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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
Form 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-27212
ENDOCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0618093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7 Studebaker, Irvine, California 92618
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 595-4770
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value;
Rights to Purchase Shares of Participating Preferred Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form-10K. [ ]
The number of shares of the registrant's common stock outstanding as of
March 13, 2001 was 15,222,186.
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was $86,073,126 (computed using the average
bid and asked prices quoted on the Nasdaq National Market on March 13, 2001).
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The information required to be included in Part III of this Form 10-K is
incorporated by reference to the definitive proxy statement to be filed by the
registrant no later than 120 days after December 31, 2000, the close of its
fiscal year, for the registrant's annual meeting of stockholders to be held on
May 22, 2001.
ENDOCARE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
ITEM NUMBER AND CAPTION
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PAGE
PART I NUMBER
- ------ ------
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
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Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22
PART III
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Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
PART I
Statements in this report which are not historical facts are
forward-looking statements within the meaning of the federal securities laws.
These statements may contain words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," or other wording indicating future results.
Forward-looking statements are subject to risks and uncertainties. Actual
results may differ materially from the results discussed in forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Factors That May Affect
Future Results and Trading Price of Common Stock" under Item 1 below, and
elsewhere in this report. We undertake no obligation to revise or update any
forward-looking statements to reflect any event or circumstance that may arise
after the date of this report. References herein to "Endocare," "the Company,"
"we," "our," and "us" refer to Endocare, Inc., a Delaware Corporation.
ITEM 1. BUSINESS
GENERAL
We are a vertically-integrated medical device company that develops,
manufactures and markets cryosurgical and stent technologies for applications in
oncology and urology. We have concentrated on developing devices for the
treatment of the two most common diseases of the prostate, prostate cancer and
benign prostate hyperplasia. We are also developing cryosurgical technologies
for treating tumors in other organs, including the kidney, breast and liver.
We have developed and recently introduced an innovative, second generation
cryosurgical system for the treatment of prostate cancer. The Cryocare System
(TM) offers the advantage of controlled, targeted freezing of the tumor with the
benefit of faster patient recovery and minimal complications. The system was
launched in July 1999 following the initiation of national Medicare coverage for
cryosurgical procedures as a primary treatment alternative for localized
prostate cancer. We also operate a mobile cryosurgery business in Florida which
provides cryosurgical equipment for the treatment of prostate and liver cancer
on a per procedure basis.
We have also developed new therapies for the improved treatment of benign
prostate hyperplassia, or BPH. Our initial product development efforts for BPH
involve the use of stent technology to provide both immediate and long-term
relief to BPH patients. Our Horizon Prostatic Stent (TM) is a nitinol-based
stent with shape memory characteristics for easy placement via a catheter
following surgical intervention of the prostate and convenient atraumatic
removal of the stent following the healing process. We believe that our Horizon
Prostatic Stent will address one of the major issues of BPH therapy, the
immediate relief of patients following thermotherapy and surgical resection. In
1999, we completed phase two of the Horizon Prostatic Stent United States Food
and Drug Administration, or FDA, study and received approval to expand the trial
to the pivotal study, which is the final study before clearance can be obtained
for broader use. We expect to complete the FDA study during the second half of
2001. In addition, we are exploring the use of the stent for long-term relief of
BPH without the need for thermotherapy in a subset of the patient
population.
PROSTATE CANCER
MARKET BACKGROUND
The incidence of prostate cancer has risen steadily since 1980 to become
the second most common cause of cancer-related deaths among men. The dramatic
increase in prostate cancer cases has led to heightened awareness of the
disease, which has led to increased rates of testing and improved diagnostic
methods.
Therapeutic alternatives for patients with prostate cancer have been both
limited and unattractive. Current treatment options include radical surgery,
radiation therapy, hormone therapy, cryotherapy and "watchful waiting." These
options are evaluated using a number of criteria, including the patient's age,
physical condition and stage of the disease. However, due to the slow
progression of the disease, the decision for treatment typically is based upon
the severity of the condition and the resulting quality of life.
Radical prostatectomy is most often the therapy of choice due to the high
degree of confidence in surgically removing the cancerous tissue, particularly
for patients having more advanced stages of the disease and those who fail to
respond to less invasive alternatives. The procedure is dependent on the skill
of the surgeon and is often associated with high rates of impotence,
incontinence and operative mortality.
Radiation therapy for prostate cancer includes both external radiation beam
and interstitial radioactive seed therapies. External beam radiation therapy
emerged as one of the first alternatives to radical prostatectomy; however,
studies have shown that the success rate of this procedure is not comparable to
that of radical prostatectomy. Interstitial radioactive seed therapy, also
referred to as brachytherapy, is the permanent placement of radioactive seeds in
the prostate. Brachytherapy has been shown to be most effective for localized
tumors caught in the early stage of disease development.
Cryosurgery, freezing tissue to destroy tumor cells, was first developed in
the 1960's. During this period, the use of "cold probes," or cryoprobes, was
explored as a method to kill prostate tissue without resorting to radical
surgery. Although effective in killing cancer cells, the inability to control
the amount of tissue frozen prevented broad use and development of cryotherapy
for prostate cancer.
In the late 1980's, progress in ultrasound imaging allowed for a revival in
the use of cryosurgery. Using ultrasound, the cryoprobe may be guided to the
targeted tissue from outside the body through a small incision. The physician
activates the cryoprobe and uses ultrasound to monitor the growth of ice in the
prostate as it is occurring. When the ice encompasses the entire prostate, the
probe is turned off. This feedback mechanism of watching the therapy as it is
administered allows the physician precise control during application. Published
studies suggest that cryosurgery may be able to deliver disease free rates
comparable to radical surgery, but with the benefit of lower rates of
incontinence and mortality.
CRYOCARE SYSTEM
We have developed the Cryocare System, a next-generation cryosurgery
system, to allow the urologist to treat prostate cancer in a minimally invasive
manner. The Cryocare System has been designed to freeze tissue much faster and
with more control than existing systems.
The Cryocare System incorporates enhanced control mechanisms to minimize
the risk of unintended damage to tissue surrounding the prostate. Most
significantly, the Cryocare probes stop freezing instantly. Use of four to six
temperature probes selectively placed in the prostate near the rectal tissue,
sphincter muscles (which control continence) and neurovascular bundles (which
control potency) enables the physician to monitor temperatures of tissue
adjacent to the prostate. Combining these control features allows the physician
to treat prostate cancer with a high degree of control and precision that was
not previously possible.
The Cryocare System has been cleared for marketing by the FDA and was
commercially launched in July 1999 following the initiation of national Medicare
coverage for cryosurgical procedures as a primary treatment alternative for
localized prostate cancer. Through direct sales of cryosurgical systems and its
cryosurgical system placement program, we have installed Cryocare Systems
primarily in North America, with over 1,000 patients treated to date. In
December 2000, the Health Care Financing Administration approved National
Medicare coverage for cryosurgical procedures to treat prostate cancer patients
who have failed radiation therapy and the coverage is scheduled to become
effective July 2001.
We own 6 patents relating to the technology used to create the freezing
process and to precisely control the shape of the freeze zone produced by the
Cryoprobes (TM) and covering our Cryoprobe technology. The technology may also
allow for expanded therapeutic applications by tailoring the Cryoprobe
performance to other anatomical targets, such as treating tumors in the kidney,
breast and liver.
BENIGN PROSTATE HYPERPLASIA
MARKET BACKGROUND
BPH, which affects a significant number of adult men, is a non-cancerous
enlargement of the innermost part of the prostate. BPH frequently results in a
gradual squeezing of the part of the urethra which runs through the prostate.
This causes patients to experience a frequent urge to urinate because of the
incomplete emptying of the bladder and a burning sensation or similar discomfort
during urination. The obstruction of urinary flow can also lead to a general
lack of control over urination, including difficulty initiating urination when
desired as well as difficulty preventing urinary flow because of the residual
volume of urine in the bladder (a condition known as urinary incontinence). BPH
symptoms may disturb sleep by causing the BPH sufferer to awaken frequently to
urinate. Although symptoms occasionally stabilize or diminish without
intervention, they generally become more severe over the course of the disease.
Left untreated, the obstruction caused by BPH can lead to acute urinary
retention (complete inability to urinate), serious urinary tract infections and
permanent bladder and kidney damage.
Most males will eventually suffer from BPH. In the United States, the
incidence of BPH for men in their fifties is approximately 50% and rises to
approximately 80% by the age of 80. The general aging of the United States
population, as well as increasing life expectancies, is anticipated to
contribute to the continued growth in the number of BPH sufferers.
Patients diagnosed with BPH generally have four options for treatment: (i)
"watchful waiting," (ii) drug therapy; (iii) surgical intervention, including
transurethral resection of the prostate and laser assisted prostatectomy; and
(iv) new, less invasive thermal therapies. Currently, approximately 25% of
patients with BPH are actually treated with surgical intervention. Treatment is
generally reserved for patients with intolerable symptoms or those with
significant potential symptoms if treatment were withheld. A large number of
patients delay discussing their symptoms or elect "watchful waiting" to see if
the condition remains tolerable. We believe the development of less invasive
procedures for treatment of BPH could result in a substantial increase in the
number of BPH patients who elect to receive interventional therapy.
Drug Therapies: Some drugs are designed to shrink the prostate, or TURP, by
inhibiting or slowing the growth of prostate cells. Other drugs are designed to
relax the muscles in the prostate and bladder neck to relieve urethral
obstruction. Current drug therapy generally requires daily administration for
the duration of the patient's life.
Surgical Interventions: Transurethral resection of the prostate is the most
common surgical procedure and involves the removal of the prostate's innermost
core in order to reduce pressure on the urethra. TURP is performed by
introducing an electrosurgical cutting loop through a cystoscope into the
urethra and "chipping out" both the prostatic urethra and surrounding prostate
tissue up to the surgical capsule, thereby completely clearing the obstruction.
The average TURP procedure requires a hospital stay of approximately four days.
Less Invasive Thermal Therapies: Other technologies developed or under
development are non-surgical, catheter-based therapies that use thermal energy
to preferentially heat diseased areas of the prostate to a temperature
sufficient to cause cell death. Thermal energy forms being utilized include
microwave, radio frequency and ultrasound energy. The procedures are typically
performed in an outpatient setting under local anesthesia. Both microwave and
radio frequency therapy systems are currently being marketed worldwide,
including the United States, where the first FDA clearances were obtained in May
and October 1996, for microwave and radio frequency, respectively.
