SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
(Amendment No. 1)
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): FEBRUARY 7, 2003
MEDICOR LTD.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or other Jurisdiction of Incorporation)
333-64420 14-1871462
(Commission File No.) (IRS Employer identification No.)
4560 S. Decatur Blvd., Ste. 300
Las Vegas, Nevada 89103
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (702) 932-4560
Scientio, Inc.
P.O. Box 94007
Belle Harbor, NY 11694-0007
(Former name and address)
This Form 8-K/A is being filed to amend the Form 8-K filed by MediCor Ltd., a
Delaware corporation formerly known as Scientio, Inc., on February 24, 2003 to
include financial statements and pro forma financial information set forth in
Item 7 below.
Item 7. FINANCIAL STATEMENTS, PRO FORMA STATEMENTS AND EXHIBITS
INDEX TO THE FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL STATEMENTS Page
----
AUDITED FINANCIAL STATEMENTS FOR INTERNATIONAL INTEGRATED INCORPORATED
Independent Auditors' Report F-1
Consolidated Statements of Operations For The Periods
Ended As Noted F-2
Consolidated Statements of Cash Flows For The Periods
Ended as Noted F-3
Consolidated Statement of Shareholders' Equity For The
Periods Ended As Noted F-5
Consolidated Balance Sheet June 30, 2002 F-6
Notes to Consolidated Financial Statements F-7
INTERIM UNAUDITED FINANCIAL STATEMENTS FOR INTERNATIONAL INTEGRATED
INCORPORATED
Consolidated Balance Sheet, December 31, 2002 F-21
Consolidated Statement of Operations For The Six Months
Ended December 31, 2002 and December 31, 2001 F-22
Consolidated Statement of Cash Flows For The Six Months
Ended December 31, 2002 and December 31, 2001 F-23
Notes to Consolidated Interim Financial Statements F-25
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS F-35
Pro Forma Balance Sheet Dated December 31, 2002 F-37
Pro Forma Consolidated Statement of Operations
Fiscal Year Ended June 30, 2002 F-38
Pro Forma Consolidated Statement of Operations
Six Months Ended December 31, 2002 F-39
-2-
ITEM 8. CHANGE IN FISCAL YEAR.
MediCor Ltd., a Delaware corporation has changed its fiscal year to
June 30 from September 30.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 20, 2003
MEDICOR LTD.,
a Delaware corporation
By: /s/ Jim J. McGhan
_________________________
Jim J. McGhan
Chief Operating Officer
-3-
<page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
International Integrated Incorporated:
We have audited the accompanying consolidated balance sheet of International
Integrated Incorporated and Subsidiaries (collectively, the "Company") as of
June 30, 2002, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended, for the six months
ended June 30, 2001, for the four months ended December 31, 2000 and for the
year ended August 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express and opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of June
30, 2002, and the results of its operations and its cash flows for the year then
ended, for the six months ended in June 30, 2001, for the four months ended
December 31, 2000 and for the year ended August 31, 2000, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, on May 12,
2000, the United States Food and Drug Administration ("FDA") notified the
Company that further sales to customers by the Company's subsidiary
(PIP.America) would be suspended until the FDA has reviewed and approved the
clinical study being conducted by the Company. The Company has currently
enrolled all patients required for the clinical study and is in a monitoring
phase, which management of the Company anticipates will be completed by the
second quarter of calendar year 2003.
As discussed in Note O, additional equity and/or debt financing will be required
in order to complete the Company's acquisition of Hutchinson International, Inc.
Deloitte & Touche LLP
December 2, 2002, except for the last paragraph in
Note O, as to which the date is February 7, 2003
F-1
INTERNATIONAL INTEGRATED INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED AS NOTED
<table>
<caption>
YEAR ENDED 6 MONTHS ENDED 4 MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2001 DECEMBER 31, 2000 AUGUST 31, 2000
------------- -------------- ----------------- ---------------
NET SALES $ 1,703,590 $ 927,679 $ 508,157 $ 7,287,540
------------ ----------- ----------- -----------
Cost of sales 442,627 404,977 255,501 3,504,081
Write down of inventory to fair market value 390,042 - - -
Selling, general and administrative expenses 8,230,133 2,318,144 1,517,628 5,758,716
Research and development 294,723 175,077 215,790 518,262
------------ ----------- ----------- -----------
OPERATING LOSS (7,653,935) (1,970,519) (1,480,762) (2,493,519)
Interest income 69 3,715 3,995 3,740
Interest expense (362,295) (35,260) (55,430) (47,094)
------------ ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (8,016,161) (2,002,064) (1,532,197) (2,536,873)
Income taxes - - - 28,391
------------ ----------- ----------- -----------
NET LOSS (8,016,161) (2,002,064) (1,532,197) (2,565,264)
Preferred dividends 201,398 83,086 30,377 31,645
------------ ----------- ----------- -----------
NET LOSS ATTRIBUTABLE
TO COMMON SHAREHOLDERS $(8,217,559) $(2,085,150) $(1,562,574) $(2,596,909)
============ =========== =========== ===========
EARNINGS PER SHARE DATA FOR
THE PERIODS NOTED:
WEIGHTED AVERAGE SHARES 9,410,256 9,201,855 8,450,000 7,875,000
BASIC AND DILUTED ($0.87) ($0.23) ($0.18) ($0.33)
NET LOSS PER SHARE
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
INTERNATIONAL INTEGRATED INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED AS NOTED
<table>
<caption>
YEAR ENDED 6 MONTHS ENDED 4 MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2001 DECEMBER 31, 2000 AUGUST 31, 2000
------------- -------------- ----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,016,161) $(2,002,064) $(1,532,197) $(2,565,264)
Adjustments to reconcile net loss to net cash
utilized by operating activities:
Depreciation and amortization 197,851 79,750 24,368 29,324
Provision for doubtful accounts 3,128,172 - - 77,077
Loss on disposal of property, plant and equipment 1,922 - - 17,892
Inventory Write Down 390,042 - - -
Changes in operating assets and liabilities, net of acquired
assets and liabilities:
Receivables (2,194,715) 39,262 (110,953) (1,198,421)
Notes receivable - - (225,000) (250,000)
Inventories 101,357 119,828 1,125,626 (1,798,443)
Prepaid expenses and other current assets 37,197 (13,020) (5,015) (60,588)
Accounts payable 2,281,895 167,745 (690,355) 995,523
Accrued expenses and other current liabilities 970,415 232,450 (180,629) 603,063
Income taxes payable (15,868) (13,803) 25,627 4,044
Payroll taxes payable 13,796 - - -
Interest payable (127,372) 32,082 41,035 43,343
Long term accrued liabilities 24,355 63,674 90,537 811,302
------------ ---------- ---------- ----------
Net cash utilized by operating activities (3,207,114) (1,294,096) (1,436,956) (3,291,148)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of company, net of cash acquired - (948,781) - -
Purchases of property, plant and equipment (13,753) (1,953) (4,084) (375,268)
Proceeds on sale of property, plant and equipment - - - 1,185
Net increase in deposits (850,000) - (240,000) (1,883,000)
------------ ---------- ---------- ----------
Net cash utilized by investing activities (863,753) (950,734) (244,084) (2,257,083)
------------ ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures 150,000 - - -
Proceeds from issuance of short term debt 4,744,986 2,180,956 1,444,643 6,890,238
Payments on short term debt (1,118,232) (1,556,553) (767,264) (1,159,940)
Issuance of common stock 45,552 500,000 - -
Issuance of preferred stock 424,763 1,027,411 304,854 797,309
Dividends paid (201,398) (83,086) (30,377) (31,645)
------------ ---------- ---------- ----------
Net cash provided by financing activities 4,045,671 2,068,728 951,856 6,495,962
------------ ---------- ---------- ----------
Net increase (decrease) in cash (25,196) (176,102) (729,184) 947,731
Cash at beginning of period 42,445 218,547 947,731 -
------------ ---------- ---------- ----------
CASH AT END OF PERIOD $ 17,249 $ 42,445 $ 218,547 $ 947,731
============ ========== ========== ==========
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
INTERNATIONAL INTEGRATED INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED AS NOTED
<table>
<caption>
YEAR ENDED 6 MONTHS ENDED 4 MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2001 DECEMBER 31, 2000 AUGUST 31, 2000
------------- --------------- ----------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Conversion of short-term debt to common stock $ 4,000,000 $ 1,660,000 - $ 4,785,000
Common stock commission on sale of preferred stock $ 9,552 $ 1,335 - -
On February 28, 2001, the Company purchased all of the capital stock of HPL Biomedical Inc., d/b/a Biodermis for
an amount including $1,240,000 in cash. In conjunction with the acquisition, the transaction consisted of the following:
Fair value of assets acquired, excluding acquisition of cash $ 2,048,574
Cash acquired 51,219
Cash paid 1,240,000
Liabilities assumed 859,793
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 7,365 - $ 10,399 $ 12
Taxes $ - - - $ 190,579
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
INTERNATIONAL INTEGRATED INCORPORATED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED AS NOTED
<table>
<caption>
Par Value
-----------------------
Number of Shares Preferred Common Capital in excess Accumulated
Preferred Common Shares Shares of par value Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance - September 1, 1999 - - $ - $ - $ - $ - $ -
Issuance of Preferred Shares 110,310 - 1,103 - 796,206 797,309
Issuance of Common Shares - 8,450,000 - 84,500 4,700,500 4,785,000
Net Loss - - - - - (2,565,264) (2,565,264)
Dividends Paid - - - - - (31,645) (31,645)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - August 31, 2000 110,310 8,450,000 1,103 84,500 5,496,706 (2,596,909) 2,985,400
Issuance of Preferred Shares 43,897 - 439 - 304,415 - 304,854
Issuance of Common Shares - - - - - - -
Net Loss - - - - - (1,532,197) (1,532,197)
Dividends Paid - - - - - (30,377) (30,377)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2000 154,207 8,450,000 1,542 84,500 5,801,121 (4,159,483) 1,727,680
Issuance of Preferred Shares 147,240 - 1,472 - 1,024,604 - 1,026,076
Issuance of Common Shares - 912,650 - 9,127 2,152,208 - 2,161,335
Net Loss - - - - - (2,002,064) (2,002,064)
Dividends Paid - - - - - (83,086) (83,086)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2001 301,447 9,362,650 3,014 93,627 8,977,933 (6,244,633) 2,829,941
- --------------------------------------------------------------------------------------------------------------------------------
Balance - July 1, 2001 301,447 9,362,650 3,014 93,627 8,977,933 (6,244,633) 2,829,941
Issuance of Preferred Shares 90,339 - 904 - 423,859 - 424,763
Issuance of Common Shares - 2,361,275 - 23,612 4,021,940 - 4,045,552
Net Loss - - - - - (8,016,161) (8,016,161)
Dividends Paid - - - - - (201,398) (201,398)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2002 391,786 11,723,925 $ 3,918 $117,239 $ 13,423,732 $(14,462,192) $ (917,303)
================================================================================================================================
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<Page>
INTERNATIONAL INTEGRATED INCORPORATED
CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
ASSETS
Current Assets
Cash $ 17,249
Receivables, less allowance for doubtful accounts of
$3,205,249 299,826
Inventories 108,636
Prepaid expenses and other current assets 75,270
-------------
Total Current Assets 500,981
Property, plant and equipment, net 244,776
Goodwill and other intangibles, net 1,564,026
Deposits 2,733,000
-------------
TOTAL ASSETS $ 5,042,783
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Convertible debentures $ 150,000
Note payable to related party 213,834
Accounts payable 2,946,467
Accrued expenses and other current liabilities 1,646,121
Payroll taxes payable 13,796
Interest payable -
-------------
Total Current Liabilities 4,970,218
Long term accrued liabilities 989,868
-------------
TOTAL LIABILITIES 5,960,086
COMMITMENTS AND CONTINGENCIES (NOTE M)
SHAREHOLDERS' EQUITY
Convertible preferred shares, $.01 par value, 20,000,000 shares
authorized, 391,786 shares issued and outstanding; preferred
shares convert to common shares on a one to one basis 3,918
Common shares, $.01 par value, 50,000,000 shares authorized,
11,723,925 shares issued and outstanding 117,239
Capital in excess of par value 13,423,732
Accumulated deficit (14,462,192)
-------------
TOTAL SHAREHOLDERS' EQUITY (917,303)
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,042,783
=============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
Notes to Consolidated Financial Statements
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company
International Integrated Incorporated ("III" or the "Company") was incorporated
in the British Virgin Islands ("BVI") on August 25, 1999, and commenced
operations on September 1, 1999 as a global integrator of medical device
manufacturing, distribution and development companies and technologies. Through
its subsidiaries, the Company designs, develops, manufactures and distributes
medical devices and acquires technologies on a worldwide basis.
