** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

----

 

**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, 2004**                                                                                          |
|                                                                                                                                           |
| **or**                                                                                                                                         |
|                                                                                                                                           |       | ** **                                                                                                    |
| **o**                                                                                                                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                           |       |                                                                                                          |
| **For  the transition period from         to           ** |

 

**Commissionfile number 50442**

** **

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**MEDICORLTD.**

(Exact name ofsmall 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’s telephone number)          |
|                                                             |       |                               |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15 (d) of the Exchange Act during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes ý****No**o**

 

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On February 7, 2004,there were 18,146,056 shares of common stock outstanding.

 

Transitional SmallBusiness Disclosure Format (Check one): Yes **o**No **ý**

 

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**MEDICORLTD.**

# **INDEX**

| Part I. Financial  Information |
|--------------------------------|
|                           |
| Item  1.                       |   | Consolidated  Financial Statements (Unaudited) |
|                           |   |   |
|                           |   | Consolidated Balance Sheet —  December 31, 2004 |
|                           |   |   |
|                           |   | Consolidated  Statements of Operations — Three Months Ended December 31, 2004 and 2003 |
|                           |   |   |
|                           |   | Consolidated  Statements of Operations — Six Months Ended December 31, 2004 and 2003 |
|                           |   |   |
|                           |   | Consolidated  Statements of Cash Flows - Six Months Ended December 31, 2004 and 2003 |
|                           |   |   |
|                           |   | Notes  to Consolidated Financial Statements — December 31, 2004 |
|                           |   |   |
| 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.                        |   | Unregistered Sales of  Equity Securities and Use of Proceeds |
|                           |   |   |
| 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 |

 

----

***PART I — FINANCIAL INFORMATION***

 

***ITEM 1.  CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)***

 

**MediCor, Ltd.**

**Consolidated Balance Sheet**

**December 31, 2004**

**(Unaudited)**

 
| **Assets**                                                                                                                                         |       |        |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                                                               |       |        |       |
| Current assets:                                                                                                                                    |       |        |       |
|                                                                                                                                               |       |        |       |
| Cash                                                                                                                                               |       | $           | 1,218,811  |   |
| Receivables,  less allowance for doubtful accounts of $916,613                                                                                     |       | 5,921,374   |       |
| Notes  receivable, less allowance for doubtful accounts of $1,796,522                                                                              |       | —      |       |
| Inventories                                                                                                                                        |       | 3,706,922   |       |
| Prepaid expenses  and other current assets                                                                                                         |       | 157,058     |       |
|                                                                                                                                               |       |        |       |
| Total current  assets                                                                                                                              |       | 11,004,165  |       |
| Property, plant  and equipment, net                                                                                                                |       | 2,911,563   |       |
| Leased property  under capital leases, net                                                                                                         |       | 2,600,253   |       |
| Goodwill and  other intangibles, net                                                                                                               |       | 36,763,534  |       |
| Deposits                                                                                                                                           |       | 106,299     |       |
| Other assets                                                                                                                                       |       | 660,012     |       |
|                                                                                                                                               |       |        |       |
| Total assets                                                                                                                                       |       | $           | 54,045,826 |   |
|                                                                                                                                               |       |        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                     | ** ** | ** **  | ** ** |
|                                                                                                                                               |       |        |       |
| Current  liabilities:                                                                                                                              |       |        |       |
|                                                                                                                                               |       |        |       |
| Notes payable                                                                                                                                      |       | $           | 1,633,023  |   |
| Note payable to  related party                                                                                                                     |       | 44,100,649  |       |
| Accounts payable                                                                                                                                   |       | 6,201,022   |       |
| Obligations  under capital leases                                                                                                                  |       | 316,761     |       |
| Accrued expenses  and other current liabilities                                                                                                    |       | 2,072,329   |       |
| Payroll taxes  payable                                                                                                                             |       | 904,683     |       |
| Interest payable  to related party                                                                                                                 |       | 1,283,384   |       |
|                                                                                                                                               |       |        |       |
| Total current  liabilities                                                                                                                         |       | 56,511,851  |       |
|                                                                                                                                               |       |        |       |
| Long-term  convertible debentures                                                                                                                  |       | 400,000     |       |
| Long-term notes  payable                                                                                                                           |       | 8,446,454   |       |
| Long-term  obligations under capital leases                                                                                                        |       | 2,139,939   |       |
| Long-term  accrued liabilities                                                                                                                     |       | 1,856,773   |       |
|                                                                                                                                               |       |        |       |
| Total  liabilities                                                                                                                                 |       | 69,355,017  |       |
|                                                                                                                                               |       |        |       |
| Commitments and  contingencies (Note V)                                                                                                            |       |        |       |
|                                                                                                                                               |       |        |       |
| Stockholders’  equity (deficit)                                                                                                               |       |        |       |
|                                                                                                                                               |       |        |       |
| Preferred  shares, $.001 par value, 45,000 shares authorized, 10,937 issued and  outstanding; liquidation preference $10,937,000                   |       | 11          |       |
|                                                                                                                                               |       |        |       |
| Additional paid  in capital - preferred stock                                                                                                      |       | 11,289,018  |       |
|                                                                                                                                               |       |        |       |
| Common shares,  $.001 par value, 100,000,000 shares authorized, 18,166,354 shares issued,  18,146,056 shares outstanding and 20,298 shares retired |       | 18,112      |       |
|                                                                                                                                               |       |        |       |
| Additional paid  in capital - common stock                                                                                                         |       | 17,623,892  |       |
|                                                                                                                                               |       |        |       |
| Deferred  compensation                                                                                                                             |       | 79,500      |       |
|                                                                                                                                               |       |        |       |
| Accumulated  (deficit)                                                                                                                             |       | (44,319,724 | )          |
|                                                                                                                                               |       |        |       |
| Stockholders’  equity (deficit)                                                                                                               |       | (15,309,191 | )          |
|                                                                                                                                               |       |        |       |
| Total  liabilities and stockholders’ equity                                                                                                   |       | $           | 54,045,826 |   |
|                                                                                                                                                    |            |             |            |  |  |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

 

2

----

 

**MediCor, Ltd.**

**Consolidated Statements of Operations**

**Three Months Ended December 31, 2004 and 2003**

**(Unaudited)**

 
| ** **                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                   |       |       |       |       |       |
| Net sales                                              |       | $          | 6,145,254  |       | $          | 306,542 |   |
| Cost of sales                                          |       | 3,180,430  |       | 64,482     |       |
| Return of  consigned inventory previously written down |       | —     |       | (1,575     | )          |
|                                                   |       |       |       |       |       |
| Gross profit                                           |       | 2,964,824  |       | 243,635    |       |
| Operating  expenses:                                   |       |       |       |       |       |
| Selling, general  and administrative expenses          |       | 5,385,844  |       | 1,679,117  |       |
| Research and  development                              |       | 567,475    |       | 424,826    |       |
| Other expenses                                         |       | 122,757    |       | —     |       |
|                                                   |       |       |       |       |       |
| Operating income  / (loss)                             |       | (3,111,252 | )          | (1,860,308 | )          |
|                                                   |       |       |       |       |       |
| Net interest  expense / (income)                       |       | 1,260,044  |       | 256,791    |       |
|                                                   |       |       |       |       |       |
| Income / (loss)  before income taxes                   |       | (4,371,296 | )          | (2,117,099 | )          |
| Income tax  expense (benefit)                          |       | (58,595    | )          | 1,737      |       |
|                                                   |       |       |       |       |       |
| Net income /  (loss)                                   |       | (4,312,701 | )          | (2,118,836 | )          |
| Preferred  dividends deemed                            |       | 154,468    |       | —     |       |
| Preferred  dividends in arrears Series A Preferred 8%  |       | 220,554    |       | —     |       |
|                                                   |       |       |       |       |       |
| Net loss  attributable to common stockholders          |       | $          | (4,687,723 | )          | $          | (2,118,836 | ) |
|                                                   |       |       |       |       |       |
| Earnings per  share data:                              |       |       |       |       |       |
| Weighted average  shares, basic and diluted            |       | 18,116,198 |       | 17,577,189 |       |
| Basic and  diluted                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss per  share                                    |       | $          | (0.26      | )          | $          | (0.12 | ) |
|                                                        |            |            |            |            |            |  |  |  |  |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

3

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**MediCor, Ltd.**

**Consolidated Statements of Operations**

**Six Months Ended December 31, 2004 and 2003**

**(Unaudited)**

 
| ** **                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                   |       |       |       |       |       |
| Net sales                                              |       | $          | 12,288,313 |       | $          | 642,881 |   |
| Cost of sales                                          |       | 6,734,265  |       | 142,695    |       |
| Return of  consigned inventory previously written down |       | (350       | )          | (24,150    | )          |
|                                                   |       |       |       |       |       |
| Gross profit                                           |       | 5,554,398  |       | 524,336    |       |
| Operating  expenses:                                   |       |       |       |       |       |
| Selling, general  and administrative expenses          |       | 9,239,641  |       | 2,866,962  |       |
| Research and  development                              |       | 1,201,189  |       | 433,951    |       |
| Other expenses                                         |       | 130,028    |       | —     |       |
|                                                   |       |       |       |       |       |
| Operating income  / (loss)                             |       | (5,016,460 | )          | (2,776,577 | )          |
|                                                   |       |       |       |       |       |
| Net interest  expense / (income)                       |       | 2,529,483  |       | 485,370    |       |
|                                                   |       |       |       |       |       |
| Income / (loss)  before income taxes                   |       | (7,545,943 | )          | (3,261,947 | )          |
| Income tax  expense (benefit)                          |       | 282,316    |       | 1,737      |       |
|                                                   |       |       |       |       |       |
| Net income /  (loss)                                   |       | (7,828,259 | )          | (3,263,684 | )          |
| Preferred  dividends deemed                            |       | 260,172    |       | —     |       |
| Preferred  dividends in arrears Series A Preferred 8%  |       | 429,310    |       |       |       |
|                                                   |       |       |       |       |       |
| Net loss  attributable to common stockholders          |       | $          | (8,517,741 | )          | $          | (3,263,684 | ) |
|                                                   |       |       |       |       |       |
| Earnings per  share data:                              |       |       |       |       |       |
| Weighted average  shares, basic and diluted            |       | 18,089,308 |       | 17,547,158 |       |
| Basic and  diluted                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss per  share                                    |       | $          | (0.47      | )          | $          | (0.19 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements

 

4

----

 

**MediCor, Ltd.**

**Consolidated Statements of Cash Flows**

**Six Months Ended December 31, 2004 and 2003**

**(Unaudited)**

 
| ** **                                                                                                                                                                                               | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                |       |       |        |       |       |
| Net loss                                                                                                                                                                                                 |       | $          | (7,828,259  | )          | $          | (3,263,684 | ) |
| Adjustments to reconcile net loss to net cash  utilized by operating activities:                                                                                                                         |       |       |        |       |       |
| Depreciation and amortization                                                                                                                                                                            |       | 483,369    |        | 246,406    |       |
| Provision for doubtful accounts                                                                                                                                                                          |       | 2,195,686  |        | 233,167    |       |
| Inventory write down                                                                                                                                                                                     |       | 350        |        | 24,150     |       |
| Non-employee stock options                                                                                                                                                                               |       | 119,375    |        | 22,928     |       |
| Employee preferred stock                                                                                                                                                                                 |       | 80,000     |        | —     |       |
| Directors restricted common stock                                                                                                                                                                        |       | 26,500     |        | —     |       |
| Changes in operating assets and liabilities                                                                                                                                                              |       |       |        |       |       |
| Receivables                                                                                                                                                                                              |       | (1,447,974 | )           | (190,581   | )          |
| Notes receivable                                                                                                                                                                                         |       | (1,492,094 | )           | 27,384     |       |
| Inventories                                                                                                                                                                                              |       | (524,860   | )           | (21,215    | )          |
| Prepaid expenses and other current assets                                                                                                                                                                |       | 588,429    |        | (57,279    | )          |
| Goodwill                                                                                                                                                                                                 |       | (617,675   | )           | —     |       |
| Deposits                                                                                                                                                                                                 |       | 617,675    |        | (600,000   | )          |
| Other assets                                                                                                                                                                                             |       | (629,918   | )           | (48,100    | )          |
| Bank overdraft                                                                                                                                                                                           |       | —     |        | (111,829   | )          |
| Accounts payable                                                                                                                                                                                         |       | 148,880    |        | (67,763    | )          |
| Accrued expenses and other current liabilities                                                                                                                                                           |       | (906,815   | )           | (189,805   | )          |
| Income tax payable                                                                                                                                                                                       |       | —     |        | —     |       |
| Payroll taxes payable                                                                                                                                                                                    |       | 407,422    |        | 80,449     |       |
| Interest payable                                                                                                                                                                                         |       | 775,422    |        | 118,949    |       |
| Long term accrued liabilities                                                                                                                                                                            |       | —     |        | 15,770     |       |
| Net cash provided by (utilized) operating activities                                                                                                                                                     |       | (8,004,487 | )           | (3,781,053 | )          |
|                                                                                                                                                                                                     |       |       |        |       |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                |       |       |        |       |       |
| Payments for property, plant and equipment                                                                                                                                                               |       | (282,827   | )           | (14,850    | )          |
| Payments for purchase of Laboratoires Eurosilicone  S.A., net of cash acquired                                                                                                                           |       | (8,800,727 | )           | —     |       |
| Payments for purchase of Deramedics, net of cash  aquired                                                                                                                                                |       | (75,000    | )           | —     |       |
| Net cash provided by (utilized) investing activites                                                                                                                                                      |       | (9,158,554 | )           | (14,850    | )          |
|                                                                                                                                                                                                     |       |       |        |       |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                |       |       |        |       |       |
| Principal payments under capital lease obligation                                                                                                                                                        |       | (262,867   | )           | —     |       |
| Proceeds from issuance of convertible debentures                                                                                                                                                         |       | —     |        | 1,350,000  |       |
| Proceeds from issuance of short term debt                                                                                                                                                                |       | 16,520,500 |        | 2,598,600  |       |
| Proceeds from issuance of long term debt                                                                                                                                                                 |       | 7,333,407  |        |       |       |
| Payments on convertible debentures                                                                                                                                                                       |       | (200,000   | )           |       |       |
| Payments on short term debt                                                                                                                                                                              |       | (6,160,251 | )           | (88,021    | )          |
| Issuance of preferred stock                                                                                                                                                                              |       | 1,172,271  |        | —     |       |
| Issuance of common stock                                                                                                                                                                                 |       | 4,969      |        | 11,489     |       |
| Purchase of treasury stock                                                                                                                                                                               |       | —     |        | (39,999    | )          |
| Net cash provided by (utilized) financing activities                                                                                                                                                     |       | 18,408,029 |        | 3,832,069  |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| **EFFECT ON EXCHANGE RATE CHANGES ON CASH**                                                                                                                                                              |       | (191,269   | )           | —     |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| Net increase in cash                                                                                                                                                                                     |       | 1,053,719  |        | 36,166     |       |
| Cash at beginning of period                                                                                                                                                                              |       | 165,092    |        | 50,631     |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| **CASH AT END OF PERIOD**                                                                                                                                                                                |       | $          | 1,218,811   |       | $          | 86,797 |   |
|                                                                                                                                                                                                     |       |       |        |       |       |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES**                                                                                                                                                       |       |       |        |       |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| Conversion of short-term debt to preferred stock                                                                                                                                                         |       | $          | 250,000     |       | $          | — |   |
| Conversion of short-term debt to common stock                                                                                                                                                            |       | $          | 75,000      |       |       |   |
| Issuance of preferred stock to employees/consultants                                                                                                                                                     |       | $          | 80,000      |       | $          | — |   |
| Issuance of common stock to directors                                                                                                                                                                    |       | $          | 26,500      |       |       |   |
|                                                                                                                                                                                                     |       |       |        |       |       |
| The Company purchased all of the capital stock of  Laboratories Euorsilcone S.A.S. for $39,332,356. In conjunction with the  acquisition, liabilities were assumed as follows:                           |       |       |        |       |       |
| Fair value of assets acquired                                                                                                                                                                            |       | $          | 15,870,718  |       |       |   |
| Goodwill                                                                                                                                                                                                 |       | $          | 32,211,067  |       |       |   |
| Cash paid for capital stock                                                                                                                                                                              |       | $          | (39,332,356 | )          |       |   |
| Liabilities assumed                                                                                                                                                                                      |       | $          | (8,749,429  | )          |       |   |
|                                                                                                                                                                                                     |       |       |        |       |       |
| Included in the fair value of assets acquired and  liabilities assumed is $2,532,081 for capital lease obligations.                                                                                      |       |       |        |       |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| The Company purchased all of the capital stock of  Dermatological Medical Products and Specialites, S.A. de C.V. for $75,000. In  conjunction with the acquisition, liabilities were assumed as follows: |       |       |        |       |       |
| Fair value of assets acquired                                                                                                                                                                            |       | $          | 75,000      |       |       |   |
| Cash paid for capital stock                                                                                                                                                                              |       | $          | (75,000     | )          |       |   |
| Liabilities assumed                                                                                                                                                                                      |       | $          | —      |       |       |   |
|                                                                                                                                                                                                     |       |       |        |       |       |
| A capital lease obligation of $187,485 was incurred  when the Company entered into a lease for new vehicles.                                                                                             |       |       |        |       |       |
|                                                                                                                                                                                                     |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**                                                                                                                                                     |       |       |        |       |       |
| Cash paid during the period for:                                                                                                                                                                         |       |       |        |       |       |
|                                                                                                                                                                                                     |       |       |        |       |       |
| Interest                                                                                                                                                                                                 |       | $          | 1,678,124   |       | $          | 28,212 |   |
| Taxes                                                                                                                                                                                                    |       | $          | —      |       | $          | — |   |
|                                                                                                                                                                                                          |            |            |             |            |            |  |  |  |

