial statements.  Actualresults could differ from those estimates.

 

**Revenue Recognition**

 

The Company generally recognizes revenue from product sales uponsurgical implantation for consigned items and upon shipment for all others,provided that no significant post-delivery obligations remain and collection ofthe resulting receivable is reasonably assured.  When significant post-delivery obligations exist, revenue isdeferred until such obligations are fulfilled. MediCor allows credit for products returned within its policyterms.  Such returns are estimated andan allowance for product returns is recorded at the time of sale as necessary.

 

7

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##### **Receivables**

##### ** **

##### **The Company has reserved $3,384,999against certain receivables due to issues regarding collectibility.  The Company intends to pursue all avenues tocollect on amounts due.**

##### ** **

##### **ProductWarranties**

##### ** **

##### **III Acquisition Corp. d/b/a PIP.America(“PIP.America”), a subsidiary of the Company, provides a product replacementprogram to surgeons for deflations for a period of ten (10) years from the dateof implantation.  For each deflation,the surgeon receives financial assistance plus a free replacement. Managementestimated the amount of potential future product replacement claims based onstatistical analysis.  Expected futureobligations are determined based on the history of product shipments and claimsand are discounted to a current value. Changes to actual claims and interest rates could have a material impacton the statistical calculation which could materially impact the Company’sreported expenses and results of operations.**

##### ** **

##### **Accountingfor Long-Lived Assets**

##### ** **

##### **The Company accounts for long-livedassets, other than goodwill, in accordance with the provisions of SFAS No. 144,“Accounting for the Impairment and Disposal of Long Lived Assets,” whichsupercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to be Disposed of.” This statement creates one accounting model, based on the frameworkestablished in SFAS No. 121, to be applied to all long-lived assets includingdiscontinued operations.  Adoption ofthis statement had no material effect on its financial position or results ofoperations.  SFAS No. 144 requires,among other things, that an entity review its long-lived assets and certainrelated intangibles for impairment whenever changes in circumstances indicatethat the carrying amount of an asset may not be fully recoverable.  The Company does not believe that any suchchanges have taken place.**

##### ** **

##### **Researchand Development**

##### ** **

##### **Research and development costs areexpensed by the Company as incurred, including the costs of clinical studiesand other regulatory approval activities.**

 

##### **Sharesand Share Amounts**

 

Effective as ofFebruary 7, 2003, the Company merged with International IntegratedIncorporated (“III”).  All references inthe financial statements to the number of shares and per share amounts havebeen retroactively restated to reflect the increased number of common stockoutstanding.

 

**Effects ofRecent Accounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombination” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 is effective as of July 1,2001 and SFAS No. 142 is effective January 2002 for companies havingfiscal years beginning after December 15, 2001.  Under SFAS No. 142, goodwill will not be amortized, but will besubject to impairment testing.  TheCompany adopted SFAS No. 141 and SFAS No. 142 effective for the fiscal yearbeginning July 1, 2002.  TheCompany has evaluated SFAS No. 141 and has determined that it will not have aneffect on the Company’s December 31, 2003 consolidated financialstatements.  The absence of goodwillamortization as a result of adopting SFAS No. 142 did not have a materialeffect on the Company’s consolidated results of operations or financialposition.  There was no indication thatgoodwill was impaired.

 

In August 2001, theFinancial Accounting Standards Board issued SFAS No. 143, “Accounting for AssetRetirement Obligations,” which addresses the financial accounting and reportingfor obligations associated 

 

8

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with the retirement of tangible long-lived assets and the associatedasset retirement costs.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002.  The Company has determined that SFAS No. 143will not have an effect on the Company’s December 31, 2003 financialstatements.

 

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This statement replaces SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of,” and provisions of Accounting Principles BoardOpinion (“APB”) No. 30, “Reporting of Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual, andInfrequently Occurring Events and Transactions” for the disposal of segments ofa business.  This statement creates oneaccounting model, based on the framework established in SFAS No. 121, to beapplied to all long-lived assets including discontinued operations.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001. Adoption of SFAS No. 144 in the first quarter of fiscal 2003 had noimpact on the Company’s consolidated results of operations or financial position.

 

In April 2002, theFinancial Accounting Standards Board issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.” The most significant provisions of this statement relate to therescission of Statement No. 4, “Reporting Gains and Losses from Extinguishmentof Debt;” and it also amends other existing authoritative pronouncements tomake various technical corrections, clarify meanings, or describe theirapplicability under changes conditions. Under this new statement, any gain or loss on extinguishment of debtthat was classified as an extraordinary item in prior periods that does notmeet certain defined criteria as an extraordinary item in prior periods must bereclassified.  This statement iseffective for financial statements issued on or after May 15, 2002.  The Company has completed an evaluation ofSFAS No. 145, and has determined that it will not have an effect on theconsolidated financial statements.

 

In June 2002, the FinancialAccounting Standards Board issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement requires companies to recognize costs associated withexit or disposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. Statement No. 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002.  Adoption of this statement did not have a material effect on theCompany’s consolidated results of operations or financial position.

 

InNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which clarifies disclosure andrecognition / measurement requirements related to certain guarantees.  The disclosure requirements are effectivefor financial statements issued after December 15, 2002 and therecognition and measurement requirements are effective on a prospective basisfor guarantees issued or modified after December 31, 2002.  The adoption of FI N45 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

On December 31, 2002, the Financial Accounting Standards Boardissued FASB Statement No. 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure.” Statement 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition to Statement 123’s fair value method of accounting forstock-based employee compensation.  Statement 148 also amends thedisclosure provisions of Statement 123 and APB Opinion No. 28, “Interim Financial Reporting,” torequire disclosure in the summary of significant accounting policies of theeffects of an entity’s accounting policy with respect to stock-based employeecompensation on reported net income and earnings per share in annual andinterim financial statements.  While the Statement does not amend Statement123 to require companies to account for employee stock options using the fairvalue method, the disclosure provisions of Statement 148 are applicable to allcompanies with stock-based employee compensation, regardless of whether theyaccount for that compensation using the fair value method of Statement 123 orthe intrinsic value method of Opinion 25. Statement No. 148 is effective forfiscal years ending after December 15, 2002.  The Company willcontinue to account for stock-based employee compensation under the intrinsicvalue method of Opinion 25 but adopted the disclosure provisions of

 

9

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Statement No. 148 in the fourth quarter of fiscal 2003.  Adoptionof this standard did not have a material effect on the Company’s consolidatedresults of operations or financial position.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities.”  A variableinterest entity (“VIE”) is one where the contractual or ownership interest inan entity change with changes in the entity’s net asset value.  This interpretation requires theconsolidation of a VIE by the primary beneficiary, and also requires disclosureabout VIEs where an enterprise has a significant variable interest but is notthe primary beneficiary.  At theeffective date, the Company has not acquired an interest in any VIEs.

 

InApril 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS No. 149 establishes accounting and reporting standards forderivative instruments and for hedging activities.  This statement is effective for contracts entered into ormodified after June 30, 2003.  TheCompany has determined that adoption of SFAS No. 149 will not have a materialeffect on the Company’s financial position or results of operations.

 

InMay 2003, The FASB issued statement number No. 150 “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity,”  effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterSeptember 15, 2003.  Adoption ofthis standard did not have a material effect on the Company’s consolidated resultsof operations of financial position.

 

**Note C – Interim Reporting**

 

Theaccompanying unaudited consolidated financial statements for the three andsix-month periods ended December 31, 2003 and December 31, 2002 havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with instructions toForm 10-QSB and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. In the opinion of management, all adjustments (consisting only ofnormal recurring accruals, unless otherwise indicated) considered necessary fora fair presentation of the results of operations for the indicated periods havebeen included. Certain amounts recorded in previous periods have beenreclassified to conform to the current period presentation. Operating resultsfor the six months ended December 31, 2003 are not necessarily indicativeof the results for the full fiscal year.

 

**Note D – Major Customer**

 

During the three and six months endedDecember 31, 2002 approximately 25% of the Company’s consolidated revenuewas attributable to one customer while revenue related to that same customerfor the three and six months ended December 31, 2003 was zero.

 

**Note E –Cash & Cash Equivalents**

 

Allhighly liquid investments with original maturities of three months or less atthe date of purchase are considered to be cash equivalents.

 

**Note F –Accounts Receivable and Notes Receivable**

 

Accountsreceivable at December 31, 2003 consisted of:

 

10

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|                            |   | **December 31, 2003** |      |
|---------------------------------|--------|----------------------------|-----------|
|                            |   |                       |      |
| Accounts receivable             |   | $                          | 3,536,047 |   |
| Allowance for doubtful accounts |   | (3,384,999                 | )         |
|                            |   |                       |      |
| Total                           |   | $                          | 151,048   |   |

 

PIP.America has a distribution agreement with a third-partymanufacturer (Poly Implants Protheses, S.A.) for certain surgically implantableprosthesis.  As part of the distributionagreement certain expenses are reimbursable to the Company by themanufacturer.  Accounts receivableconsist primarily of reimbursements associated with the PIP.America replacementprogram, clinical study expenses and returned products.