The Company is managed from Las Vegas, Nevada, United States of America ("USA")
in a corporate structure designed to energize its growth into a world-class
business entity. The Company's name precisely describes its business strategy:
to be the leading integrator of selected international medical device markets,
technologies and corporations. Unless the context indicates otherwise, all
references to the "Company" include III and its subsidiaries.
For the year ended June 30, 2002, the operating activities in the USA were
carried out by III Acquisition Corporation (d/b/a/ "PIP.America") and by Bio-III
Acquisition, Inc. (d/b/a/ "Biodermis"), both of which are indirectly wholly
owned subsidiaries of III.
Regarding PIP.America, prior to May 12, 2000, sales were made on both a direct
and a consigned inventory basis. As of May 12, 2000, the United States Food and
Drug Administration ("FDA") notified PIP.America and Poly Implant Prostheses,
S.A. ("PIP-France"), the manufacturer and supplier of PIP.America's products,
that further direct sales to customers by the Company's subsidiary, PIP.America,
would be suspended until the FDA has reviewed and approved the clinical study
being conducted by PIP-France and PIP.America. Sales continued through June 30,
2002, from consigned inventory while the clinical study for the FDA continued as
well. Upon completion, the information from the clinical study will be submitted
to the FDA upon which time management anticipates appropriate clearances to
market the products in the USA will be received. On behalf of PIP-France,
PIP.America has currently enrolled all patients required for the clinical study
and is in a monitoring phase, which management anticipates will be completed by
March 31, 2003 and approved by the FDA in the second quarter of 2003.
While awaiting approval from the FDA regarding direct sales from PIP.America,
the Company's sales are being generated by Biodermis and from remaining
PIP.America consignment inventory. Pursuant to a voluntary withdrawal from the
market, sales of PIP.America products ceased in November of 2002 pending final
PMA (Pre-market approval) clearance. The Company has a commitment from
International Integrated Industries, LLC ("LLC") to fund operating shortfalls
that extends to December 31, 2003. LLC is an independent company in which the
Company's Chairman, Mr. Donald K. McGhan, has a controlling interest. III has no
direct ownership in LLC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. In the consolidated statements, all significant
intercompany transactions and balances have been eliminated in accordance with
accounting principles generally accepted in the USA ("GAAP").
F-7
Basis of Presentation
The Company's USA operating units, PIP.America and Biodermis, are Delaware
corporations and wholly owned subsidiaries of International Integrated
Management, Inc. ("III Management"), a Delaware corporation, which is an
indirectly wholly owned subsidiary of III.
The consolidated financial statements have been prepared in United States
dollars and in accordance with GAAP.
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and the reported amounts of revenues and expenses during
the reporting period and the disclosure of contingent liabilities at the date of
the financial statements. Significant estimates used by the Company include the
estimated useful lives for depreciable and amortizable assets, the estimated
allowance for doubtful accounts receivable, the estimated costs associated with
product failures, the estimated allowance for product returns, the estimated
valuation for deferred tax assets and estimated cash flows in assessing the
recoverability of long-lived assets. Actual results could differ from those
estimates.
Fiscal Year
Management has designated the end of the Company's fiscal year to be June 30.
Correspondingly, the financial statements for the fiscal year ended June 30,
2002 are presented.
Revenue Recognition
The Company generally recognizes revenue from product sales upon surgical
implantation for consigned items and upon shipment for all others, provided that
no significant post-delivery obligations remain and collection of the resulting
receivable is reasonably assured. When significant post-delivery obligations
exist, revenue is deferred until such obligations are fulfilled. III allows
credit for products returned within its policy terms. Such returns are estimated
and an allowance for product returns is recorded at the time of sale as
necessary.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No.141,
"Business Combinations and SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 is effective as of July 1, 2001 and SFAS No. 142 is effective
January 2002 for companies having fiscal years beginning after December 15,
2001. The Company has evaluated SFAS No. 141 and has determined that it will not
have an effect on the Company's June 30, 2002 consolidated financial statements.
Under SFAS No. 142, goodwill will not be amortized, but will be subject to
impairment testing. The Company adopted SFAS No. 142 July 1, 2002. The absence
of goodwill amortization as a result of adopting SFAS No. 142 will not have a
material effect on the Company's consolidated operations or financial position.
There was no indication that goodwill was impaired.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company has
determined that SFAS No. 143 will not have an effect on the Company's financial
statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
F-8
for Long-Lived Assets to be Disposed of," and provisions of Accounting
Principles Board Opinion ("APB") No. 30, "Reporting of Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions" for
the disposal of segments of a business. This statement creates one accounting
model, based on the framework established in SFAS No. 121, to be applied to all
long-lived assets including discontinued operations. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144
will not have an effect on the Company's consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No,
13, and Technical Corrections. The most significant provisions of this statement
relate to the rescission of Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt: and it also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changes conditions. Under this new statement,
any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods that does not meet certain defined criteria
as an extraordinary item in prior periods that does not meet certain defined
criteria must be reclassified. This statement is effective for financial
statements issued on or after May 15, 2002. The Company has completed an
evaluation of SFAS 145, and has determined that it will not have an effect on
the consolidated financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Statement No. 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. Management does not
expect that adopting this statement will have any material effect on the
Company's consolidated results of operations or financial position.
In November 2002, the FASE issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN45 clarifies and expands on existing disclosure
requirements for guarantees, including loan guarantees. It also would require
that, at the inception of a guarantee, the Company must recognize a liability
for the fair value of its obligation under that guarantee. The initial fair
value recognition and measurement provisions will be applied on a prospective
basis to certain guarantees issued or modified after December 31, 2002. The
adoption of FIN45 will not have a material impact on the Company's financial
position, results of operations or cash flows.
On December 31, 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. Statement No. 148 is effective for fiscal years ending after
December 15, 2002. The Company will continue to account for stock-based employee
compensation under the intrinsic value method of Opinion 25 but will adopt the
disclosure provisions of Statement No. 148 in the fourth quarter of fiscal 2003.
Management does not expect that adoption of this standard will have a material
effect on the Company's consolidated results of operations or financial
position.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
A variable interest entity ("VIE") is one where the contractual or ownership
interests in an entity change with changes in the entity's net asset value. This
interpretation requires the consolidation of a VIE by the primary beneficiary,
and also requires disclosure about VIEs where an enterprise has a significant
variable interest but is not the primary beneficiary. At the effective date, the
Company has not entered into any VIEs.
Receivables
The Company has reserved $3,205,249 against certain receivables due to issues
regarding collectibility. The Company intends to pursue all avenues to collect
on amounts due.
Inventories
Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. Inventories are of two types, raw
materials and finished goods, as presented in Note C.
WRITE DOWN OF INVENTORY TO FAIR MARKET VALUE
The current value of the consignment inventory of implants in physician offices
on the books of the PIP.America subsidiary of III is uncertain. A voluntary
withdrawal of such inventory from the market was initiated subsequent to June
30, 2002 in conjunction with an agreement reached between the FDA and
PIP.America. Accordingly, III has chosen to write down such inventory to a fair
market value of zero as of June 30, 2002.
Property, Plant and Equipment
Property, plant and equipment are recorded by the Company at cost. Costs of
normal repairs and maintenance are charged to expense as incurred. Depreciation
commences upon placing the asset in service and is computed on a straight-line
basis over the estimated useful lives of the assets, as follows:
Furniture and fixture 5 years
Computer equipment 3-5 years
Tools and dies 5 years
When assets are retired, or disposed of, the cost and accumulated depreciation
thereon are removed from the accounts and the related gains or losses are
included in the statement of operations.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the estimated fair
value of the identifiable assets (including other intangible assets) and
liabilities assumed in the acquisition of HPL Biomedical, and is amortized over
40 years. Other intangible assets are recorded at fair value and amortized over
periods ranging from 3 to 17 years. The Company adopted SFAS No. 142 beginning
July 1, 2002. The absence of goodwill amortization as a result of adopting SFAS
No. 142 will not have a material effect on the Company's consolidated operations
or financial position. There was no indication that goodwill was impaired.
F-9
Impairment of Long-Lived Assets
The Company assesses the impairment of goodwill and other intangibles related to
its consolidated subsidiary and other long-lived assets under SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. The Company believes that no adjustment for impairment is necessary at
June 30, 2002.