 

See accompanying notes to unaudited consolidated financial statements

 

5

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*** ***

**MEDICORLTD. NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTSDecember 31, 2004**

**Note A - Description of Business**

 

 MediCor Ltd. (the “Company” or “MediCor”)is a global health care company that acquires, develops, manufactures andmarkets products primarily for the aesthetic, plastic surgery and dermatologymarkets.  Current products include breast and other implants and scarmanagement products.  The Company’s breast implant products are currentlysold in approximately 85 countries, but are not sold in the United States orCanada.  The Company sells its products tohospitals, surgery centers and physicians primarily through distributors, aswell as through direct sales personnel. MediCor was founded in 1999 by chairman of the board Donald K. McGhan,the founder and former chairman and chief executive officer of InamedCorporation, McGhan Medical and McGhan Limited. MediCor’s objective is to be a leading supplier of selectedinternational medical devices and technologies. To achieve this strategy, we intend to build upon and expand ourbusiness lines, primarily in the aesthetic, plastic and reconstructive surgeryand dermatology markets.  We intend toaccomplish this growth through the expansion of existing product lines andofferings and through the acquisition of companies and other assets, includingintellectual property rights and distribution rights.

 

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

*Principles of Consolidation*

Theconsolidated financial statements include the accounts of the Company and allof its subsidiaries in which a controlling interest is maintained.  All inter-company accounts and transactionshave been eliminated.  Certain prior period amounts in previously issuedfinancial statements have been reclassified to conform to the current periodpresentation.  The consolidated financial statements have been prepared inUnited States dollars.*****Critical Accounting Policiesand Use of Estimates*****

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and disclosure of contingent assets andliabilities.  On an on-going basis, weevaluate our estimates and judgments, including those related to revenuerecognition, inventories, adequacy of allowances for doubtful accounts,valuation of long-lived assets and goodwill, income taxes, litigation andwarranties.  We base our estimates onhistorical and anticipated results and trends and on various other assumptionsthat we believe are reasonable under the circumstances, including assumptionsas to future events.  The policiesdiscussed below are considered by management to be critical to an understandingof our financial statements.  Theseestimates form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources.  By their nature, estimates are subject to aninherent degree of uncertainty.  Actualresults may differ from those estimates.

##### ***Revenue Recognition***

##### ***Werecognize product revenue, net of sales discounts, returns and allowances, inaccordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SABNo. 104”) and Statement of Financial Accounting Standards No. 48, “RevenueRecognition When Right of Return Exists” (“SFAS No. 48”).  These statements establish that revenue can berecognized when persuasive evidence of an arrangement exists, delivery hasoccurred and all significant contractual obligations have been satisfied, thefee is fixed or determinable, and collection is considered probable.  We recognize revenue upon delivery of productto third-party distributors and customers and do not allow for bill-and-holdsales. Due to the widespread holding of consignment inventory in our industry,we also recognize revenue when the products are withdrawn from consignmentinventory in hospitals, clinics and doctors’ offices.  We do not offer price protection to ourthird-party distributors and customers and accept product returns only if theproduct is defective.  Appropriatereserves are established for anticipated returns and allowances are based onour***

6

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product return history.  Webelieve our estimates for anticipated returns is a “critical accountingestimate” because it requires us to estimate returns and, if actual returnsvary, it could have a material impact on our reported sales and results ofoperations.  Historically our estimatesof return rates have not fluctuated from the actual returns by more than 1% to2%.

 

*Allowance for Doubtful Accounts*

##### ***MediCormaintains allowances for doubtful accounts for estimated losses resulting fromthe inability of some of its customers to make required payments.  The allowances for doubtful accounts are basedon the analysis of historical bad debts, customer credit-worthiness, pasttransaction history with the customer, current economic trends, and changes incustomer payment terms.  If the financialcondition of MediCor’s customers were to deteriorate, adversely affecting theirability to make payments, additional allowances may be required.***

##### ***Inventories***

##### ***Inventoriesare stated at the lower of cost or market using the first-in, first-out (“FIFO”)method.  The Company may write down itsinventory for estimated obsolescence or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions.***

##### ***Property and Equipment***

Property andequipment are stated at cost less accumulated depreciation and amortization.  Depreciation is recorded on the straight-linebasis over the estimated useful lives of the assets, which range from three toten years. Amortization of leasehold improvements is based upon the estimateduseful lives of the assets or the term of the lease, whichever is shorter.  Significant improvements and betterments arecapitalized, while maintenance and repairs are charged to operations asincurred.  Asset retirements anddispositions are accounted for in accordance with Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment and Disposalof Long Lived Assets” (“SFAS No. 144”), as described below.

##### ***Accounting for Long-Lived Assets***

##### ***TheCompany accounts for long-lived assets, other than goodwill, in accordance withthe provisions of SFAS No. 144, which supersedes SFAS No. 121 “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to be disposedof.”  This statement creates oneaccounting model, based on the framework established in SFAS No. 121, to beapplied to all long-lived assets including discontinued operations.  Adoption of this statement had no materialeffect on the financial position or results of operations.  SFAS No. 144 requires, among other things,that an entity review its long-lived assets and certain related intangibles forimpairment whenever changes in circumstances indicate that the carrying amountof an asset may not be fully recoverable.***  We believe the estimate of ourvaluation of long-lived assets is a “critical accounting estimate” because ifcircumstances arose that led to a decrease in the valuation, it could have amaterial impact on our results of operations. With the exception of the third-party purchase agreements in June 2004, asdescribed in Note J to the financial statements included in our annualreport on Form 10-KSB, we do not believe that any other changes have takenplace.

##### ***Goodwill and Other Intangible Assets***

##### ***Goodwillrepresents the excess of the purchase price over the estimated fair value ofidentified assets the businesses acquired. Other intangible assets are recordedat fair value and amortized over periods ranging from three to 17 years.  The Company adopted SFAS No. 142, “Goodwilland Other Intangible Assets” in January 2002. As a result, goodwill is no longer amortized, but is subject to atransitional impairment analysis and is tested for impairment on an annualbasis.  The test for impairment involvesthe use of estimates related to the fair values of the business operations withwhich goodwill is associated and is usually based on a market value approach.  Other intangible assets are amortized usingthe straight-line method over their estimated useful lives and are evaluatedfor impairment under SFAS No. 144.***

 

7

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##### ***Product Replacement Programs***

##### ***IIIAcquisition Corp. d/b/a PIP.America (“PIP.America”), a subsidiary of theCompany in the U.S., provides a product replacement program to surgeons fordeflations of breast implant products for a period of ten (10) years from thedate of implantation.  For eachdeflation, the surgeon receives financial assistance plus a free implant replacement.  Management estimated the amount of potentialfuture product replacement claims based on statistical analysis.  Expected future obligations are determinedbased on the history of product shipments and claims and are discounted to acurrent value, and this amount is reserved. Changes to actual claims, interest rates or other estimations could havea material impact on the statistical calculation which could materially impactthe Company’s reserves and results of operations. Although these products arenot currently being sold (because they are in the process of obtaining FDAapproval, as more fully described below), they were sold under a distributionagreement prior to November 2000 and a reserve for product replacements ismaintained for the products sold in prior years.  Eurosilicone, a subsidiary of the Companylocated in France, has not to date provided a product replacement program orany similar program.  Historically, ithas also solely relied on third-party distributors in countries where salesoccur to support those products.  As aresult, Eurosilicone does not maintain a reserve.  As of December 31, 2004 our productreplacement program reserve consisted of:***

 

| ** **                                        | ** ** | **Product  Replacement Program** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
|                                              |       |                             |       |
| Balance at June  30, 2004                         |       | $2,057,991                       |       |
| Accruals for  warranties issued during the period |       | —                           |       |
| Settlements made  during the period               |       | —                           |       |
|                                              |       |                             |       |
| Balance at  December 31, 2004                     |       | $2,057,991                       |       |

##### ***Shipping and Handling Costs***

##### ***Shippingand handling costs incurred by the Company are included under cost of sales.***

##### ***Research and Development***

##### ***Researchand development costs are expensed by the Company as incurred, including thecosts of clinical studies and other regulatory approval activities.***

##### ***Stock-Based Compensation***

The Company has adopted the provisions of SFASNo. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Inaccordance with SFAS No. 123, MediCor has elected the disclosure-onlyprovisions related to employee stock options and follows the intrinsic valuemethod in Accounting Principals Board Opinion No. 25, “Accounting forStock Issued to Employees, (“APB Opinion No. 25”) in accounting for stockoptions issued to employees. Under APB Opinion No. 25, compensationexpense, if any, is recognized as the difference between the exercise price andthe fair value of the common stock on the measurement date, which is typicallythe date of grant, and is recognized over the service period, which istypically the vesting period.

The Company accounts for options and warrant grants tonon-employees using the guidance prescribed by SFAS No. 123, FinancialAccounting Standards Board (“FASB”) Interpretation No. 44, “Accounting forCertain Transactions Involving Stock Compensation, and Interpretation of APBNo. 25,” and Emerging Issue Task Force (“EITF”) No. 96-18, Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or In Conjunction with Selling, Goods, or Services, (“EITF No. 96-18”) wherebythe fair value of such option and warrant grants are measured using the FairValue Based Method at the earlier of the date at which the non-employee’sperformance is completed or a performance commitment is reached.

8

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The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation,” to stock-based employee compensation including therequired disclosures of SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure — and Amendment of FASB Statement No. 123” (“SFAS No.148”).
| ** **                                                                                                                                     | ** ** | **Six Months Ended  December 31, 2004** | ** ** | **Six Months Ended  December 31, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
|                                                                                                                                           |       |                                    |       |                                    |       |
| Net Loss, as  reported                                                                                                                         |       | $                                       | (8,517,741 | )                                       | $          | (3,263,684 | ) |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Add: Total  stock-based non-employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | 145,875                                 |       | 46,589                                  |       |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects  |       | (819,000                                | )          | (30,501                                 | )          |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Pro forma net  loss                                                                                                                            |       | $                                       | (9,190,866 | )                                       | $          | (3,247,596 | ) |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Loss per share:                                                                                                                                |       |                                    |       |                                    |       |
| Basic and  diluted - as reported                                                                                                               |       | $                                       | (0.47      | )                                       | $          | (0.19 | ) |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Basic and  diluted - pro forma                                                                                                                 |       | $                                       | (0.51      | )                                       | $          | (0.20 | ) |
|                                                                                                                                                |            |                                         |            |                                         |            |  |  |  |  |

 

These pro forma amounts may not be representative of future disclosuressince the estimated fair value of stock options is amortized to expense overthe vesting period, and additional options may be granted in future years.

 

The estimated fair value of each MediCor option granted is calculatedusing the Black-Scholes pricing model. The weighted average assumptions used in the model were as follows:

 
| ** **                     | ** ** | **2004** | ** ** | **2003**  | ** ** |
|--------------------------------|------------|----------|------------|-----------|------------|
| Risk-free  interest rate       |       | 3.50     | %          | 6.00-6.50 | %          |
| Expected years  until exercise |       | 7 Years  |       | 3-4 Years |       |
| Expected stock  volatility     |       | 50.0     | %          | 0.0       | %          |
| Dividend yield                 |       | 0        | %          | 0         | %          |

*Income Taxes*

Deferred income tax assets or liabilities are computed based on thetemporary differences between the financial statement and income tax bases ofassets and liabilities using the statutory marginal income tax rate in effectfor the years in which the differences are expected to reverse. Deferred incometax expenses or credits are based on the changes in the deferred income taxassets or liabilities from period to period. A valuation allowance againstdeferred tax assets is required if, based on the weight of available evidence, itis more likely than not that some portion or all of the deferred tax assetswill not be realized. The valuation allowance should be sufficient to reducethe deferred tax asset to the amount that is more likely than not to berealized.