HORIZON PROSTATIC STENT
We have developed a new urological stent which has been designed to provide
immediate relief for BPH patients who undergo thermotherapy. Our Horizon
Prostatic Stent is made of nitinol, a titanium metal alloy that employs a
feature called shape memory. This shape memory feature allows the Horizon
Prostatic Stent to be soft and flexible in its relaxed state, allowing the
device to be introduced in a relatively pain-free manner using a catheter. When
the device is heated to its transition temperature, the device self-expands to a
pre-determined shape. In the case of the Horizon Prostatic Stent, the
predetermined shape is that of a rigid tube, or stent. The catheter is inserted
using a local anesthetic and positioned in the prostatic urethra under direct
vision. The stent is activated by body heat, causing the shape memory to open to
its tube-like position. After approximately 30 days, the stent is removed by the
physician by flushing cool water through an endoscope, causing the stent to
return to its soft, relaxed state. The stent is removed by retrieving it through
the working channel of the endoscope.
We have completed phase two of the FDA clinical trials for the Horizon
Prostatic Stent and have received approval to expand the trial to the pivotal
study, which is the final study before clearance can be obtained for broader
use. Because the stent will be removed from the patients within 30 to 60 days,
we expect that the trials can be completed quickly and that the regulatory
process may be expedited. However, there can be no assurance that the FDA will
not require more time consuming and extensive clinical studies or that FDA
approval will ever be obtained. We have 9 patents surrounding our inventions in
the stent product line.
LEVERAGING CORE TECHNOLOGIES
We view our cryosurgical technology as a core technology that can be
applied in the treatment of other types of cancers. In 1999, we entered into an
alliance with Sanarus Medical, Inc., a women's healthcare company, to develop
market applications in breast cancer and benign breast tumors. We are also
exploring clinical applications in cryoablation of kidney, lung and liver
tumors.
PRODUCTS
Endocare has developed the following products:
COMMERCIAL
PRODUCT NAME TARGETED INDICATION STATUS LAUNCH DATE
Cryocare-4 Probe System General Surgery Marketing May 1996
Cryocare-8 Probe System Prostate Cancer Marketing July 1999
FastTrac Prostate Cancer Marketing March 2001
CryoGuide Prostate Cancer Marketing March 2001
Horizon Prostatic Stent Acute Urinary Retention FDA Trials ------
PATENTS AND INTELLECTUAL PROPERTY
Our policy is to secure and protect intellectual property rights relating
to our technology through patenting inventions and licensing others when
necessary. While we believe that the protection of patents and licenses is
important to our business, we also rely on trade secrets, know-how and
continuing technological innovation to maintain our competitive position. Given
our technology and patent portfolio, we do not consider the operation of our
business to be materially dependent upon any one patent, group of patents or
single technological innovation.
Our policy is to sell our products under trademarks and to secure
Trademark protection in the United States and worldwide where possible. We
believe the protection of our trademarks is important to our business.
No assurance can be given that our processes or products will not infringe
patents or proprietary rights of others or that any license required would be
made available under any such patents or proprietary rights, on terms acceptable
to us or at all. From time to time, we have received correspondence alleging
infringement of proprietary rights of third parties. No assurance can be given
that any relevant claims of third parties would not be upheld as valid and
enforceable, and therefore we could be prevented from practicing the subject
matter claimed or would be required to obtain licenses from the owners of any
such proprietary rights to avoid infringement.
We seek to preserve the confidentiality of our technology by entering into
confidentiality agreements with our employees, consultants, customers and key
vendors and by other means. No assurance can be given, however, that these
measures will prevent the unauthorized disclosure or use of such technology.
SALES AND MARKETING
We derive a majority of our revenues from the sales of Cryocare Systems,
which includes the sales of associated disposable Cryoprobes, and from the sale
of disposable Cryoprobes to sites where we have placed cryosurgical systems. We
expect that sales of these products will continue to constitute the majority of
our net sales for the foreseeable future. Accordingly, any factor adversely
affecting the sales of Cryocare Systems and Cryoprobes would have a material
adverse effect on our business, financial condition and results of our
operations. We also operate a regional mobile cryosurgery business in Florida
which provides cryosurgical equipment for the treatment of prostate and liver
cancer on a procedural basis. For the years ended December 31, 1998, 1999 and
2000, the mobile cryosurgery business accounted for 20%, 33% and 11%,
respectively, of our consolidated revenues. In July 1999, HCFA implemented
national Medicare coverage for cryosurgical ablation of the prostate, one of the
approved uses of our eight probe Cryocare System. No assurance can be given
that health care professionals will adopt the technology or that reimbursement
will be sufficient enough to induce the physicians to perform the procedure. In
December 2000, HCFA approved national Medicare coverage for cryosurgical
procedures to treat prostate cancer patients who have failed radiation therapy
and the coverage is scheduled to become effective July 2001.
Until March 1999, when we exercised an option to terminate our
distribution agreement with Boston Scientific Corporation, our Cryocare System
for urological applications was distributed worldwide by Boston Scientific
(other than in Canada). For the years ended December 31, 1998 and 1999,
Boston Scientific accounted for 41% and 0%, respectively, of our consolidated
revenues. We are continuously evaluating additional international distribution
partners for our Cryocare System for urological applications as an alternative
to establishing an international sales force to sell our product. As of December
31, 2000, we have international distributorship relationships in several
countries.
We currently sell our products domestically through our direct sales force
which, as of December 31, 2000, consisted of a senior vice president of sales
and marketing, nine regional sales managers and two clinical application
specialists. Internationally, products are sold primarily through independent
distributors. Overall, international sales were insignificant in 1998 and
represented approximately 12% and 16% of our consolidated revenue in 1999 and
2000, respectively. Our distributor agreements typically provide the distributor
with exclusive selling rights to our products in a particular territory, and are
terminable by either party generally at will with advance notice. Each party
bears its own expenses in performing its obligations under the agreement. Our
ability to distribute our products internationally depends substantially on the
capabilities and efforts of our international distributors. There can be no
assurance that we will be able to maintain or expand our relationships with our
distributors or to replace a distributor in the event any such relationship is
terminated. In the event that our relationships with any of our distributors
were terminated and we were unable to replace the distribution capability, our
ability to distribute our products could be materially adversely affected, which
could have a material adverse effect on our business, financial condition and
results of operations. In addition, in such event, our current sales and
marketing personnel and financial resources might not be sufficient to enable us
to establish our own distribution capability to market and sell our products.
We sell our products primarily to physicians and hospitals and have both
domestic and international customers. No customers account for more than 10% of
our total revenues. For further information regarding our customers, see Note
12 to our consolidated financial statements.
BACKLOG
As of December 31, 2000 and 1999, we maintained minimal backlog. Our policy
is to stock enough inventory to be able to ship most orders within a few days of
receipt of order. Historically, most of our orders have been for shipment within
30 days of the placement of the order. Therefore, we rely on orders placed
during a given period for sales during that period. Backlog information as of
the end of a particular period is not necessarily indicative of future levels of
our revenue.
MANUFACTURING
We manufacture our products internally at our facility in Irvine,
California. Most of our purchased components and processes are available from
more than one vendor. However, certain components and processes are currently
available from or performed by a single vendor. The ability of third party
manufacturing sources to deliver components or finished goods will affect our
ability to commercialize our products, and our dependence on third party sources
may adversely affect our profit margins. Further, although we continuously
evaluate alternative vendors, the qualification of additional or replacement
vendors for certain components or services is a lengthy process. Any supply
interruption from a single source vendor would have a material adverse effect on
our ability to manufacture our products until a new source of supply was
qualified and, as a result, could have a material adverse effect on our
business, financial condition and results of operations.
Additionally, our success, if any, will depend in part upon our ability to
manufacture our products in compliance with the FDA's current Good Manufacturing
Practices regulations and other regulatory requirements, in sufficient
quantities and on a timely basis, while maintaining product quality and
acceptable manufacturing costs. Failure to increase production volumes in a
timely or cost effective manner or to maintain compliance with current Good
Manufacturing Practices or other regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
Manufacturers often encounter difficulties in scaling up production of
new products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel. Our
failure to overcome these manufacturing problems could have a material adverse
effect on our business, financial condition and results of operations.
Our manufacturing facility was subject to an FDA audit in September 1999,
and we did not receive notice that we failed to comply with the FDA's current
Good Manufacturing Practice regulations. In addition, we have obtained from
the California Department of Health Services a license to manufacture medical
devices, subject to periodic inspections and other regulation by that agency.
GOVERNMENT REGULATION
Governmental regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of our products. In the United States, the FDA has broad authority
under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act
to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of medical devices are subject to foreign governmental regulation and
restrictions which vary from country to country.
Medical devices intended for human use in the United States are classified
into one of three categories, depending upon the degree of regulatory control to
which they will be subject. Such devices are classified by regulation into
either class I (general controls), class II (performance standards) or class III
(pre-market approval) depending upon the level of regulatory control required to
provide reasonable assurance of the safety and effectiveness of the device. Good
Manufacturing Practices, labeling, maintenance of records and filings with the
FDA also apply to medical devices.
A subset of medical devices categorized as class I or II devices that were
commercially distributed before March 28, 1976 or are substantially equivalent
to a device that was in commercial distribution before that date may be marketed
after the acceptance of the pre-market notification under a 510(k) exemption.
Section 510(k) of the Federal Food, Drug and Cosmetic Act allows an exemption
from the requirement of pre-market notification. Generally, devices that have an
existing history or track record are included in this category.
The process of obtaining FDA and other required regulatory clearances or
approvals is lengthy and expensive. There can be no assurance that we will be
able to obtain necessary clearances or approvals for clinical testing or for
manufacturing or marketing of our products. Failure to comply with applicable
regulatory approvals can, among other things, result in warning letters, fines,
suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. In addition, governmental regulation may be established
which could prevent, delay, modify or rescind regulatory clearance or approval
of our products.
Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which our products may be marketed. In
addition, to obtain such clearances or approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on our business. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for failure
to comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. There can be no assurance that we will be able to
obtain regulatory clearances or approvals for our products on a timely basis or
at all, and delays in receipt of or failure to receive such approvals, the loss
of previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on our business,
financial condition and results of operations.