Warranty Reserve
PIP.America provides a warranty replacement program to surgeons for deflations
for a period of ten (10) years from the date of implantation. For each deflation
the surgeon receives financial assistance plus a free replacement. Since
PIP.America is a distributor of the PIP-France product a portion of the warranty
expense is covered by PIP-France. The Company's accrual for warranty reserve is
based on the portion of projected costs not covered by PIP-France.
Research and Development
Research and development costs are expensed by the Company as incurred,
including the costs of clinical studies and regulatory approval activities.
Equity
The Company has two classes of stock: preferred and common. Shares of
convertible series A preferred stock and common stock may be transferred or sold
subject to the conditions of the Shareholder Subscription Agreement, which
includes a right of first refusal by the Company and its then current
shareholders, and in compliance with applicable securities laws.
The Company is obligated to pay owners of its convertible series A preferred
stock an 8% annual dividend, distributed in cash or in additional Company
preferred stock at estimated current fair value existing at the time of
distribution. The choice to receive the dividend in cash or additional shares of
stock is solely up to the investor.
The Company does not pay, nor does it intend to pay, dividends on shares of its
common stock.
Preferred and common shares have voting rights on a one vote per share basis.
Upon an event of public conversion, preferred shares convert to common shares on
a one preferred share to one common share basis.
Earnings per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. When applicable, diluted net income
per share is computed using the weighted average number of preferred, common and
dilutive common equivalent shares outstanding during the period. Dilutive common
equivalent shares include in-the-money stock options.
The following is a reconciliation of the numerator (net loss) and denominator
(number of shares) used in the basic and diluted EPS calculation:
F-10
<table>
<caption>
YEAR ENDED SIX MONTHS ENDED FOUR MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2001 DECEMBER 31, 2000 AUGUST 30, 2000
------------- ---------------- ----------------- ---------------
Net loss attributable to common shareholders $ (8,217,559) $(2,085,150) $ (1,562,574) $ (2,596,909)
Weighted average shares outstanding 9,410,256 9,201,855 8,450,000 7,875,000
Net loss per share, basic and diluted $ (0.87) $ (0.23) $ (0.18) $ (0.33)
</table>
Common equivalent shares excluded from the calculation of diluted EPS, as their
effect was anti-dilutive, were 2,342,898 in the year ended June 30, 2002,
2,887,456 in the six months ended June 30, 2001, 2,699,830 in the four months
ended December 31, 2001 and 2,458,017 in the year ended August 31, 2000.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), issued in 1995, defined a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. As provided for in SFAS 123, the Company has elected to apply
APB No. 25 "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation plans. Options
included in employment agreements and consulting agreements are considered
issued. The options were issued at or above estimated fair value, which,
pursuant to APB No. 25, did not result in any compensation expense.
Pursuant to SFAS 123, Company management has estimated the fair value of each
stock option as of the grant date utilizing the Black-Scholes valuation model,
with the following assumptions:
<table>
<caption>
YEAR ENDED SIX MONTHS ENDED FOUR MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2001 DECEMBER 31, 2000 AUGUST 30, 2000
------------- ---------------- ----------------- ---------------
Risk-free interest rate 6.0-6.5% 5.63-7.50% - 7.25-7.88%
Dividend yield 0% 0% - 0%
Volatility factor 0.10% 0.10% - 0.10%
Expected life in years 3-4 4-6 - 5
</table>
The effect of using the fair-value method above is that the Company's net loss
and loss per share would have been increased by $9,316 or $0.00 per share, for
the year ended June 30, 2002, $4,219 or $0.00 per share for the six months ended
June 30, 2001, $2,188 or $0.00 per share for the four months ended December 31,
2000 and $9,226 or $0.00 per share for the year ended August 31, 2000.
Concentrations of Risk
Financial instruments which subject the Company to concentrations of credit risk
consist principally of receivables. The credit risk associated with receivables
is limited due to the large number of customers and their broad dispersion over
many geographic areas within the USA and internationally. For all periods
presented, no revenues from transactions with a single customer amounted to more
than ten percent of total revenues.
The Company relies on a limited number of suppliers of its products.
The Company's future is highly dependent on its ability to raise additional
capital through equity and debt financing. The Company is dependent upon LLC to
fund operations and cash flow short falls when capital is otherwise not
available.
F-11
B. BUSINESS ACQUISITIONS & SIGNIFICANT EVENTS
Pursuant to an Asset Purchase Agreement signed April 25, 2002, the Company
agreed to acquire substantially all of the assets of a privately-held United
States medical products distributor. The maximum purchase price under the
agreement is $10,000,000, subject to downward adjustment based on the time
elapsed before closing. The closing is conditioned upon the distributor
acquiring necessary governmental approvals for commercialization in the United
States of the products to be distributed, which the Company anticipates will
occur during 2003. The Company has agreed to make deposits against the purchase
price on a regular basis. As of June 30, 2002, deposits paid totaled $850,000.
C. INVENTORIES
Inventories of the Company as of the period noted consist of:
June 30, 2002
------------------
Raw Materials Inventory in Warehouse $ 93,413
Finished Goods Inventory in Warehouse 15,223
Finished Goods Inventory on Consignment -
------------------
Total $ 108,636
==================
As discussed in Note A, the PIP.America consignment inventory has been written
down by $390,042 to zero as of June 30, 2002.
D. RECEIVABLES AND NOTES RECEIVABLE
Receivables of the Company as of the period noted consist of:
June 30, 2002
------------------
Accounts receivable $ 449,826
Accounts receivable - PIP-France 3,055,249
------------------
Subtotal 3,505,075
Allowance for doubtful accounts (3,205,249)
------------------
Total $ 299,826
==================
Accounts receivable-PIP-France consist primarily of reimbursements associated
with the PIP.America warranty replacement program, clinical study expenses and
returned products.
Changes in allowance for doubtful accounts are as follows:
Beginning balance, July 1, 2001 $ (77,077)
Provisions (3,128,172)
Write-offs -
------------------
Ending balance, June 30, 2002 $ (3,205,249)
==================
F-12
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment of the Company as of the period noted consist of:
June 30, 2002
------------------
Furniture and fixtures $ 340,800
Computer equipment 88,072
Tools and dies 7,896
------------------
Subtotal 436,768
Accumulated depreciation (191,992)
------------------
Total $ 244,776
==================
Depreciation expense was $97,901 for the year ended June 30, 2002, $46,433 for
the six months ended June 30, 2001, $24,368 for the four months ended December
31, 2000 and $29,324 for the year ended August 31, 2000.
F. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles of the Company as of the period noted consist of:
June 30, 2002
------------------
Goodwill $ 1,219,210
Distribution Agreements 225,000
Non-Compete 130,000
Patents 100,000
Other 23,083
------------------
Subtotal 1,697,293
Accumulated Amortization (133,267)
------------------
Total $ 1,564,026
==================
Amortization expense was $99,950 for the year ended June 30, 2002 and $33,317
for the six months ended June 30, 2001. III acquired HPL Biomedical on February
28, 2001; therefore, amortization expense for the four months ended December 31,
2000 and the year ended August 31, 2000 was not applicable. The purchase price
included a cash payment of $1,240,000 and the assumption of $860,000 in
liabilities, $647,000 of which were amounts due to III and were eliminated upon
consolidation when the transaction was consummated. The recording of this
transaction created $1,697,000 in intangibles consisting of $1,219,200 in
goodwill, $225,000 in distribution agreements, $130,000 in non-compete
provisions, $100,000 for a patent and $23,083 in other intangibles.
The following table reconciles previously reported net loss and loss per share
for the year ended June 30, 2002, the six months ended June 30, 2001, the four
months ended December 31, 2000 and the year ended August 31, 2000 to net loss
and loss per share as adjusted for the cessation of amortization expense related
to our goodwill balances.
<table>
<caption>
Year Ended Six Months Ended Four Months Ended Year Ended
June 30, 2002 June 30, 2001 December 31, 2000 August 30, 2000
---------------------------------------------------------------------------
Net loss as reported $ (8,217,559) $(2,085,150) $ (1,562,574) $ (2,596,909)
Amortization of goodwill, net of tax 31,480 10,494 - -
---------------------------------------------------------------------------
Net loss as adjusted $ (8,186,079) $(2,074,656) $ (1,562,574) $ (2,596,909)
===========================================================================
Basic and diluted loss per
share information
Loss per share as reported $ (0.87) $ (0.23) $ (0.18) $ (0.33)
Amortization of goodwill, net of tax - - - -
---------------------------------------------------------------------------
Loss per share as adjusted $ (0.87) $ (0.23) $ (0.18) $ (0.33)
---------------------------------------------------------------------------
</table>
F-13
G. ACCRUED EXPENSES
Accrued expenses and other current liabilities of the Company as of the period
noted consist of:
June 30, 2002
------------------
Consulting $ 874,303
Accounting and Audit Fees 200,000
Product Warranty Reserve 90,371
Dividends 83,458
Salaries and Employee Benefits 82,661
Legal 75,464
Other 239,864
------------------
Total $ 1,646,121
==================
Accrued consulting expense represents amounts relating to consulting agreements
with key executives. The amount accrued consists of 2-10 months of expenses.
Long term accrued liabilities of $989,868 consist of product warranty reserves.
H. FOREIGN CURRENCY
For the year ended June 30, 2002, all transactions by the Company occurred in US
dollars.
I. RELATED PARTY
Medical Device Alliance Inc. ("MDA") is a company in which III's Chairman, Mr.
Donald K. McGhan, has a significant interest. As described in Note A, LLC is a
company in which Mr. McGhan has a controlling interest. III has no direct
ownership in either MDA or LLC.
Mr. Donald K. McGhan was a party to certain litigation involving MDA which
concluded in December, 2001 in a global settlement among all parties. Since the
Company was never a party to the proceedings, management of the company has
concluded that there was no material effect on the Company's businesses, results
of operations, or financial positions.
The Company's management offices located in Las Vegas, Nevada, are subleased by
III Management from LLC until December 31, 2002. Such lease expenses were
$364,287 for the year ended June 30, 2002, $191,467 for the six months ended
June 30, 2001, $115,560 for the four months ended December 31, 2000 and $404,460
for the year ended August 31, 2000.
A note payable exists between the Company and LLC as described in Note J.