9

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##### ***Effectsof Recent Accounting Pronouncements***

 

In December 2003, the SEC adopted SAB No. 104 whichcodifies, revises, and rescinds certain sections of SAB No. 101, “RevenueRecognition,” in order to make this interpretive guidance consistent withcurrent authoritative accounting and auditing guidance and SEC rules andregulations.  The changes in SAB No. 104did not have a material impact on our financial position or results ofoperations.

In March2004, FASB approved the consensus reached on the EITF Issue No. 03-01, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” (“EITF No. 03-01”).  Theobjective of this Issue is to provide guidance for identifying impairedinvestments. EITF No. 03-01 also provides new disclosure requirements forinvestments that are deemed to be temporarily impaired. The accountingprovisions of EITF No. 03-01 are effective for all reporting periods beginningafter June 15, 2004, while the disclosure requirements are effective only forannual periods ending after June 15, 2004. We have evaluated the impact of theadoption of EITF No. 03-01 and do not believe it will be significant to ourresults of operations or financial position.

In December 2004, FASB issued Statement of Financial Accounting Standards SFAS No. 123 (revised 2004), Share-Based Payment, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  A key provision of this statement is the requirement of a public entity to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period or vesting period).  This standard becomes effective for the Company January 1, 2006 as the Company is currently a small business issuer.

 

In July 2004, FASB released draft abstract EITF Issue No. 04-08, “TheEffect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITFNo. 04-08”), for comment. The objective of EITF No. 04-08 is to provideguidance for whether contingently convertible debt instruments should beincluded in diluted earnings per share calculations. The draft abstractreflects the EITF’s tentative conclusion that contingently convertible debtshould be included in diluted earnings per share calculations regardless ofwhether or not the trigger price has been reached.  In its September meeting, the EITF confirmedthe July conclusion, and the guidance becomes effective December 15,2004.  We do not believe the impact of EITF No. 04-08 will be significantto our results of operations or financial position.  We expect to adoptthe guidance in the quarter ended March 31, 2005.

 

**Note C— Interim Reporting**

 

The accompanying unaudited consolidated financialstatements for the three- and six-month periods ended December 31, 2004 and December31, 2003, have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and withinstructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements.  In the opinion of management, all adjustments(consisting only of normal recurring accruals, unless otherwise indicated)considered necessary for a fair presentation of the results of operations forthe indicated periods have been included.  Certain amounts recorded inprevious periods have been reclassified to conform to the current period presentation. Operating results for the six months ended December 31, 2004 are notnecessarily indicative of the results for the full fiscal year.

 

**Note D — Major Customers**

During the three and sixmonths ended December 31, 2004, two different customers accounted for 10% and 11%,respectively, of the Company’s consolidated revenue.  Revenue related to these two distributors forthe three and six months ended December 31, 2003 is not comparable due to theacquisition of Eurosilicone.

 

10

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**Note E — Cash and Cash Equivalents**

All highly liquid investments with originalmaturities of three months or less at the date of purchase are considered to becash equivalents.

**Note F — Accounts Receivable**

Accounts receivable at December 31, 2004 consistedof:

| ** **                       | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|-----------------------|------------|
|                             |       |                  |       |
| Accounts  receivable             |       | $                     | 6,837,987  |   |
| Allowance for  doubtful accounts |       | (916,613              | )          |
|                             |       |                  |       |
| Total                            |       | $                     | 5,921,374  |   |

 

Changes in allowance for doubtful accounts are asfollows:
| Balance July 1,  2004      |   | $       | 213,021 |   |
|----------------------------|--------|---------|---------|--------|
| Provisions /  (recovery)   |   | 703,592 |    |
| Write-offs                 |   | —  |    |
| Balance December  31, 2004 |   | $       | 916,613 |   |
|                            |        |         |         |        |  |

**Note G — Notes Receivable**

Notes receivable at December 31, 2004 consisted of: 
| ** **                       | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|-----------------------|------------|
|                             |       |                  |       |
| Notes receivable                 |       | $                     | 1,796,522  |   |
| Allowance for  doubtful accounts |       | (1,796,522            | )          |
|                             |       |                  |       |
| Total                            |       | $                     | —     |   |

Poly Implants Protheses S.A. (“PIP”), a third-partymanufacturer of breast implants located in France, issued to the Companya revolving promissory note for certain sums to come due to the Company basedon the Company’s and the manufacturer’s administration of product replacementand product replacement related claims. These amounts have been fully reserved for, as an allowance for doubtfulaccounts, due to the lack of past payments and uncertain prospect of collection.

11

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**NoteH — Inventories**

Inventories at December31, 2004 consisted of:
| ** **      | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|-----------------------|------------|
|            |       |                  |       |
| Raw Materials   |       | $                     | 769,002    |   |
| Work in Process |       | 312,800               |       |
| Finished Goods  |       | 2,625,120             |       |
|            |       |                  |       |
| Total           |       | $                     | 3,706,922  |   |

**Note I - Property and Equipment**

Propertyand equipment at December 31, 2004 consisted of: 
| ** **                             | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
|                                   |       |                  |       |
| Automobiles                            |       | $                     | 86,043     |   |
| Computer  Equipment and tools and dies |       | 318,884               |       |
| Furniture,  Fixtures and equipment     |       | 456,099               |       |
| Land and  buildings                    |       | 2,268,840             |       |
| Leasehold  Improvements                |       | 107,748               |       |
| Machinery and  equipment               |       | 370,245               |       |
|                                   |       |                  |       |
| Subtotal                               |       | 3,607,858             |       |
| Accumulated  depreciation              |       | (696,295              | )          |
|                                   |       |                  |       |
| Total                                  |       | $                     | 2,911,563  |   |

Depreciationexpense was $141,825 for the three months ended December 31, 2004 and $87,882for the three months ended December 31, 2003. Depreciation expense was $308,354for the six months ended December 31, 2004 and $177,315 for the same period ayear ago.  The increase for the three-and six-month periods is due to the depreciation of the acquired assets ofEursolicone.

12

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**Note J —Goodwill and Other Intangibles**

Goodwill and otherintangibles as of December 31, 2004 consisted of:
| ** **                                                                  | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                        |       |                  |       |
| Goodwill                                                                    |       | $                     | 34,040,163 |   |
| Distribution  Agreements, Non-Compete and Other                             |       | 425,418               |       |
| Patents                                                                     |       | 3,100,000             |       |
|                                                                        |       |                  |       |
| Subtotal                                                                    |       | 37,565,581            |       |
|                                                                        |       |                  |       |
| Accumulated  Amortization - Goodwill                                        |       | (41,973               | )          |
| Accumulated  Amortization - Distribution Agreements,  Non-Compete and Other |       | (231,334              | )          |
|                                                                        |       |                  |       |
| Accumulated  Amortization - Patents                                         |       | (528,740              | )          |
|                                                                        |       |                  |       |
| Subtotal                                                                    |       | (802,047              | )          |
|                                                                        |       |                  |       |
| Total                                                                       |       | $                     | 36,763,534 |   |

 

Amortization expense for the three months ended December31, 2004 was $87,508, compared to $87,882 for the prior period ended December31, 2003.  The amortization for the sixmonths ended December 31, 2004 was $175,015, compared to $177,315 with theprior period ended December 31, 2003.

 

The estimated amortization expense for the next five years consists of:

 
| ** **              | ** ** | **December 31,  2005** | ** ** | **December 31,  2006** | ** ** | **December 31,  2007** | ** ** | **December 31,  2008** | ** ** | **December 31,  2009** | ** ** |
|-------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
|                    |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Distribution Agreements |       | 22,500                 |       | 22,500                 |       | 22,500                 |       | 22,500                 |       | 22,500                 |       |
| Non-compete             |       | 5,417                  |       | —                 |       | —                 |       | —                 |       | —                 |       |
| Patents                 |       | 295,029                |       | 295,029                |       | 295,029                |       | 295,029                |       | 295,029                |       |
|                    |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Total                   |       | $                      | 322,946    |                   | $          | 317,529                |       | $                      | 317,529    |                   | $          | 317,529 |   | $ | 317,529 |   |
|                         |            |                        |            |                        |            |                        |            |                        |            |                        |            |  |  |  |  |  |

 

13

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**Note K —Leased Property under Capital Leases**

The following isan analysis of the leased property under capital leases by major classes.  All of this property is located in France asa part of our Eurosilicone subsidiary:
| ** **                | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|-----------------------|------------|
|                      |       |                  |       |
| Buildings                 |       | $                     | 2,395,637  |   |
| Vehicles                  |       | 323,929               |       |
|                      |       |                  |       |
| Subtotal                  |       | 2,719,566             |       |
|                      |       |                  |       |
| Accumulated  Depreciation |       | (119,313              | )          |
|                      |       |                  |       |
| Subtotal                  |       | (119,313              | )          |
|                      |       |                  |       |
| Total                     |       | $                     | 2,600,253  |   |

Depreciationexpense was $66,121 for the three months ended December 31, 2004 and $119,313for the six months ended December 31, 2004.

Thefollowing is a schedule by years of future minimum lease payments underoperating leases that have initial or remaining noncancelable lease terms inexcess of one year as of December 31, 2004:

                
| **Year ended December 31,**      | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
|                             |       |       |       |
| 2005                             |       | $          | 618,172    |   |
| 2006                             |       | 431,664    |       |
| 2007                             |       | 410,344    |       |
| 2008                             |       | 383,056    |       |
| 2009                             |       | 333,623    |       |
| Later years                      |       | 733,764    |       |
|                             |       |       |       |
| Total minimum  payments required |       | $          | 2,910,624  |   |

**Note L —Deposits and Other Assets**

Deposits at December 31, 2004 totaled $106,299.  These are security deposits on office leasesand with local utility companies.

 

Other assets consisted of security investments of $33,740 and unamortizeddebt acquisition costs of $626,272 at December 31, 2004.

 

 

14

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**Note M —Accrued Expenses**

Accrued expensesand other current liabilities at December 31, 2004 consisted of:
| ** **            | ** ** | **December 31, 2004** | ** ** |
|-----------------------|------------|-----------------------|------------|
|                  |       |                  |       |
| Consulting            |       | $                     | 296,647    |   |
| Wages and paid  leave |       | 708,939               |       |
| 834,574               |       |                  |       |
| Other                 |       | 232,169               |       |
|                  |       |                  |       |
| Total                 |       | $                     | 2,072,329  |   |

Consulting feesconsisted of amounts relating to a consulting agreement. Other accrued expensesincluded interest and legal expenses.

Long-termaccrued liabilities at December 31, 2004 consisted of:

 
| ** **                   | ** ** | **December 31, 2004** | ** ** |
|------------------------------|------------|-----------------------|------------|
|                         |       |                  |       |
| Legal settlement             |       | $                     | 517,356    |   |
| Product  replacement reserve |       | 1,339,417             |       |
|                         |       |                  |       |
| Total                        |       | $                     | 1,856,773  |   |

**Note N —Convertible Debentures**

Therewere no short-term convertible debentures at December 31, 2004. During thequarter ended December 31, 2004, $75,000 was converted to shares of the Company’scommon stock and $100,000 was repaid.

Long-termconvertible debentures at December 31, 2004 were $400,000.  These convertible debentures are convertibleafter one year and at the 18-month, 24-month, 30-month and 36-month anniversaryof the issuance date at the holder’s discretion to shares of the Company’scommon stock at a price equal to the greater of $5.00 or seventy-five percent(75%) of the daily weighted average trading price per share of the Company’scommon stock over a period of twenty (20) trading days prior to the conversiondate. These convertible debentures mature between April 2006 and August 2006.

Duringthe quarter ended December 31, 2004, we did not incur any costs relating to theseconvertible debentures.

 

15

----

## ***Note O — Notes Payable***

## ***Short-term notes payable of $1,633,023 at December 31, 2004 consistedof several notes which ranged from $40,282 to $1,287,811 with annual interestrates of between 3.39% and 8%.***

## ***Long-term notes payable consisted of a bank term loan in the amount of $7,726,869for a term of seven years denominated in Euros with an annual interest rate basedon six month Libor plus 2.25%.  Thevariable interest rate as of December 31, 2004 was 4.49%.  In addition, we have several notes whichranged from $20,618 to $412,367 with terms of between twenty-one months andfour years, with annual rates of interest between 3.39% 5.25%.***

Future maturities of long-term debt are as follows:

 
| **Year ended December 31,** | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
|                        |       |       |       |
| 2005                        |       | $          | 1,633,023  |   |
| 2006                        |       | 1,606,320  |       |
| 2007                        |       | 1,526,748  |       |
| 2008                        |       | 1,449,952  |       |
| 2009                        |       | 1,287,811  |       |
|                        |       |       |       |
| Subtotal                    |       | 7,503,854  |       |
|                        |       |       |       |
| Payments over  five years   |       | 2,575,623  |       |
|                        |       |       |       |
| Total                       |       | $          | 10,079,477 |   |

 

**Note P — Related Party Transactions**

International Integrated Industries, LLC (“LLC”) isa family holding company in which the chairman of the Company, Mr. Donald K.McGhan, has a controlling interest. Neither the Company nor any of its subsidiaries has any direct ownershipin LLC.  LLC acted on behalf of theCompany by funding significant expenses incurred for which the Company has arevolving loan agreement as shown on the Company’s Consolidated Balance Sheetof $44,100,649 at December 31, 2004.  Theoutstanding balance of the note payable accrues interest at an annual interestrate of ten percent (10%) per annum.  Duringthe three months ended December 31, 2004, LLC advanced $820,000 to the Company,of which none was repaid.  Interestexpense relating to this note payable was $1,283,384 for the quarter ended December31, 2004.  The unpaid liability for theseexpenses is included in the Company’s note payable to affiliates, which iscontained in the financial statements presented herein.  The Company had a commitment from LLC to fundoperating shortfalls as necessary for the period presented.

In October 2003, the Company entered into a reimbursementagreement with a company controlled by its chairman for the reimbursement ofexpenses incurred in the operation of its private plane when used for MediCorbusiness.  The reimbursement agreement iseffective for expenses incurred for MediCor business purposes.  The Company recognized a total of $193,151for the three months ended December 31, 2004 and a total of $642,656 for thesix months ended December 31, 2004 in expenses pursuant to the reimbursement agreement.  All expenses recognized pursuant to the reimbursementagreement have been included by the Company in selling, general, andadministrative expenses.  In June 2004,MediCor modified its reimbursement agreement to reflect a “dry lease” effectiveJune 1, 2004.  Only costs directly tiedto MediCor’s use of the plane asset will be reimbursable to the companycontrolled by the Company’s chairman. All other operating costs (such as fuel, pilot wages, food, etc.) willbe paid directly by the Company or through a disbursement agent to those thirdparties and only when the plane is used for MediCor business purposes.