 

Changesin allowance for doubtful accounts are as follows:

 
| Balance October 1, 2003   |   | $       | 3,262,322 |   |
|--------------------------------|--------|---------|-----------|--------|
| Provisions/(recovery)          |   | 122,677 |      |
| Write-offs                     |   | —  |      |
| Balance December 31, 2003 |   | $       | 3,384,999 |   |

 

**Note G –Inventories**

 

Inventories are stated atthe lower of cost or market, cost determined by the first-in, first-out (FIFO)method.  The Company writes down its inventory for estimated obsolescenceor unmarketable inventory equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand and marketconditions.

 

Inventories atDecember 31, 2003 consisted of:

 
|           |   | **December 31, 2003** |    |
|----------------|--------|----------------------------|---------|
|           |   |                       |    |
| Raw Materials  |   | $                          | 119,795 |   |
| Finished Goods |   | 17,098                     |    |
|           |   |                       |    |
| Total          |   | $                          | 136,893 |   |

 

The 2002 value of consignedinventory of implants in physician offices on the books of the PIP.Americasubsidiary of the company was uncertain. A voluntary withdrawal of such inventory from the market was initiatedsubsequent to June 30, 2002 in conjunction with an agreement reached betweenthe FDA and PIP.America.  Accordingly,the Company wrote down such inventory to a fair market value of zero as ofJune 30, 2002.  During the sixmonths ended December 31, 2003, inventory previously written down to afair market value of zero was returned to the manufacturer for credit.

 

**Note H - Propertyand Equipment**

 

Property and equipment isstated at cost.  Depreciation is based on the useful lives of theproperties and computed using the straight-line method.  Buildings aredepreciated over 30 years, furniture and equipment over 3 to 10 years andleasehold improvements over the shorter of their estimated remaining lives orlease term.  Significant improvements and betterments are capitalized,while maintenance and repairs are charged to operations as incurred.

 

11

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Property and equipment atDecember 31, 2003 consisted of: 

 
|                                  |   | **December 31, 2003** |    |
|---------------------------------------|--------|----------------------------|---------|
|                                  |   |                       |    |
| Leasehold Improvements                |   | $                          | 137,518 |   |
| Furniture, Fixtures and equipment     |   | 348,510                    |    |
| Computer Equipment and tools and dies |   | 136,858                    |    |
| Subtotal                              |   | 622,886                    |    |
| Accumulated depreciation              |   | (325,315                   | )       |
|                                  |   |                       |    |
| Total                                 |   | $                          | 297,571 |   |

 

Depreciation expense was$30,348 for the three months ended December 31, 2003 and $25,392 for thethree months ended December 31, 2002. For the six months ended December 31, 2003 depreciation expense was$69,092 and $50,393 for the same period a year ago.  The overall increase in depreciation for both periods isattributable to the acquisition of new assets and leasehold improvements withan offsetting disposal of selected assets that had been previously capitalized.

 

## **Note I –Goodwill and Other Intangibles**

 

Goodwill represents the excess of the purchase price over the estimatedfair value of the identified assets (including other intangible assets) andliabilities assumed in the acquisition of HPL Biomedical, Inc. d/b/a Biodermis(“Biodermis”).  The Company adopted SFASNo. 142 and no longer amortized goodwill. Other intangible assets are recorded at fair value and amortized overperiods ranging from 3 to 17 years.

## ** **

## **Goodwill and other intangibles as ofDecember 31, 2003 consisted of:**

## ** **

|                     |   | **December 31, 2003** |      |
|--------------------------|--------|----------------------------|-----------|
|                     |   |                       |      |
| Goodwill                 |   | $                          | 1,221,793 |   |
| Distribution Agreements  |   | 225,000                    |      |
| Non-compete              |   | 130,000                    |      |
| Patents                  |   | 3,100,000                  |      |
| Other                    |   | 20,501                     |      |
| Subtotal                 |   | 4,697,294                  |      |
| Accumulated amortization |   | (451,267                   | )         |
|                     |   |                       |      |
| Total                    |   | $                          | 4,246,027 |   |

 

Amortization for the threemonths ended December 31, 2003 was $87,882 compared to $17,118 for thesame period a year ago. The amortization for the six months endedDecember 31, 2003 was $177,315 compared to $34,185 from the prior periodending December 31, 2002.  Theincrease in amortization for both periods can be attributed to the purchase ofpatents in March 2003.

 

## **Note J –Deposits**

## ** **

## **Deposits at December 31, 2003 totaled$5,683,000.  In 2000, the Companyobtained the right to purchase a 7.5% common equity interest in a third-partymanufacturer from its founder for $3,750,000. In 2000, the Company made a non-refundable deposit of $1,883,000 againstthe purchase price.  The Company isunder**

 

12

----

 

no obligation to fund the remainder of the payment or the exercise thepurchase right.  The remaining depositbalance of $3,800,000 is related to an asset purchase agreement described inNote R.

 

## **Note K –Accrued Expenses**

 

## **Accrued expenses and other currentliabilities at December 31, 2003 consisted of:**

## ** **

|                        |   | **December 31, 2003** |      |
|-----------------------------|--------|----------------------------|-----------|
|                        |   |                       |      |
| Consulting                  |   | $                          | 762,500   |   |
| Product replacement reserve |   | 404,591                    |      |
| Other                       |   | 207,654                    |      |
|                        |   |                       |      |
| Total                       |   | $                          | 1,374,745 |   |

 

## **Consulting fees consisted of amounts relatingto consulting agreements with key executives.**

## ** **

## **Other accrued expenses included salariesand employee benefits, legal, research and development and other miscellaneousaccrued expenses.**

## ** **

## **Long-term accrued liabilities of$1,429,367 at December 31, 2003 consisted of product replacement reserves.**

## ** **

## **Note L –Convertible Debentures**

## ** **

## **Short-term convertible debentures atDecember 31, 2003 were $275,000. These convertible debentures pay 10% interest.  Interest is prepaid and amortized over the life of the ConvertibleDebenture.  The convertible debenturesare convertible within one year at the holder’s discretion to shares of Companycommon stock at a price of $4.02.  Theseconvertible debentures mature between January and December 2004.**During the three months ended December 31, 2003, $75,000 ofshort-term convertible debentures was converted to 18,641 shares of commonstock, while $60,000 of short-term convertible debentures was repaid.

 

## **Long-term convertible debentures atDecember 31, 2003 were $1,650,000. The increase of $1,000,000 was due to issuance of long-term convertibledebentures on November 24, 2003 paying 10% interest.  Interest is accrued on a quarterly basis forthe life of the debenture and is payable within 30 days from the end of thecalendar quarter. The convertible debentures are convertible after one year andat the 18-month, 24-month, 30-month and 36-month anniversary of the issuancedate at the holder’s discretion to shares of Company common stock at a priceequal to the greater of $5.00 or seventy-five percent (75%) of the dailyweighted average trading price per share of the Company’s common stock over aperiod of twenty (20) trading days prior to the conversion date. Theseconvertible debentures mature between April 2006 and November 2006.**

 

## **There were costs of $50,000 associatedwith the above change in long-term convertible debentures, of which $1,389 wasamortized. The remaining balance of $48,611 will be amortized over the life ofthe long- term convertible debentures.**

 

**Note M –Related Party Transactions**

 

InternationalIntegrated Industries, LLC (“LLC”) is a company in which the Company’s Chairmanhas a controlling interest.  Neither theCompany nor any of its subsidiaries has any direct ownership in LLC.  LLC acted on behalf of the Company byfunding significant expenses incurred for which the Company has a revolvingloan agreement as shown on the Company’s Balance Sheet of $9,369,942 atDecember 31, 2003.  The outstandingbalance of the note payable accrues interest at an annual interest rate of tenpercent

 

13

----

 

(10%).  During the three months endedDecember 31, 2003, LLC advanced $883,600 to the Company, of which none wasconverted to common stock and $5,251 was repaid.  During the three months ended December 31, 2003, the companyrepaid LLC $327,709 of accrued interest. Interest expense relating to this note payable was $422,197 for the sixmonths ended December 31, 2003. The unpaid liability for these expenses are included in the Company’snote payable to affiliates, which is contained in the financial statementspresented herein.  The Company had acommitment from LLC to fund operating shortfalls as necessary for the periodpresented.

 

InOctober 2003, the Company entered into a Reimbursement Agreement with acompany controlled by the Company’s Chairman, Mr. Donald K. McGhan, for thereimbursement of expenses incurred in the operation of its private plane whenused for MediCor business.  The ReimbursementAgreement is effective for expenses incurred for MediCor businesspurposes.  The Company recognized atotal of $97,424 in expenses pursuant to the Reimbursement Agreement during thesecond quarter of fiscal 2004.  Allexpenses recognized pursuant to the Reimbursement Agreement have been includedby the Company in selling, general, and administrative expenses.

 

**Note N –Federal Income Taxes**

 

Thebenefit for income taxes reflected in the Consolidated Statements of Operationsfor the Company for the periods noted consist of:

 
|                                                  |   | **December 31, 2003** |       | **December 31, 2002** |   |
|-------------------------------------------------------|--------|----------------------------|------------|----------------------------|--------|
|                                                  |   |                       |       |                       |   |
| Current                                               |   | $                          | 1,109,653  |                       | $      | 648,992 |   |
| Deferred                                              |   | 87,152                     |       | 52,266                     |   |
|                                                  |   |                       |       |                       |   |
| Total Benefit                                         |   | 1,196,805                  |       | 701,258                    |   |
| Less allowance for realization of deferred tax  asset |   | $                          | (1,196,805 | )                          | $      | (701,258 | ) |
|                                                  |   |                       |       |                       |   |
| Benefit Net                                           |   | $                          | —     |                       | $      | — |   |

 

Asof December 31, 2003 and June 30, 2003, the Company recordedallowances of $7,689,029 and $6,492,224 respectively, against certain futuretax benefits, the realization of which is currently uncertain.  The deferred differences related to certainaccounts receivable, accrued warranties, and depreciation/amortization notcurrently deductible as expenses under IRS provisions.  Although the Company recorded this allowanceto the deferred tax assets, the Company may still utilize the future tax benefitsfrom net operating losses for 20 years from the year of the loss to the extentof future taxable income.  The estimatednet operating losses for tax purposes of approximately $11.8 million willexpire over several years ending in 2023.