Our Cryocare System has received FDA clearance for sale in the United
States for approved urological and general surgery, gynecology and oncology
uses. In addition, we have obtained CE Mark for distribution in Europe and
product registration for distribution in Canada, Australia and New Zealand.
COMPETITION
Currently, we market cryosurgical systems and other urological products.
Significant competitors in the area of prostate cancer therapies include
Cryomedical Sciences, Inc., Galil Medical, Ltd., Theragenics Corporation and
North American Scientific, Inc. Significant competitors in the area of BPH
therapies include Urologix, Inc., VidaMed, Inc., EDAP/TMS, S.A., C.R. Bard, Inc.
and ACMI/Circon Corporation. The principal competitive factors in the
cryosurgical urology markets include efficiency, price, availability of
government or private insurance reimbursement and service. Endocare believes
that it competes favorably in each of these areas.
Many of our competitors are significantly larger than we are and have
greater financial, technical, research, marketing, sales, distribution and other
resources than we do. Additionally, we believe there will be intense price
competition for products developed in our market. There can be no assurance that
our competitors will not succeed in developing or marketing technologies and
products that are more effective or commercially attractive than any that we are
developing or marketing , or that such competitors will not succeed in obtaining
regulatory approval, introducing or commercializing any such products before we
do. Such developments could have a material adverse effect on our business,
financial condition and results of operations. Further, there can be no
assurance that, even if we are able to compete successfully, that we would do so
in a profitable manner.
EMPLOYEES
As of December 31, 2000, we had a total of 79 employees. Of the 79
employees, 13 are engaged directly in research and development activities, 6 in
regulatory affairs/quality assurance, 19 in manufacturing, 28 in sales and
marketing, and 13 in general and administrative positions. We expect to increase
employment in conjunction with the continued commercialization of the Cryocare
System and expanded research, development and clinical activities related to the
Horizon Prostatic Stent. We have never experienced a work stoppage, none of our
employees are represented by a labor organization, and we consider our employee
relations to be good.
Although we conduct most of our research and development using our own
employees, we occasionally have funded and plan to continue to fund research
using consultants. Consultants provide services under written agreements and are
paid based on the amount of time spent on our matters. Under their consulting
agreements, such consultants are required to disclose and assign to our business
any ideas, discoveries and inventions developed by them in the course of
providing consulting services.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND TRADING PRICE OF COMMON STOCK
WE HAVE A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE LOSSES
Since our inception, we have engaged primarily in research and development
and have minimal experience in manufacturing, marketing and selling our products
in commercial quantities.
We have incurred annual operating losses since inception. For the fiscal
years ended December 31, 1998, 1999, and 2000, we had net losses of
approximately $4.9 million, $9.3 million and $12.4 million, respectively. As of
December 31, 2000, our accumulated deficit was approximately $32.2 million. We
may not be able to successfully develop or commercialize our current or future
products, achieve significant revenues from sales or procedures or achieve or
sustain profitability. We expect to continue to incur operating losses because
our products will require substantial expenditures relating to, among other
matters, development, clinical testing, regulatory compliance, manufacturing and
marketing. If we do achieve profitability, we cannot be certain that we would
be able to sustain or increase profitability on a quarterly or annual basis
thereafter.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD LIMIT OUR FUTURE
REVENUE
Certain of our products, including our Cryocare System, are in the early
stages of market introduction. Our products may not be accepted by potential
customers. We believe that recommendations and endorsements of physicians and
patients and sufficient reimbursement by health care payers will be essential
for market acceptance of our Cryocare System and other products, and these
recommendations and endorsements may not be obtained and sufficient
reimbursement may not be forthcoming. Cryosurgery has existed for many years,
but has not been widely accepted due to concerns regarding safety and efficacy
and widespread use of alternative therapies. Our ability to successfully market
our Cryocare System is dependent upon acceptance of cryosurgical procedures in
the United States and certain international markets. Any future reported
adverse events or other unfavorable publicity involving patient outcomes from
the use of cryosurgery, whether from our products or the products of our
competitors, could adversely affect acceptance of cryosurgery. Emerging new
technologies and procedures to treat cancer, prostate enlargement and other
prostate disorders also may negatively affect the market acceptance of
cryosurgery. Our Cryocare System and our other products may not gain any
significant degree of market acceptance among physicians, patients and health
care payers. If our products do not achieve market acceptance, our future
revenue will be limited.
WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR MARKETING OUR PRODUCTS
Our growth depends in large part on continued ability to successfully
develop and commercialize our current products under development or any new
products. Several of our products are in varying stages of development. Our
stent is in clinical trials and has not been approved for marketing in the
United States. We also are developing enhancements to our Cryocare System. We
may experience difficulties that could delay or prevent the successful
development and commercialization of our current products under development or
any new products. Our products in development may not prove safe and effective
in clinical trials. Clinical trials may identify significant technical or other
obstacles that must be overcome prior to obtaining necessary regulatory or
reimbursement approvals. Our failure to successfully develop and commercialize
new products or to achieve significant market acceptance would have a
significant negative effect on our financial condition.
THERE IS UNCERTAINTY RELATING TO THIRD PARTY REIMBURSMENT WHICH IS CRITICAL TO
MARKET ACCEPTANCE OF OUR PRODUCTS
In the United States, health care providers, such as hospitals and
physicians, that purchase our products generally rely on third party payers,
principally federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or part of the cost of medical procedures involving our
products. While certain private health insurance companies pay for the
procedures in which our products are used in certain areas of the United States,
private insurance reimbursement may not be adopted nationally or by additional
insurers and may be terminated by those private insurance companies currently
paying for procedures in which our products are used. Reimbursement levels from
Medicare or private insurers may not be sufficient to induce physicians to
perform, and patients to elect, procedures utilizing our products. Further, we
anticipate that, under the prospective payment system used by private health
care payers, the cost of our products will be incorporated into the overall cost
of the procedures in which they are used and that there will be no separate,
additional reimbursement for our products. This also may discourage the use of
our products. Furthermore, we could be negatively affected by changes in
reimbursement policies of government or private health care payers, particularly
to the extent any such changes affect reimbursement for procedures in which our
products are used. Failure by physicians, hospitals and other users of our
products to obtain sufficient reimbursement from health care payers for
procedures involving our products could have a significant negative effect on
our financial condition.
Furthermore, significant attention is placed on reforming the healthcare
system in the United States and other countries. Any changes in Medicare or
third party medical expense reimbursement which may arise from healthcare reform
would likely have a material adverse effect on the price for our products. In
addition, changes to the healthcare system may also affect the commercial
acceptance of products we are currently developing and products we may develop
in the future. Several proposals have been made in the United States Congress
and various state legislatures recently that, if adopted, would reform the
healthcare system in the United States and potentially reduce healthcare
spending which may result in a material adverse effect on our business.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE
We have limited sales and marketing experience and if we are unable to
expand our sales and marketing capabilities, we may not be able to effectively
commercialize our products. We have limited experience marketing and selling
our products, and do not have experience marketing and selling our products in
commercial quantities.
We derive the majority of our revenues from the sales of Cryocare Systems
and expect that sales of Cryocare Systems will continue to constitute the
majority of sales for the foreseeable future. Any factor negatively impacting
the sales or usage of Cryocare Systems would have a significant effect on our
business. In March 1999, we exercised our right to terminate our exclusive
worldwide distribution agreement with Boston Scientific Corporation pursuant to
which Boston Scientific had agreed to market and distribute the Cryocare System,
our principal product. As a result, future sales of the Cryocare System will be
dependent on our marketing efforts. We may not be able to successfully expand
our sales and marketing capabilities in order to effectively commercialize the
Cryocare System product.
We believe that, to become and remain competitive, we will need to develop
additional third party international distribution channels and a direct sales
force for our products. If we enter into third party marketing arrangements,
our percentage share of product revenues is likely to be lower than if we
directly marketed and sold our products through our own sales force.
Establishing marketing and sales capabilities sufficient to support sales in
commercial quantities will require significant resources. We may not be able to
recruit and retain direct sales personnel, succeed in establishing and
maintaining any third party distribution channels or succeed in our future sales
and marketing efforts.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF THIRD PARTY SUPPLIERS TO MANUFACTURE
OUR PRODUCTS
We depend upon a limited number of unaffiliated third party suppliers for
components and materials used in the manufacture of our products and, as such,
our business would be seriously harmed if we were unable to develop and maintain
relationships with suppliers that allow us to obtain sufficient quantities and
quality materials and components on acceptable terms. If our principal
suppliers cease to supply the materials and components we need to manufacture
our products, there may not be adequate alternatives to meet our needs, which
will have a material adverse effect on our business. To date, we have been able
to obtain the necessary components and materials used in the manufacture of our
products without material delays, however, there can be no assurance that we
will be able to obtain the necessary components and materials used in our
products in the future on a timely basis, if at all.
WE ARE DEPENDENT ON ADEQUATE PROTECTION OF OUR PATENT AND PROPRIETARY RIGHTS
We may not be able to obtain effective patents to protect our technologies
from use by other companies with competitive products, and patents of other
companies could prevent us from developing or marketing our products. Our
success will depend, to a significant degree, on our ability to secure and
protect intellectual proprietary rights and enforce patent and trademark
protections relating to our technology. While we believe that the protection of
patents or licenses is important to our business, we also rely on trade secrets,
know-how and continuing technological innovation to maintain our competitive
position. We cannot ensure that (1) we were the first to invent the technologies
covered by our patents or pending patent applications, (2) we were the first to
file patent applications for these inventions, (3) any of our pending patent
applications will result in issued patents, (4) others will not independently
develop similar or alternative technologies or duplicate any of our
technologies, (5) our patents will provide a basis for commercially viable
products or will provide us with any competitive advantages, and (6) our
processes or products do not or will not infringe patents or proprietary rights
of others. We are currently involved in a patent infringement lawsuit initiated
by us in the U.S. District Court for the Central District of California against
a competitor. The complaint seeks damages and injunctive relief to prevent this
competitor from marketing cryosurgical systems and components incorporating our
patented combination of cryocooling, ultrasound and temperature monitoring
technology. Counterclaims have been made against us by the competitor in this
litigation alleging that our cryosurgical system infringes on the competitor's
proprietary rights. This litigation and any other litigation necessary to
protect our patent position could be costly, and it is possible that we will not
have sufficient resources to fully pursue this litigation or to protect our
other patent rights and could result in the rejection or invalidation of our
existing and future patents, if any. If we are unsuccessful in this lawsuit our
competitors may be able to use certain or of our cryosurgical systems
technology. This outcome, or any adverse outcome in litigation relating to the
validity of our patents, or any other failure to pursue litigation or otherwise
to protect our patent position, could materially harm our business and financial
condition. In addition, from time to time, we have received correspondence
alleging infringement of proprietary rights of third parties. We may have to
pay substantial damages, possibly including treble damages, for past
infringement if it is ultimately determined that our products infringe a third
party's patents. Further, we may be prohibited from selling our products before
we obtain a license, which, if available at all, may require us to pay
substantial royalties. Even if infringement claims against us are without
merit, defending a lawsuit takes significant time, may be expensive and may
divert management attention from other business concerns. We try to preserve
the confidentiality of our technology be entering into confidentiality
agreements with our employees, consultants, customers, and key vendors and by
other means. These measures may not, however, prevent the unauthorized
disclosure or use of such technology. It is possible that these agreements will
be breached or that they will not be enforceable in every instance, and that we
will not have adequate remedies for any such breach. In addition, enforcement
of these agreements may be costly and time consuming.