 

16

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**NoteQ — Federal Income Taxes**

The Company follows FAS 109 for reporting income taxes. The incometax expense (benefit) reflected in theConsolidated Statements of Operations for the Company for the periods notedconsist of:
| ** **                                            | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
|                                                  |       |                  |       |                  |       |
| Current                                               |       | $                     | (2,617,684 | )                     | $          | (1,109,653 | ) |
| Deferred                                              |       | (92,769               | )          | (87,152               | )          |
|                                                  |       |                  |       |                  |       |
| Total Benefit                                         |       | $                     | (2,710,453 | )                     | $          | (1,196,805 | ) |
| Less allowance  for realization of deferred tax asset |       | (2,992,769            | )          | (1,196,805            | )          |
|                                                  |       |                  |       |                  |       |
| Total Tax  Expense                                    |       | $                     | 282,316    |                  | $          | — |   |

The current tax expense for the quarter ended December31, 2004 resulted from income tax paid on a foreign subsidiary.  As of December 31, 2004, the Company recordedan allowance of $14,358,757 against certain future tax benefits, therealization of which is currently uncertain. The deferred differences related to certain accounts receivable, accruedwarranties, and depreciation/amortization not currently deductible as expensesunder Internal Revenue Service provisions. Although the Company recorded this allowance to the deferred tax assets,the Company may still utilize the future tax benefits from net operating lossesfor 20 years from the year of the loss to the extent of future taxableincome.  The estimated net operatinglosses for tax purposes of approximately $25 million will expire over severalyears ending in 2024.

Primary components of the deferred tax assets at theperiods noted were approximately as follows:
|                                         | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
|                                                   |       |                  |       |
| Computed  expected income tax asset/(liability) at 34% |       | $                     | 2,900,000  |   |
| Adjustments                                            |       |                  |       |
| Net operating  loss                                    |       | 10,325,250            |       |
| Allowance for  bad debt                                |       | 243,202               |       |
| Warranty reserve                                       |       | 699,717               |       |
| Depreciation and  amortization                         |       | 190,588               |       |
|                                                   |       |                  |       |
| Income tax  benefit                                    |       | $                     | 14,358,757 |   |
| Less allowance  for realization of deferred tax asset  |       | (14,358,757           | )          |
|                                                   |       |                  |       |
| Deferred tax  asset, net                               |       | $                     | —     |   |
|                                                        |            |                       |            |  |  |

**Note R — Preferred Stock**

The Company authorized a series of 45,000 shares ofpreferred stock designated as Series A 8.0% Convertible Preferred Stock (“SeriesA Preferred”) on July 5, 2004.  The SeriesA Preferred has a par value of $.001 per share with a liquidation preference of$1,000 per share.  In the event of liquidation,shareholders of the Series A Preferred shall be entitled to receive priority asto distribution over common stock.  The SeriesA Preferred stock is convertible into common stock at any time at a conversionprice of $3.85 per share until June 30, 2010, subject to potential adjustmentin the event certain EBITDA or common stock value targets are not met. On June30, 2011 all unconverted shares to common stock will be subject to a mandatoryredemption.  The redemption price of$1,000 per share plus $1,000 per whole share for all accrued and unpaidpaid-in-kind dividends and any other accrued and unpaid dividends, whether ornot declared which amount will be payable by the Company in cash. The Companyhas issued an aggregate of 10,937 shares for $10,937,000.

17

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**NoteS — Loss per Share**

A reconciliationof weighted average shares outstanding, used to calculate basic loss per share,to weighted average shares outstanding assuming dilution, used to calculatediluted loss per share, follows:

 
| ** **                                         | ** ** | **Six Months Ended  December 31, 2004** | ** ** | **Six Months Ended  December 31, 2003** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | ** **                              | ** ** |
| ** **                                         | ** ** | **Income**                              | ** ** | **Shares**                              | ** ** | **Per-Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per-Share** | ** ** |
| ** **                                         | ** ** | **(Numerator)**                         | ** ** | **(Denominator)**                       | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
|                                               |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Net Income (Loss) before preferred stock dividends |       | (7,828,259                              | )          |                                    |       |   |   | (3,263,684 | ) |   |   |   |   |
| Less: Preferred stock dividends                    |       | 689,482                                 |       |                                    |       |   |   | — |   |   |   |   |   |
|                                               |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic EPS                                          |       | (8,517,741                              | )          | 18,089,308                              |       | (0.47 | ) | (3,263,684 | ) | 17,547,158 |   | (0.19 | ) |
|                                               |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Effect of dilutive securities                      |       | —                                  |       |                                    |       |   |   |   |   |   |   |   |   |
|                                               |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                        |       | $                                       | (8,517,741 | )                                       | 18,089,308 |   | (0.47 | ) | $ | (3,263,684 | ) | 17,547,158 |   | (0.19 | ) |
|                                                    |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |

 

Common equivalent shares of 4,967,663 have been excluded from the computationof diluted earnings per share because their effect would be anti-dilutive.

 

**Note T —Stock Options and Warrants**

TheCompany has a stock option plan for key employees and consultants.  There were 4,242,680 shares reserved forissuance pursuant to the Company’s stock option plan and up to 6,000,000 shareswere reserved for issuance pursuant to stand-alone options granted inconnection with employment agreements. The stock option plan does not specify the vesting or the terms of theoptions, which are left to the plan administrators.  The terms of stand-alone options and warrantsare also determined at the time of grant. The Company’s share option activity and related information issummarized below:
| ** **                                | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | ** **  |
|                                      |       |        |       |                                 |       |
| Outstanding  Options at June 30, 2004     |       | 2,121,152   |       | $                                    | 3.11       |   |
|                                      |       |        |       |                                 |       |
| Granted                                   |       | 390,000     |       | $                                    | 3.40       |   |
| Exercised                                 |       | —      |       | $                                    | 0.00       |   |
| Cancelled                                 |       | (62,134     | )          | $                                    | 1.61       |   |
|                                      |       |        |       |                                 |       |
| Outstanding  Options at December 31, 2004 |       | 2,449,018   |       | $                                    | 3.19       |   |
|                                      |       |        |       |                                 |       |
| Options  exercisable at end of period     |       | 688,138     |       | $                                    | 2.84       |   |

 

18

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The following table summarizes information about stockoptions outstanding at December 31, 2004:

 
| **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** | ** ** |
|                          |       |                  |       |   |   |   |   |   |   |   |   |
| $1.00 - $2.01                 |       | 799,018               |       | 5.0 |   | $1.67 |   | 350,430 |   | $1.78 |   |
| $3.00 - $3.80                 |       | 650,000               |       | 6.4 |   | $3.44 |   | 96,875 |   | $3.48 |   |
| $4.15 - $4.30                 |       | 1,000,000             |       | 6.4 |   | $4.24 |   | 220,833 |   | $4.24 |   |

## ***The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions of SFASNo. 123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation including the required disclosures of SFAS No. 148, “Accountingfor Stock-Based Compensation — Transition and Disclosure — and Amendment ofFASB Statement No. 123” (“SFAS No. 148”).***

 
| ** **                                                                                                                                     | ** ** | **Six Months Ended  December 31, 2004** | ** ** | **Six Months Ended  December 31, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | ** **                              | ** ** | ** **                              | ** ** |
| Net Loss, as  reported                                                                                                                         |       | $                                       | (8,517,741 | )                                       | $          | (3,263,684 | ) |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Add: Total  stock-based non-employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | 145,875                                 |       | 46,589                                  |       |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects  |       | (819,000                                | )          | (30,501                                 | )          |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Pro forma net  loss                                                                                                                            |       | $                                       | (9,190,866 | )                                       | $          | (3,247,596 | ) |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Loss per share:                                                                                                                                |       |                                    |       |                                    |       |
| Basic and  diluted - as reported                                                                                                               |       | $                                       | (0.47      | )                                       | $          | (0.19 | ) |
|                                                                                                                                           |       |                                    |       |                                    |       |
| Basic and  diluted - pro forma                                                                                                                 |       | $                                       | (0.51      | )                                       | $          | (0.20 | ) |
|                                                                                                                                                |            |                                         |            |                                         |            |  |  |  |  |

## *** ***

These pro forma amounts may not be representative of future disclosuressince the estimated fair value of stock options is amortized to expense overthe vesting period, and additional options may be granted in future years.

 

The estimated fair value of each MediCor option granted is calculatedusing the Black-Scholes pricing model.  The weighted average assumptions used in themodel were as follows:

 
| ** **                     | ** ** | **2004** | ** ** | **2003**   | ** ** |
|--------------------------------|------------|----------|------------|------------|------------|
| Risk-free  interest rate       |       | 3.50%    |       | 6.00-6.50% |       |
| Expected years  until exercise |       | 7 Years  |       | 3-4 Years  |       |
| Expected stock  volatility     |       | 50.0%    |       | 0.0%       |       |
| Dividend yield                 |       | 0%       |       | 0%         |       |

 

19

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

## ***Note U - Business Segment Information***

The Company is a corporate entity with a number of wholly-owned,autonomous subsidiaries which operate as single business units in a singleindustry segment across multiple geographic locations within the U.S. andinternationally and, as such, does not have multiple segments to report.  Revenues from customers and distributorsattributable to various foreign (non-U.S.) countries were material.  Sales in foreign (non-U.S.) countries arecurrently about 95% of total sales with the largest country accounting forabout 13% of sales.  Additionally, asignificant amount of revenues and costs are Euro denominated.  Long-lived assets attributable to variousforeign countries outside the U.S. were material and equaled about $39 million,located in France.  Amounts attributableto the U.S. were approximately $4 million.

**Note V —Commitments and Contingencies**

TheCompany has received a written commitment from LLC, an affiliate of its chairman,to provide sufficient cash to fund any operating loss through January 1, 2006.The same entity has provided the Company an aggregate of over $59 millionin funding from the Company’s inception through December 31, 2004. The futurefunding may take the form of debt or equity or a combination thereof.

Pursuantto an asset purchase agreement signed April 25, 2002, the Company agreedto acquire substantially all of the assets of a privately-held United Statesmedical products distributor. Pursuant to an amendment dated October 16,2003 to the asset purchase agreement, the purchase price was amended to equalthe deposits made by the Company as of October 16, 2003, plus an additionalagreed payment in cash at closing and issuance of MediCor Ltd. equity atclosing. The closing is conditioned upon the distributor acquiring necessarygovernmental approvals for commercialization in the United States of theproducts to be distributed.  The Companyis no longer obligated to make additional deposits against the purchase price,but the Company has committed to fund all future expenses associated withobtaining required government approvals. As of December 31, 2004 the Companybooked a reserve for the entire deposit, due to various uncertainties relatedto this third-party distributor.

TheCompany’s PIP.America subsidiary has a distribution agreement with PolyImplants Protheses S.A. (“PIP”), a third-party manufacturer of breast implantslocated in France. This agreement covers the sale by the Company of PIP’ssaline, pre-filled breast implant products in North America; although no saleswere reported in the year ending June 30, 2004 because these products arenot currently approved for distribution in North America. Previously, themanufacturer was undertaking the process of securing FDA approval for theseproducts. At March 30, 2004, the Company had $3,444,802 of accountsreceivable from the manufacturer, representing amounts owed to the Companyunder the terms of the distribution agreement. These amounts have been fullyreserved for, with an allowance for doubtful account, due to the lack ofpayment and uncertain prospect of collection. Effective March 30, 2004,the Company and the manufacturer amended the distribution agreement to providefor, among other things, transferring administration, funding and ownership ofthe pre-market approval application process to the Company’s subsidiary. Inconjunction with this change, the Company forgave certain amounts owed by themanufacturer, and the parties amended the pricing terms. The amendmentsobligate the Company to fund the ongoing clinical and regulatory costs andexpenses. The amount and timing of these costs is unknown and may be material.Because the Company has just undertaken management of the application process,the likelihood and timing of obtaining FDA approval are also uncertain.Concurrently, the manufacturer issued to the Company a revolving promissorynote for certain sums to come due to the Company based on the Company’s and themanufacturer’s administration of product replacement and product replacement relatedclaims. The principal amount under the note as of December 31, 2004 was$1,796,522.

In October 1999, June 2000 and July 2003, separate but relatedcomplaints were filed by Saul and Ruth Kwartin, Steven M. Kwartin, and Robertand Nina Kwartin respectively, against our PIP.America subsidiary asco-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., each unaffiliatedwith MediCor, and Jean Claude Mas, 

 

20

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Jyll Farren-Martin and our chairman, personally, in the Circuit Courtof Miami-Dade County, Florida.  TheKwartin family members’ claims are primarily premised on allegations thatplaintiffs are shareholders of PIP/USA, Inc. (“PIP/USA”) or have statutory andcommon law rights of shareholders of PIP/USA as a result of loans orinvestments allegedly made to or into PIP/USA or a third-party or under analleged employment agreement.  Plaintiffsallege that, as a result, they have certain derivative or other rights to analleged distribution agreement between Poly Implants Prostheses, S.A.(“PIP-France”) and PIP/USA.  Plaintiffsclaim, among other things, that III Acquisition Corporation (“PIP.America”) andits chairman tortiously interfered with that agreement and with plaintiffs’other alleged rights as lenders, investors, shareholders, quasi-shareholders oremployees of PIP/USA or other entities. In addition to monetary damages andinjunctive relief, plaintiffs seek to reinstate the alleged distributionagreement between PIP/USA and PIP-France and invalidate PIP.America’sdistributor relationship with PIP-France. It is PIP.America’s position that theKwartin litigations are within the scope of the indemnification agreements. 

 

Initially, two cases were filed in October 1999 and June 2000, Case No.99-25227-CA-01 and Case No. 00-14665-CA-01. Of the two, Case No. 99-25227 wasdismissed.  The same plaintiffs then, inSeptember 2003, filed Case No. 0322537-CA-27, alleging similar claims to thoseincluded in the dismissed case.  Also inSeptember 2003, another member of the same family filed Case No.03-15006-CA-09, again alleging similar claims on his own behalf. Plaintiffs areall members of one family who purport to be shareholders of PIP/USA, Inc. suingderivatively on its behalf or individually, and seeking to rescind varioustransactions between PIP.America and Poly Implants Protheses, S.A. and imposeliability against PIP.America and its co-defendants for unspecified monetarydamages arising out of alleged tortious and other purported wrongful actsconcerning alleged relationships between plaintiffs, PIP/USA, Inc. and PolyImplants Protheses, S.A.