J. NOTES PAYABLE
LLC acted on behalf of the Company by funding significant expenses incurred for
which the Company has a revolving loan agreement as shown on the Consolidated
Balance Sheet of $213,834 at June 30 2002, at an annual interest rate of ten
percent (10%). During the year ended June 30, 2002, $4,744,984 was advanced to
the Company by LLC, of which $4,000,000 was converted to common stock and
$1,118,232 was re-paid. Interest expense relating to this note was $231,821 for
the year ended June 30, 2002. During the six months ended June 30, 2001,
$2,180,956 was advanced to the Company by LLC of which $1,660,000 was converted
to common stock and $1,565,553 was repaid. Interest expense relating to this
note was $35,260 for the six months ended June 30, 2001. During the four months
F-14
ended December 31, 2000, $1,444,643 was advanced to the Company by LLC, of which
none was converted to common stock and $766,264 was repaid. Interest expense
relating to this note was $45,030 for the four months ended December 31, 2000.
During the year ended August 31, 2000, $6,890,238 was advanced to the Company by
LLC, of which $4,785,000 was converted to common stock and $1,159,940 was
repaid. Interest expense relating to this note was $47,082 for the year ended
August 31, 2000. The Company had a commitment from LLC to fund operating
shortfalls as necessary for the periods presented.
Interest expense on the Statement of Operations for the year ended June 30, 2002
also includes $105,053 related to the interest component of discounting the
PIP.America product warranty reserve and $25,421 related to miscellaneous items
as of June 30, 2002. See further discussion of the PIP.America product warranty
reserve in Note A.
K. INCOME TAXES
Federal Income Taxes
The benefit for income taxes reflected in the Consolidated Statements of
Operations for the Company for the period noted consist of:
<table>
<caption>
YEAR ENDED SIX MONTHS ENDED FOUR MONTHS ENDED YEAR ENDED
JUNE 30, 2002 JUNE 30, 2001 DECEMBER 31, 2001 AUGUST 31, 2000
------------- ---------------- ----------------- ---------------
Current $ 1,089,784 $ 26,206 $ 26,206 $ 26,206
Deferred 3,347,104 1,846,162 1,215,975 741,754
------------ -------------- -------------- -------------
Total Benefit 4,436,888 1,872,368 1,242,181 767,960
Less allowance for realization of
deferred tax asset (4,436,888) (1,872,368) (1,242,181) (767,960)
------------ -------------- ------------- ------------
Benefit, net $ - $ - $ - $ -
============ ============== ============= =============
</table>
As of June 30, 2002, June 30, 2001, December 31, 2000 and August 31, 2000 the
Company recorded allowances of $4,436,888, $1,872,368, $1,242,181, $767,960,
respectively, against certain future tax benefits, the realization of which is
currently uncertain. Subsequent to the end of the periods noted, no deferred tax
benefits were recorded as assets for taxable losses of the Company. The deferred
tax benefits were primarily composed of net operating losses and timing
differences related to certain accounts receivable and depreciation/amortization
not currently deductible as expenses under IRS provisions. Although the Company
recorded this allowance to the deferred tax assets, the Company may still
utilize the future tax benefits from net operating losses for 20 years from the
year of the loss to the extent of future taxable income.
F-15
Primary components of the deferred tax asset at the period noted were
approximately as follows:
<table>
<caption>
June 30, 2002 June 30, 2001 December 31, 2000 August 31, 2000
------------- ------------- ----------------- ---------------
Computed expected income tax asset / $ 1,450,651 $ 595,187 $ 445,492 $ 426,794
(liability) at 34%
Adjustments:
Net Operating Loss 1,467,413 872,286 426,794 -
Allowance for Bad Debt 1,089,784 26,206 26,206 26,206
Warranty Reserve 373,774 357,655 334,283 303,501
Depreciation & Amortization 55,256 21,084 9,406 11,459
---------- ---------- --------- --------
Income Tax benefit 4,436,888 1,872,368 1,242,181 767,960
Less allowance for realization of (4,436,888) (1,872,368) (1,242,181) (767,960)
deferred tax asset ---------- ---------- --------- --------
Deferred tax asset, net $ - $ - $ - $ -
============ ============= ========== ============
</table>
L. SHAREHOLDERS' EQUITY
Shareholders' equity as of June 30, 2002 for the Company consists of:
Common Stock
During the year ended June 30, 2002, the Company issued an additional 2,361,275
common shares (of 50,000,000 common shares authorized) resulting in proceeds of
$4,045,552 of which $4,000,000 reduced the note payable to LLC, $36,000
represented exercise of stock options and $9,552 represented a common stock
commission on the sale of preferred stock.
During the six months ended June 30, 2001, the Company issued an additional
912,650 common shares resulting in $2,161,335 of which $1,660,000 reduced the
note payable to LLC and $1,335 represented a common stock commission on the sale
of preferred stock. The balance of $500,000 was generated through common stock
sales to third parties the funds from which were used to reduce the note payable
to LLC. During the four months ended December 31, 2000 the Company issued no
common shares. During the year ended August 31, 2000, the Company issued
8,450,000 common shares reducing the note payable to LLC by $4,785,000.
Preferred Stock
The Company's preferred stock may be issued from time to time in one or more
series, with terms approved by the Board of Directors without the consent of the
stockholders of III. During the year ended June 30, 2002, III issued 90,339
shares of series A preferred stock (of 20,000,000 preferred shares authorized),
generating proceeds of $424,763 net of offering expenses. Also, during the year
ended June 30, 2002, the Company paid $201,398 in dividends to holders of series
A preferred stock. Before deducting offering commissions, the gross proceeds
were $677,639 of which $642,495 reduced the note payable to LLC.
F-16
During the six months ended June 30, 2001, III issued 147,240 shares of Series A
Preferred Stock (of 20,000,000 preferred shares authorized), generating
$1,026,076 net of offering expenses. Also, during the six months ended December
31, 2001, the company paid $83,086 in dividends to holders of Series A Preferred
Stock. Before deducting offering commissions, the gross proceeds were $1,104,300
of which $928,775 reduced the note payable to LLC.
During the four months ended December 31, 2000, III issued 43,897 shares of
Series A Preferred Stock (of 20,000,000 preferred shares authorized), generating
$304,854 net of offering expenses. Also, during the four months ended December
31, 2000, the Company paid $30,377 in dividends to holders of Series A Preferred
Stock. Before deducting offering commissions, the gross proceeds were $329,229
of which $325,000 reduced the note payable to LLC.
During the year ended August 31, 2000, III issued 110,310 shares of Series A
Preferred Stock (of 20,000,000 preferred shares authorized), generating $797,309
net of offering expenses. Also, during the year ended August 31, 2000, the
Company paid $31,645 in dividends to holders of Series A Preferred Stock. Before
deducting offering commissions, the gross proceeds were $827,325 of which
$759,941 reduced the note payable to LLC.
Stock Option Plan
The Company has a Stock Option Plan for executive management and designated key
managers and consultants. Up to 1,000,000 options to purchase shares were
reserved for issuance pursuant to the Company's Stock Compensation Plan and up
to 3,000,000 options to purchase shares were reserved for issuance pursuant to
employment agreements. Options are issued with exercise prices at estimated fair
value at the time of issuance.
Options granted under the plans generally become exercisable ratably over a
three or four year period from the date of grant. Options granted under the
plans expire no later than ten years after the date of grant.
Year Ended
June 30, 2002
----------------------------
Weighted Average
Shares Exercise Price
----------------------------
Options outstanding at beginning of period 3,105,000 $ 0.28
Options granted 210,000 2.00
Options exercised (360,000) 0.10
Options canceled
--------- -------------
Options outstanding at end of period 2,955,000 $ 1.31
========= =============
Options exercisable at end of period 1,342,500 $ 0.40
--------- -------------
F-17
The impact of all stock sales as of June 30, 2002 is shown in the following
table:
Number of Shares Issue Price Per Share Amount
------------------------------------------------
Preferred Stock 391,786 $ 7.50 $ 2,553,001
Common Stock 6,460,000 0.10 646,000
700,000 0.25 175,000
702,650 0.50 351,325
100,000 1.00 100,000
2,900,000 2.00 5,800,000
400,000 4.00 1,600,000
450,000 5.00 2,250,000
10,000 6.00 60,000
1,275 7.50 9,563
------------------------------------------------
Total Stock 12,115,711 $ 13,544,889
================================================
The impact of all stock options which have been issued as of June 30, 2002 is
shown in the following table:
Stock Options
Options Granted to Purchase Shares Under Consulting Agreements
<table>
<caption>
Average Exercise Price
Number of Shares Granted Per Share Amount
-------------------------------------------------------------
Subtotal 90,000 $ 0.94 $ 84,600
-------------------------------------------------------------
Options Granted to Purchase Shares by Employment Agreements
Subtotal 2,865,000 $ 1.13 $ 3,237,450
-------------------------------------------------------------
Total Stock Options 2,955,000 $ 1.12 $ 3,322,050
=============================================================
</table>
Notes: Average exercise price per share is rounded to two significant digits.
During the current year options were issued in August 2001 and October
2001.
During the current year common stock transactions occurred during May and
June of 2002.
During the current year preferred stock transactions occurred between
August 2001 and June 2002; offering expenses of $385,394 are included in
the amount of $2,533,001 above.
Weighted average exercise prices are found above under the heading "Stock
Option Plan".
F-18
M. COMMITMENTS AND CONTINGENCIES
The Company leases and subleases office and warehouse facilities and office
equipment under various terms. Such operating leases expire within one year.
Facilities and office equipment lease expenses amounted to $572,777 for the year
ended June 30, 2002, $272,241 for the six months ended June 30, 2001, $180,589
for the four months ended December 31, 2000 and $434,561 for the year ended
August 30, 2000.
The Company's future minimum annual lease payments as of June 30, 2002 are
$348,012 for July 1, 2002 through June 30, 2003 and zero thereafter. See note O
regarding a subsequent lease commitment.
As part of the definitive Asset Purchase Agreement described in note B, the
Company is making weekly deposits of $50,000 against the adjusted purchase
price. The Company intends to fund the balance of the purchase price from funds
provided by institutional investors, LLC or a combination thereof. The Company
is vigorously pursuing obtaining the necessary equity or debt financing prior to
closing.
In October, 1999, the Company, through its subsidiary PIP.America, entered into
an agreement with Poly Implant Prostheses, S.A. ("PIP-France") for the
non-exclusive distribution rights for PIP-France breast implant products and to
act as the marketing, sales and distribution entity for North America and any
territories of the United States. Shortly thereafter, the agreement became
exclusive when the only other distributor of PIP-France implants, PIP/USA, Inc.
("PIP/USA") wound down operations and ceased doing business.