WE ARE FACED WITH INTENSE COMPETITION AND RAPID TECHNOLOGICAL AND INDUSTRY
CHANGE
We are faced with intense competition and rapid technological and industry
change and, if our competitors' existing products or new products are more
effective than our products, the commercial opportunity for our products will be
reduced or eliminated. The commercial opportunity for our products will be
reduced or eliminated if our competitors develop and market products that are
superior to our products. We face intense competition from other surgical
device manufacturers, as well as, in some cases, from pharmaceutical companies.
Many of our competitors are significantly larger than us and have greater
financial, technical, research, marketing, sales, distribution and other
resources than us. We believe there will be intense price competition for
products developed in our markets. Our competitors may develop or market
technologies and products, including drug-based treatments, that are more
effective or commercially attractive than any that we are developing or
marketing. Our competitors may succeed in obtaining regulatory approval, and
introducing or commercializing products before we do. Such developments could
have a significant negative effect on our financial condition. Even if we are
able to compete successfully, we may not be able to do so in a profitable
manner. The medical device industry generally, and the urological disease
treatment market in particular, are characterized by rapid technological change,
changing customer needs, and frequent new product introductions. Our products
may be rendered obsolete as a result of future innovations.
WE MAY NEED ADDITIONAL LONG TERM FINANCING
If we undertake or accelerate significant research and development projects
for new products or pursue corporate acquisitions, we may require additional
outside financing. Such additional funds may be raised through the sale of our
equity securities or the incurrence of additional debt or through collaborative
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
us to relinquish rights to certain of our technologies, products or marketing
territories. Our failure to raise capital when needed could have a significant
negative effect on our business, operating results, financial condition and
prospects.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited experience in producing our products in commercial
quantities. Manufacturers often encounter difficulties in scaling up production
of new products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel. Our
failure to overcome these manufacturing problems could negatively impact our
business and financial condition. We use internal manufacturing capacity in our
manufacturing efforts. Certain of our purchased components and processes are
currently available from or performed by a single vendor. Any supply
interruption from a single source vendor would have a significant negative
effect on our ability to manufacture our products until a new source of supply
is qualified and, as a result, could have a significant negative effect on our
business and financial condition. Our success will depend in part upon our
ability to manufacture our products in compliance with the FDA's Good
Manufacturing Practices regulations and other regulatory requirements in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. Failure to increase production volumes in a
timely or cost-effective manner or to maintain compliance with the FDA's Good
Manufacturing Practices or other regulatory requirements could have a
significant negative effect on our financial condition.
WE ARE DEPENDENT ON KEY PERSONNEL
Failure to attract and retain skilled personnel could hinder our research
and development and sales and marketing efforts. Our future success depends to a
significant degree upon the continued services of key technical and senior
management personnel, including Paul W. Mikus, our Chief Executive Officer.
None of these individuals is bound by an employment agreement or covered by an
insurance policy of which we are the beneficiary. Our future success also
depends on our continuing ability to attract, retain and motivate highly
qualified managerial, technical and sales personnel. The inability to retain or
attract qualified personnel could have a significant negative effect upon our
research and development and sales and marketing efforts and thereby materially
harm our business and financial condition.
GOVERNMENT REGULATION CAN HAVE A SIGNIFICANT IMPACT ON OUR BUSINESS
Government regulation in the United States and other countries is a
significant factor affecting the research and development, manufacture and
marketing of our products. In the United States, the FDA has broad authority
under the federal Food, Drug and Cosmetic Act and the Public Health Service Act
to regulate the distribution, manufacture and sale of medical devices. Foreign
sales of drugs and medical devices are subject to foreign governmental
regulation and restrictions which vary from country to country. The process of
obtaining FDA and other required regulatory approvals is lengthy and expensive.
We may not be able to obtain necessary approvals for clinical testing or for the
manufacturing or marketing of our products. Failure to comply with applicable
regulatory approvals can, among other things, result in fines, suspension of
regulatory approvals, product recalls, operating restrictions, and criminal
prosecution. In addition, governmental regulations may be established which
could prevent, delay modify or rescind regulatory approval of our products. Any
such position by the FDA, or change of position by the FDA, may adversely impact
our business and financial condition. Regulatory approvals, if granted, may
include significant limitations on the indicated uses for which our products may
be marketed. In addition, to obtain such approvals, the FDA and foreign
regulatory authorities may impose numerous other requirements on us. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals can be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. We may not be able to obtain regulatory
approvals for our products on a timely basis, or at all, and delays in receipt
of or failure to receive such approvals, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory requirements
would have a significant negative effect on our financial condition. In
addition, the health care industry in the United States is generally subject to
fundamental change due to regulatory, as well as political, influences. We
anticipate that Congress and state legislatures will continue to review and
assess alternative health care delivery and payment systems. Potential
approaches that have been considered include controls on health care spending
through limitations on the growth of private purchasing groups and price
controls. We cannot predict what impact the adoption of any federal or state
health care reform measures may have on our business.
We, our distributors and healthcare providers who purchase our products and
services are subject to state and federal laws prohibiting kickbacks or other
forms of bribery in the healthcare industry. We may be subject to civil and
criminal prosecution and penalties if we or our agents violate any of these
laws.
WE MAY BE NEGATIVELY IMPACTED BY PRODUCT LIABILITY AND PRODUCT RECALL
The manufacture and sale of medical products entails significant risk of
product liability claims or product recalls. Our existing insurance coverage
limits may not be adequate to protect us from any liabilities we might incur in
connection with the clinical trials or sales of our products. We may require
increased product liability coverage as our products are commercialized.
Insurance is expensive and may not be available on acceptable terms, or at all.
A successful product liability claim or series of claims brought against us in
excess of our insurance coverage, or a recall of our products, could have a
significant negative effect on our business and financial condition. Even
unsuccessful claims could result in the expenditure of funds and management time
and could have a negative impact on our business.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS
If our revenue declines in a quarter from the revenue in the previous
quarter our earnings will likely decline because many of our expenses are
relatively fixed. In particular, research and development, sales and marketing
and general and administrative expenses are not affected directly by variations
in revenue. In some future quarter or quarters, due to a decrease in revenue or
for some other reason, our operating results likely will be below the
expectations of securities analysts or investors. In this event, the market
price of our common stock may fall abruptly and significantly.
OUR BUSINESS IS EXPOSED TO RISKS RELATED TO ACQUISITIONS AND MERGERS
As part of our strategy to commercialize our products, we may acquire one
or more businesses, such as a related company that would use our products in
clinical applications. In June 1999, we consummated a business combination with
Advanced Medical Procedures, LLC, a regional mobile cryosurgery service company
that provides our cryosurgical equipment for the treatment of prostate and liver
cancer on a procedural basis. We may not be able to effectively integrate our
business with any other business we may acquire or merge with or effectively
utilize the business acquired to develop and market our products. The failure
to integrate an acquired company or acquired assets into our operations may
cause a drain on our financial and managerial resources, and thereby have a
significant negative effect on our business and financial results.
These difficulties could disrupt our ongoing business, distract our
management and employees or increase our expenses. Furthermore, any physical
expansion in facilities due to an acquisition may result in disruptions that
seriously impair our business. We are not experienced in managing facilities or
operations in geographically distant areas. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets. Finally, in connection with any future
acquisitions, we may incur debt or issue equity securities as part or all of the
consideration for the acquired company's assets or capital stock. We may be
unable to obtain sufficient additional financing on favorable terms or at all.
Equity issuances would be dilutive to our existing stockholders.
OUR COMMON STOCK HAS A LIMITED MARKET AND TRADING HISTORY
If we fail to satisfy the continued listing requirements of the Nasdaq
National Market or Nasdaq SmallCap Market, our stock could become subject to the
SEC's Penny Stock Rules, making the stock difficult to sell. Our common stock
began trading on the Nasdaq SmallCap Market on February 28, 1997 and in May 2000
was listed and is currently traded on the Nasdaq National Market. If we are
unable to maintain the standards for quotation on the Nasdaq National Market or
the Nasdaq SmallCap Market, the ability of our investors to resell their shares
may be limited. In addition, our securities may be subjected to "penny stock"
rules that impose additional sales practice and market making requirements on
broker-dealers who sell or make a market in such securities. This could affect
the ability or willingness of broker-dealers to sell or make a market in our
securities and the ability of holders of our securities to sell their securities
in the secondary market.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY
Our stock price may fluctuate significantly, making it difficult to resell
shares when an investor wants to at prices they find attractive. The market
prices for securities of emerging companies have historically been highly
volatile. Future announcements concerning us or our competitors could cause
such volatility including: our operating results, technological innovations or
new commercial products, corporate collaborations, government regulation,
developments concerning proprietary rights, litigation or public concern as to
the safety of our products, investor perception of us and our industry, and
general economic and market conditions. In addition, the stock market is
subject to price and volume fluctuations that affect the market prices for
companies in general, and small-capitalization, high technology companies in
particular, which are often unrelated to the operating performance of these
companies.