 

Primarycomponents of the deferred tax asset at the periods noted were approximately asfollows:

 

14

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|                                                   |   | **December 31, 2003** |      | **June 30, 2003** |   |
|--------------------------------------------------------|--------|----------------------------|-----------|------------------------|--------|
|                                                   |   |                       |      |                   |   |
| Computed expected income tax asset/(liability) at  34% |   | $                          | 1,109,653 |                   | $      | 1,814,778 |   |
| Adjustments                                            |   |                       |      |                   |   |
| Net operating loss                                     |   | 4,732,842                  |      | 2,918,064              |   |
| Allowance for bad debt                                 |   | 1,150,900                  |      | 1,071,617              |   |
| Warranty reserve                                       |   | 623,546                    |      | 624,677                |   |
| Depreciation and amortization                          |   | 72,088                     |      | 63,088                 |   |
|                                                   |   |                       |      |                   |   |
| Income tax benefit                                     |   | $                          | 7,689,029 |                   | $      | 6,492,224 |   |
| Less allowance for realization of deferred tax  asset  |   | (7,689,029                 | )         | (6,492,224             | )      |
|                                                   |   |                       |      |                   |   |
| Deferred tax asset, net                                |   | $                          | —    |                   | $      | — |   |

 

**Note O –Loss per Share**

 

A reconciliation of weightedaverage shares outstanding, used to calculate basic loss per share, to weightedaverage shares outstanding assuming dilution, used to calculate diluted lossper share, follows:

 
|                                         |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|----------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                         |   | **2003**                                  |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                         |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average outstanding shares: basic   |   | 17,577,189                                |   | 14,569,087                              |   | 17,547,158 |   | 14,569,087 |   |
| Common equivalent shares                     |   | —                                    |   | —                                  |   | — |   | — |   |
| Weighted average outstanding shares: diluted |   | 17,577,189                                |   | 14,569,087                              |   | 17,547,158 |   | 14,569,087 |   |

 

Certain common equivalentshares have been excluded from the computation of diluted earnings per sharebecause their effect would be anti-dilutive.

 

## **Note P –Stock Options and Warrants**

## ** **

## **The Company has a stock option plan forkey employees and consultants.  Therewere 1,242,680 shares reserved for issuance pursuant to the Company’s stockoption plan and up to 6,000,000 shares were reserved for issuance pursuant tostand-alone options granted in connection with employment agreements.  The Company accounts for those plans underthe recognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.**

## ** **

## **The Company’s share option activity andrelated information is summarized below:**

 

15

----

 
|                                       |   | **Six Months Ended December 31, 2003** |   |
|--------------------------------------------|--------|---------------------------------------------|--------|
|                                       |   | **Options**                                 |   | **Weighted  Average  Exercise Price** |   |
|                                       |   |                                        |   |   |   |
| Options outstanding at beginning of period |   | 3,038,358                                   |   | $ | 0.93 |   |
| Granted                                    |   | 440,000                                     |   | $ | 1.19 |   |
| Exercised                                  |   | (77,667                                     | )      | $ | 0.08 |   |
| Cancelled                                  |   | (77,668                                     | )      | $ | 1.47 |   |
|                                       |   |                                        |   |   |   |
| Options outstanding at end of period       |   | 3,323,023                                   |   | $ | 1.08 |   |
|                                       |   |                                        |   |   |   |
| Options exercisable at end of period       |   | 2,019,352                                   |   | $ | 0.51 |   |

## ** **

## **The following table summarizes informationabout stock options outstanding at December 31, 2003:**

## ** **

|                          |   | **Outstanding**        |   | **Exercisable**                                               |   |
|-------------------------------|--------|------------------------|--------|---------------------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number of  Options** |   | **Weighted  Average  Remaining  Years of  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number of  Options** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                   |   |                                                          |   |   |   |   |   |   |   |
| $0.05 - $0.10                 |   | 1,528,496              |   | 1.4                                                           |   | $ | 0.08 |   | 1,528,496 |   | $ | 0.08 |   |
| $1.00 - $2.01                 |   | 1,674,527              |   | 4.8                                                           |   | $ | 1.35 |   | 478,356 |   | $ | 1.81 |   |
| $3.00 - $3.80                 |   | 120,000                |   | 6.5                                                           |   | $ | 0.63 |   | 12,500 |   | $ | 3.80 |   |

 

## **The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation including the requireddisclosures of FAS 148.**

## ** **

|                                                                                                                                                |   | **Six Months Ended  December 31, 2003** |       | **Six Months Ended  December 31, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|----------------------------------------------|--------|
|                                                                                                                                                |   |                                         |       |                                         |   |
| Net Loss, as reported                                                                                                                               |   | $                                            | (3,263,684 | )                                            | $      | (2,031,823 | ) |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (276,224                                     | )          | (60,550                                      | )      |
|                                                                                                                                                |   |                                         |       |                                         |   |
| Pro forma net loss                                                                                                                                  |   | $                                            | (3,539,908 | )                                            | $      | (2,092,373 | ) |
|                                                                                                                                                |   |                                         |       |                                         |   |
| Loss per share:                                                                                                                                     |   |                                         |       |                                         |   |
| Basic and diluted                                                                                                                                   |   | $                                            | (0.19      | )                                            | $      | (0.14 | ) |
|                                                                                                                                                |   |                                         |       |                                         |   |
| Basic and diluted - pro forma                                                                                                                       |   | $                                            | (0.20      | )                                            | $      | (0.14 | ) |

 

16

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Thesepro forma amounts may not be representative of future disclosures since the estimatedfair value of stock options is amortized to expense over the vesting period,and additional options may be granted in future years.

 

Theestimated fair value of each MediCor option granted is calculated using theBlack-Scholes pricing model. The weighted average assumptions used in the modelwere as follows:

 
|                          |   | **2003**  |   | **2002**  |   |
|-------------------------------|--------|-----------|--------|-----------|--------|
|                          |   |      |   |      |   |
| Risk-free interest rate       |   | 3.50      | %      | 6.00-6.50 | %      |
| Expected years until exercise |   | 2-6 Years |   | 3-4 Years |   |
| Expected stock volatility     |   | 0.0       | %      | 0.0       | %      |
| Dividend yield                |   | 0         | %      | 0         | %      |

 

The Company also issued warrants to purchase 80,776 shares of commonstock to consultants in connection with consulting agreements. Warrants weregranted between 1999 and 2001 at prices between $.08 and $1.61.  All warrants granted had an exercise priceequal to the market value of the underlying common stock on the date of grant.

## ** **

## **Note Q -Business Segment Information**

## ** **

The Company is a corporateentity with a number of wholly-owned, autonomous subsidiaries which operate assingle business units in multiple geographic locations within the U.S. andinternationally in the medical device technology segment of the medical/healthcare market, and as such does not have multiple segments to report.  Revenues from customers attributable to anyindividual foreign country were not material.

 

**Note R – Commitments and Contingencies**

 

The Company has received awritten commitment from International Integrated Industries, LLC, an affiliateof the Company’s chairman, to provide sufficient cash to fund any operatingloss through December 31, 2004. The same entity has provided the Company an aggregate of over $26million in funding from the Company’s inception through December 31,2003.  The future funding may take theform of debt or equity or a combination thereof.

 

Pursuant to an AssetPurchase Agreement signed April 25, 2002, the Company agreed to acquiresubstantially all of the assets of a privately-held United States medicalproducts distributor.  Pursuant to anamendment dated October 16, 2003 to the Asset Purchase Agreement, thepurchase price was amended to equal the deposits made by the Company as ofOctober 16, 2003, plus an additional agreed payment in cash at closing andissuance of MediCor Ltd. equity at closing. The closing is conditioned upon the distributor acquiring necessarygovernmental approvals for commercialization in the United States of theproducts to be distributed, which the Company currently anticipates will occurbefore the end of the first quarter of fiscal 2005.  The Company is no longer obligated to make additional depositsagainst the purchase price, but the Company has committed to fund all futureexpenses associated with obtaining required government approvals.

 

InOctober 1999, June 2000 and July 2003, separate but relatedcomplaints were filed by Saul and Ruth Kwartin,  Steven M. Kwartin, and Robert and Nina Kwartin respectively, andvarious other unnamed plaintiffs, against III Acquisition Corporation, aDelaware corporation, which operates under the tradename PIP.America(“PIP.America”), a subsidiary of MediCor Ltd., as co-defendant with PIP/USA,Inc. and Poly 

 

17

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Implants Protheses, S.A., each unaffiliated with MediCor, and JeanClaude Mas and our chairman, Donald K. McGhan personally, in the Circuit Courtof Miami-Dade County, Florida.