In a separate agreement, the Company was granted an opportunity to make an
investment in PIP-France, in which III agreed to make a deposit of $1,883,000
with Betreib Gesel, S.A. ("Betreib Gesel"), a Luxembourg company. The deposit
occurred on January 25, 2000. This deposit equates to over fifty percent (50%)
of the agreed upon purchase price of Silver Star, S.A. ("Silver Star"), also a
Luxembourg company which, directly or indirectly, owns a seven and a half
percent (7.5%) interest in PIP-France, located in Toulon, France. III has a
commitment to Betreib Gesel amounting to $1,867,000 in satisfaction of the
remainder of the purchase price net of the deposit for Silver Star, which is
expected to be satisfied in 2003.
PIP.America is a co-defendant with PIP/USA and PIP-France, in certain civil
litigation matters (Saul Kwartin, et. al, v. PIP/USA, Inc., et. al, and Steven
M. Kwartin v. PIP/USA, Inc., et al.), in the Circuit Court of Miami-Dade County,
Florida. In these cases, the plaintiffs, who purport to be shareholders of
PIP/USA suing derivatively on its behalf, seek to rescind various transactions
between PIP.America and PIP/USA. Further, the plaintiffs seek to impose
liability against PIP.America and its co-defendants for alleged monetary damages
for alleged tortuous and other purported acts concerning alleged relationships
between plaintiffs, PIP/USA and PIP-France. The Company's counsel has stated it
is unable to express an opinion as to the likelihood of an unfavorable outcome
of the actions or to estimate the range of potential loss concerning the
actions. Management of the Company believes that the matter will be concluded in
its favor and expects that the outcome of the matter will not have a material
adverse impact on the Company's business, results of operations, or financial
position.
F-19
A number of product warranty claims have been asserted against PIP.America,
including less than ten during the year ended June 30, 2002 which have proceeded
to litigation. The Company has refused service to the extent possible on all
claims brought against PIP/USA, a predecessor company unrelated to III. Claims
against the Company's subsidiary, PIP.America, have been and are being reviewed
with counsel in the ordinary course of business. PIP.America has indemnification
provisions for a portion of projected costs in its distribution agreement with
PIP-France and has established a product warranty reserve. Management of the
Company believes that these matters will either be settled or otherwise
concluded in its favor and expects that the outcomes of such matters will not
have a material adverse impact on the Company's business, results of operations
or financial position.
The Company is not aware of any legal actions to which it is a party, current or
planned, other than those described above.
N. SEGMENT INFORMATION
During the year ended June 30, 2002 and the six months ended June 30, 2001, the
Company operated as a single business in multiple geographic locations within
the USA and internationally in the Medical Device Technology segment of the
medical/health care market, and as such does not have multiple segments to
report pursuant to the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". During the year ended June 30, 2002,
revenues from customers within the USA totaled approximately $1,200,000, while
revenues from customers internationally totaled approximately $520,000. During
the six months ended June 30, 2001, revenues from customers within the USA
totaled approximately $730,000, while revenues from customers internationally
totaled approximately $200,000. During the four months ended December 31, 2000
and the year ended August 31, 2000, the Company operated as a single business in
multiple geographic locations within the USA in the Medical Device Technology
segment of the medical/health care market, and as such does not have multiple
segments to report pursuant to the provisions of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." Additionally, revenues from
customers attributable to any individual foreign country were not material. The
Company will continue to evaluate the reporting effects of SFAS No. 131 as its
acquisition and investment program continues.
O. SUBSEQUENT EVENTS
For the period from July 1, 2002 through December 31, 2002, LLC advanced
approximately $4,200,000 to the Company for general corporate use. Of the loan
amounts, approximately $545,000 was repaid from July 1, 2002 through December
31, 2002, leaving an approximate note payable balance of $3,700,000 at December
31, 2002.
In November 2002 the Company signed a lease for occupancy of its Corporate
headquarters at a different corporate location in Las Vegas, Nevada. The lease
term runs for five (5) years beginning in January 2003 at a cost of $152,205
during the first year with a 4% fixed annual rent increase in the subsequent
periods.
In connection with the Asset Purchase Agreement described in note B, the Company
funded to the distributor seller $180,000 to be used by the distributor seller
to satisfy a funding obligation to its supplier. The funding was not credited
against the purchase price.
On February 7, 2003, the Company entered into an Agreement of Merger with
Scientio, Inc., a publicly traded Delaware corporation, and SC Merger, Ltd., a
British Virgin Islands corporation and a wholly owned subsidiary of Scientio
Inc. As a result of the merger, the separate corporate existence of SC Merger,
Ltd. has ceased, and III continues as the surviving corporation and a wholly
owned subsidiary of Scientio Inc. In connection with the merger, Scientio Inc.
("SCIT.OB") changed its corporate name to MediCor Ltd.
F-20
<Page>
International Integrated Incorporated
Consolidated Balance Sheet
December 31, 2002
Unaudited
ASSETS
Current Assets
Cash $ 68,258
Receivables, less allowance for doubtful accounts of
$3,205,249 362,625
Inventories 119,229
Prepaid expenses and other current assets 117,077
-------------------
Total Current Assets 667,189
Property, plant and equipment, net 200,400
Goodwill and other intangibles, net 1,529,841
Deposits 4,343,705
-------------------
TOTAL ASSETS $ 6,741,135
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Convertible debentures $ 560,000
Note payable to related party 3,661,456
Accounts payable 2,749,190
Accrued expenses and other current liabilities 1,560,826
Payroll taxes payable 17,309
Interest payable 81,394
-------------------
Total Current Liabilities 8,630,175
Long term accrued liabilities 989,868
-------------------
TOTAL LIABILITIES 9,620,043
COMMITMENTS AND CONTINGENCIES (Note M)
SHAREHOLDERS' EQUITY
Convertible preferred shares, $.01 par value, 20,000,000 shares
authorized, 410,601 shares issued and outstanding; preferred shares
convert to common shares on a one to one basis 4,106
Common shares, $.01 par value, 50,000,000 shares authorized,
11,723,925 issued and outstanding 117,239
Capital in excess of par value 13,435,946
Accumulated deficit (16,436,199)
-------------------
TOTAL SHAREHOLDERS' EQUITY (2,878,909)
-------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,741,135
===================
F-21
International Integrated Incorporated
Consolidated Statement of Operations
For The Periods Ended As Noted
Unaudited
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
NET SALES $ 832,280 $ 871,483
------------ ------------
Cost of sales 345,270 371,735
Selling, general and administrative
expenses 2,197,837 2,761,570
Research and development 44,854 56,358
------------ ------------
OPERATING LOSS (1,755,681) 2,318,180
Interest income 0
Interest expense (95,301) (145,724)
------------ ------------
LOSS BEFORE INCOME TAXES (1,850,982) (2,463,904)
Income taxes - -
------------ ------------
NET LOSS (1,850,982) (2,463,904)
Preferred dividends 123,025 96,858
------------ ------------
NET LOSS ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (1,974,007) (2,560,762)
------------ =============
EARNINGS PER SHARE DATA :
WEIGHTED AVERAGE SHARES 11,723,925 9,362,650
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.17) $ (0.27)
F-22
International Integrated Incorporated
Consolidated Statement of Cash Flows
For The Periods Ended As Noted
Unaudited
<table>
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,850,982) $ (2,463,904)
Adjustments to reconcile net loss to net cash
utilized by operating activities:
Depreciation and amortization 84,628 98,198
Provision for doubtful accounts - -
Loss on disposal of property, plant and equipment - 1,922
Changes in operating assets and liabilities
Receivables (62,799) 256,617
Inventories (10,593) 111,330
Prepaid expenses and other current assets (41,807) 67,594
Accounts payable (197,277) (102,498)
Accrued expenses and other current liabilities (85,295) 416,638
Payroll taxes payable 3,513 (3,036)
Interest payable 81,394 85,832
Long term accrued liabilities - 12,177
------------ ------------
Net cash utilized by operating activities (2,079,218) (1,519,130)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,067) (4,778)
Increase in deposits (1,610,705) (300,000)
------------ ------------
Net cash utilized by investing activities (1,616,772) (304,778)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures 410,000 -
Proceeds from issuance of short term debt 3,991,936 2,101,826
Payments on short term debt (544,314) (225,000)
Issuance of common stock - -
Issuance of preferred stock 12,402 136,554
Dividends paid (123,025) (96,858)
------------ ------------
Net cash provided by financing activities 3,746,999 1,916,522
------------ ------------
Net increase in cash 51,009 92,614
Cash at beginning of period 17,249 42,445
------------ ------------
CASH AT END OF PERIOD $ 68,258 $ 135,059
============ ============
</table>
F-23
International Integrated Incorporated
Consolidated Statements of Cash Flows
For The Periods Ended As Noted
Unaudited
<table>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
- -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the six months for:
Interest $ - $ 7,264
Taxes $ - -
</table>
F-24
Notes to Unaudited Consolidated Financial Statements
For the Six Months Ended December 31, 2002
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company
International Integrated Incorporated ("III" or the "Company") was incorporated
in the British Virgin Islands ("BVI") on August 25, 1999, and commenced
operations on September 1, 1999 as a global integrator of medical device
manufacturing, distribution and development companies and technologies. Through
its subsidiaries, the Company designs, develops, manufactures and distributes
medical devices and acquires technologies on a worldwide basis.
The Company is managed from Las Vegas, Nevada, United States of America ("USA")
in a corporate structure designed to energize its growth into a world-class
business entity. The Company's name precisely describes its business strategy:
to be the leading integrator of selected international medical device markets,
technologies and corporations. Unless the context indicates otherwise, all
references to the "Company" include III and its subsidiaries.
For the six months ended December 31, 2002, the operating activities in the USA
were carried out by III Acquisition Corporation (d/b/a/ "PIP.America") and by
Bio-III Acquisition, Inc. (d/b/a/ "Biodermis"), both of which are indirectly
wholly owned subsidiaries of III.
Regarding PIP.America, prior to May 12, 2000, sales were made on both a direct
and a consigned inventory basis. As of May 12, 2000, the United States Food and
Drug Administration ("FDA") notified PIP.America and Poly Implant Prostheses,
S.A. ("PIP-France"), the manufacturer and supplier of PIP.America's products,
that further direct sales to customers by the Company's subsidiary, PIP.America,
would be suspended until the FDA has reviewed and approved the clinical study
being conducted by PIP-France and PIP.America. Sales continued through November
2002, from consigned inventory while the clinical study for the FDA continued as
well. Upon completion, the information from the clinical study will be submitted
to the FDA upon which time management anticipates appropriate clearances to
market the products in the USA will be received. On behalf of PIP-France,
PIP.America has currently enrolled all patients required for the clinical study
and is in a monitoring phase, which management anticipates will be approved by
the FDA in the fourth quarter of 2003.