THE FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK
PRICE
Future sales of our common stock (including shares issued upon the exercise
of outstanding options and warrants and the conversion of convertible
debentures) could have a significant negative effect on the market price of our
common stock. Such sales also might make it more difficult for us to sell
equity securities or equity-related securities in the future at a time and price
that we would deem appropriate.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER MAY HAVE A POSSIBLE NEGATIVE EFFECT ON
OUR STOCK PRICE
Certain provisions of our Certificate of Incorporation and Bylaws may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. In March
1999, our board of directors adopted a stockholder rights plan in which
preferred stock purchase rights were distributed as a dividend. These
provisions may make it more difficult for stockholders to take certain
corporation actions and may have the effect of delaying or preventing a change
in control. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. This section provides that
a corporation shall not engage in any business combination with any interested
stockholder during the three-year period following the time that such
stockholder becomes an interested stockholder. This provision could have the
effect of delaying or preventing a change of control of Endocare. The foregoing
factors could limit the price that certain investors might be willing to pay in
the future for shares of our common stock.
CALIFORNIA ENERGY CRISIS
Our headquarters and principal operations are located in Orange County,
California. California has recently found itself in a utility crisis caused, in
part, by a lack of affordable power sources and the financial instability of
several of its primary power suppliers. Orange County has undergone several
periods of "rolling blackouts," a technique used by our power provider to
conserve its resources. Although our operations have not been halted as a
result of these conservation measures, potential suspensions of our operations
due to power disruptions could result in materially higher costs and lost
revenues, either of which would materially adversely impact our business,
financial condition and results of operations.
ITEM 2. PROPERTIES
We currently occupy approximately 16,000 square feet of office,
manufacturing, engineering, warehouse, and research and development space in
Irvine, California. The property is leased through March 2002. We also occupy
approximately 1,320 square feet of office space in Winter Park, Florida. The
property is leased through March 2002. We believe the leased properties satisfy
our current needs.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, we filed patent infringement lawsuits against Israeli-based
Galil Medical, Ltd., and its U.S. affiliate, Galil Medical USA, Inc.
(collectively, "Galil"). The suit against Galil filed in the U.S. District
Court for the Central District of California, alleges that Galil has marketed
and sold cryosurgical systems that infringe our patented combination of
cryocooling, ultrasound and temperature monitoring technology. Our suit seeks
damages and injunctive relief with respect to products and procedures which are
found to infringe our proprietary technology. In August 2000, Galil submitted
counterclaims alleging that our cryosurgical probes infringe Galil's probe
patents. Galil seeks unspecified damages and injunctive relief with respect to
our cryosurgical system. We believe we have adequate defenses to these claims
and intend to defend the litigation vigorously if necessary. All proceedings in
the action were stayed by the District Court on December 13, 2000 pending the
outcome of the settlement discussions by the parties. The parties are currently
engaged in settlement discussions. We do not expect any material adverse effect
on our consolidated financial condition or the results of operations because of
such actions.
In March 2000, we filed a similar suit to the one discussed above against
Cryomedical Sciences, Inc. In December 2000, the parties reached a settlement in
this action. In the settlement agreement, CMSI stipulated for purposes of the
agreement that our patent combining cryo-cooling, ultrasound and temperature
monitoring technology is valid and enforceable. On December 20, 2000, as part
of the settlement, the District Court signed a Consent Judgment validating the
settlement agreement in which CMSI stipulated for purposes of the agreement that
our patent combining cryo-cooling, ultrasound and temperature monitoring
technology is valid and enforceable. The settlement resulted in certain
cross-licensing agreements.
In the normal course of business, we are subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, we believe that the final outcome of these matters will not have a
material adverse effect on our consolidated results of operations or financial
condition.
From time to time, we have received other correspondence alleging
infringement of proprietary rights of third parties. No assurance can be given
that any relevant claims of third parties would not be upheld as valid and
enforceable, and therefore that we could be prevented from practicing the
subject matter claimed or would be required to obtain licenses from the owners
of any such proprietary rights to avoid infringement. We do not expect any
material adverse effect on our consolidated financial condition or the results
of operations because of such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock began trading on the Nasdaq SmallCap Market on February
28, 1997 and on May 23, 2000 was listed and is currently traded on the Nasdaq
National Market System under the symbol "ENDO". Between February 20, 1996 and
February 27, 1997, our common stock was traded on the over-the-counter market on
the Nasdaq Electronic Bulletin Board under the symbol "ENDO." The following
table sets forth the high and low closing prices for our common stock during the
periods indicated as quoted on the Nasdaq SmallCap Market or Nasdaq National
Market:
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
1999 2000
----- -----
HIGH LOW HIGH LOW
----- ----- ------ ------
Fourth quarter $8.94 $5.31 $19.44 $12.44
Third quarter. $8.25 $5.00 $21.38 $16.00
Second quarter $6.00 $3.06 $20.25 $11.88
First quarter. $6.00 $2.03 $21.75 $ 9.00
As of March 13, 2001, the closing price of our common stock was $11.25.
Also, as of that date, we had approximately 326 stockholders of record. On
March 13, 2001 there were 15,212,030 shares of our common stock issued and
outstanding.
In March 1999, our Board of Directors adopted a Stockholder Rights Plan in
which preferred stock purchase rights were distributed as a dividend at the rate
of one preferred stock purchase right for each share of common stock held as of
the close of business on April 15, 1999. The preferred stock purchase rights are
designed to guard against partial tender offers and other coercive tactics that
might be used in an attempt to gain control of Endocare or to deprive
stockholders of their interest in the long-term value of our business. The
preferred stock purchase rights will be exercisable only if a person or group
acquires 15% or more of our common stock (subject to certain exceptions stated
in the Stockholder Rights Plan) or announces a tender offer, the consummation of
which would result in ownership by a person or a group of 15% or more of our
common stock. Each preferred stock purchase right will entitle stockholders to
buy one one-thousandth of a share of a new series of junior participating
preferred stock at an exercise price of $25 upon certain events. If a person or
group acquires 15% or more of our outstanding common stock (subject to certain
exceptions stated in the Stockholder Rights Plan), or a holder of 15% or more of
our common stock engages in certain self-dealing transactions or a merger
transaction in which we are the surviving corporation and our common stock
remains outstanding, then each preferred stock purchase right not owned by such
person or group or certain related parties will entitle its holder to purchase,
at the preferred stock purchase right's then-current exercise price, units of
our Series A Preferred Stock (or, in certain circumstances, our common stock,
cash, property or other securities of Endocare) having a market value equal to
twice the then-current exercise price. In addition, if, after the preferred
stock purchase rights become exercisable, we are acquired in a merger or other
business combination transaction, or sell 50% or more of our assets or earnings
power, each stock purchase right will entitle its holder to purchase, at the
preferred stock purchase right's then-current price, a number of the acquiring
company's common shares having a market value at the time of twice the preferred
stock purchase right's exercise price. At any time on or prior to the close of
business on the first date of a public announcement that a person or group has
acquired beneficial ownership of 15% or more of our common stock (subject to
certain exceptions stated in the Stockholder Rights Plan), the preferred stock
purchase rights are redeemable for one cent per stock purchase right at the
option of our Board of Directors. The preferred stock purchase rights are
intended to enable all stockholders to realize the long-term value of their
investment in our business. The preferred stock purchase rights will not
prevent a takeover attempt, but should encourage anyone seeking to acquire our
business to negotiate with our Board of Directors prior to attempting to a
takeover. The dividend distribution was made on April 15, 1999 to the
stockholders of record on that date. The preferred stock purchase rights will
expire on April 15, 2009.
We have not paid any cash dividends on our common stock and do not intend
to pay any cash dividends in the foreseeable future. We are precluded from
paying cash dividends under our existing debt agreement without first obtaining
the consent of our creditor.
On November 22, 2000, we entered into a common stock purchase agreement
with SAFECO 401(k) Savings Plan, SAFECO Common Stock Trust, SAFECO Resource
Series Trust, Narragansett I, L.P, Narragansett Offshore, Ltd., and SDS Merchant
Fund, L.P. Pursuant to a purchase agreement, on November 24, 2000, we sold an
aggregate of 1,509,440 shares of our common stock to the investors at
a price of $13.25 per shares and issued warrants to purchase up to an aggregate
of 188,680 shares of our common stock to the investors at an exercise price of
$13.9125 per share. The issued warrants resulted in total gross proceeds of
$20,000,080 to our business (before deducting fees and expenses of approximately
$1.7 million). The issued warrants are exercisable for a term of five years
from the date of issuance. We agreed to register the resale by the investors of
the shares and the shares of common stock issuable upon exercise of the
warrants. The shares and warrants were sold pursuant to an exemption from
registration under the Securities Act of 1933, as amended, by virtue of Rule 506
of Regulation D under such act. We also granted the investors the right to
purchase, subject to certain exceptions and restrictions, a pro rata portion
of any of our capital stock (including securities convertible into or
exercisable for capital stock) which we may, from time to time, propose to sell
and issue. Such right expires upon the first anniversary of the effective date
of the registration statement described above. PaineWebber Incorporated acted
as the placement agent and received a 6% fee for the sale of our common
stock and warrants.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of our business for
the years ended December 31, 1996, 1997, 1998, 1999 and 2000.