 

Initially,  two cases were filed in October 1999,Case No. 99-25227-CA-01 and Case No. 00-14665-CA-01.  Of the two, Case No. 99-25227 was dismissed.  The same plaintiffs then, in June 2000,filed Case No. 0322537-CA-27, alleging similar claims to those included in thedismissed case.  In June 2003,another member of the same family filed Case No. 03-15006-CA-09, again allegingsimilar claims, but on their own behalf. Plaintiffs are all members of one family who purport to be shareholdersof PIP/USA, Inc. suing derivatively on its behalf, and seeking to rescindvarious transactions between PIP.America and PIP/USA, Inc. and seek to imposeliability against PIP.America and its co-defendants for unspecified monetarydamages arising out of alleged tortuous and other purported wrongful actsconcerning alleged relationships between plaintiffs, PIP/USA, Inc. and PolyImplants Protheses, S.A.  In the thirdcase, filed in 2003, MediCor is named but has not yet been served, but doesanticipate being a defendant.

 

PeggyWilliams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel, etal. v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA,Inc., Case No. 03CH11316, Miriam Furman, et al. v. PIP/USA, Inc., Case No.03CH10832 and Karen S. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 werefiled in the Circuit Court of Cook County, Chancery Division, in or aroundJuly 2003.  Counsel for Jessica FischerSchnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239 amended her class actioncomplaint to include plaintiffs from the other four cases, and each of theothers has been voluntarily dismissed. The consolidated amended complaint contains counts alleging productliability, breach of the implied warranties of merchantability and fitness fora particular purpose, violation of the Illinois Consumer Fraud Act andthird-party beneficiary status. Unspecified monetary damages, exemplary damages and attorneys fees andcosts are sought.  A motion seeking todismiss all counts but the third-party beneficiary claim has been filed and aruling is expected by the end of March 2004.

 

SalinasI. Landers, et al. v. Poly Implants Protheses, S.A., et al., Case No. CV030377, was filed in June 2003 in the Superior Court of San Luis ObispoCounty, California.  Plaintiffs purportto sue on behalf of themselves and an alleged class of persons allegedlysimilarly situated for unspecific monetary damages, exemplary damages, attorneys’fees and costs and injunctive relief for alleged breach of express warranty andalleged violations of California’s Song-Beverly Consumer Warranty Act andUnfair Competition Law.  PIP.Americafiled a demurrer to the action, which was overruled by the Court.  PIP.America has now filed an answer to thecomplaint.  Plaintiffs have served PolyImplant Prostheses, S.A., through the Hague convention, but that company hasyet to file a responsive pleading. Plaintiffs are in the process of moving forentry of default against Poly Implant Prostheses, S.A.  A case management hearing is scheduled forMay 5, 2004, at which time the court is likely to schedule a date to heararguments for and against class certification.

 

MarshaDicken, et al. v. PIP/USA, Inc., et al., Case No. 2003-05588, was filed in oraround July 2003 in the District Court of Harris County, Texas.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated foralleged strict liability, breach of express warranty, breach of implied warranties,violation of Section 402B of the Restatement (Second) of Torts,negligence, misrepresentations, and violation of Texas’ Deceptive TradePractices Act with respect to implant products.  Plaintiffs seek an unspecified amount in alleged compensatory damages,additional statutory damages, interest, attorneys’ fees and costs.  The lawsuit is in the discovery phase.  No order concerning class certification hasbeen entered. The court has scheduled a pretrial conference to be held inJune 2004, and has specified that a trial date will be set shortlythereafter.

 

Thoughit is not yet possible to predict the outcome of any of the cases describedabove, MediCor and its subsidiaries, as applicable, have denied plaintiffs’allegations and are vigorously defending themselves upon the merits of eachlawsuit and against certification of any class.  While we and our subsidiaries are desirous to honor ourrespective obligations under warranty provisions, all three purported classaction cases above include two distinctly different types of claims.  The first of these arise from products soldby PIP.America’s predecessor with whom we are not affiliated, PIP/USA,Inc.  This company sold implantsmanufactured by Poly Implants Protheses, S.A. prior to PIP.America’s entry intothe U.S. market, which occurred in late 1999. Because PIP.America did not sell these products, PIP.America similarlydid not

 

18

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warrantthese products.  The next claims arisefrom products sold by PIP.America and warranted by PIP.America.  We believe that PIP.America should not beheld responsible for warranty or other claims relating to products it did notsell or warrant.  With respect to claimsarising from products PIP.America did sell, PIP.America will seek to fulfillany obligations it has to all customers. PIP.America is indemnified by PIP/USA, Inc., Poly Implants Protheses,S.A., and Poly Implants Protheses, S.A.’s President, Jean Claude Mas,personally, from all claims, including those asserted above.  PIP.America is in the process of assertingits indemnification claims and, in the event of an adverse judgment in anycase, PIP.America intends to seek the benefits of this indemnity.  As a result, we believe the costs associatedwith these matters will not have a material adverse impact on our business,results of operations or financial position.

 

Weand our subsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of our business, includingproduct liability and product warranty claims asserted against us.  Litigation, particularly product liabilitylitigation, can be expensive and disruptive to normal business operations andthe results of complex legal proceedings can be very difficult to predict.  Claims against us or our subsidiaries havebeen and are periodically reviewed with counsel in the ordinary course ofbusiness.  We presently believe we orour subsidiaries have meritorious defenses in all lawsuits in which we or anyof our subsidiaries are defendants, subject to our continuing warrantyobligations, which we and our subsidiaries intend to continue to satisfy.  While it is not possible to predict theoutcome of these matters, we believe that the costs associated with them will nothave a material adverse impact on our business, results of operations orfinancial position.

 

The Company leased office,manufacturing and warehouse facilities and office equipment under variousterms.  Lease expenses amounted to$92,242 and $161,175 for the three months ended December 31, 2003 and2002, respectively.  For the six monthsended December 31, 2003 lease expenses were $188,048 compared to $297,787for the six months ending December 31, 2002.  Future minimum lease payments are approximated as follows:

 
| **Year ended December 31,** |   | **Amount** |   |
|----------------------------------|--------|------------|--------|
| 2004                             |   | 224,482    |   |
| 2005                             |   | 223,228    |   |
| 2006                             |   | 242,317    |   |
| 2007                             |   | 251,776    |   |
| 2008                             |   | 37,088     |   |

 

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***ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION`***

 

ThisQuarterly Report on Form 10-QSB, including the following “Management’sDiscussion and Analysis or Plan of Operation,” contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they ever materialize or prove incorrect, could cause the results of theCompany to differ materially from those expressed or implied by suchforward-looking statements.  All statements other than statements ofhistorical fact are statements that could be deemed forward-looking statements,including statements regarding new and existing products, technologies andopportunities; statements regarding market and industry segment growth anddemand and acceptance of new and existing products any projections of sales,earnings, revenue, margins or other financial items; any statements of theplans, strategies and objectives of management for future operations, includingthe execution of acquisition plans; any statements regarding future economicconditions or performance; any statements of belief or intention; and anystatements of assumptions underlying any of the foregoing.  Factors thatmay cause such differences include, but are not limited to: increasedcompetition; changes in product demand; changes in market acceptance; newproduct development; United States Food and Drug Administration (“FDA”)approval or rescission of approval; delay or rejection of new or existingproducts; changes in agreements with governmental agencies; changes ingovernment regulation; supply of raw materials; changes in reimbursementpractices; adverse results of litigation; the performance of contracts bysuppliers, customers and partners; employee management issues; the challenge ofmanaging asset levels, including inventory; the difficulty of aligning expense levelswith revenue changes; and other risks that are described herein and that areotherwise described from time to time in the Company’s reports and otherdocuments filed with the Securities and Exchange Commission, including thosecontained in “Factors that May Affect Future Results” set forth below in“Management’s Discussion and Analysis or Plan of Operation.”  The Companyassumes no obligation and does not intend to update these forward-lookingstatements, except as required by law.

 

**OVERVIEW**

 

MediCoracquires, develops, manufactures and markets products for medical specialtiesin aesthetic, plastic and reconstructive surgery and dermatology markets. Products include surgically implantable prostheses for aesthetic, plastic andreconstructive surgery and scar management products.  Our products aresold worldwide to hospitals, surgery centers and physicians through variousdistributors and direct sales personnel.

 

MediCorhas two main product lines –

 

•                  surgically implantable prostheses foraesthetic plastic and reconstructive surgery; and

•                  scar management products.

 

***Breast Aesthetics***

 

Currently,we are awaiting the required FDA clearance to sell saline breast implants inthe United States.  These products are typically sold on both a direct anda consigned inventory basis.

 

***Scar ManagementProducts***

 

Inthe United States, Biodermis distributes its products to dermatologists,dermatological surgeons, aesthetic, plastic and reconstructive surgeons andObstetric/Gynecologists through a combination of a direct sales force anddistributors.  Internationally, Biodermis distributes to the same fieldsof medicine through approximately 70 distributors in about 50 countries,including Canada and Mexico.

 

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**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis or Plan of Operation addresses MediCor’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation ofthese financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  On an on-going basis, we evaluate our estimates andjudgments, including those related to revenue recognition, inventories,adequacy of allowances for doubtful accounts, valuation of long-lived assetsand goodwill, income taxes, litigation and warranties.  We base ourestimates on historical and anticipated results and trends and on various otherassumptions that we believe are reasonable under the circumstances, includingassumptions as to future events.  The policies discussed below areconsidered by management to be critical to an understanding of our financialstatements.  These estimates form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.  By their nature,estimates are subject to an inherent degree of uncertainty.  Actualresults may differ from those estimates.