While awaiting approval from the FDA regarding direct sales from PIP.America,
the Company's sales are being generated by Biodermis. Pursuant to a voluntary
withdrawal from the market, sales of PIP.America products ceased in November of
2002 pending final PMA (Pre-market approval) clearance. The Company has a
commitment from International Integrated Industries, LLC ("LLC") to fund
operating shortfalls that extends to December 31, 2003. LLC is an independent
company in which the Company's Chairman, Mr. Donald K. McGhan, has a controlling
interest. III has no direct ownership in LLC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. In the consolidated statements, all significant
intercompany transactions and balances have been eliminated in accordance with
accounting principles generally accepted in the USA ("GAAP").
Basis of Presentation
The Company's USA operating units, PIP.America and Biodermis, are Delaware
corporations and wholly owned subsidiaries of International Integrated
Management, Inc. ("III Management"), a Delaware corporation, which is an
indirectly wholly owned subsidiary of III.
F-25
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles") for
interim financial information and with the instructions to Form 10-Q and to Form
8-K. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. In
addition, certain reclassifications have been made for consistent presentation.
Operating results for the six months ended December 31, 2002 are not necessarily
indicative of the results that may be expected for any future quarters or the
year ending June 30, 2003. For further information, refer to the consolidated
financial statements and notes thereto, included and incorporated with this
filing.
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and the reported amounts of revenues and expenses during
the reporting period and the disclosure of contingent liabilities at the date of
the financial statements. Significant estimates used by the Company include the
estimated useful lives for depreciable and amortizable assets, the estimated
allowance for doubtful accounts receivable, the estimated costs associated with
product failures, the estimated allowance for product returns, the estimated
valuation for deferred tax assets and estimated cash flows in assessing the
recoverability of long-lived assets. Actual results could differ from those
estimates.
Fiscal Year
The end of the Company's fiscal year is June 30.
Revenue Recognition
The Company generally recognizes revenue from product sales upon surgical
implantation for consigned items and upon shipment for all others, provided that
no significant post-delivery obligations remain and collection of the resulting
receivable is reasonably assured. When significant post-delivery obligations
exist, revenue is deferred until such obligations are fulfilled. III allows
credit for products returned within its policy terms. Such returns are estimated
and an allowance for product returns is recorded at the time of sale as
necessary.
Receivables
The Company has reserved $3,205,249 against certain receivables due to issues
regarding collectibility. The Company intends to pursue all avenues to collect
on amounts due.
Inventories
Inventories are stated at the lower of cost or market, cost determined by the
first-in, first-out (FIFO) method. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. Inventories are of two types, raw
materials and finished goods, as presented in Note C.
Property, Plant and Equipment
Property, plant and equipment are recorded by the Company at cost. Costs of
normal repairs and maintenance are charged to expense as incurred. Depreciation
commences upon placing the asset in service and is computed on a straight-line
basis over the estimated useful lives of the assets, as follows:
Furniture and fixture 5 years
Computer equipment 3-5 years
Tools and dies 5 years
When assets are retired, or disposed of, the cost and accumulated depreciation
thereon are removed from the accounts and the related gains or losses are
included in the statement of operations.
F-26
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the estimated fair
value of the identifiable assets (including other intangible assets) and
liabilities assumed in the acquisition of HPL Biomedical. Other intangible
assets are recorded at fair value and amortized over periods ranging from 3 to
17 years. The Company has elected to have SFAS No. 142 become effective for the
fiscal year beginning July 1, 2002 and is in the process of evaluating the
impact of SFAS No. 142 on the financial statements.
Impairment of Long-Lived Assets
The Company assesses the impairment of goodwill and other intangibles related to
its consolidated subsidiary and other long-lived assets under SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. The Company believes that no adjustment for impairment is necessary at
December 31, 2002.
Warranty Reserve
PIP.America provides a warranty replacement program to surgeons for deflations
for a period of ten (10) years from the date of implantation. For each deflation
the surgeon receives financial assistance plus a free replacement. Since
PIP.America is a distributor of the PIP-France product a portion of the warranty
expense is covered by PIP-France. The Company's accrual for warranty reserve is
based on the portion of projected costs not covered by PIP-France.
Research and Development
Research and development costs are expensed by the Company as incurred,
including the costs of clinical studies and regulatory approval activities.
Equity
The Company has two classes of stock: preferred and common. Shares of
convertible series A preferred stock and common stock may be transferred or sold
subject to the conditions of the Shareholder Subscription Agreement, which
includes a right of first refusal by the Company and its then current
shareholders, and in compliance with applicable securities laws.
The Company is obligated to pay owners of its convertible series A preferred
stock an 8% annual dividend, distributed in cash or in additional Company
preferred stock at estimated current fair value existing at the time of
distribution. The choice to receive the dividend in cash or additional shares of
stock is solely up to the investor.
The Company does not pay, nor does it intend to pay, dividends on shares of its
common stock.
Preferred and common shares have voting rights on a one vote per share basis.
Upon an event of public conversion, preferred shares convert to common shares on
a one preferred share to one common share basis.
Earnings per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. When applicable, diluted net income
per share is computed using the weighted average number of preferred, common and
dilutive common equivalent shares outstanding during the period. Dilutive common
equivalent shares include in-the-money stock options.
F-27
The following is a reconciliation of the numerator (net loss) and denominator
(number of shares) used in the basic and diluted EPS calculation:
<table>
<caption>
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Net loss attributable to common shareholders $ (1,974,007) $ (2,560,762)
Weighted average shares outstanding 11,723,925 9,362,650
Net loss per share, basic and diluted $ (0.17) $ (0.27)
</table>
Common equivalent shares excluded from the calculation of diluted EPS, as their
effect was anti-dilutive, were 2,185,825 in the six months ended December 31,
2002 and $2,275,362 in the six months ended December 31, 2001.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), issued in 1995, defined a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. As provided for in SFAS 123, the Company has elected to apply
APB No. 25 "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation plans. Options
included in employment agreements and consulting agreements are considered
issued. The options were issued at or above estimated fair value, which,
pursuant to APB No. 25, did not result in any compensation expense.
Pursuant to SFAS 123, Company management has estimated the fair value of each
stock option as of the grant date utilizing the Black-Scholes valuation model,
with the following assumptions:
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Risk-free interest rate 6.0-6.5% 5.63-7.50%
Dividend yield 0% 0%
Volatility factor 0.10% 0.10%
Expected life in years 3-4 4-6
The effect of using the fair-value method above is that the Company's net loss
per share would have been increased by $0.00 per share, for the six months ended
December 31, 2002 and December 31, 2001.
Concentrations of Risk
Financial instruments which subject the Company to concentrations of credit risk
consist principally of receivables. For the six months ended December 31, 2002,
the credit risk associated with receivables is limited due to the large number
of customers and their broad dispersion over many geographic areas within the
USA and internationally. For the six months ended December 31, 2002 and December
31, 2001, no revenues from transactions with a single customer amounted to more
than ten percent of total revenues.
For the six months ended December 31, 2002, the Company relied on a limited
number of suppliers of its products.
F-28
The Company is dependent upon LLC to fund operations and cash flow short falls
when capital is otherwise not available.
B. BUSINESS ACQUISITIONS & SIGNIFICANT EVENTS
Pursuant to an Asset Purchase Agreement signed April 25, 2002, the Company
agreed to acquire substantially all of the assets of a privately-held United
States medical products distributor. The maximum purchase price under the
agreement is $10,000,000, subject to downward adjustment based on the time
elapsed before closing. The closing is conditioned upon the distributor
acquiring necessary governmental approvals for commercialization in the United
States of the products to be distributed, which the Company anticipates will
occur during 2003. The Company has agreed to make deposits against the purchase
price on a regular basis. As of December 31, 2002, deposits paid totaled
$2,387,625.
C. INVENTORIES
Inventories of the Company as of the period noted consist of:
December 31, 2002
-----------------------
Raw Materials Inventory in Warehouse $ 108,915
Finished Goods Inventory in Warehouse 10,314
Finished Goods Inventory on Consignment -
-----------------------
Total $ 119,229
=======================
D. RECEIVABLES AND NOTES RECEIVABLE
Receivables of the Company as of the period noted consist of:
December 31, 2002
-----------------------
Accounts receivable $ 310,006
Accounts receivable - PIP-France 3,257,868
-----------------------
Subtotal 3,567,874
Allowance for doubtful accounts (3,205,249)
-----------------------
Total $ 362,625
=======================
Accounts receivable-PIP-France consist primarily of reimbursements associated
with the PIP.America warranty replacement program, clinical study expenses and
returned products.
Changes in allowance for doubtful accounts are as follows:
Beginning balance, July 1, 2002 $ (3,205,249)
Provisions -
Write-offs -
----------------------
Ending balance, December 31, 2002 $ (3,205,249)
======================
F-29
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment of the Company as of the period noted consist of:
December 31, 2002
-----------------------
Furniture and fixtures $ 340,800
Computer equipment 94,135
Tools and dies 7,896
-----------------------
Subtotal 442,831
Accumulated depreciation (242,431)
-----------------------
Total $ 200,400
=======================
Depreciation expense was $50,443 for the six months ended December 31, 2002 and
$48,224 for the six months ended December 31, 2001.
F. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles of the Company as of the period noted consist of:
December 31, 2002
-----------------------
Goodwill $ 1,219,200
Distribution Agreements 225,000
Non-Compete 130,000
Patents 100,000
Other 23,083
------------------------
Subtotal 1,697,293
Accumulated Amortization (697,452)
------------------------
Total $ 1,529,841
========================
On February 28, 2001, a wholly owned subsidiary of the Company acquired all of
the stock of HPL Biomedical, Inc., d/b/a Biodermis ("Biodermis") under the
purchase method of accounting, for a total purchase price of $2,100,000. The
purchase price included a cash payment of $1,240,000 and the assumption of
$860,000 in liabilities, $647,000 of which were amounts due to III and were
eliminated upon consolidation when the transaction was consummated. The
recording of this transaction created $1,697,000 in intangibles consisting of
$1,219,200 in goodwill, $225,000 in distribution agreements, $130,000 in
non-compete provisions, $100,000 for a patent and $23,083 in other intangibles.
Amortization expense was $34,185 for the six months ended December 31, 2002 and
$49,974 for the six months ended December 31, 2001.