 

Peggy Williams v. PIP/USA, Inc., Case No. 03 CH 9654, Jessica FischerSchnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239, Dawn Marie Cooper, etal. 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 were filed in the Circuit Court of Cook County, Chancery Division, inor around July 2003. Counsel for Jessica Fischer Schnebel, et al. v. PIP/USA,Inc., Case No. 03CH07239 amended her class action complaint to include plaintiffsfrom the other four cases, and each of the others has been voluntarilydismissed. 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 damagesand attorneys fees and costs are sought. PIP.America has filed a motion seekingto dismiss all counts but the third-party beneficiary claim. Plaintiffsrequested and received a second two-month extension to tender written discoveryto our witnesses before filing a response to the motion to dismiss. Depositionsof Medicor personnel will be taken in late January, plaintiffs will respond tothe motion to dismiss by roughly March 1, 2005, and a ruling on the motionshould come by mid-April of 2005. PIP.America has tendered this consolidatedcase to Poly Implant Prostheses, S.A. (PIP-France) for defense and indemnity,and in late November 2004, PIP-France agreed to accept that tender.

 

On December 23, 2004, Europlex, a Mexican company, purported to file alawsuit against Eurosilicone, one of our French subsidiaries, in the AvignonCommercial Court in France, alleging that Eurosilicone implicitly terminated adistribution agreement between the parties by failing to deliver productsordered by Europlex pursuant to the agreement, among other minor allegations.As a result of these allegations, Europlex claims damages in amount ofapproximately 4,000,000 Euros. We believe the suit is without merit and intendto defend against the alleged claims vigorously.

 

Though it is not yet possible to predict the outcome of the casesdescribed above, MediCor and its subsidiaries, as applicable, have deniedplaintiffs’ allegations and are vigorously defending themselves upon the meritsof each lawsuit and against certification of any class. Consequently, pursuantto SFAS No. 5, no accruals have been made for these matters.  While MediCor and its subsidiaries aredesirous to honor their respective obligations under our product replacement programs,the purported class action case above includes two distinctly different typesof claims. The first of these arise from products sold by PIP/USA, Inc., withwhom neither MediCor nor any of its affiliates are affiliated. This companysold implants manufactured by Poly Implants Protheses, S.A. prior toPIP.America’s entry into the U.S. market, which occurred in late 1999. BecausePIP.America did not sell these products, PIP.America similarly did not warrantthese products. The next claims arise from products sold by PIP.America andassociated to the product replacement program administered by PIP.America. Withrespect to claims arising from products sold by PIP.America, PIP.America isadministering and fulfilling its obligations to its customers in the ordinarycourse of business, and for which it has taken appropriate reserves. Other thana limited, $500 portion of certain of its own product replacement claims thatit is administering, PIP.America is indemnified by PIP/USA, Inc., Poly ImplantsProtheses, S.A., and Poly Implants Protheses, S.A.’s President, Jean ClaudeMas, personally, from all claims, including those asserted above.

 

PIP.America either already has, or is in the process of, asserting itsindemnification claims and, in the event of an adverse judgment in any case,PIP.America intends to seek the benefits of this indemnity. As a result, webelieve the costs associated with these matters will not have a materialadverse impact on our business, results of operations or financial position.

 

21

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MediCor and its subsidiaries have been and will continue to beperiodically named as a defendant in other lawsuits in the normal course ofbusiness, including product liability and product warranty claims. Litigation,particularly product liability litigation, can be expensive and disruptive tonormal business operations and the results of complex proceedings can be very difficultto predict. Claims against MediCor or its subsidiaries have been and areperiodically reviewed with counsel in the ordinary course of business. Wepresently believe we or our subsidiaries have meritorious defenses in alllawsuits in which we or our subsidiaries are defendants, subject to thesubsidiaries’ continuing product replacement obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predictthe outcome of these matters, we believe that the costs associated with themwill not have a material adverse impact on our business, results of operationsor financial position.

 

The Company leases office, manufacturing and warehousefacilities under various terms expiring from 2007 to 2008.  Lease expenses amounted to $23,790 and 92,242for the three months ended December 31, 2004 and 2003, respectively.  There was a one-time adjustment of $53,212 forcapital lease payments that were expensed during the quarter ending September30, 2004. For the six months ended December 31, 2004 lease expenses were $272,107compared to $188,048 for the six months ending December 31, 2003.  Future minimum lease payments areapproximated as follows:

 
| **Year ended December 31,** | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
|                        |       |       |       |
| 2005                        |       | 233,228    |       |
| 2006                        |       | 242,317    |       |
| 2007                        |       | 251,776    |       |
| 2008                        |       | 37,088     |       |

 

**Note W — Acquisitions**

 

On July 5, 2004, the Company acquired all of the capital stock ofEurosilicone, a privately-held medical device manufacturer based in Apt,France.  The primary reasons foracquiring Eurosilicone include its historical sales, cash flow and market shareof the breast implant industry, its manufacturing facilities and its productline.  Due to the relatively low bookvalue of its current and fixed assets, as compared to the purchase price, thisresulted in a significant amount of goodwill. There was no allocation of this amount to intangible assets, because nopatents were acquired and the other relevant assets (e.g. customer-related,marketing-related, contracts) were insignificant and immaterial. The financing forthe acquisition was provided primarily by additional loans from InternationalIntegrated Industries, LLC, an affiliate of the Company’s chairman.  The Company may also be obligated to makeadditional performance payments based on revenue targets over the next threeyears.

 

The financial statements reflect various purchase priceallocations.  In accordance with SFAS No.141, “Business Combinations” (“SFAS No. 141”), the total purchase price wasallocated to the tangible and intangible assets of Eurosilicone based upontheir estimated fair values at the acquisition date with the excess purchaseprice allocated to goodwill. The purchase accounting adjustments made are basedupon currently available information. Accordingly, the actual adjustments recorded in connection with thefinal purchase price allocation may be updated according SFAS No. 141, and anysuch changes may be material.

 

22

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The following table summarizes the components of the total purchaseprice and the allocation as of the date of acquisition and updated as of December31, 2004:

 
| ** **                                       | ** ** | **Book Value of Assets Acquired /  Liabilities  Assumed** | ** ** | **Purchase Price  Adjustments** | ** ** | ** ** | ** ** | **Preliminary  Fair Value** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|------------|------------|-----------------------------|------------|
| Cash and cash  equivalents                       |       | $                                                         | 1,929,698  |                            | $          | —     |       |                        |       | $ | 1,929,698 |   |
| Accounts  receivable                             |       | 5,625,350                                                 |       | (672,563                        | **)**      | (a)        |       | 4,952,787                   |       |
| Inventory                                        |       | 2,654,043                                                 |       | 639,936                         | ** ** | (c)        |       | 3,293,979                   |       |
| Other current  assets                            |       | 96,909                                                    |       | —                          |       |       |       | 96,909                      |       |
|                                             |       |                                                      |       |                            |       |       |       |                        |       |
| Total current  assets                            |       | 10,306,000                                                |       | (32,627                         | )          |       |       | 10,273,373                  |       |
|                                             |       |                                                      |       |                            |       |       |       |                        |       |
| Property, plant  and equipment                   |       | 2,367,354                                                 |       | —                          |       |       |       | 2,367,354                   |       |
| Leased property  under capital leases            |       | 2,532,208                                                 |       | —                          |       |       |       | 2,532,208                   |       |
| Goodwill                                         |       | —                                                    |       | 32,426,870                      | ** ** | (d)        |       | 32,426,870                  |       |
| Other long term  assets                          |       | 481,981                                                   |       | —                          |       |       |       | 481,981                     |       |
| Total assets                                     |       | $                                                         | 15,687,543 |                            | $          | 32,394,243 |       |                        |       | $ | 48,081,786 |   |
|                                             |       |                                                      |       |                            |       |       |       |                        |       |
| Accounts payable                                 |       | 2,774,978                                                 |       | —                          |       |       |       | 2,774,978                   |       |
| Notes Payable                                    |       | 367,742                                                   |       | —                          |       |       |       | 367,742                     |       |
| Obligations  under capital leases                |       | 554,217                                                   |       | —                          |       |       |       | 554,217                     |       |
| Other current  liabilities                       |       | 1,607,362                                                 |       | 204,480                         | ** ** | (c)        |       | 1,811,842                   |       |
| Long term notes  payable                         |       | 745,304                                                   |       | —                          |       |       |       | 745,304                     |       |
| Long term  obligations under capital leases      |       | 1,977,991                                                 |       | —                          |       |       |       | 1,977,991                   |       |
| Long term  accrued liabilities                   |       | —                                                    |       | 517,356                         | ** ** | (c)        |       | 517,356                     |       |
| Shareholders’  equity                       |       | 7,659,949                                                 |       | (7,659,949                      | **)**      | (b)        |       | —                      |       |
| 39,332,356                                       | ** ** | ** **                                                |       | 39,332,356                      |       | (e)        |       | 39,332,356                  |       |
| Total  Liabilities and Shareholders’ equity |       | $                                                         | 15,687,543 |                            | $          | 32,394,243 |       |                        |       | $ | 48,081,786 |   |

 

In accordance with SFAS No. 142, goodwill will not be amortized andwill be tested for impairment at least annually.  The amounts contained in the purchase priceallocation may change as additional information becomes available regarding theassets and liabilities acquired.  The purchaseprice allocations are expected to be finalized before the year ended June 30, 2005.  Any change in the fair value of the netassets will change the amount of the purchase price allocable to goodwill.

 

The following adjustments have been reflected in thebalance sheet.

 

(a)          To record an additional allowancefor doubtful accounts as of the acquisition and to record a reserve against ashort-term non-liquid deposit.

 

(b)         To eliminate historicalshareholders’ equity of Eurosilicone.

 

(c)          Reflects severalone-time adjustments as of the acquisition date, relating to inventory previouslynot recognized of $639,936; legal settlement with a commercial agent for$517,536; and an accrual for employee and product litigation of $204,480.

 

(d)         To reflect goodwill.

 

(e)          To record the purchaseprice of Eurosilicone.

 

 

23

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The following unaudited pro-forma financial information reflects thecondensed consolidated results of operations of the Company as if theacquisition had taken place on July 1, 2003. The pro-forma financial information is not necessarily indicative of theresults of operations had the transaction been effected on July 1, 2003.

 
|                            | ** ** | **For the Six Months Ended  December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| Net sales                                 |       | $                                          | 12,288,313 |   | $ | 9,654,415 |   |
| Net income /  (loss)                      |       | (8,517,741                                 | )          | (2,802,888 | ) |
| Diluted (loss)  earnings per common share |       | (0.47                                      | )          | (0.16 | ) |
|                                           |            |                                            |            |  |  |  |  |

 

On August 27, 2004, the Company completed the acquisition of privately-held Dermatological MedicalProducts and Specialties, S.A. de C.V., a distributor of aesthetic, plastic andreconstructive surgery devices in Mexico.

 

 

24

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***ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION***

 

This Quarterly Report onForm 10-QSB, including the following “Management’s Discussion and Analysis orPlan of Operation,” contains forward-looking statements that involve risks anduncertainties, as well as assumptions that, if they ever materialize or proveincorrect, could cause the results of the Company to differ materially fromthose expressed or implied by such forward-looking statements.  Allstatements other than statements of historical fact are statements that couldbe deemed forward-looking statements, including statements regarding new andexisting products, technologies and opportunities; statements regarding marketand industry segment growth and demand and acceptance of new and existingproducts any projections of sales, earnings, revenue, margins or otherfinancial items; any statements of the plans, strategies and objectives ofmanagement for future operations, including the execution of acquisition ormarketing plans; any statements regarding future economic conditions orperformance; any statements of belief or intention; and any statements ofassumptions underlying any of the foregoing.  Factors that may cause suchdifferences include, but are not limited to: increased competition; changes inproduct demand; changes in market acceptance; new product development; UnitedStates Food and Drug Administration (“FDA”) approval, or denial or rescissionof approval; delay or rejection of new or existing products; changes inagreements with governmental agencies; changes in government regulation; supplyof raw materials; changes in reimbursement practices; adverse results oflitigation; the performance of contracts by suppliers, customers and partners;employee management issues; the challenge of managing asset levels, includinginventory; the difficulty of aligning expense levels with revenue changes; andother risks that are described herein and that are otherwise described fromtime to time in the Company’s reports and other documents filed with theSecurities and Exchange Commission, including those contained in “Factors thatMay Affect Future Results” set forth below in “Management’s Discussion andAnalysis or Plan of Operation.”  The Company assumes no obligation anddoes not intend to update these forward-looking statements, except as requiredby law.

 

**OVERVIEW**

MediCor Ltd. is a global health care company thatacquires, develops, manufactures and markets products primarily for theaesthetic, plastic surgery and dermatology markets.  Current productsinclude breast and other implants and scar management products.  Ourproducts are sold primarily in foreign (non-U.S.) countries and foreign sales arecurrently about 95% of total sales, with the largest country accounting forabout 13% of sales.  We sell our productsto hospitals, surgical centers and physicians primarily through distributors,as well as through direct sales personnel.

**Company History and Business Strategy**

MediCor was founded in1999 by chairman of the board Donald K. McGhan, the founder and former chairmanand chief executive officer of Inamed Corporation, McGhan Medical and McGhanLimited.  MediCor’s objective is to be aleading supplier of selected international medical devices andtechnologies.  To achieve this strategy,we intend to build upon and expand our business lines, primarily in theaesthetic, plastic and reconstructive surgery and dermatology markets.  We intend to accomplish this growth throughthe expansion of existing product lines and offerings and through theacquisition of companies and other assets, including intellectual propertyrights and distribution rights.  Webelieve that the acquisition of Eurosilicone will have a material, positiveimpact on our historical sales and cash flow. As detailed in the historical results, Eurosilicone recorded sales forthe year ended December 31, 2003 and December 31, 2002 of €15,825,206 and €13,902,855,respectively.

**Products**

Currently, MediCor has two main product lines:

•                    breast and other implants for aesthetic, plasticand reconstructive surgery; and

•                    scar management products.

 

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***Breast and other implantproducts***

MediCor’s primary product line is breastimplants.  We have a strategy ofestablishing or acquiring manufacturing and distribution capabilities for thisproduct line.  Historically, we acted asa distributor in the United States for breast implant products manufactured bya third-party manufacturer.  In May2004, we agreed to purchase and in July 2004 we closed on the acquisition ofEurosilicone SAS (“Eurosilicone”).  Basedon our evaluation of available industry data, Eurosilicone is the third largestbreast implant manufacturer in the world. Sales in foreign countries (non-U.S.)are currently about 95% of total sales with the largest country accounting forabout 13% of sales.   Eurosilicone also manufactures a broad line ofother implant products.  The financingfor the Eurosilicone acquisition was primarily provided through additionalloans from International Integrated Industries, LLC, an affiliate of MediCor’schairman, as more fully described in the financial statements and notes.