 

Managementhas identified the critical accounting policies to be those related to revenuerecognition, adequacies of allowances for doubtful accounts, valuation oflong-lived assets and goodwill, income taxes, litigation and warranties.

 

**RESULTS OFOPERATIONS**

 

***Sales***

 

Salesfor the three months ended December 31, 2003 decreased $106,342, from$412,884 to $306,542 for the same period in 2002. For the six months endedDecember 31, 2003 sales decreased $189,399, from $832,280 to $642,881. The26% decrease for the three months ended December 31, 2003 and the 23% decreasefor the six months ended December 31, 2003 was driven by lower unit sales,primarily due to the timing of orders from one large customer.

 

***Cost of Sales***

 

Costof sales as a percentage of net sales for the three- and six-month periodsended December 31, 2003 were approximately 22% for each compared toapproximately 34% during the same periods in 2002.  This excludes abenefit of $1,575 for the three months ended December 31, 2003 and abenefit of $24,150 for the six months ended December 31, 2003 from areturn of consigned inventory previously written down.  The overall reduction in cost of sales forthe three- and six-month periods was due to lower sales, as well as overallhigher per unit sales reflecting a change in product mix.  Normally, we expect that cost of sales willremain relatively constant on a percentage basis of approximately 35% to 40%.

 

***Selling, Generaland Administrative***

 

Selling,general and administrative expenses increased 52% to $1,679,117 for the threemonths ended December 31, 2003, as compared to $1,103,280 during the sameperiod in 2002.  For the six monthsended December 31, 2003, selling, general and administrative expenses were$2,866,962 compared to $2,344,892 for the same period a year ago.  The overall increase for the three- and six-monthperiods can be attributed to increases in payroll and payroll related expenses;depreciation and amortization; travel, and amortization of commissions relatedto convertible debentures. In addition the Company experienced a decrease inexpenditures of rent and professional fees. As our business and sales increase, we anticipate that SG&A expenseswill increase in absolute dollars, but decrease as a percentage of sales.

 

***Research andDevelopment***

 

Researchand development expenses in the recent quarter ended December 31, 2003increased $237,201 or 126% from the same period in 2002.  For the six months ended December 31,2003 research and development increased $224,651 or 107% compared to the sameperiods in 2002.  The increase for thethree- and six-month

 

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periods was driven by our commitment to fund all future expensesassociated with obtaining required government approvals for saline breastimplant products.  We expect thatresearch and development expenses will increase as our business matures.

 

***Interest Expense***

 

Interestexpense increased to $483,662 for the six months ended December 31, 2003,compared to $95,301 in same period in the prior year.  Interest expense consists primarily of interest related toborrowings.  The change in interest expense was primarily due to anincrease in the average principal note payable to related party balances and anincrease in convertible debentures.

 

***Net Loss***

 

Netloss for the three months ended December 31, 2003 increased to $2,118,836from $962,857 in the comparable period in the year.  Net loss increasedfrom $2,031,823 reported in the previous six months to $3,263,684 for the sixmonths ended December 31, 2003. The decline was due to lower sales, higher selling, general andadministrative expenses,  research anddevelopment and interest expense Basic and diluted loss per share was ($0.12)for current three month period compared to ($0.07) for the comparable periodlast year. Net losses are primarily attributable to the substantial costsassociated with facilitating FDA pre-market approvals for products sought to besold by MediCor and limited sales of our current products.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourability to make payments to refinance our debt and to fund planned capitalexpenditures and operations will depend on our ability to secure additionalsignificant financing and generate sufficient cash in the future.  Becausewe have only limited product sales and will not be in a position to materiallyincrease sales until the FDA issues a pre-market approval relating to one ormore of the products sought to be sold by us, we have historically raised fundsto support our operating expenses and capital requirements through sales ofequity or debt securities or through other credit arrangements, includingborrowing from our affiliates.  Our existing cash, cash equivalent andcash generated from operations will be insufficient to meet our anticipatedcash needs for the next 12 months.  To satisfy our liquidity requirements,we will need to raise additional funds.  To the extent additional sales ofequity or debt securities are insufficient to satisfy our liquidityrequirements, we expect that we will be able to obtain any necessary additionalfunds through the incurrence of additional indebtedness to ouraffiliates.  We have received a written commitment from InternationalIntegrated Industries, LLC, an affiliate of our chairman, to provide sufficientcash to fund any operating expenses and capital expenditures throughDecember 31, 2004.  The same entity has provided to us over $26million in funding from our formation through December 31, 2003.  Thefuture funding may take the form of debt or equity or a combination thereof.

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

Certainstatements contained in this Quarterly Report on Form 10-QSB, and otherwritten and oral statements made from time to time by us, do not relate solelyto historical facts.  These statementsare considered “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Wordssuch as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,”“intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” and similarwords and expressions, identify forward looking statements.  These forward-looking statements involveimportant risks and uncertainties that could materially alter results in thefuture from those expressed in any forward-looking statements made by us or onour behalf.  We caution you thatforward-looking statements are only predictions and that actual events orresults may differ materially.  Inevaluating these statements, you should specifically consider the variousfactors that could cause actual events or results to differ materially,including those factors described below. It is not possible to foresee or identify all factors affecting ourforward-looking statements and you should not consider any list of such factorsto be exhaustive. The Company assumes no obligation and does not intend toupdate these forward-looking statements, except as required by law.

 

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***If clinical trials for our products are unsuccessful or delayed, wewill be unable to meet our anticipated development and commercializationtimelines.***

 

Beforeobtaining regulatory approvals for the commercial sale of any products, we mustdemonstrate through pre-clinical testing and clinical trials that our productsare safe and effective for use in humans.  Conducting clinical trials is alengthy, time-consuming and expensive process.

 

Completionof clinical trials may take several years or more.  Our commencement andrate of completion of clinical trials may be delayed by many factors,including:

 

•                  lack of efficacy during the clinical trials;

•                  unforeseen safety issues;

•                  slower than expected patient recruitment; and

•                  government or regulatory delays.

 

Theresults from pre-clinical testing and early clinical trials are often not predictiveof results obtained in later clinical trials.  A number of new productshave shown promising results in clinical trials, but subsequently failed toestablish sufficient safety and efficacy data to obtain necessary regulatoryapprovals.  Data obtained from pre-clinical and clinical activities aresusceptible to varying interpretations, which may delay, limit or preventregulatory approval.  In addition, regulatory delays or rejections may beencountered as a result of many factors, including perceived defects in thedesign of the clinical trials and changes in regulatory policy during theperiod of product development.  Any delays in, or termination of, ourclinical trials or clinical trials of our collaborative partners or supplierswill adversely affect our development and commercialization timelines, whichwould adversely affect our future sales and profitability.

 

***Our products may not gain market acceptance among physicians, patientsand the medical community generally.***

 

Thedegree of market acceptance of any medical device or other product that wedevelop or market will depend on a number of factors, including demonstratedclinical efficacy and safety, cost-effectiveness, potential advantages overalternative products, and our marketing and distribution capabilities. The relative size of our company may also affect market acceptance of ourproducts.  Physicians will not recommend our products until clinical dataor other factors demonstrate their safety and efficacy compared to othercompeting products.  Even if the clinical safety and efficacy of ourproducts is established, physicians may elect not to recommend them for anynumber of other reasons, including whether our products best meet theparticular needs of the individual patient and their overall evaluation of ourcompany.

 

***If we are unable to develop, gain regulatory approval for and marketnew products and technologies, we will not achieve meaningful revenue and mayexperience a decrease in demand for our products or our products could becomeobsolete.***

 

Themedical device industry is highly competitive and is subject to significant andrapid technological change.  We believe that our ability to respondquickly to consumer needs or advances in medical technologies, withoutcompromising product quality, will be crucial to our success.  We arecontinually engaged in product development and improvement programs toestablish and improve our competitive position.  We cannot, however,guarantee that we will be successful in enhancing our existing products orproducts we have in development or clinical trials.  Nor can we guarantee that we will be successful in developing newproducts or technologies that will timely achieve regulatory approval orreceive market acceptance.

 

***If changes in the economy and consumer spending reduce consumer demandfor our products or our products in development, our sales and profitabilitywill suffer.***

 

Breastaugmentation and reconstruction and other aesthetics procedures are electiveprocedures.  Other than U.S. federally mandated insurance reimbursementfor post-mastectomy reconstructive surgery, breast augmentations and othercosmetic procedures are not typically covered by insurance.  Adverse changes in the economy may cause 

 

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consumers to reassess theirspending choices and reduce the demand for cosmetic surgery.  This shiftcould have an adverse effect on our projected future sales and profitability.

 

***Our ability to expand our business will be significantly limited if wecannot obtain additional financing.***

 

Toaccomplish our plans to expand our current product lines and markets and topurchase new companies, products and intellectual property, we need substantialadditional capital, which we may not be able to obtain.  While we have todate been funded in substantial part from financing from an affiliate of ourchairman, we do not anticipate this funding source will provide sufficientcapital to finance our intended growth strategy and that we will need significantexternal financing to accomplish our goals.  We are currently negotiatingwith potential equity and debt providers to obtain additional financing, butthis additional financing may not be available on terms that are favorable tous, or at all.  If adequate funds are not available, or are not availableon acceptable terms, our ability to implement our expansion and growth planswill be significantly impaired.  Inaddition, the financial terms of any such financing, if obtainable, may bedilutive to existing stockholders.