F-30
G. ACCRUED EXPENSES
Accrued expenses and other current liabilities of the Company as of the period
noted consist of:
December 31, 2002
-----------------------
Consulting $ 1,185,000
Product Warranty Reserve 90,371
Dividends 91,688
Salaries and Employee Benefits 112,586
Legal 41,181
Other 40,000
------------------------
Total $ 1,560,826
========================
Long term accrued liabilities of $989,868 consist of product warranty reserves.
H. FOREIGN CURRENCY
For the six months ended December 31, 2002, all transactions by the Company
occurred in US dollars.
I. RELATED PARTY
Medical Device Alliance Inc. ("MDA") is a company in which III's Chairman, Mr.
Donald K. McGhan has a significant interest. As described in Note A, LLC is a
company in which Mr. Donald K. McGhan has a controlling interest. III has no
direct ownership in either MDA or LLC.
Mr. Donald K. McGhan was a party to certain litigation involving MDA which
concluded in December, 2001 in a global settlement among all parties. Since the
Company was never a party to the proceedings, management of the company has
concluded that there was no material effect on the Company's businesses, results
of operations, or financial position.
The Company's management offices located in Las Vegas, Nevada, were subleased by
III Management from LLC until December 31, 2002. Such lease expenses were
$189,386 for the six months ended December 31, 2002 and $182,008 for the six
months ended December 31, 2001.
A note payable exists between the Company and LLC as described in Note J.
J. NOTES PAYABLE
LLC acted on behalf of the Company by funding significant expenses incurred for
which the Company has a revolving loan agreement as shown on the Consolidated
Balance Sheet of $3,661,456 at December 31, 2002, at an annual interest rate of
ten percent (10%). During the six months ended December 31, 2002, $3,991,936 was
advanced to the Company by LLC, of which $544,314 was re-paid. Interest expense
relating to this note was $76,781 for the six months ended December 31, 2002.
During the six months ended December 31, 2001, $2,101,826 was advanced to the
Company by LLC, of which $225,000 was repaid. Interest expense relating to this
note was $85,832 for the six months ended December 31, 2001. The Company had a
commitment from LLC to fund operating shortfalls as necessary for the year
presented.
Interest expense on the Statement of Operations also includes $18,520 at
December 31, 2002 and $59,892 at December 31, 2001 related to miscellaneous
items.
F-31
K. INCOME TAXES
Federal Income Taxes
At December 31, 2002 and December 31, 2001, the Company recorded allowances
against certain future tax benefits, the realization of which is currently
uncertain. Subsequent to the end of the period noted, no deferred tax benefits
were recorded as assets for taxable losses of the Company. The deferred tax
benefits were primarily composed of net operating losses and timing differences
related to certain accounts receivable and depreciation/amortization not
currently deductible as expenses under IRS provisions. Although the Company
recorded this allowance to the deferred tax assets, the Company may still
utilize the future tax benefits from net operating losses for 20 years from the
year of the loss to the extent of future taxable income.
L. SHAREHOLDERS' EQUITY
Shareholders' equity as of December 31, 2002 for the Company consists of:
Common Stock
During the six months ended December 31, 2002 and the six months ended December
31, 2001, the Company issued no additional common shares (of 50,000,000 common
shares authorized).
Preferred Stock
The Company's preferred stock may be issued from time to time in one or more
series, with terms approved by the Board of Directors without the consent of the
stockholders of III. During the six months ended December 31, 2002, III issued
18,815 shares of series A preferred stock (of 20,000,000 preferred shares
authorized), generating proceeds of $141,113. Also, during the six months ended
December 31, 2002, the Company paid $123,025 in dividends to holders of series A
preferred stock. During the six months ended December 31, 2001, III issued
32,300 shares of series A preferred stock, generating proceeds of $242,250. Also
during the six months ended December 31, 2001, the Company paid $96,858 in
dividends to holders of series A preferred stock.
Stock Option Plan
The Company has a Stock Option Plan for executive management and designated key
managers and consultants. Up to 1,000,000 options to purchase shares were
reserved for issuance pursuant to the Company's Stock Compensation Plan and up
to 3,000,000 options to purchase shares were reserved for issuance pursuant to
employment agreements. Options are issued with exercise prices at estimated fair
value at the time of issuance.
Options granted under the plans generally become exercisable ratably over a
three or four year period from the date of grant. Options granted under the
plans expire no later than ten years after the date of grant.
F-32
Six Months Ended
December 31, 2002
------------------------------
Weighted Average
Shares Exercise Price
------------------------------
Options outstanding at beginning of period 2,955,000 $ 0.43
Options granted 940,000 2.50
Options exercised
Options canceled
---------- ----------
Options outstanding at end of period 3,895,000 $ 0.91
========== ==========
Options exercisable at end of period 1,932,500 $ 0.27
---------- ----------
M. COMMITMENTS AND CONTINGENCIES
The Company leases and subleases office and warehouse facilities and office
equipment under various terms. Such operating leases expire within one year.
Facilities and office equipment lease expenses amounted to $307,499 for the six
months ended December 31, 2002 and $286,708 for the six months ended December
31, 2001.
In November 2002 the Company signed a lease for occupancy of its Corporate
headquarters at a different corporate location in Las Vegas, Nevada. The lease
term runs for five (5) years beginning in January 2003 at a cost of $152,205
during the first year with a 4% fixed annual rent increase in the subsequent
periods.
As part of the definitive Asset Purchase Agreement described in note B, the
Company is making weekly deposits of $50,000 against the adjusted purchase
price. The Company intends to fund the balance of the purchase price from funds
provided by institutional investors, LLC or a combination thereof. The Company
is vigorously pursuing obtaining the necessary equity or debt financing prior to
closing.
On October 28, 1999, the Company, through its subsidiary PIP.America, entered
into an agreement with Poly Implant Prostheses, S.A. ("PIP-France") for the
non-exclusive distribution rights for PIP-France breast implant products and to
act as the marketing, sales and distribution entity for North America and any
territories of the United States. Shortly thereafter, the agreement became
exclusive when the only other distributor of PIP-France implants, PIP/USA, Inc.
("PIP/USA") wound down operations and ceased doing business.
In a separate agreement, the Company was granted an opportunity to make an
investment in PIP-France, in which III agreed to make a deposit of $1,883,000
with Betreib Gesel, S.A. ("Betreib Gesel"), a Luxembourg company. The deposit
occurred on January 25, 2000. This deposit equates to over fifty percent (50%)
of the agreed upon purchase price of Silver Star, S.A. ("Silver Star"), also a
Luxembourg company which, directly or indirectly, owns a seven and a half
percent (7.5%) interest in PIP-France, located in Toulon, France. III has a
commitment to Betreib Gesel amounting to $1,867,000 in satisfaction of the
remainder of the purchase price net of the deposit for Silver Star, which is
expected to be satisfied in 2003.
PIP.America is a co-defendant with PIP/USA and PIP-France, in certain civil
litigation matters (Saul Kwartin, et. al, v. PIP/USA, Inc., et. al, and Steven
M. Kwartin v. PIP/USA, Inc., et al.), in the Circuit Court of Miami-Dade County,
Florida. In these cases, the plaintiffs, who purport to be shareholders of
PIP/USA suing derivatively on its behalf, seek to rescind various transactions
between PIP.America and PIP/USA. Further, the plaintiffs seek to impose
F-33
liability against PIP.America and its co-defendants for purported monetary
damages for alleged tortuous and other purported acts concerning alleged
relationships between plaintiffs, PIP/USA and PIP-France. The Company's counsel
has stated it is unable to express an opinion as to the likelihood of an
unfavorable outcome of the actions or to estimate the range of potential loss
concerning the actions. Management of the Company believes that the matter will
be concluded in its favor and expects that the outcome of the matter will not
have a material adverse impact on the Company's business, results of operations,
or financial position.
A number of product warranty claims have been asserted against PIP.America,
including less than ten during the six months ended December 31, 2002 which have
proceeded to litigation. The Company has refused service to the extent possible
on all claims brought against PIP/USA, a predecessor company unrelated to III.
Claims against the Company's subsidiary, PIP.America, have been and are being
reviewed with counsel in the ordinary course of business. PIP.America has
indemnification provisions for a portion of projected costs in its distribution
agreement with PIP-France and has established a product warranty reserve.
Management of the Company believes that these matters will either be settled or
otherwise concluded in its favor and expects that the outcomes of such matters
will not have a material adverse impact on the Company's business, results of
operations or financial position.
The Company is not aware of any legal actions to which it is a party, current or
planned, other than those described above.
N. SEGMENT INFORMATION
During the six months ended December 31, 2002 and December 31, 2001, the Company
operated as a single business in multiple geographic locations within the USA
and internationally in the Medical Device Technology segment of the
medical/health care market, and as such does not have multiple segments to
report pursuant to the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". Revenues from customers attributable
to any individual foreign country were not material. The Company will continue
to evaluate the reporting effects of SFAS No. 131 as its acquisition and
investment program continues.
O. SUBSEQUENT EVENTS
For the period from January 1, 2003 through March 31, 2003, LLC advanced
approximately $1,560,000 to the Company for general corporate use. Of the loan
amounts, approximately $200,000 was repaid from January 1, 2003 through March
31, 2003, leaving an approximate note payable balance of $5,020,000 at March 31,
2003.
On February 7, 2003, the Company entered into an Agreement of Merger with
Scientio, Inc., a publicly traded Delaware corporation, and SC Merger, Ltd., a
British Virgin Islands corporation and a wholly owned subsidiary of Scientio
Inc. As a result of the merger, the separate corporate existence of SC Merger,
Ltd. has ceased, and III continues as the surviving corporation and a wholly
owned subsidiary of Scientio Inc. In connection with the merger, Scientio Inc.
("SCIT.OB") changed its corporate name to MediCor Ltd.
F-34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Scientio, Inc., a Delaware corporation ("Scientio") entered into an
agreement of merger, dated as of February 7, 2003, with International Integrated
Incorporated, a British Virgin Islands company ("III"), and SC Merger, Ltd., a
British Virgin Islands company and a wholly owned subsidiary of Scientio. Other
parties to the merger agreement were (1) certain members of III who collectively
held a majority of the issued and outstanding capital stock of III, and (2)
certain stockholders of Scientio who collectively held a majority of the issued
and outstanding capital stock of Scientio. The transactions contemplated by the
merger agreement were approved by the unanimous written consent of the board of
Scientio and the written consent of the holders of the majority of the issued
and outstanding capital stock of Scientio. In connection with the merger, on
February 24, 2003, Scientio filed a certificate of amendment with the Secretary
of State of the State of Delaware to amend its certificate of incorporation to
change its name from Scientio, Inc. to MediCor Ltd. (the "Company").