Prior to May 2000, through our III Acquisition Corp.subsidiary, which does business under the trade name PIP.America, wedistributed in the United States pre-filled saline breast implants manufacturedby Poly Implants Protheses, S.A. (“PIP”), on both a direct and a consignedinventory basis.  As of May 2000, theUnited States Food and Drug Administration (“FDA”) notified PIP.America and PIPthat further direct sales to customers by PIP.America would be suspended untilthe FDA reviewed and approved the clinical study being conducted by PIP.  Pursuant to a voluntary withdrawal from themarket, sales of PIP.America products ceased in November 2002 pending final pre-marketapproval (“PMA”) clearance.  PIP.Americaand MediCor are currently conducting the clinical study and it is in amonitoring phase.  The likelihood andtiming of obtaining FDA approval are uncertain as is the timing ofcommercialization in the U.S.

In April 2002, we agreed to acquire substantially allof assets of another privately-held United States breast implant distributorwhose principal product line consists of inflatable saline breastimplants.  As in the case of PIP’sproducts, these were also available in the U.S. prior to May 2000.  The closing of this asset acquisition isconditioned upon the distributor acquiring necessary governmental approvals forcommercialization in the United States of the products to be distributed.  The likelihood and timing of obtaining FDAapproval are uncertain as is the timing of commercialization in the U.S.

***Scar Management Products***

 

In the United States,Biodermis distributes its products to dermatologists, dermatological surgeons,aesthetic, plastic and reconstructive surgeons and Obstetric/Gynecologiststhrough a combination of a direct sales force and distributors. Internationally, Biodermis distributes to the same fields of medicine throughapproximately 70 distributors in about 50 countries, including Canada andMexico.

 

**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’s Discussionand Analysis or Plan of Operation addresses MediCor’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reportingperiod.  On an on-going basis, we evaluate our estimates and judgments,including those related to revenue recognition, inventories, adequacy ofallowances for doubtful accounts, valuation of long-lived assets and goodwill,income taxes, litigation and warranties.  We base our estimates onhistorical and anticipated results and trends and on various other assumptionsthat we believe are reasonable under the circumstances, including assumptionsas to future events.  The policies discussed below are considered bymanagement to be critical to an understanding of our financial statements.  These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources.  By their nature, estimates aresubject to an inherent degree of uncertainty.  Actual results may differfrom those estimates.

 

Management has identifiedthe critical accounting policies to be those related to revenue recognition, adequaciesof allowances for doubtful accounts, valuation of long-lived assets andgoodwill, income taxes, litigation and warranties.

 

 

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**RESULTSOF OPERATIONS**

 

***Sales***

 

Sales for the threemonths ended December 31, 2004 equaled $6,145,254, an increase of $5,838,712 ascompared to the prior year quarter.  Forthe six months ended December 31, 2004 sales were $12,288,313 an increase of $11,645,432versus the same period a year ago.  Thesales of our subsidiary Eurosilicone, acquired on July 5, 2004, drove theincrease in sales versus the prior year periods.  On a pro forma basis, salesfor the three months ended December 31, 2004, increased by about $1.2 millionor 25%.  Excluding the estimated impactof foreign exchange rates, this growth was approximately 20%.  On a pro forma basis, sales for the six monthsended December 31, 2004, increased by about $2.6 million or approximately 27%versus the prior year quarter.

 

***Cost of Sales***

 

Cost of sales as apercentage of net sales for the three months ended December 31, 2004 wereapproximately 52% compared to approximately 21% during the same period in 2003.For the six months ended December 31, 2004 cost of sales as a percentage of netsales was approximately 52%.  During thesame period in 2003 cost of sales as a percentage of net sales wereapproximately 18% which excludes an adjustment for consigned inventory that wasreturned of $24,150.  The majority of thecosts associated with the production of our product are recurring.  The overall increase in cost of sales andgross profit for the three and six-month periods were driven by the acquisitionof Eurosilicone, specifically due to higher labor and raw material costs.  Normally, we expect that cost of sales willremain relatively constant on a percentage basis of approximately 45% to 50%.

 

***Selling, General andAdministrative***

 

Selling, general andadministrative expenses increased to $5,385,844 for the three months ended December31, 2004, as compared to $1,679,117 during the same period in 2003.  The largest increase was driven by bad debtreserve of $1,325,271.  After reviewingour note with Poly Implants Protheses S.A., we concluded that their financialcondition warranted a reserve, although we continue to seek payment.  In addition, the three-month increase can beattributed to: an increase in payroll and payroll related expenses of$1,302,573; accounting fees of $247,054; and consulting expense of$122,668.  Of all SG&A expenses, abouthalf were recurring charges.

 

For the six months endedDecember 31, 2004, SG&A expenses increased to $9,239,641 as compared to $2,866,962for the same period a year ago, primarily as the result of the labor, generaladministrative and legal costs from the acquisition of Eurosilicone.  The increase can be attributed to anadditional reserve for the Poly Implants Protheses S.A. note of$1,839,697.  In addition, there were increasesin payroll and payroll related items of $1,728,695; commission expense of$422,787; travel related expense of $341,724; accounting fees of $304,988;depreciationand amortization expense of $255,176; and costs related to acquisitions of  $225,000. Of all SG&A expenses, about 60% were recurring items.  The reason for the level of SG&A expensesrelative to revenue are due to normal start up period costs and costsassociated with establishing and maintaining a fixed infrastructure.  As our business and sales increase, weanticipate that recurring SG&A expenses will increase in absolute dollars,but decrease as a percentage of sales.

 

***Research and Development***

 

Research and development in the recent quarter ending December31, 2004 was $567,475 as compared to $424,826 for the same period in 2003. Theincrease is attributed to non-recurring expenses of $46,477 for the process ofobtaining required government approvals of saline breast implants pursuant tothe distribution agreement with Poly Implants Protheses S.A. and $96,172 forother expenses relating to the development of product lines.

 

For the six months ended December 31, 2004 researchand development was $1,201,189 as compared to 433,951 for the same period inthe prior year.  The increase was drivenby non-recurring expenses of $925,000 associated with the asset purchase agreementwith the prior U.S. distributor for Biosil products, $86,587 towards obtainingrequired government approvals for saline breast implant products pursuant tothe distribution agreement with Poly Implants Protheses S.A and $189,602 forother expenses relating to the development of product lines.  We expect that research and developmentexpenses will 

 

 

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decrease once wereceive required government approvals, but will increase as we bring newproducts to market or existing products to new markets.

 

***Interest Expense***

 

Interest expenseincreased to $1,260,044 for the three months ended December 31, 2004, comparedto $256,791 in same period in the prior year. Interest expense increased to $2,529,483 for the six months endedDecember 31, 2004, as compared to $485,370 for the six months ended December31, 2003.  Interest expense consistsprimarily of interest related to borrowings.  The change in interestexpense was primarily due to a significant increase in the average principalnote payable to related party balances incurred as a result of the Eurosiliconeacquisition.

 

***Other Expense***

 

Otherexpense increased to $122,757 for the three months ended and $191,269 for thesix months ended December 31, 2004, compared to no expense in the same periodsa year ago.  For the three and six-monthsended December 31, 2004 other expenses consisted of $120,792 and $127,353 respectively,due to a loss on the exchange rate from Euros to United States dollars.

 

***Net Loss***

 

Net loss for the threemonths ended December 31, 2004 increased to $4,687,723 from $2,118,836 for thecomparable period in the previous year.  Net loss increased from $3,263,684reported in the six months ended December 31, 2003 period to $8,517,741 for thesix months ended December 31, 2004.  The increasewas due to higher selling costs, general and administrative expenses, researchand development and interest expense. Basic and diluted loss per share was ($0.26) for the three month periodcompared to ($0.12) for the comparable period last year.  Basic and diluted loss per share was ($0.47)for the six-month period compared to ($0.19) for the comparable period lastyear.

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

Cashflow utilized in operations during the six months ended December 31, 2004 was($8,004,487) as impacted by selling, general and administrative continuedstartup costs, research and development and interest expense.  On July 5, 2004, we completed the acquisitionof Eurosilicone which had a net affect on our investing activities of($8,800,727).  To complete the acquisitionwe borrowed an additional $11,000,000 from LLC. In connection with indebtedness to LLC, we entered into a creditfacility with BNP Paribas.  Under thatfacility we initially drew approximately $9,014,680 of which $5,000,000 wasrepaid to LLC.  The balance of availablecredit under the BNP Paribas facility is tied to performance payments we mayhave to make to the sellers under the Eurosilicone acquisition agreement.

 

Ourability to make payments to refinance our debt and to fund planned capital expendituresand operations will depend on our ability to secure additional significantfinancing and generate sufficient cash in the future.  Currently, we haveonly limited product sales in the United States and will not be in a positionto materially increase United States sales until the FDA issues a pre-market approvalrelating to one or more of the products sought to be sold by us.  We are currently funding activities for two pre-marketapproval applications which are operating expenses.  Under our asset purchase agreement relatingto one of those product lines, we have an obligation to make additional cashpayments on closing of that transaction (which only occurs following FDAapproval of the application). Thus, we have no obligation to close this transactionor make this payment unless the product is cleared for marketing in the UnitedStates.  We expect we will be able tomake that payment from available cash or from the proceeds of affiliate debt,provided by such date we have not concluded a third-party financing.

 

Wehave historically raised funds to support our operating expenses and capitalrequirements through sales of equity or debt securities or through other creditarrangements, including borrowing from our affiliates.  Our existing cash,cash equivalents and cash generated from operations, including the operationsof Eurosilicone, will be insufficient to meet our anticipated cash needs forthe next 12 months.  To satisfy our liquidity requirements, we will needto raise additional funds.  To the extent additional sales of equity ordebt securities are insufficient to satisfy our liquidity requirements, we planon being able to obtain any necessary additional funds through the incurrenceof additional indebtedness to our affiliates.  We have received a writtencommitment from International Integrated Industries, LLC, an affiliate of ourchairman, to provide sufficient cash to fund any operating expenses and capitalexpenditures through January 1, 2006.  The same entity has provided to us over$59 million in funding through December 31, 2004.  This historic fundinghas been a combination of equity and debt. The outstanding debt is a revolving credit facility with interestaccruing at 10% per annum.  We have noset payment terms, though we try to remain current on payments of interest soas not to incur compound interest.  It ispayable on demand.  As a result, it canbe called at any time, and for any reason. From time to time in connection with our other fund-raising activities,International Integrated has converted some of the debt to equity along sidethird-party investors.  There is noobligation or understanding that any such conversions will occur.  We are presently seeking to refinance some orall of the International Integrated indebtedness from a combination ofthird-party indebtedness, equity and possible conversions of debt toequity.  We may or may not besuccessful.  In the interim, any futurefunding from International Integrated may take the form of debt or equity or acombination thereof.

 

Weexpect our funding needs to be primarily to continue to fund any operatinglosses.  In addition, to the extent wewant to pursue additional acquisitions, we expect that we will need additionalfinancing.  We do not presently have anycommitments for such financing.  Thatfinancing may also not be available when we need it, on terms acceptable to usor at all.  Unavailability of thisfinancing will adversely affect our ability to effect acquisitions.

 

**FACTORS THAT MAY AFFECT FUTURERESULTS**

 

Certain statementscontained in this Quarterly Report on Form 10-QSB, and other written andoral statements made from time to time by us, do not relate solely tohistorical facts.  These statements areconsidered “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  Words such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “forecast,”

 

 

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“intend,” “may,” “plan,” “possible,” “project,” “should,”“will,” and similar words and expressions, identify forward lookingstatements.  These forward-lookingstatements involve important risks and uncertainties that could materiallyalter results in the future from those expressed in any forward-lookingstatements made by us or on our behalf. We caution you that forward-looking statements are only predictions andthat actual events or results may differ materially.  In evaluating these statements, you shouldspecifically consider the factors described below that could cause actualevents or results to differ materially. We assume no obligation and do notintend to update these forward-looking statements, except as required by law.

 

***If we are unable to maintain or establishsatisfactory agreements with third-party manufactures to distribute salinefilled breast implants in the United States, we may not be able to distributethose products in the United States.***

 

We currently aredependant on establishing or maintaining rights to distribute in the UnitedStates breast implant products manufactured by third-parties.  We are currently seeking to renegotiate theterms of one such agreement.  We may notbe able to establish or maintain these rights on acceptable terms or atall.  If we fail to establish or maintainthese rights, we may not be able to sell breast implant products in the UnitedStates for a number of years, if at all.

 

***If clinical trials for ourproducts are unsuccessful or delayed, we will be unable to meet our anticipateddevelopment and commercialization timelines.***

 

Before obtainingregulatory 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.

 

Completion of clinicaltrials may take several years or more.  Our commencement and rate ofcompletion of clinical trials may be delayed by many factors, including:

 

•       lack ofefficacy during the clinical trials;

•       unforeseensafety issues;

•       uncertaintieswith or actions of our collaborative partners or suppliers;

•       slowerthan expected patient recruitment;

•       difficultiesin recognizing technical or laboratory data and clinical data;

•       difficultiesin patient retention; and

•       governmentor regulatory delays.

 

The results frompre-clinical testing and early clinical trials are often not predictive ofresults obtained in later clinical trials.  A number of new products haveshown 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.

 

***If we are unable to develop,gain regulatory approval for and market new products and technologies, we willnot achieve meaningful revenue and may experience a decrease in demand for ourproducts or our products could become obsolete.***

 

The medical deviceindustry is highly competitive and is subject to significant and rapidtechnological change and market shifts.  We believe that our ability torespond quickly 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 besuccessful in developing new products or 

 

 

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technologies that will timely achieve regulatoryapproval or receive market acceptance. Once developed, we must also timely obtain regulatory approval for ourproducts, the failure of which may cause our products to be obsolete onceregulatory approval is granted.  Two ofour competitors are in the advanced stage of obtaining regulatory approval fortheir silicone filled breast implants, while we have not started the regulatoryprocess for such products in the United States. This could put us at a significant market disadvantage in the United Statesmarket.  The lack of United Statesregulatory approval for our products, in the face of our competitors’approvals, may also adversely affect us in non-United States markets.

 

***If changes in the economy andconsumer spending reduce consumer demand for our products or our products indevelopment, our sales and profitability will suffer.***

 

Breast augmentation andreconstruction and other aesthetics procedures are elective procedures. Other than insurance reimbursement for post-mastectomy reconstructive surgerythat is available in some cases, breast augmentations and other cosmeticprocedures are not typically covered by insurance.  Adverse changes in the economy may causeconsumers to reassess their spending choices and reduce the demand for cosmeticsurgery.  This shift could have an adverse effect on our projected futuresales and profitability.