 

***Because we have only a limited operating history and our businessstrategy calls for significant growth through new products and acquisitions,there is significant uncertainty about our business and prospects*****.**

 

MediCorand its subsidiaries have only been operating since 1999.  Although ourBiodermis operation has been in existence for a longer period of time, it hasonly operated under MediCor’s management since its acquisition in 2001. Significantly, during much of our history we have also been prevented fromselling our primary existing product, saline-filled breast implants, in theU.S. market due to the FDA’s 2000 call for a pre-market approval for thatproduct.  As a result, all of our current revenues have been derived fromour scar management products.  Revenue generated by our Biodermissubsidiary has not been significant, and we do not expect more than modestinternal growth in that segment.  Our business plans call for significantexpansion into other markets that in the future will constitute the significantmajority of our sales and income.  As a result, our existing businessplatform is not necessarily indicative of our future business or prospects.

 

***MediCor and its prospects must be considered in light of the risks,expenses and difficulties frequently encountered by companies in an early stageof development, particularly companies in rapidly evolving markets such as themedical device market.***

 

Risksfor our business include the uncertainties associated with developing and implementingan evolving business model and the management of both internal andacquisition-based growth.  This is particularly acute in a rapidlyevolving market such as the market for medical devices.  To address these risks, we must continue todevelop the strength and quality of our operations, maximize the valuedelivered to customers, respond to competitive developments and continue toattract, retain and motivate qualified employees.  We may not besuccessful in addressing these challenges.

 

***We are subject to substantial government regulation, which couldmaterially adversely affect our business.***

 

Theproduction and marketing of our products and intended products and our researchand development, pre-clinical testing and clinical trial activities are subjectto extensive regulation and review by numerous governmental authorities, bothin the U.S. and abroad.  Most of the medical devices we intend to sell ordevelop must undergo rigorous pre-clinical testing and clinical trials and anextensive regulatory approval process before they can be marketed.  Thisprocess makes it longer, more uncertain and more costly to bring the productsto market, and some of these products may not be approved, or, once approved,they may be recalled.  The pre-marketing approval process can beparticularly expensive, uncertain and lengthy. Many devices for which FDA approval has been sought by other companieshave never been approved for marketing. In addition to testing and approval procedures, extensive regulationsalso govern marketing, manufacturing, distribution, labeling, andrecord-keeping procedures.  If we or our suppliers or collaborativepartners do not comply with applicable regulatory requirements, this couldresult in warning letters, non-approval, suspensions of regulatory approvals,civil penalties and criminal fines, product seizures and recalls, operatingrestrictions, injunctions, and criminal prosecution.

 

Delaysin or rejection of FDA or other government entity approval of new productswould adversely affect our business.  Delays or rejection may beencountered due to, among other reasons, government or regulatory delays, 

 

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lack of efficacy during clinical trials, unforeseen safety issues,slower than expected rate of patient recruitment for clinical trials, inabilityto follow patients after treatment in clinical trials, inconsistencies betweenearly clinical trial results and results obtained in later clinical trials,varying interpretations of data generated by clinical trials, or changes inregulatory policy during the period of product development in the U.S. andabroad.  In the U.S., there has been a continuing trend of more stringentFDA oversight in product clearance and enforcement activities, causing medicaldevice manufacturers to experience longer approval cycles, more uncertainty,greater risk, and higher expenses.  Internationally, there is a risk thatwe or our suppliers or collaborative partners may not be successful in meetingthe quality standards or other certification requirements.  Even ifregulatory approval of a product is granted, this approval may entaillimitations on uses for which the product may be labeled and promoted. It ispossible, for example, that we or our suppliers or collaborative partners maynot receive FDA approval to market our current or future products for broaderor different applications or to market updated products that representextensions of our, our suppliers’ or collaborative partners’ basictechnology.  In addition, we or our suppliers or collaborative partnersmay not receive export or import approval for products in the future, andcountries to which products are to be exported may not approve them for import.

 

***Government regulation of manufacturing of medical devices is expensiveand time consuming for manufacturers and may result in product unavailabilityor recalls.***

 

Medicaldevice manufacturing facilities also are subject to continual governmentalreview and inspection.  The FDA has stated publicly that compliance withmanufacturing regulations will be scrutinized more strictly.  Agovernmental authority may challenge our or our suppliers’ or collaborativepartners’ compliance with applicable federal, state and foreignregulations.  In addition, any discovery of previously unknown problemswith products or facilities may result in restrictions on the product or thefacility, including withdrawal of the product from the market or otherenforcement actions.

 

***If we are unable to avoid significant product liability claims orproduct recalls, we may be forced to pay substantial damage awards and otherexpenses that could exceed our reserves and any applicable insurance coverage.***

 

Wehave in the past been, currently are, and may in the future be subject toproduct liability claims alleging that the use of our technology or productshas resulted in adverse health effects.  These claims may be brought evenwith respect to products that have received, or in the future may receive,regulatory approval for commercial sale.  In particular, the manufactureand sale of breast implant products entails significant risk of productliability claims due to potential allegations of possible disease transmissionand other health factors, rupture or other product failure.  Some breastimplant manufacturers that suffered these types of claims in the past have beenforced to cease operations or even to declare bankruptcy.  We may alsoface a substantial risk of product liability claims from other products we maychoose to sell.  In addition to productliability claims, we may in the future need to recall or issue fieldcorrections related to our products due to manufacturing deficiencies, labelingerrors, or other safety or regulatory reasons.

 

Wedo not presently have liability insurance to protect us from the costs ofclaims for damages due to the use or recall of our products, except that ourBiodermis subsidiary carries a limited amount of product liability insurancerelated to its products.  We may in the future seek additional insurance,which will be limited in both circumstance of coverage and amount.  Recentpremium increases and coverage limitations, including specifically limitationsor prohibitions by insurers on insurance covering breast implant manufacturers,may make this insurance uneconomic or even unavailable.  However, even ifwe obtain or increase insurance, one or more product liability claims or recallorders could exceed any coverage we may hold.  If we continue to havelimited or no coverage or our insurance does not provide sufficient coverage,product liability claims or recalls could result in losses in excess of ourreserves.

 

***Certain lawsuits filed seek class action status and may, if successful,cause us to incur substantial liability, including damage awards andsignificant legal fees that may exceed our reserves.***

 

Threelawsuits have been filed naming us or one of our subsidiaries, the Frenchmanufacturer from which we purchase breast implant products, and the U.S.distributor of those same products who preceded our subsidiary in the U.S.market.  In these suits the plaintiffsseek, among other things, class action status for claims, including claims forbreach of warranty  The claims arisefrom products distributed both before and after our subsidiary that 

 

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distributed the products came into existence.  Although certain of the claims arise from products distributed bythe other distributor prior to our subsidiary coming into existence, we havestill been named as a defendant.  Whilewe have reserved an amount equal to the outstanding warranty claims for claimsarising from products our subsidiary did distribute, the plaintiffs are seekingto hold us responsible for more damages. There can be no assurance we can terminate the litigation as to oursubsidiary for reserved amounts. Although our subsidiary is indemnified by three separate entities,including Poly Implants Protheses, S.A., the French manufacturer, PIP/USA, Inc.the previous distributor, and Mr. Jean Claude Mas, personally, there can be noassurance this indemnity will protect us, as there is no guarantee the Frenchmanufacturer, the previous distributor, or Mr. Mas will, or is able to, honorthe indemnification they have provided.

 

Ifwe are unsuccessful in defending against the claims involved in these suits, orif class action status is achieved, and the indemnification were to provenon-reliable, we could be responsible for significant damages above thereserves and available assets needed to satisfy such a judgment.

 

***If we suffer negative publicity concerning the safety of our products,our sales may be harmed and we may be forced to withdraw products.***

 

Physiciansand potential patients may have a number of concerns about the safety of ourproducts and proposed products, whether such concerns have a basis in generallyaccepted science or peer-reviewed scientific research or not.  Negativepublicity—whether accurate or inaccurate—about our products, based on, forexample, news about breast implant litigation or regulatory actions, couldmaterially reduce market acceptance of our products and could result in productwithdrawals.  In addition, significantnegative publicity could result in an increased number of product liabilityclaims, whether or not these claims have a basis in fact.

 

***Because a key component of our growth strategy is based on successfullymaking acquisitions and otherwise diversifying our product offerings, we areexposed to numerous risks associated with acquisitions, diversification andrapid growth.***

 

Akey component of our growth strategy is the acquisition of other companies,products and technologies that meet our criteria for strategic fit, geographicpresence, revenues, profitability, growth potential and operatingstrategy.  The successful implementation of this strategy depends on ourability to identify suitable acquisition candidates, acquire companies andassets on acceptable terms and integrate their operations successfully.

 

Wemay not be able to identify suitable acquisition candidates in our desiredproduct areas or we may not be able to acquire identified candidates onacceptable terms.  Moreover, in pursuing acquisition opportunities we willlikely compete with other companies with greater financial and other resources. Competition for these acquisition targets likely could also result in increasedprices of acquisition targets and a diminished pool of companies and assetsavailable for acquisition.