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998 1999 2000
----------- ----------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues:
Net product sales . . . . . . . . . . . $ 1,878 $ 1,918 $ 1,363 $ 2,329 $ 5,968
Mobile cryosurgical procedures. . . . . 148 347 490 1,133 703
Revenue from collaborative agreements . 250 83 642 -- --
Research revenue from related party . . 1 -- -- -- --
----------- ----------- ------------ ------------ ------------
Total revenues. . . . . . . . . . . . . 2,277 2,348 2,495 3,462 6,671
----------- ----------- ------------ ------------ ------------
Costs and expenses:
Cost of product sales . . . . . . . . . 994 1,271 974 1,255 2,607
Cost of mobile cryosurgical procedures. 59 151 209 429 405
Research and development. . . . . . . . 1,023 1,596 1,920 2,574 3,204
Selling, general and administrative . . 1,410 3,553 4,653 7,992 12,230
Impairment loss on long-lived assets. . 325 -- -- -- --
----------- ----------- ------------ ------------ ------------
Total costs and expenses. . . . . . . . 3,811 6,571 7,756 12,250 18,446
----------- ----------- ------------ ------------ ------------
Loss from operations. . . . . . . . . . (1,534) (4,223) (5,261) (8,788) (11,775)
Interest income (expense), net. . . . . (29) 201 336 (476) ( 624)
----------- ----------- ------------ ------------ ------------
Net loss. . . . . . . . . . . . . . . . $ (1,563) $ (4,022) $ (4,925) $ (9,264) $ (12,399)
=========== =========== ============ ============ ============
Net loss per share. . . . . . . . . . . $ (.27) $ (.48) $ (.49) $ (.86) $ (.97)
=========== =========== ============ ============ ============
Weighted average shares outstanding . . 5,895,000 8,307,000 10,062,000 10,838,000 12,757,000
=========== =========== ============ ============ ============
BALANCES AT DECEMBER 31,
------------------------
1996 1997 1998 1999 2000
------- ------ ------ -------- -------
(IN THOUSANDS)
Balance Sheet Data:
-------------------
Working capital . . . . . . . . . . . . $ 595 $3,718 $5,544 $ 6,445 $19,452
Total assets. . . . . . . . . . . . . . 1,952 5,691 7,992 12,996 28,845
Long-term debt. . . . . . . . . . . . . 771 44 201 10,153 7,574
Total shareholders' equity (deficiency) (17) 3,960 6,011 (480) 14,869
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may be deemed to contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended and are subject to the Safe Harbor provisions created by that statute.
Our business and results of operations are subject to risks and uncertainties
including, but not limited to, those discussed under the caption "Factors That
May Affect Future Results and Trading Price of Common Stock" included elsewhere
in this report, and in risk factors contained in other periodic reports filed
with the Securities and Exchange Commission. Such risk factors include, but are
not limited to, limited operating history of our business with a history of
losses; fluctuations in our order levels; uncertainty regarding market
acceptance of our new products; uncertainty of product development and the
associated risks related to clinical trials; the rapid pace of technological
change in our industry; our limited sales, marketing and manufacturing
experience, and the ability to convince health care professionals and third
party payers of the medical and economic benefits of our Cryocare System. The
actual results that we achieve may differ materially from any forward-looking
statements due to such risks and uncertainties.
GENERAL
We are a vertically-integrated medical device company that develops,
manufactures and markets cryosurgical and stent technologies for applications in
oncology and urology. We have concentrated on developing devices for the
treatment of the two most common diseases of the prostate, prostate cancer and
benign prostate hyperplasia. We are also developing cryosurgical technologies
for treating tumors in other organs, including the kidney, breast and liver.
Since our formation in 1990, we operated first as a research and development
department, then later as a division of Medstone International, Inc. Effective
January 1, 1996, we became an independent, publicly-owned corporation upon being
spun-out to existing Medstone shareholders.
We derive revenues primarily from the sale of our Cryocare Systems, related
disposable Cryoprobes and revenue from mobile cryosurgical procedures.
Revenue's are recognized upon the shipment of products, or in the case of our
mobile cryosurgical procedures, upon the completion of procedures. Under our
cryosurgical system placement program, a system is placed at a customer site for
use with our disposable Cryoprobes. The cost of the system is depreciated into
product cost of sales over an estimated useful life of three years.
We have incurred losses since our inception. As of December 31, 2000, we
had an accumulated deficit of $32.2 million. These losses and accumulated
deficit have resulted from significant costs incurred in the development of the
cryosurgery and stent technology platforms, clinical studies and establishing
our infrastructure to launch our products. We intend to continue to invest
heavily in research, development, clinical studies, sales and marketing, and
general administrative infrastructure. As a result, we do not expect to be
profitable in the near future. Although we have experienced revenue growth
in recent periods, operating results for future periods are subject to
numerous uncertainties. In view of the rapidly evolving nature of the business
and our limited operating history, period-to-period comparisons of operating
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. There can be no assurance that we will be
able to achieve or sustain profitability.
On June 30, 1999, we acquired all the outstanding membership interests of
Advanced Medical Procedures, LLC, a Florida limited liability company. AMP
operates a mobile cryosurgery business which provides cryosurgical equipment for
the treatment of prostate and liver cancer on a per procedure basis. The merger
was accounted for as a pooling-of-interests for financial reporting purposes.
The historical financial statements for the periods prior to the merger are
restated as though our businesses had been combined during such periods.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues.
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
------ ------ ------
Revenues:
Net product sales. . . . . . . . . . . 55% 67% 89%
Mobile cryosurgical procedures . . . . 20 33 11
Revenue from collaborative agreements. 25 -- --
------ ------ -----
Total revenues . . . . . . . . . . . 100% 100% 100%
------ ------ -----
Costs and expenses:
Cost of product sales. . . . . . . . . 39% 36% 39%
Cost of mobile cryosurgical procedures 8 13 6
Research and development . . . . . . . 77 74 48
Selling, general and administrative. . 187 231 183
------ ------ -----
Total costs and expenses . . . . . . 311 354 276
----- ----- -----
Loss from operations. . . . . . . . . . (211) (254) (177)
Interest income (expense), net. . . . . 14 (14) ( 9)
----- ----- -----
Net loss. . . . . . . . . . . . . . . . (197)% (268)% (186)%
====== ===== =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Product revenue for the year ended December 31, 2000 increased 156% to
$5,968,000 compared to $2,329,000 in 1999. The increase was attributable
primarily to increased sales of our Cryocare System and related disposable
Cryoprobes following Medicare's July 1, 1999 implementation of national coverage
for localized prostate cancer. We have also experienced increased general
surgery system sales in Asia in 2000.
Revenue from mobile cryosurgical procedures for the year ended December 31,
2000 decreased 38% to $703,000 compared to $1,133,000 in 1999. The decrease
corresponds to a decline in the number of mobile cryosurgical procedures
performed in 2000, including a reduction in higher revenue liver cryosurgical
procedures.
Gross margins on product sales were 56% for the year ended December 31,
2000 compared to 46% in 1999. The increase is due to a mix of higher margin
cryosurgical probe and system sales in 2000 coupled with a reduction in product
costs due to manufacturing efficiencies associated with increased production.
Gross margin on mobile cryosurgical procedures was 42% for the year ended
December 31, 2000 compared to 62% in 1999. The change in margins is
attributable to procedure mix, including fewer higher margin cryosurgical liver
procedures performed in 2000.
Research and development expense increased 24% to $3,204,000 for the year
ended December 31, 2000 compared to $2,574,000 in 1999. The increase reflects
the investment we have made in the form of additional personnel and related
infrastructure to support improvement in our Cryocare System product, new
product development efforts and clinical costs associated with the Horizon
Prostatic Stent.
Selling, general and administrative expense increased 53% to $12,230,000
for the year ended December 31, 2000 compared to $7,992,000 in 1999. This
increase reflects increased sales and marketing costs, including increased sales
commissions, associated with the commercialization of our cryosurgical product
for prostate cancer and an average increase of approximately 60% in our direct
sales and marketing personnel between periods.
Interest income (expense), net was ($624,000) for the year ended December
31, 2000 compared to ($476,000) in 1999. The change was due to interest expense
associated with the issuance of debt in the middle of 1999 and 2000, including
corresponding amortization of deferred financing costs, partially offset by
interest income.
Our net loss for the year ended December 31, 2000 was $12,399,000 or 97
cents per share on 12,757,000 weighted average shares outstanding, compared to a
net loss of $9,264,000, or 86 cents per share on 10,838,000 weighted average
shares outstanding for the same period in 1999. The increase in net loss
resulted from higher research and development costs, higher selling, general and
administrative expenses and increased interest expense partially offset by
increased revenues and lower cost of sales as a percentage of sales.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Product revenue for the year ended December 31, 1999 increased 71% to
$2,329,000 compared to $1,363,000 in 1998. The increase was attributable to
the third quarter 1999 launch of our cryosurgical technology in conjunction with
Medicare's July 1, 1999 implementation of national coverage for this treatment
protocol for localized prostate cancer.
Revenue from our mobile cryosurgical procedures for the year ended December
31, 1999 increased 131% to $1,133,000 compared to $490,000 in 1998. The
increase corresponds to a greater number of procedures performed in 1999 as a
result of increased sales and marketing efforts.
Revenue from collaborative agreements for the year ended December 31, 1999
was zero compared to $642,000 in 1998. The 1998 amount represented a licensing
fee and the respective quarters' amortization of a lump-sum payment from Boston
Scientific Corporation based upon a previous distribution agreement entered into
in November 1996. The distribution agreement with Boston Scientific was
terminated by us in March 1999.
Gross margins on our product sales were 46% for the year ended December 31,
1999 compared to 29% in 1998. The increase is due to a mix of higher margin
cryosurgical probe and system sales in 1999 coupled with a reduction in product
costs due to manufacturing efficiencies associated with increased production.
Gross margin on our mobile cryosurgical procedures was 62% for the year
Ended December 31, 1999 compared to 57% in 1998. The change in margins is
attributable to procedure mix and higher surgery rental rates in 1998.
Our Research and development expense increased 34% to $2,574,000 for the
year ended December 31, 1999 compared to $1,920,000 in 1998. The increase
reflects the investment we have made in the form of additional personnel and
related infrastructure to support general product improvement, new product
development efforts and clinical costs associated with the Horizon Prostatic
Stent.
Selling, general and administrative expense increased 72% to $7,992,000 for
the year ended December 31, 1999 compared to $4,653,000 in 1998. This increase
reflects increased sales and marketing costs associated with the mid-1999 launch
of our cryosurgical product for prostate cancer and an almost doubling of our
direct sales and marketing personnel between periods.
Interest income (expense), net was ($476,000) for the year ended December
31, 1999 compared to $337,000 in 1998. The change was due to interest expense
associated with the issuance of convertible debentures and a note payable in
1999, including corresponding amortization of deferred financing costs, offset
by interest income.
Our net loss for the year ended December 31, 1999 was $9,264,000, or 86
cents per share on 10,838,000 weighted average shares outstanding, compared to a
net loss of $4,925,000, or 49 cents per share on 10,062,000 weighted average
shares outstanding for the same period in 1998. The increase in net loss
resulted from higher research and development costs, higher selling, general and
administrative expenses and increased interest expense partially offset by
increased revenues and lower cost of sales as a percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations since inception primarily through private
placements of equity securities, loans that were subsequently converted into
equity securities, convertible debentures, sales to customers, licensing fees
from a former distributor, a credit facility, interest on investments, and the
proceeds from the exercise of outstanding options and warrants.