In the merger SC Merger, Ltd. merged with and into III. As a result of
the merger, the separate corporate existence of SC Merger, Ltd. ceased, and III
continued as the surviving corporation and a wholly owned subsidiary of
Scientio. Upon consummation of the merger, excluding those shares as to which
dissenters' rights or appraisal rights are perfected pursuant to the
International Business Companies Act of the British Virgin Islands (Cap. 291),
all of the ordinary shares of III, par value $0.01 per share, issued and
outstanding immediately prior to February 7, 2003, the "effective time" of the
merger, and all of the 8% Convertible Class A Preference Shares of III, par
value $0.01 per share, issued and outstanding immediately prior to the effective
time of the merger, were converted into the right to receive shares of common
stock of Scientio.
Each III ordinary share and each III preference share issued and
outstanding immediately prior to the effective time of the merger was converted
into the right to receive 1.24268 shares of Scientio common stock. In lieu of
the issuance of any fractional shares of Scientio common stock to III members
who surrender their III shares in the merger, Scientio will issue a whole share
of Scientio common stock. The exchange ratio was determined through negotiations
between the management of III and Scientio. As a result of the merger, the
members of III prior to the merger will own approximately 96% of the outstanding
common stock (and outstanding voting securities) of Scientio immediately
following the merger.
For accounting purposes, a reverse merger occurred and in a reverse
merger transaction MediCor Ltd. is treated as the continuing reporting entity
that acquired III. III will be treated as continuing the reporting entity of
MediCor Ltd. after the reverse merger transaction.
The following unaudited pro forma consolidated financial statements
(hereinafter collectively referred to as "the pro forma financial statements")
give effect to the transactions referred to above and are presented for
illustrative purposes only. These pro forma financial statements are not
necessarily indicative of the results of operations of future periods or the
results that would have been realized had the acquisition of III been completed
as of the dates set forth in the pro forma financial information. The pro forma
financial statements are qualified in their entirety by reference to and should
be read in conjunction with the historical financial statements of III including
the notes thereof, incorporated herein by reference or included herein.
F-35
The unaudited pro forma consolidated balance sheet as of December 31,
2002 is based on the unaudited balance sheet of III dated December 31, 2002
attached hereto and gives effect to the foregoing transactions as if they had
occurred on July 1, 2001.
The accompanying unaudited pro forma consolidated statement of
operations for the year ended June 30, 2002 and period ending December 31, 2002
are based on the corresponding audited and unaudited consolidated statement of
operations of III attached hereto and gives effect to the foregoing transactions
as if they had occurred as of July 1, 2001.
The accompanying pro forma financial statements are unaudited and are
subject to a number of estimates, assumptions and other uncertainties, and do
not purport to be indicative of the actual results of operations that would have
occurred had the acquisition reflected therein in fact occurred on the dates
specified, nor do such financial statements purport to be indicative of the
results of operations that may be achieved in the future.
F-36
PRO FORMA CONSOLIDATED BALANCE SHEET
The following pro forma balance sheet has been derived from the balance
sheet of the Company and III at December 31, 2002 and adjusts such information
to give effect to the reverse merger and recapitalization as if the reverse
merger and recapitalization had occurred on July 1, 2001. The pro forma balance
sheet is presented for informational purposes only and does not purport to be
indicative of the financial condition that actually would have resulted if the
reverse merger and recapitalization had been consummated at the date of the
balance sheet. The pro forma balance sheet should be read in conjunction with
the notes thereto and the Company's consolidated financial statements and
related notes thereto contained elsewhere in this filing.
INTERNATIONAL INTEGRATED INCORPORATED
PRO FORMA BALANCE SHEET
<table>
<caption>
III Scientio Combined December 31, 2002
Balance Balance Balance -----------------------
Sheet Sheet Consolidation Sheet Pro Forma
12/31/02 12/31/02 Adjustment 12/31/02 Adjustment Pro Forma
----------------------------------------------------------------------------------
(unaudited)
----------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 68,258 $ - $ 68,258 $324,423A $ 392,681
Receivables, less allowance for doubtful
accounts of $3,205,249 362,625 2,000 364,625 364,625
Inventories 119,229 119,229 119,229
Prepaid expenses and other current assets 117,077 117,077 117,077
----------------------------------------------------------------------------------
Total Current Assets 667,189 2,000 669,189 993,612
Property, plant and equipment, net 200,400 - 200,400 200,400
Goodwill and other intangibles, net 1,529,841 1,529,841 1,529,841
Deposits 4,343,705 4,343,705 4,343,705
Deferred Registration Costs - - - -
Investment - Related Party, at Equity - - - -
----------------------------------------------------------------------------------
TOTAL ASSETS $ 6,741,135 $ 2,000 $ 6,743,135 $324,423 $ 7,067,558
==================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Convertible debentures $ 560,000 $ 560,000 560,000
Note payable to related party 3,661,456 3,661,456 3,661,456
Accounts payable 2,749,190 2,749,190 2,749,190
Accounts payable - Related Parties - 26,700 26,700 26,700
Accrued expenses and other current liabilities 1,560,826 15,750 1,576,576 1,576,576
Payroll taxes payable 17,309 17,309 17,309
Interest payable 81,394 81,394 81,394
----------------------------------------------------------------------------------
Total Current Liabilities 8,630,175 42,450 8,672,625 8,672,625
Long term accrued liabilities 989,868 - 989,868 989,868
----------------------------------------------------------------------------------
TOTAL LIABILITIES 9,620,043 42,450 9,662,493 9,662,493
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Convertible preferred shares, $.01 par value,
20,000,000 shares authorized, 410,601 shares
issued and outstanding; preferred shares
convert to common shares on a one to one
basis (Note 1) 4,106 (4,106)
Common shares, $.001 par value, 30,000,000
shares authorized, 15,117,239 shares issued
and outstanding (Note 2) 117,239 662 (102,160) 15,741 15,741
Capital in excess of par value 13,435,946 311,934 106,266 13,854,146 13,854,146
Accumulated deficit (16,436,199) (353,046) (16,789,245) 324,423A (16,464,822)
----------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (2,878,908) (40,450) (2,919,358) (2,594,935)
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,741,135 $ 2,000 $ 6,743,135 $324,423 $ 7,067,558
==================================================================================
Note 1: Preferred converts to common on one to one basis
Note 2: Common par value is $.001, 30,000,000 authorized, 15,079,333 III and 661,900 Scientio
A Entry to eliminate payment of preferred stock dividends as a result of conversion of preferred stock to common stock since
preferred stock converted to common as a result of merger assuming merger occurred on July 1, 2001.
</table>
F-37
<page>
PRO FORMA FINANCIAL DATA
(Unaudited)
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma statements of operations have been
derived from the statements of operations of the Company for the six months
ended December 31, 2002 and fiscal year ended June 30, 2002 and adjust such
information to give effect to the reverse merger and recapitalization as if the
reverse merger and recapitalization had occurred on July 1, 2001. The pro forma
statements of operations are presented for informational purposes only and do
not purport to be indicative of the results of operations that actually would
have resulted if the reverse merger and recapitalization had been consummated on
July 1, 2001 nor which may result from future operations.
The Pro Forma Consolidated Statements of Operations should be read in
conjunction with the notes thereto and III's consolidated financial statements
and related notes thereto contained elsewhere in this filing.
<table>
<caption>
III Scientio Combined For the year Ended
Statement of Statement of Statement of June 30, 2002
Operations Operations Operations ---------------------------------
For the year For the year For the year Pro Forma
Ended 6/30/02 Ended 6/30/02 Ended 6/30/02 Adjustment Pro Forma
--------------------------------------------------------------------------------------
(unaudited)
--------------------------------------------------------------------------------------
NET SALES $ 1,703,590 $ 2,700 $ 1,706,290 $ 1,706,290
--------------------------------------------------------------------------------------
Cost of sales 442,627 442,627 442,627
Write down of inventory to fair market value 390,042 390,042 390,042
Selling, general and administrative expenses 8,230,133 232,930 8,463,063 8,463,063
Research and development 294,723 294,723 294,723
--------------------------------------------------------------------------------------
OPERATING LOSS (7,653,935) (230,230) (7,884,165) (7,884,165)
Interest income 69 125 194 194
Interest expense (362,295) (362,295) (362,295)
--------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (8,016,161) (230,105) (8,246,266) (8,246,266)
Income taxes - - - -
NET LOSS (8,016,161) (230,105) (8,246,266) (8,246,266)
Preferred dividends 201,398 201,398 (201,398)A -
--------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (8,217,559) $ (230,105) $ (8,447,664) $(201,398) $ (8,246,266)
======================================================================================
EARNINGS PER SHARE DATA :
WEIGHTED AVERAGE SHARES 12,070,803 1,973,893 14,044,696 14,044,696
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.68) $ (0.12) $ (0.60) $ (0.59)
A Entry to eliminate preferred stock dividend as a result of conversion of preferred stock to common stock
</table>
F-38
<page>
INTERNATIONAL INTEGRATED INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<table>
<caption>
III Scientio Combined For the Six Months Ended
Statement of Statement of Statement of December 31, 2002
Operations Operations Operations ---------------------------------
6 months 6 months 6 months Pro Forma
12/31/02 12/31/02 12/31/02 Adjustment Pro Forma
--------------------------------------------------------------------------------------
(unaudited)
--------------------------------------------------------------------------------------
NET SALES $ 832,280 $ - $ 832,280 $ 832,280
--------------------------------------------------------------------------------------
Cost of sales 345,270 345,270 345,270
Write down of inventory to fair market value 0 0 0
Selling, general and administrative expenses 2,197,837 30,729 2,228,566 2,228,566
Research and development 44,854 44,854 44,854
--------------------------------------------------------------------------------------
OPERATING LOSS (1,755,681) (30,729) (1,786,410) (1,786,410)
Interest income 0 0 0 0
Interest expense (95,301) (95,301) (95,301)
--------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (1,850,982) (30,729) (1,881,711) (1,881,711)
Income taxes - 936 936 936
--------------------------------------------------------------------------------------
NET LOSS (1,850,982) (31,665) (1,882,647) (1,882,647)
Preferred dividends 123,025 123,025 (123,025)A -
--------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (1,974,007) $ (31,665) $ (2,005,672) $(123,025) $ (1,882,647)
======================================================================================
EARNINGS PER SHARE DATA :
WEIGHTED AVERAGE SHARES 15,079,333 661,900 15,741,233 15,741,233
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.13) $ (0.05) $ (0.13) $ (0.12)
A Entry to eliminate preferred stock dividend as a result of conversion of preferred stock to common stock
</table>
F-39