 

Acquisitionsalso involve a number of other risks, including the risks of acquiringundisclosed or undesired liabilities, acquired in-process technology, stockcompensation expense and increased compensation expense resulting from newlyhired employees, the diversion of management attention, potential disputes withthe sellers of one or more acquired entities and the possible failure to retainkey acquired personnel.  Client satisfaction or performance problems withan acquired business or product line could also have a negative impact on ourreputation as a whole, and any acquired entity or assets could significantlyunder-perform relative to our expectations.  Our ability to meet thesechallenges has not been established.

 

Weexpect that, at least for the foreseeable future, we will be required to usecash consideration for acquisitions.  We likely will be required to obtainsignificant third-party financing to accomplish these acquisitions.  Thisfinancing may not be available on favorable terms, if at all.  The termsof any such financing may be dilutive to existing stockholders.

 

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***If our intellectual property rights do not adequately protect ourproducts or technologies, others could compete against us more directly.***

 

Oursuccess depends in part on our ability to obtain patents or rights to patents,protect trade secrets, operate without infringing upon the proprietary rightsof others, and prevent others from infringing on our patents, trademarks andother intellectual property rights.  We will be able to protect our intellectualproperty from unauthorized use by third parties only to the extent that it iscovered by valid and enforceable patents, trademarks and licenses and we areable to enforce those rihgts.  Patent protection generally involvescomplex legal and factual questions and, therefore, enforceability andenforcement of patent rights cannot be predicted with certainty.  Patents, if issued, may be challenged,invalidated or circumvented.  Thus, any patents that we own or licensefrom others may not provide adequate protection against competitors.  In addition, our pending and future patentapplications may fail to result in patents being issued.  Also, those patents that are issued may notprovide us with adequate proprietary protection or competitive advantages againstcompetitors with similar technologies.  Moreover, the laws of certainforeign countries do not protect our intellectual property rights to the sameextent as do the laws of the United States.

 

Inaddition to patents and trademarks, we rely on trade secrets and proprietaryknow-how.  We seek protection of these rights, in part, throughconfidentiality and proprietary information agreements.  These agreementsmay not provide meaningful protection or adequate remedies for violation of ourrights in the event of unauthorized use or disclosure of confidential andproprietary information.  Failure to protect our proprietary rights couldseriously impair our competitive position.

 

***If third parties claim we are infringing their intellectual propertyrights, we could suffer significant litigation or licensing expenses or beprevented from marketing our products.***

 

Ourcommercial success depends significantly on our ability to operate withoutinfringing the patents and other proprietary rights of others.  However,regardless of our intent, our technologies may infringe the patents or violateother proprietary rights of third parties.  In the event of suchinfringement or violation, we may face litigation and may be prevented frompursuing product development or commercialization.

 

***We depend on a limited number of suppliers for certain raw materialsand the loss of any supplier could adversely affect our ability to manufacturemany of our products.***

 

Wecurrently rely on a single supplier for silicone raw materials used in many ofour products.  Although we have an agreement with this supplier totransfer the necessary formulations to us in the event that it cannot meet ourrequirements, we cannot guarantee that we would be able to produce a sufficientamount of quality silicone raw materials in a timely manner.  We will alsodepend on a sole or limited number of third-party manufacturers for siliconebreast implants to be distributed by us.

 

***Our international business exposes us to a number of risks.***

 

Asignificant part of our current sales are and a significant part of ourprojected future sales will be derived from international operations.  Inaddition, we anticipate having material international suppliers and operations,including, potentially, manufacturing operations.  Accordingly, we will beexposed to risks associated with international operations, including risksassociated with re-valuation of the local currencies of countries where wepurchase or sell our products or conduct business, which may result in our purchasedproducts becoming more expensive to us in U.S. dollar terms or sold productsbecoming more expensive in local currency terms, thus reducing demand, or inincreased costs to us.  Our operations and financial results also may besignificantly affected by other international factors, including:

 

•                  foreign government regulation of medicaldevices;

•                  product liability claims;

•                  new export license requirements;

•                  political or economic instability in ourtarget markets;

•                  trade restrictions;

•                  changes in tax laws and tariffs;

•                  inadequate protection of intellectualproperty rights in some countries;

 

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•                  managing foreign distributors, manufacturersand staffing; and

•                  managing foreign branch offices.

 

If these risks actuallymaterialize, our sales to international customers, as well as those domesticcustomers that use products manufactured abroad, may decrease or our supplieror manufacturing costs may materially increase.

 

***Our failure toattract and retain key managerial, technical, selling and marketing personnelcould adversely affect our business.***

 

Our success will depend uponour ability to attract and retain key managerial, financial, technical, sellingand marketing personnel.  The lack of key personnel might significantlydelay or prevent the achievement of our development and strategicobjectives.  We do not maintain key man life insurance on any of ouremployees.  Other than certain of ourexecutives who are parties to employment agreements, none of our employees isunder any obligation to continue providing services to MediCor.  We arecurrently in the process of building our management and technical staffs. We believe that our success will depend to a significant extent on the abilityof our key personnel, including the new management and technical staffs, tooperate effectively, both individually and as a group.  Competition forhighly skilled employees in our industry is high, and we cannot be certain thatwe will be successful in recruiting or retaining these personnel.

 

***MediCor’s futuregrowth will place a significant strain on our managerial, operational,financial and other resources.***

 

Our success will depend uponour ability to manage our internal and acquisition-based growtheffectively.  This will require that we continue to implement and improveour operational, administrative and financial and accounting systems andcontrols and continue to expand, train and manage our employee base.  Weanticipate that we will need to hire and retain numerous additional employeesand consultants for both internal and acquisition-based growth for sometime.  Integration of these employees and consultants and employee andconsultant loss in the process will require significant management attention andresources.  Our systems, procedures, controls and personnel may not beadequate to support our future operations and our management may not be able toachieve the rapid execution necessary to exploit the market for our businessmodel.

 

***If oursuppliers,  collaborative partners orconsultants do not perform, we will be unable to obtain,  develop, market or sell products asanticipate******dand we may be exposed to additional risks*****.**

 

We have in the past and mayin the future enter into supply, collaborative or consulting arrangements withthird parties to supply or develop products.  These arrangements may notproduce or provide successful products.  If we fail to establish thesearrangements, the number of products from which we could receive future revenueswill be limited.

 

Our dependence on supply,collaborative or consulting arrangements with third parties subjects us to anumber of risks.  These arrangements may not be on terms favorable tous.  Agreements with suppliers may limit our supply of products or requireus to purchase products we can not profitably sell.  They may also restrict our ability to market or distribute otherproducts.  Agreements with consultantsor collaborative partners typically allow the third parties significantdiscretion in electing whether or not to pursue any of the plannedactivities.  We cannot with certainty control the amount and timing ofresources our suppliers, collaborative partners or consultants may devote toour products, and these third parties may choose to pursue alternativeproducts.  These third parties also may not perform their obligations asexpected.  Business combinations, significant changes in their businessstrategy, or their access to financial resources may adversely affect asupplier’s, partner’s or consultant’s willingness or ability to complete itsobligations under the arrangement.  Moreover, we could become involved indisputes with our suppliers, partners or consultants, which could lead todelays or termination of the arrangements and time-consuming and expensivelitigation or arbitration.

 

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***Our quarterlyoperating results are subject to substantial fluctuations and any failure tomeet financial expectations for any fiscal quarter may disappoint securitiesanalysts and investors and could cause our stock price to decline*****.**

 

Our quarterly operatingresults may vary significantly due to a combination of factors, many of whichare beyond our control. These factors include:

 

•                  changes in demand for our products;

•                  our ability to meet the demand for ourproducts;

•                  existing and increased competition;

•                  our ability to compete against significantlylarger and better funded competitors;

•                  the number, timing, pricing and significanceof new products and product introductions and enhancements by us and ourcompetitors;

•                  our ability to develop, obtain regulatoryapproval for, introduce and market new and enhanced versions of our products ona timely basis;

•                  changes in pricing policies by us and ourcompetitors;

•                  the timing of significant orders andshipments;

•                  regulatory approvals or other regulatoryaction affecting new or existing products;

•                  litigation with respect to product liabilityclaims or product recalls and any insurance covering such claims or recalls; and

•                  general economic factors.

 

As a result, we believe thatperiod-to-period comparisons of our results of operations are not necessarilymeaningful and investors should not rely upon these comparisons as indicationsof future performance.  These factors may cause our operating results tobe below market analysts’ expectations in some future quarters, which couldcause the market price of our stock to decline.

 

***ITEM 3.******  CONTROLS AND PROCEDURES***

 

As of the quarter endedDecember 31, 2003, management, with the participation of the chief executiveand financial officers, carried out an evaluation of the effectiveness of ourdisclosure controls and procedures pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the chief executive officer and the chief financialofficer believe that, as of end of the fiscal quarter covered by this report,our disclosure controls and procedures were effective in making known to themmaterial information relating to MediCor (including its consolidatedsubsidiaries) required to be included in this report.  As of the end ofour fiscal year ended June 30, 2003, management adopted formal disclosurecontrols and procedures which were employed in the preparation of this report.

 

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  Thelikelihood of achieving such objectives is affected by limitations inherent indisclosure controls and procedures.  These include the fact that humanjudgment in decision-making can be faulty and that breakdowns in internalcontrol can occur because of human failures such as simple errors or mistakesor intentional circumvention of the established process.  Management willreview our disclosure controls and procedures periodically to determine theireffectiveness and to consider modifications or additions to them.