At December 31, 2000, our cash and cash equivalents balance was
$22,016,000, compared to $7,365,000 at December 31, 1999. This increase was
provided primarily by the 2000 financing transactions discussed below offset by
cash used in operating activities. At December 31, 2000, net working capital was
$19,452,000, and the ratio of current assets to current liabilities was 4 to 1.
For the year ended December 31, 2000, net cash used by operating activities
was approximately $10.7 million compared to $8.4 million and $4.3 million for
the years ended December 31, 1999 and 1998, respectively. Working capital has
been used as our operations have increased in 2000. Net accounts receivable
increased to $2,114,000 at December 31, 2000, compared to $958,000 at December
31, 1999. The increase resulted primarily from a corresponding increase in
product sales in conjunction with the commercialization of our cryosurgical
technology for prostate cancer. Inventories increased to $1,544,000 at December
31, 2000 compared to $1,279,000 at December 31, 1999. Property and equipment
additions during 2000 were approximately $230,000 as compared to $339,000 and
$351,000 in 1999 and 1998, respectively. Additionally, $781,000 of inventory
was transferred to property and equipment during 2000 under our cryosurgical
system placement program as compared to $490,000 in 1999. Working capital was
provided as accounts payable and other current liabilities grew to approximately
$5,401,000 compared to $3,324,000 at December 31, 1999 due to an increase in
operating activities. In 2000, we invested $250,000 in a business that provides
medical equipment and technician services to hospitals and out patient surgery
centers. In 1999, we invested $300,000 in Sanarus Medical Inc., a women's
healthcare company.
In June and July 1999, we received a total of $8,000,000 from the sale to
institutional investors of 7% convertible debentures due in three years from the
date of issuance. During the second quarter of 2000, the $8,000,000 in
convertible debentures was converted into 1,475,610 shares of common stock under
the terms of the agreements. Under the agreements, the purchasers of the
convertible debentures had options to purchase additional debentures for the
aggregate principal amounts of $5,000,000 and $3,000,000 prior to June 7, 2002
and July 29, 2002, respectively. The additional debentures mature three years
from the date they are issued, bear interest at 7% per annum and are convertible
in whole or in part at a conversion price of $6.75 per share (subject to certain
anti-dilution adjustments). We had a put option to require the purchasers to
buy the $5,000,000 principal amount of additional debentures if the closing bid
price for the common stock as listed for quotation is more that $10.00 per share
for the twenty (20) trading days in a consecutive thirty (30) trading day period
and on the date we elect to exercise the put option, and if certain other
conditions are met. We also had a put option to require the purchasers to buy
the $3,000,000 principal amount of additional debentures if the closing bid
price for the common stock as listed for quotation is more that $9.00 per share
for twenty (20) trading days in a consecutive thirty (30) trading day period and
on the date we elect to exercise the put option, and if certain other conditions
are met. On May 5, 2000, we received $8,000,000 from the sale of the additional
7% convertible debentures to institutional investors pursuant to the purchase
options discussed above of which $500,000 was converted into 74,074 shares of
common stock during the fourth quarter of 2000. In addition, in July 1999, we
entered into a Loan and Security Agreement with a lender which originally
provided for a revolving credit line in the amount of $2,000,000 plus up to an
additional $1,000,000 based on eligible accounts receivable. In April 2000, we
increased the revolving portion of the credit facility from $2,000,000 to
$4,000,000, in addition to the $1,000,000 based on eligible accounts receivable.
As of December 31, 2000, $1,000,000 of the loan was outstanding. The loan
matures and all amounts must be repaid on July 31, 2001. The loan bears
interest at the highest prime or equivalent rate announced by certain designated
banks, plus 2% for the option of the loan based on eligible account receivables
or 3.5%. The loan is secured by a first priority lien on all of the assets of
our business, except for intellectual property, is fully guaranteed by our
subsidiary, AMP, and contains certain restrictive covenants. We expect to renew
or replace the loan upon maturity.
In November 2000, we sold 1,509,440 shares of our common stock at a price
Of $13.25 per share in a private placement. After transaction fees, legal,
accounting, filing fees and other associated expenses of approximately
$1,648,000, the net contribution to our capital was approximately $18,352,000.
We believe that our existing cash resources and credit facility will
provide sufficient resources to meet present and reasonably foreseeable working
capital requirements and other cash needs through at least the end of 2001. If
we elect to undertake or accelerate significant research and development
projects for new products or pursue corporate acquisitions, it may require
additional outside financing prior to such time. We expect that to meet our
long-term needs we may need to raise substantial additional funds through
the sale of our equity securities, the incurrence of indebtedness or through
funds derived through entering into collaborative agreements with third parties.
We also expect to renew or replace our credit line which expires in July 2001.
OTHER MATTERS
ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The provisions of the statement require
the recognition of all derivatives as either assets or liabilities in the
consolidated balance sheet and the measurement of those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This
statement, as amended, is effective in the first quarter of 2001. The adoption
of SFAS 133 is not expected to have a material effect on our financial position
or results of operations.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140. "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities". The statement replaces Statement of
Financial Accounting Standards No. 125 and is effective in the second quarter
of 2001. SFAS 140 revises the accounting for securitizations and other
transfers of financial assets. The adoption of SFAS 140 is not expected to have
a material effect on our financial position or results of operations.
OTHER
We are not aware of any issues related to environmental concerns that have
or are expected to materially effect our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash, cash equivalents, notes receivable
and debentures. At December 31, 2000, the carrying values of our financial
instruments approximated their fair values.
Our policy is not to enter into derivative financial instruments. We do not
have any significant foreign currency exposure since we do not transact business
in foreign currencies. Therefore, we do not have significant overall currency
exposure. In addition, we do not enter into any futures or forward contracts
and therefore we do not have significant market risk exposure with respect to
commodity prices.
We maintain a $5,000,000 credit facility bearing interest at the highest
Prime rate or equivalent rate announced by certain designated banks, plus 2% or
3.5%. The current rate of interest on the credit facility is approximately
12.5%. This is our only debt which does not have a fixed-rate of interest. A
significant change in interest rates would not materially impact our
consolidated financial statements. The credit facility expires in July 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
(1) Index to Financial Statements
Independent Auditors' Report
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000
Consolidated Balance Sheets at December 31, 1999 and 2000
Consolidated Statements of Shareholders' Equity (Deficiency)
for the years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts - for the years ended
December 31, 1998, 1999 and 2000
(All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.)
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Endocare, Inc.:
We have audited the accompanying consolidated financial statements of Endocare,
Inc. (the Company) and subsidiary as listed in the accompanying index. In
connection with our audits of the financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Endocare, Inc. and
subsidiary as of December 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Orange County, California
February 8, 2001
ENDOCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
------------- ------------- --------------
Revenues:
Net product sales. . . . . . . . . . . $ 1,363,112 $ 2,328,973 $ 5,967,708
Mobile cryosurgical procedures . . . . 490,066 1,132,901 703,240
Revenue from collaborative agreements. 641,672 -- --
------------- ------------- --------------
Total revenues . . . . . . . . . . . 2,494,850 3,461,874 6,670,948
------------- ------------- --------------
Costs and expenses:
Cost of product sales. . . . . . . . . 974,308 1,254,917 2,607,128
Cost of mobile cryosurgical procedures 208,685 429,751 405,321
Research and development . . . . . . . 1,919,527 2,573,518 3,203,717
Selling, general and administrative. . 4,653,487 7,991,885 12,230,294
------------- ------------- --------------
Total costs and expenses . . . . . . 7,756,007 12,250,071 18,446,460
------------- ------------- --------------
Loss from operations . . . . . . . . . . ( 5,261,157) (8,788,197) (11,775,512)
Interest income (expense), net . . . . . 336,593 (475,978) (624,114)
------------- ------------- --------------
Net loss . . . . . . . . . . . . . . . . $( 4,924,564) $( 9,264,175) $( 12,399,626)
============= ============= ==============
Net loss per share of common stock -
basic and diluted. . . . . . . . . . . $ (.49) $ (.86) $ (.97)
============= ============= ==============
Weighted average shares of
common stock outstanding . . . . . . . 10,062,000 10,838,000 12,757,000
============= ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
ENDOCARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-------------
1999 2000
------------- -------------
ASSETS
---------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 7,364,951 $ 22,016,448
Accounts receivable, less allowances of $270,000
and $406,639 at December 31, 1999 and 2000,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958,145 2,113,766
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,278,785 1,543,733
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . 166,969 178,972
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 9,768,850 25,852,919
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 962,720 1,496,153
Deferred financing costs and other assets, net of accumulated amortization
of $413,394 and $188,742 at December 31, 1999 and 2000, respectively. 2,264,803 1,495,718
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,996,373 $ 28,844,790
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,517,470 $ 2,231,344
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 910,103 1,646,079
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 896,210 1,523,602
Credit facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,000,000
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 3,323,783 6,401,025
Convertible debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 7,500,000
Note payable and other liabilities. . . . . . . . . . . . . . . . . . . . . 2,153,082 74,268
------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 13,476,865 13,975,293
Shareholders' equity (deficiency):
Preferred stock, $.001 par value; 1,000,000 shares
authorized; none issued and outstanding. . . . . . . . . . . . . . . -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; 11,248,323 and 15,018,649 issued and
outstanding at December 31, 1999 and 2000, respectively. . . . . . . 11,248 15,019
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 20,310,010 48,163,186
Receivable from shareholders . . . . . . . . . . . . . . . . . . . . . . (1,028,125) (1,135,457)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (19,773,625) (32,173,251)
------------- -------------