 

***Our business will be negativelyimpacted if we cannot obtain additional financing.***

 

To accomplish our plans toconduct our current operations, to expand our current product lines and marketsand to purchase new companies, products and intellectual property, we needsubstantial additional capital, which we may not be able to obtain.  Wecurrently have significant debt that must be serviced.  While we have to date been funded insubstantial part from financing from an affiliate of our chairman, we do notanticipate this funding source will provide sufficient capital to finance ourintended growth strategy, and we expect that we will need significant externalfinancing to accomplish our goals.  Our primary lender is an affiliate ofour chairman and may also seek payment of its debt on an accelerated basis,which we would be unlikely to be able to do. We have in the past and willlikely in the future negotiate with potential equity and debt providers toobtain additional financing, but this additional financing may not be availableon terms that are acceptable to us, or at all.  If adequate funds are notavailable, or are not available on acceptable terms, our ability to operate ourbusiness or implement our expansion and growth plans will be significantlyimpaired.  In addition, the financialterms of any such financing, if obtainable, may be dilutive to existingstockholders.

***We rely on our chairman forcontinued capitalfunding, management direction and strategic planning and we do not presentlyhave any alternative funding or a management transition plan in place.***

We rely on our chairman,Donald K. McGhan, for our continued capital funding, management direction and strategicplanning.  Mr. McGhan’s is our principallender, principal stockholder, chairman of our board of directors and a memberof our four-person executive committee. Consequently, Mr. McGhan has substantial influence over significantcorporate transactions, including acquisitions that we may pursue.  Although we have no written charter, ourexecutive committee generally functions on the basis of consensus, though Mr.McGhan’s multiple roles and significant financial and stockholder stake aretypically considered.  To date, we havenot had any event where Mr. McGhan has sought to or exercised any type ofunilateral control over us, though there can be no assurance that this will nothappen in the future.  In addition, Mr.McGhan’s unique position in the industry as founding or establishing theplastic surgery business of the two principal competitors, Mentor and Inamed,presents a unique strength, but the loss of Mr. McGhan’s services or financialsupport to our company could materially and adversely affect our operations.  We do not presently have a written or otherwell-established management or financing transition plan in the event wewere to lose the services or financial support of Mr. McGhan.

***Because we have only a limitedoperating history and our business strategy calls for significant growththrough new products and acquisitions, there is significant uncertainty aboutour business and prospects*.**

MediCor and itssubsidiaries have only been operating since 1999.  Although our Biodermisoperation has been in existence for a longer period of time, it has onlyoperated 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, breast implants, in the U.S. market dueto the FDA’s 2000 call for a pre-market approval for those products.  As a result, all of our revenues prior to the Eurosilicone acquisition werederived from our scar 

 

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management products.  Revenue generated by ourBiodermis subsidiary has not been significant, and we do not expect more thanmodest internal growth in that segment As a result, our existing businessplatform is not necessarily indicative of our future business or prospects.

 

***MediCor and its prospects mustbe considered in light of the risks, expenses and difficulties frequentlyencountered by companies in an early stage of development, particularlycompanies in rapidly evolving markets such as the medical device market.***

 

Risks for our businessinclude the uncertainties associated with developing and implementing our businessstrategy as described in “Company History and Business Strategy” as we grow andthe management of both internal and acquisition-based growth.  This isparticularly acute during the rapid growth phase of a business, such as we arecurrently experiencing and in a rapidly changing market such as the market formedical devices.  To address these risks,we must continue to develop the strength and quality of our operations,maximize the value delivered to customers, respond to competitive developmentsand continue to attract, retain and motivate qualified employees.  We maynot be successful in addressing these challenges.

 

***We are subject to substantialgovernment regulation, which could materially adversely affect our business.***

 

The production andmarketing of our products and intended products and our research anddevelopment, pre-clinical testing and clinical trial activities are subject toextensive regulation and review by numerous governmental authorities, both inthe U.S. and abroad.  Most of the medical devices we sell or intend tosell or develop must undergo rigorous pre-clinical testing and clinical trialsand an extensive regulatory approval process before they can be marketed. This process makes it longer, more uncertain and more costly to bring theproducts to market, and some of these products may not be approved, or, onceapproved, 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.

 

Delays in or rejection ofFDA or other government entity approval of new products would adversely affectour business.  Delays or rejection may be encountered due to, among otherreasons, government or regulatory delays, lack of efficacy during clinicaltrials, unforeseen safety issues, slower than expected rate of patientrecruitment for clinical trials, inability to follow patients after treatmentin clinical trials, inconsistencies between pre-clinical or early clinicaltrial results and results obtained in later clinical trials, varyinginterpretations of data generated by clinical trials, or changes in regulatorypolicy during the period of product development in the U.S. and abroad. In the U.S., there has been a continuing trend of more stringent FDA oversightin product clearance and enforcement activities, causing medical devicemanufacturers to experience longer approval cycles, more uncertainty, greaterrisk, and higher expenses.  Internationally, there is a risk that we orour suppliers or collaborative partners may not be successful in meeting thequality standards or other certification requirements.  Even if regulatoryapproval of a product is granted, this approval may entail limitations on usesfor which the product may be labeled and promoted. It is possible, for example,that we or our suppliers or collaborative partners may not receive FDA approvalto market our current or future products for broader or different applicationsor to market updated products that represent extensions of our, our suppliers’or collaborative partners’ basic technology.  In addition, we or oursuppliers or collaborative partners may not receive export or import approvalfor products in the future, and countries to which products are to be exportedmay not approve them for import.

 

***Government regulation ofmanufacturing of medical devices is expensive and time consuming for manufacturersand may result in product unavailability or recalls.***

 

Medical device manufacturing facilities also aresubject to continual governmental review and inspection.  The FDA hasstated publicly that compliance with manufacturing regulations will be scrutinizedmore strictly.  A governmental authority may challenge our or oursuppliers’ or collaborative partners’ compliance with applicable federal, stateand foreign regulations.  In addition, any discovery of previously unknownproblems with products or facilities may result in restrictions on the productor the facility, including withdrawal of the product from the market or otherenforcement actions.

 

 

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***If we are unable to avoidsignificant product liability claims or product recalls, we may be forced topay substantial damage awards and other expenses that could exceed our reservesand any applicable insurance coverage.***

 

We have in the past been,currently are, and may in the future be subject to product liability claimsalleging that the use of our technology or products has resulted in adversehealth effects.  These claims may be brought even with respect to productsthat have received, or in the future may receive, regulatory approval for commercialsale.  In particular, the manufacture and sale of breast implant productsentails significant risk of product liability claims due to potentialallegations of possible disease transmission and other health factors, ruptureor other product failure.  Some breast implant manufacturers that sufferedthese types of claims in the past have been forced to cease operations or evento declare bankruptcy.  We may also face a substantial risk of productliability claims from other products we may choose to sell.  In addition to product liability claims, wemay in the future need to recall or issue field corrections related to ourproducts due to manufacturing deficiencies, labeling errors, or other safety orregulatory reasons.

 

We do not presently haveliability insurance to protect us from the costs of claims for damages due tothe use or recall of our products, except that our Biodermis subsidiary carriesa limited amount of product liability insurance related to its products. We may in the future seek additional insurance, which will be limited in bothcircumstance of coverage and amount.  Recent premium increases andcoverage limitations, including specifically limitations or prohibitions byinsurers on insurance covering breast implant manufacturers, may make thisinsurance uneconomic or even unavailable.  However, even if we obtain orincrease insurance, one or more product liability claims or recall orders couldexceed any coverage we may hold.  If we continue to have limited or nocoverage or our insurance does not provide sufficient coverage, productliability claims or recalls could result in losses in excess of our reserves.

 

***Lawsuits, including thoseseeking class action status, may, if successful, cause us to incur substantialliability, including damage awards and significant legal fees that may exceedour reserves.***

 

Lawsuits have been filednaming us or one of our subsidiaries, the French manufacturer from which wepurchase breast implant products, and the U.S. distributor of those sameproducts who preceded our subsidiary in the U.S. market.  In these suits the plaintiffs have sought orcurrently seek, among other things, class action status for claims, includingclaims for breach of warranty.  Theclaims arise from products distributed both before and after our subsidiarythat distributed the products came into existence.  Although certain of the claims arise fromproducts distributed by the other distributor prior to our subsidiary cominginto existence, we have still been named as a defendant.  While we have reserved an amount equal to theoutstanding product replacement claims for claims arising from products oursubsidiary did distribute, the plaintiffs are seeking to hold us responsiblefor more damages.  There can be noassurance we can terminate the litigation as to our subsidiary for reservedamounts.  Although our subsidiary isindemnified 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 no assurance this indemnity willprotect us, as there is no guarantee the French manufacturer, the previousdistributor, or Mr. Mas will, or is able to, honor the indemnification theyhave provided.

 

If we are unsuccessful in defending against the claimsinvolved in these suits, or if class action status is achieved, and theindemnification were to prove non-reliable, we could be responsible forsignificant damages above the reserves and available assets needed to satisfysuch a judgment.

***Our Eurosilicone operation does not carryproduct liability or similar insurance and may expose us to additional risk.***

Our French Eurosiliconesubsidiary has not in the past and does not presently have a formal or informalproduct replacement or any similar program. It also does not have a history of product-relatedlitigation.  We believe this is in partdue to not selling products in the United States, which historically has beenmuch more litigious than the rest of the world. Eurosilicone also has in the past relied on third-party distributors incountries where sales occur to support those products.  If Eurosilicone were to institute a productreplacement program outside the United States or if the litigation experienceoutside the United States were to change significantly, our Eurosiliconesubsidiary would 

 

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be exposed to additional potential liability.  Although we have policies of carefullyobserving corporate formalities and otherwise seeking to preserve theprotection of the corporate form, there can be no assurance that some or all ofthese potential liabilities will not expose us or our other subsidiaries topotential liabilities as well.

 

***If we suffer negative publicityconcerning the safety of our products, our sales may be harmed and we may beforced to withdraw products.***

 

Physicians and potentialpatients may have a number of concerns about the safety of our products andproposed products, whether such concerns have a basis in generally acceptedscience 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 our strategy is based onsuccessfully making acquisitions and otherwise diversifying, or expanding ourproduct offerings, we are exposed to numerous risks associated withacquisitions, diversification and rapid growth.***

 

Our present growth strategyis based in significant part on the acquisition of other companies, productsand technologies that meet our criteria for strategic fit, geographic presence,revenues, profitability, growth potential and operating strategy.  Thesuccessful implementation of this strategy depends on our ability to identifysuitable acquisition candidates finance acquisitions, acquire companies andassets on acceptable terms and integrate their operations successfully.

 

We may not be able toidentify suitable acquisition candidates in our desired product or geographic areasor we may not be able to acquire identified candidates on acceptableterms.  Moreover, in pursuing acquisition opportunities we will likelycompete 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.

 

Acquisitions also involvea number of other risks, including the risks of acquiring undisclosed or undesiredliabilities, acquired in-process technology, stock compensation expense andincreased compensation expense resulting from newly hired employees, thediversion of management attention, potential disputes with the sellers of oneor more acquired entities and the possible failure to retain key acquiredpersonnel.  Client satisfaction or performance problems with an acquiredbusiness or product line could also have a negative impact on our reputation asa whole, and any acquired entity or assets could significantly under-performrelative to our expectations.  Our ability to meet these challenges hasnot been established through repeated acquisitions.

 

We expect that, at leastfor the foreseeable future, we will be required to use cash consideration for acquisitions. We likely will be required to obtain significant third-party financing toaccomplish these acquisitions.  This financing may not be available on acceptableterms, if at all.  The terms of any such financing may be dilutive toexisting stockholders.

 

***If our intellectual propertyrights do not adequately protect our products or technologies, others couldcompete against us more directly.***

 

Our success depends inpart on our ability to obtain patents or rights to patents, protect tradesecrets, operate without infringing upon the proprietary rights of others, andprevent others from infringing on our patents, trademarks and otherintellectual 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 rights.  Patent protection generally involvescomplex legal and factual questions and, therefore, enforceability and enforcementof 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 advantagesagainst competitors with similar technologies.  Moreover, the laws ofcertain foreign countries do not protect our intellectual property rights tothe same extent as do the laws of the United States.

 

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In addition to patentsand trademarks, we rely on trade secrets and proprietary know-how.  Weseek protection of these rights, in part, through confidentiality andproprietary information agreements.  These agreements may not providemeaningful protection or adequate remedies for violation of our rights in the eventof unauthorized use or disclosure of confidential and proprietaryinformation.  Failure to protect our proprietary rights could seriouslyimpair our competitive position.

 

***If third parties claim we areinfringing their intellectual property rights, we could suffer significantlitigation or licensing expenses or be prevented from marketing our products.***

 

Our commercial successdepends significantly on our ability to operate without infringing the patentsand other proprietary rights of others.  However, regardless of ourintent, our technologies may infringe the patents or violate other proprietaryrights of third parties.  In the event of such infringement or violation,we may face litigation and may be prevented from pursuing product developmentor commercialization.

 

***We depend on a limited number ofsuppliers for certain raw materials and the loss of any supplier couldadversely affect our ability to manufacture many of our products.***

 

We currently rely on asingle supplier for silicone raw materials used in many of our products.  Weonly have an oral agreement with this supplier to transfer the necessaryformulations to us in the event that it cannot meet our requirements.  We cannot guarantee that this agreement willbe enforceable or that we would be able to produce a sufficient amount ofquality 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 in the North America market.

 

 ***Ourinternational business exposes us to a number of risks.***

 

A significant part of ourcurrent sales are and a significant part of our projected future sales will bederived from international operations.  In addition, we have and anticipatehaving in the future material international suppliers and operations, includingmanufacturing operations.  Accordingly, we are exposed to risks associatedwith international operations, including risks associated with re-valuation ofthe local currencies of countries where we purchase or sell our products orconduct business, which may result in our purchased products becoming moreexpensive to us in U.S. dollar terms or sold products becoming more expensivein local currency terms, thus reducing demand and sales of our products, orincreased costs to us.  Our operations and financial results also may besignificantly affected by other international factors, including:

 

•       foreigngovernment regulation of medical devices;

•       productliability claims;

•       newexport license requirements;

•       politicalor economic instability in our target markets;

•       traderestrictions;

•       changesin tax laws and tariffs;

•       inadequateprotection of intellectual property rights in some countries;

•       managingforeign distributors, manufacturers and staffing;

•       managingforeign branch offices; and

•       foreigncurrency translations.

 

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

 

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***Our failure to attract andretain key managerial, technical, selling and marketing personnel couldadversely affect our business.***

 

Our success will dependupon our ability to attract and retain key managerial, financial, technical,selling and marketing personnel.  The lack of key personnel mightsignificantly delay 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.  We may also face litigation from competitorswith hiring personnel formerly employed by them.

 

***MediCor’s future growth willplace a significant strain on our managerial, operational, financial and otherresources.***

 

Our success will dependupon our 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 employees andconsultants for both internal and acquisition-based growth for some time. Integration of these employees and consultants and employee and consultant lossin 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 our suppliers, collaborativepartners or consultants do not perform, we will be unable to obtain, develop,market or sell products as anticipate**d and we may be exposed to additional risks*.**

 

We have in the past andmay in the future enter into supply, collaborative or consulting arrangementswith third parties to supply or develop products.  These arrangements maynot produce or provide successful products.  If we fail to establish thesearrangements, the number of products from which we could receive futurerevenues will 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 marketor distribute other products.  Agreementswith consultants or collaborative partners typically allow the third partiessignificant discretion 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 becomeinvolved in disputes with our suppliers, partners or consultants, which couldlead to delays or termination of the arrangements and time-consuming andexpensive litigation or arbitration.