 

***PART II******– OTHERINFORMATION***

 

***ITEM 1.  LEGALPROCEEDINGS***

 

In October 1999, June 2000and July 2003, separate but related complaints were filed by Saul and RuthKwartin,  Steven M. Kwartin, and Robertand Nina Kwartin respectively, and various other unnamed plaintiffs, againstIII Acquisition Corporation, a Delaware corporation, which operates under thetradename PIP.America (“PIP.America”), a subsidiary of MediCor Ltd., asco-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas and our chairman, Donald K.McGhan personally, in the Circuit Court of Miami-Dade County, Florida.

 

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Initially,  two cases were filed in October 1999, CaseNo. 99-25227-CA-01 and Case No. 00-14665-CA-01.  Of the two, Case No. 99-25227 was dismissed.  The same plaintiffs then, in June 2000, filedCase No. 0322537-CA-27, alleging similar claims to those included in thedismissed case.  In June 2003, anothermember of the same family filed Case No. 03-15006-CA-09, again alleging similarclaims, but on their own behalf. Plaintiffs are all members of one family who purport to be shareholdersof PIP/USA, Inc. suing derivatively on its behalf, and seeking to rescindvarious transactions between PIP.America and PIP/USA, Inc. and seek to imposeliability against PIP.America and its co-defendants for unspecified monetarydamages arising out of alleged tortuous and other purported wrongful actsconcerning alleged relationships between plaintiffs, PIP/USA, Inc. and PolyImplants Protheses, S.A.  In the thirdcase, filed in 2003, MediCor is named but has not yet been served, but doesanticipate being a defendant.

 

Peggy Williams v. PIP/USA,Inc., Case No. 03 CH 9654, Jessica Fischer Schnebel, et al. v. PIP/USA, Inc.,Case No. 03CH07239, Dawn Marie Cooper, et al. v. PIP/USA, Inc., Case No.03CH11316, Miriam Furman, et al. v. PIP/USA, Inc., Case No. 03CH10832 and KarenS. Witt, et al. v. PIP/USA, Inc., Case No. 03CH12928 were filed in the CircuitCourt of Cook County, Chancery Division, in or around July 2003.  Counsel for Jessica Fischer Schnebel, et al.v. PIP/USA, Inc., Case No. 03CH07239 amended her class action complaint toinclude plaintiffs from the other four cases, and each of the others has beenvoluntarily dismissed.  The consolidatedamended complaint contains counts alleging product liability, breach of theimplied warranties of merchantability and fitness for a particular purpose,violation of the Illinois Consumer Fraud Act and third-party beneficiarystatus.  Unspecified monetary damages,exemplary damages and attorneys fees and costs are sought.  A motion seeking to dismiss all counts butthe third-party beneficiary claim has been filed and a ruling is expected bythe end of March 2004.

 

Salinas I. Landers, et al.v. Poly Implants Protheses, S.A., et al., Case No. CV 030377, was filed in June2003 in the Superior Court of San Luis Obispo County, California.  Plaintiffs purport to sue on behalf ofthemselves and an alleged class of persons allegedly similarly situated forunspecific monetary damages, exemplary damages, attorneys’ fees and costs and injunctiverelief for alleged breach of express warranty and alleged violations ofCalifornia’s Song-Beverly Consumer Warranty Act and Unfair CompetitionLaw.  PIP.America filed a demurrer tothe action, which was overruled by the Court. PIP.America has now filed an answer to the complaint.  Plaintiffs have served Poly ImplantProstheses, S.A., through the Hague convention, but that company has yet tofile a responsive pleading. Plaintiffs are in the process of moving for entryof default against Poly Implant Prostheses, S.A.  A case management hearing is scheduled for May 5, 2004, at whichtime the court is likely to schedule a date to hear arguments for and againstclass certification.

 

Marsha Dicken, et al. v.PIP/USA, Inc., et al., Case No. 2003-05588, was filed in or around July 2003 inthe District Court of Harris County, Texas. Plaintiffs purport to sue on behalf of themselves and an alleged classof persons allegedly similarly situated for alleged strict liability, breach ofexpress warranty, breach of implied warranties, violation of Section 402B ofthe Restatement (Second) of Torts, negligence, misrepresentations, andviolation of Texas’ Deceptive Trade Practices Act with respect to implantproducts.  Plaintiffs seek anunspecified amount in alleged compensatory damages, additional statutorydamages, interest, attorneys’ fees and costs. The lawsuit is in the discovery phase. No order concerning class certification has been entered. The court hasscheduled a pretrial conference to be held in June 2004, and has specified thata trial date will be set shortly thereafter.

 

Though it is not yetpossible to predict the outcome of any of the cases described above, MediCorand its subsidiaries, as applicable, have denied plaintiffs’ allegations andare vigorously defending themselves upon the merits of each lawsuit and againstcertification of any class.  While weand our subsidiaries are desirous to honor our respective obligations underwarranty provisions, all three purported class action cases above include twodistinctly different types of claims. The first of these arise from products sold by PIP.America’s predecessorwith whom we are not affiliated, PIP/USA, Inc. This company sold implants manufactured by Poly Implants Protheses, S.A.prior to PIP.America’s entry into the U.S. market, which occurred in late1999.  Because PIP.America did not sellthese products, PIP.America similarly did not warrant these products.  The next claims arise from products sold byPIP.America and warranted by PIP.America. We believe that PIP.America should not be held responsible for warrantyor other claims relating to products it did not sell or warrant.  With respect to claims arising from productsPIP.America did sell, PIP.America will seek to fulfill any obligations it hasto all customers.  PIP.America isindemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., and Poly ImplantsProtheses, S.A.’s President, Jean Claude Mas, personally, from all claims,including those asserted above. PIP.America is in the process of asserting its indemnification claimsand, in the event of an adverse judgment in any case, PIP.America intends toseek the

 

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benefits of this indemnity.  As a result, we believe the costs associatedwith these matters will not have a material adverse impact on our business,results of operations or financial position.

 

We and our subsidiaries havebeen and will continue to be periodically named as a defendant in otherlawsuits in the normal course of our business, including product liability andproduct warranty claims asserted against us. Litigation, particularly product liability litigation, can be expensiveand disruptive to normal business operations and the results of complex legalproceedings can be very difficult to predict. Claims against us or our subsidiaries have been and are periodicallyreviewed with counsel in the ordinary course of business.  We presently believe we or our subsidiarieshave meritorious defenses in all lawsuits in which we or any of oursubsidiaries are defendants, subject to our continuing warranty obligations,which we and our subsidiaries intend to continue to satisfy.  While it is not possible to predict theoutcome of these matters, we believe that the costs associated with them willnot have a material adverse impact on our business, results of operations orfinancial position.

 

***ITEM 2.  CHANGES IN SECURITIES***

 

During the quarter ended December 31, 2003, weextended the maturities of $75,000 in principal amount of 10% short-termconvertible debentures issued to accredited investors.  The extended debentures mature in 2004.  The offer and sale of the extendeddebentures were exempt from registration pursuant to section 4(2) of theSecurities Act.

 

During the quarter ended December 31, 2003, weissued $1,000,000 in principal amount of 10% convertible debentures due 2006 toaccredited investors.  The offer andsale of the convertible debentures were exempt from registration pursuant tosection 4(2) of the Securities Act.

 

During the quarter ended December 31, 2003, $75,000in principal amount of a 10% convertible debenture was converted into 18,641shares of common stock.  The offer andsale were exempt from registration pursuant to section 4(2) of the SecuritiesAct.

 

During the quarter ended December 31, 2003, wegranted options covering 120,000 shares of common stock to executiveofficers.  The offer and sale of theoptions and the underlying shares were exempt from registration pursuant tosection 4(2) of the Securities Act.

 

***ITEM 3.  DEFAULTS UPON SENIOR SECURITIES***

 

None

 

***ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS***

 

During the quarter coveredby this report, no matter was submitted to a vote of security holders throughthe solicitation of proxies or otherwise.

 

***ITEM 5.  OTHER INFORMATION***

 

None

 

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***ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K***

 

**(a)  Exhibits**

 

See Exhibit Index at Page 34

 

**(b)  Current Reports on Form8-K**

 

No reports on Form 8-K werefiled during the quarter for which this report is filed.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 

 
|        |              | ***MEDICOR LTD.*** |
|-------------|-------------------|-------------------------|
|        |              | (Registrant)            |
|        |
| Date:       | February 12, 2004 | By:                     |   |
|        |              |                    | /s/  Theodore R Maloney |
|        |              |                    | Theodore R. Maloney  Chief Executive Officer |
|        |              |                    |   |
|  Date: | February 12, 2004 | By:                     | /s/  Thomas R. Moyes |
|        |              |                    | Thomas R. Moyes  Chief Financial Officer |
|             |                   |                         |  |  |

 

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EXHIBIT INDEX

 
| **Exhibit  No.** |   | **Description**                                                                        |
|------------------|--------|----------------------------------------------------------------------------------------|
| 4.1              |   | Form of Investment  Agreement                                                          |
| 4.2              |   | Form of Convertible  Debenture                                                         |
| 31.1             |   | Principal Executive  Officer Certification Pursuant To 17 C.F.R. Section 240.15d-14(a) |
| 31.2             |   | Principal Financial  Officer Certification Pursuant To 17 C.F.R. Section 240.15d-14(a) |
| 32.1             |   | Principal Executive  Officer Certification Pursuant To 18 U.S.C. Section 1350          |
| 32.2             |   | Principal Financial Officer  Certification Pursuant To 18 U.S.C. Section 1350          |

 

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