 

***Our quarterly operating resultsare subject to substantial fluctuations and any failure to meet financialexpectations for any fiscal quarter may disappoint securities analysts andinvestors 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:

•                    changesin demand for our products;

•                    our ability to meet the demand for our products;

•                    movement invarious foreign currencies, primarily the Euro and the U.S. dollar;

•                    existing and increased competition;

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

 

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•                    the number, timing, pricing and significance ofnew products and product introductions and enhancements by us and ourcompetitors;

•                    our ability to develop, introduce and market newand enhanced versions of our products on a timely basis;

•                    changes in pricing policies by us and our competitors;

•                    the timing of significant orders and shipments;

•                    regulatory approvals or other regulatory actionaffecting 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 that period-to-periodcomparisons of our results of operations are not necessarily meaningful andinvestors should not rely upon these comparisons as indications of futureperformance.  These factors may cause our operating results to be belowmarket analysts’ expectations in some future quarters, which could cause themarket price of our stock to decline.

***The terms of our outstandingpreferred stock or future preferred stock may negatively affect the value ofthe common stock.***

We have the authority to issue an aggregate of20,000,000 shares of preferred stock which may be issued by our board ofdirectors with such preferences, limitations and relative rights as our boardmay determine without a vote of our stockholders.  Presently we have authorized 45,000 shares ofpreferred stock in one series, Series A 8.0% Convertible Preferred Stock, orour series A preferred stock, 10,353 of which are currently outstanding.  Our series A preferred stock has, and otherclasses of our preferred stock we may issue in the future will have, priorityover our common stock in the event of liquidation or dissolution.  In the event of our liquidation ordissolution, our then-outstanding preferred stock (including series Apreferred stock) will have priority of payment over all shares of our commonstock.  Preferred stock also generallyhas priority on payment of dividends over common stock.  Our series A preferred stock has thispriority, meaning that no dividends may be paid on our common stock unless allaccrued dividends on our series A preferred stock have been paid.  Each holder of convertible preferred stock(such as the series A preferred stock) may also generally, at the holder’soption, convert the preferred stock into common stock at any time.  We cannot predict whether, or to what extent,holders of convertible preferred stock will convert to common stock.  Preferred stock may also provide that theholders thereof may participate with the holders of common stock on dividendsor liquidation.  This may have the effectof substantially diluting the interest of the common stock holders.  Our series A preferred stock is not aparticipating preferred stock, though it is convertible into our common stock.

Our series A preferred stock is presently convertibleinto shares of our common stock at a price of $3.85 per share of common stockbased on the initial $1,000 liquidation preference per share of series Apreferred stock.  Our series A preferredstock also vote on an as-converted basis, have the right to elect two of ourseven authorized directors and have special voting rights on specifiedsignificant transactions or events.  Thecertificate of designation for the series A preferred stock includes a provisionthat if certain EBITDA or common stock value targets are not met by June 30,2008, then the liquidation preference of our series A preferred stock will beincreased pursuant to the formula, capped at 83% of the original liquidationpreference of the originally issued series A preferred stock.

The perceived risk of dilution or any actual dilutionoccasioned by the conversion of our series A preferred stock, any other futureseries of preferred stock and/or issuance of awards under the 1999 stockcompensation program may discourage persons from investing in our common stockor cause our stockholders to sell their shares, which would contribute to thedownward movement in stock price of our common stock.  New investors could also require that theirinvestment be on terms at least as favorable as the terms of our series Apreferred stock (or another series of preferred stock) due to the potentialnegative effect of the dilution on a potential investment.  In addition, downward pressure on the tradingprice of our common stock could encourage investors to engage in short sales,which would further contribute to downward pressure on the price of our commonstock.

 

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The rights, preferences, powers and limitations of our series Apreferred stock, as well as those of any future series of preferred stock asmay be established, may have the effect of delaying, deterring or preventing achange of control of our company.

 

***ITEM 3.  CONTROLS ANDPROCEDURES***

 

As of the quarter ended December31, 2004, management, with the participation of the chief executive andfinancial officers, carried out an evaluation of the effectiveness of ourdisclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and15d-15.  Based upon that evaluation, the chief executive officer and thechief financial officer believe that, as of end of the fiscal quarter coveredby this report, our disclosure controls and procedures were effective in makingknown to them material information relating to MediCor (including itsconsolidated subsidiaries) required to be included in this report.  As ofthe end of our fiscal year ended June 30, 2004, management adopted formaldisclosure controls and procedures which were employed in the preparation of thisreport.

 

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives.  Thelikelihood of achieving these 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 established processes.  Management willreview our disclosure controls and procedures periodically to determine theireffectiveness and to consider modifications or additions to them.

 

***PART II — OTHERINFORMATION***

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

In October 1999, June 2000 and July 2003, separate butrelated complaints were filed by Saul and Ruth Kwartin, Steven M. Kwartin, andRobert and Nina Kwartin respectively, against our PIP.America subsidiary asco-defendant with PIP/USA, Inc. and Poly Implants Protheses, S.A., eachunaffiliated with MediCor, and Jean Claude Mas, Jyll Farren-Martin and ourchairman, personally, in the Circuit Court of Miami-Dade County, Florida.  The Kwartin family members’ claims areprimarily premised on allegations that plaintiffs are shareholders of PIP/USA,Inc. (“PIP/USA”) or have statutory and common law rights of shareholders ofPIP/USA as a result of loans or investments allegedly made to or into PIP/USAor a third party or under an alleged employment agreement.  Plaintiffs allege that, as a result, theyhave certain derivative or other rights to an alleged distribution agreementbetween Poly Implants Prostheses, S.A. (“PIP-France”) and PIP/USA.  Plaintiffs claim, among other things, thatIII Acquisition Corporation (“PIP.America”) and its chairman tortiouslyinterfered with that agreement and with plaintiffs’ other alleged rights aslenders, investors, shareholders, quasi-shareholders or employees of PIP/USA orother entities. In addition to monetary damages and injunctive relief,plaintiffs seek to reinstate the alleged distribution agreement between PIP/USAand PIP-France and invalidate PIP.America’s distributor relationship withPIP-France. It is PIP.America’s position that the Kwartin litigations arewithin the scope of the indemnification agreements.

 

Initially, two cases were filed in October 1999 andJune 2000, Case No. 99-25227-CA-01 and Case No. 00-14665-CA-01. Of the two,Case No. 99-25227 was dismissed.  Thesame plaintiffs then, in September 2003, filed Case No. 0322537-CA-27, allegingsimilar claims to those included in the dismissed case.  Also in September 2003, another member of thesame family filed Case No. 03-15006-CA-09, again alleging similar claims on hisown behalf. Plaintiffs are all members of one family who purport to beshareholders of PIP/USA, Inc. suing derivatively on its behalf or individually,and seeking to rescind various transactions between PIP.America and PolyImplants Protheses, S.A. and impose liability against PIP.America and itsco-defendants for unspecified monetary damages arising out of alleged tortiousand other purported wrongful acts concerning alleged relationships betweenplaintiffs, PIP/USA, Inc. and Poly Implants Protheses, S.A.

 

Peggy Williams v. PIP/USA, Inc., Case No. 03 CH 9654,Jessica Fischer Schnebel, et al. v. PIP/USA, Inc., Case No. 03CH07239, DawnMarie Cooper, et al. v. PIP/USA, Inc., Case No. 03CH11316, Miriam Furman, etal. v. PIP/USA, Inc., Case No. 03CH10832 and Karen S. Witt, et al. v. PIP/USA,Inc., Case No. 03CH12928 were filed in the Circuit Court of Cook County,Chancery Division, in or around July 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 complaintcontains counts alleging product liability, breach of the implied warranties ofmerchantability and fitness for a particular purpose, violation of the IllinoisConsumer Fraud Act and third-party beneficiary status. Unspecified monetarydamages, exemplary damages and attorneys fees and costs are sought. PIP.Americahas filed a motion seeking to dismiss all counts but the third-partybeneficiary claim. Plaintiffs requested and received a second two-monthextension to tender written discovery to our witnesses before filing a responseto the motion to dismiss. Depositions of Medicor personnel will be taken inlate January, plaintiffs will respond to the motion to dismiss by 

 

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roughly March 1, 2005, and a ruling on the motion should come bymid-April of 2005. PIP.America has tendered this consolidated case to PolyImplant Prostheses, S.A. (PIP-France) for defense and indemnity, and in lateNovember 2004, PIP-France agreed to accept that tender

 

On December 23, 2004, Europlex, a Mexican company,purported to file a lawsuit against Eurosilicone SAS, one of our Frenchsubsidiaries, in the Avignon Commercial Court in France, alleging thatEurosilicone implicitly terminated a distribution agreement between the partiesby failing to deliver products ordered by Europlex pursuant to the agreement,among other minor allegations. As a result of these allegations, Europlexclaims damages in amount of approximately 4,000,000 Euros. We believe the suitis without merit and intend to defend against the alleged claims vigorously.

 

Though it is not yet possible to predict the outcomeof the cases described above, MediCor and its subsidiaries, as applicable, havedenied plaintiffs’ allegations and are vigorously defending themselves upon themerits of each lawsuit and against certification of any class. While MediCorand its subsidiaries are desirous to honor their respective obligations underour product replacement programs, the purported class action case aboveincludes two distinctly different types of claims. The first of these arisefrom products sold by PIP/USA, Inc., with whom neither MediCor nor any of itsaffiliates are affiliated. This company sold implants manufactured by PolyImplants Protheses, S.A. prior to PIP.America’s entry into the U.S. market,which occurred in late 1999. Because PIP.America did not sell these products,PIP.America similarly did not warrant these products. The next claims arisefrom products sold by PIP.America and associated to the product replacementprogram administered by PIP.America. With respect to claims arising fromproducts sold by PIP.America, PIP.America is administering and fulfilling itsobligations to its customers in the ordinary course of business, and for whichit has taken appropriate reserves. Other than a limited, $500 portion ofcertain of its own product replacement claims that it is administering,PIP.America is indemnified by PIP/USA, Inc., Poly Implants Protheses, S.A., andPoly Implants Protheses, S.A.’s President, Jean Claude Mas, personally, fromall claims, including those asserted above.

 

 PIP.Americaeither already has, or is in the process of, asserting its indemnification claimsand, in the event of an adverse judgment in any case, PIP.America intends toseek the benefits of this indemnity. As a result, we believe the costsassociated with these matters will not have a material adverse impact on ourbusiness, results of operations or financial position.

 

 MediCor and itssubsidiaries have been and will continue to be periodically named as adefendant in other lawsuits in the normal course of business, including productliability and product warranty claims. Litigation, particularly productliability litigation, can be expensive and disruptive to normal businessoperations and the results of complex proceedings can be very difficult topredict. Claims against MediCor or its subsidiaries have been and areperiodically reviewed with counsel in the ordinary course of business. Wepresently believe we or our subsidiaries have meritorious defenses in alllawsuits in which we or our subsidiaries are defendants, subject to thesubsidiaries’ continuing product replacement obligations, which thesubsidiaries intend to continue to satisfy. While it is not possible to predictthe outcome of these matters, we believe that the costs associated with themwill not have a material adverse impact on our business, results of operationsor financial position.

 

***ITEM 2.******UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS***

 

During the quarter ended December 31, 2004, we issued 434shares of Series A 8.0% Convertible Preferred Stock, 402 of which were sold tofour accredited investors and 32 of which were issued to an employee in lieu ofcash compensation.  The offer and sale of the options, the preferred stockand the underlying shares of common stock were exempt from registrationpursuant to section 4(2) of the Securities Act.

 

***ITEM 3.  DEFAULTS UPONSENIOR SECURITIES***

 

* *None

 

***ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS***

 

On November 17, 2004, theCompany held its annual stockholders’ meeting (the “Meeting”), whereby thestockholders (i) elected two (2) directors each of whose term of office as adirector continued after the Meeting; 

 

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(ii) amended the Company’s Amended and Restated 1999Stock Compensation Program increasing the share reserve by3,000,000 shares; and  (iii)ratified the selection of Greenberg & Company CPAs LLC as the Company’sindependent auditors for the fiscal year ending June 30, 2005  The vote onsuch matters was as follows:

 

1. ELECTION OF DIRECTORS

 
| ** **       | ** ** | **Total Vote  for each  nominee** | ** ** | **Total Vote  withheld  from each  nominee** | ** ** |
|------------------|------------|-----------------------------------|------------|----------------------------------------------|------------|
| Mark E. Brown    |       | 13,928,825                        |       | 70,107                                       |       |
| Donald K. McGhan |       | 13,924,636                        |       | 76,321                                       |       |

 

2. AMENDMENTTO THE MEDICOR LTD. AMENDED AND RESTATED

 1999 STOCK COMPENSATION PROGRAM

 
| For                               |   | 13,822,933 |   |
|-----------------------------------|--------|------------|--------|
| Against                           |   | 137,635    |   |
| Abstentions and broker  non-votes |   | 40,389     |   |

 

3. RATIFICATION OF APPOINTMENT OF INDEPENDENTAUDITORS  
| For                               |   | 13,912,029 |   |
|-----------------------------------|--------|------------|--------|
| Against                           |   | 69,967     |   |
| Abstentions and broker  non-votes |   | 18,961     |   |

 

 

***ITEM 5.  OTHER INFORMATION***

 

None

 

***ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K***

 

**(a) Exhibits**

 

See Exhibit Index at Page41.

 

**(b) Current Reports on Form 8-K**

 

On October 28, 2004,MediCor filed a Current Report on Form 8-K relating to the appointments ofThomas Y. Hartley and Samuel Clay Rogers as independent members to our Board ofDirectors.

 

On November 16, 2004,MediCor filed a Current Report on Form 8-K relating to the press releaseannouncing the Company’s earnings for the first fiscal quarter ending September30, 2004.

 

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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 11, 2005 | By:    | /s/ Theodore R. Maloney |
|---------------------------------------------|-------------------|--------|-------------------------|
| Theodore R. Maloney Chief Executive Officer |
|                                        |              |   |                    |
| Date:                                       | February 11, 2005 | By:    | /s/ Thomas R. Moyes     |
| Thomas R. Moyes Chief Financial Officer     |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                        | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------|------------|
| 31.1            |       | Principal Executive Officer Certification Pursuant  To 17 C.F.R. Section 240.13a-14(a) |       |
| 31.2            |       | Principal Financial Officer Certification Pursuant  To 17 C.F.R. Section 240.13a-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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