Total shareholders' equity (deficiency). . . . . . . . . . . . . . . (480,492) 14,869,497
------------- -------------
Commitments and contingencies
Total liabilities and shareholders' equity (deficiency). . . . . . . $ 12,996,373 $ 28,844,790
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
ENDOCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
TOTAL
ADDITIONAL RECEIVABLE SHAREHOLDERS'/
COMMON STOCK PAID-IN FROM ACCUMULATED EQUITY
SHARES CAPITAL AMOUNT SHAREHOLDERS DEFICIT (DEFICIENCY)
------------ ----------- --------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 . . . . . . 8,638,354 $ 8,638 $ 9,536,347 $ -- $ (5,584,886) $ 3,960,099
Common stock issued in
private placement, net. . . . . . . . 2,000,000 2,000 6,883,820 -- -- 6,885,820
Stock options exercised. . . . . . . . . 60,000 60 10,741 -- -- 10,801
Equity provided by
warrant amortization . . . . . . . . -- -- 79,044 -- -- 79,044
Net loss . . . . . . . . . . . . . . . . -- -- -- -- (4,924,564) (4,924,564)
------------ ----------- --------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 . . . . . . 10,698,354 10,698 16,509,952 -- $(10,509,450) $ 6,011,200
Common stock issued. . . . . . . . . . . 210,988 211 1,316,535 (1,028,125) -- 288,621
Stock options and warrants exercised . . 338,981 339 750,023 -- -- 750,362
Equity provided by
warrant amortization . . . . . . . . -- -- 133,500 -- -- 133,500
Fair value of convertible debenture
purchase options . . . . . . . . . . -- -- 1,600,000 -- -- 1,600,000
Net loss . . . . . . . . . . . . . . . . -- -- -- -- (9,264,175) (9,264,175)
------------ ----------- --------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 . . . . . . 11,248,323 11,248 20,310,010 (1,028,125) (19,773,625) (480,492)
Private placement of common stock, net . 1,509,440 1,509 18,350,059 -- -- 18,351,568
Conversion of convertible debentures and
accrued interest, net. . . . . . . . 1,588,545 1,589 7,473,928 -- -- 7,475,517
Common stock issued for domain name. . . 20,000 20 434,980 -- -- 435,000
Common stock issued, other . . . . . . . 7,216 8 100,675 -- -- 100,683
Stock options and warrants exercised . . 645,125 645 1,199,386 (107,332) -- 1,092,699
Equity provided by
warrant amortization . . . . . . . . -- -- 294,148 -- -- 294,148
Net loss . . . . . . . . . . . . . . . . -- -- -- -- (12,399,626) (12,399,626)
------------ ----------- --------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 . . . . . . 15,018,649 $ 15,019 $ 48,163,186 $ (1,135,457) $(32,173,251) $ 14,869,497
============ =========== =============== ============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
ENDOCARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
------------- ------------ ---------------
Cash flows from operating activities:
- ------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . $ (4,924,564) $(9,264,175) $( 12,399,626)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . . 164,629 365,925 575,057
Amortization of warrant value. . . . . . . . . 79,044 133,500 294,148
Amortization of deferred financing costs . . . -- 378,695 395,614
Common stock issued for interest payable . . . -- 288,621 549,098
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . 12,039 (550,543) ( 1,155,621)
Inventories. . . . . . . . . . . . . . . . . . 382,982 (1,226,412) ( 1,046,242)
Prepaid expenses and other current
assets . . . . . . . . . . .. . . . . . . . . (23,160) (79,572) ( 25,410)
Other assets . . . . . . . . . . . . . . . . . (112,922) 26,778 30,044
Accounts payable . . . . . . . . . . . . . . . (169,015) 863,922 713,874
Accrued compensation . . . . . . . . . . . . . 370,798 305,475 735,976
Other accrued liabilities. . . . . . . . . . . 90,286 373,656 627,257
Deferred revenue . . . . . . . . . . . . . . . (166,672) -- ( 38,000)
------------- ------------ ---------------
Net cash used in operating activities. . . . . . ( 4,296,555) (8,384,130) ( 10,743,831)
------------- ------------ ---------------
Cash flows from investing activities:
- ------------------------------------------------
Purchases of property and equipment. . . . . . (350,645) (338,818) (229,812)
Investments. . . . . . . . . . . . . . . . . . -- (300,061) (250,000)
------------- ------------ ---------------
Net cash used in investing activities. . . . . . (350,645) (638,879) (479,812)
------------- ------------ ---------------
Cash flows from financing activities:
- ------------------------------------------------
Proceeds from credit facility. . . . . . . . . . -- 2,000,000 2,000,000
Payments made to credit facility and other debt. -- -- ( 3,040,814)
Proceeds from private placement. . . . . . . . . 6,885,820 -- 18,351,568
Stock options and warrants exercised . . . . . . 10,801 750,362 1,199,386
Proceeds from issuance of debentures . . . . . . -- 8,000,000 8,000,000
Debt issuance costs and other. . . . . . . . . . 124,000 (648,201) (635,000)
------------- ------------ ---------------
Net cash provided by financing activities. . . . 7,020,621 10,102,161 25,875,140
------------- ------------ ---------------
Net increase in cash and cash equivalents. . . . 2,373,421 1,079,152 14,651,497
Cash and cash equivalents, beginning of year . . 3,912,378 6,285,799 7,364,951
------------- ------------ ---------------
Cash and cash equivalents, end of year . . . . . $ 6,285,799 $ 7,364,951 $ 22,016,448
============= ============ ===============
Non-cash activities:
- -------------------
Note receivable from stock sale. . . . . . . . $ -- $ 1,028,125 $ --
Convertible debentures and accrued interest
converted to common stock, net of unamortized
deferred financing costs of $1,573,585. . . . -- -- 7,475,517
Acquisition of trademark and domain name through
issuance of 20,000 shares of common stock . . -- -- 435,000
Transfer of inventory to property
and equipment for placement at customer sites -- 490,237 781,294
Fair value of convertible debenture
purchase options credited to additional
paid-in-capital. . . . . . . . . . . . . . . . . -- 1,600,000 --
Issuance of common stock for receivable. . . . -- -- 107,332
------------- ------------ ---------------
Total non-cash activities. . . . . . . . . $ -- $ 3,118,362 $ 8,799,143
============= ============ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
ENDOCARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
Endocare, Inc. (the "Company") is a medical device company that develops,
manufactures and markets cryosurgical and stent technologies for applications in
oncology and urology. The Company also operates a mobile cryosurgery business.
The Company has concentrated on developing devices for the treatment of the two
most common diseases of the prostate, prostate cancer and benign prostate
hyperplasia. The Company is also developing cryosurgical technologies for
treating tumors in other organs, including the kidney, breast and liver.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Endocare, Inc. and its wholly-owned subsidiary Advanced Medical
Procedures, Inc. All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents: All highly liquid investments purchased with an
original maturity of three months or less are considered to be cash equivalents.
Inventories: Inventories are stated at the lower of actual cost (first-in,
first-out) or net realizable value.
Property and Equipment: Property and equipment are stated at cost and are
depreciated on a straight-line basis over the estimated useful lives of the
respective assets, which range from two to five years. Leasehold improvements
are amortized over the shorter of the estimated useful lives of the assets or
the related lease term. Cryosurgical equipment placed at customer sites for use
with the Company's disposable Cryoprobes (TM) is depreciated into product cost
of sales over estimated useful lives of three years.
Long-Lived Assets: The Company reviews property, equipment, and intangible
assets for possible impairment whenever events or circumstances indicate that
the carrying amounts may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of an asset, an
impairment loss is recognized as the excess of the carrying value of the asset
over its fair value. In accordance with management policies, during 2000, the
Company recorded a $100,000 impairment charge for certain non-revenue producing,
cryosurgical fixed asset placements. The amount represents the net book value
of the product, as the fair value of these assets was determined to be nominal.
Deferred Financing Costs: Deferred financing costs are amortized to interest
expense over the lives of the respective debt.
Revenue Recognition: The Company recognizes product revenue upon the shipment of
its products, including the shipment of disposable products to customer sites
where the Company has placed cryosurgical systems. Revenue from mobile
cryosurgical procedures is recognized upon completion of procedures. Revenue
from collaborative agreements are recognized as the related activities are
performed or milestones are met. Realizability of accounts receivable is
determined based upon an understanding of the financial condition of, and prior
history with, the buyer and overall historical experience. In December 1999,
the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101, as
amended, was effective October 1, 2000 and provides the SEC's views in applying
Generally Accepted Accounting Principles to selected revenue recognition issues.
The adoption of SAB 101 did not cause a material change to the Company's
existing revenue recognition policies.
Warranty Costs: Certain of the Company's products are covered by warranties
against defects in material and workmanship for periods of up to twelve months.
The estimated warranty cost is recorded at the time of sale and is adjusted
periodically to reflect actual experience.
Research and Development: Research and development costs relate to both present
and future products and are expensed as incurred.
Net Loss Per Share: The Company has adopted SFAS No. 128, "Earnings Per Share".
Under SFAS 128, basic EPS is calculated by dividing net earnings (loss) by the
weighted-average common shares outstanding during the period. Diluted EPS
reflects the potential dilution to basic EPS that could occur upon conversion or
exercise of securities, options, convertible debentures, or other such items, to
common shares using the treasury stock method based upon the weighted-average
fair value of the Company's common shares during the period. In accordance with
SFAS 128, the consolidated loss (numerator), shares (denominator) and per-share
amount for fiscal 1998 are $(4,924,564), 10,062,000 and $(0.49), respectively,
the consolidated loss (numerator), shares (denominator) and per-share amount for
fiscal 1999 are $(9,264,175), 10,838,000 and $(0.86), respectively, and the
consolidated loss (numerator), shares (denominator) and per-share amount for
fiscal 2000 are $(12,399,626), 12,757,000 and $(0.97), respectively. As the
Company has been in a net loss position for the fiscal years 1998, 1999, and
2000, the potential dilution from the conversion of options, warrants and
convertible debentures to common stock of 2,549,000, 3,953,000 and 4,332,027 as
of December 31, 1998, 1999 and 2000, respectively, were not used to compute
diluted loss per share as the effect was antidilutive. Consequently, diluted EPS
equals basic EPS for all periods presented.
Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents approximates fair value for all periods presented because of the
short-term maturity of these financial instruments. The carrying amounts of all
other financial instruments on the consolidated balance sheets approximate their
fair values.
Comprehensive Income: The Company has adopted SFAS No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." This statement establishes rules for the
reporting of comprehensive income and its components. The adoption of SFAS 130
did not impact the Company's consolidated financial statements or related
disclosures as the Company does not have any components of other comprehensive
income. Therefore, comprehensive income (loss) equaled net income (loss) for
all periods presented.
Segment Disclosures: The Company has adopted SFAS No. 131 ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for reporting information about operating segments. The
Company operates in one industry segment - the design, manufacture and marketing
of surgical devices and related procedures to treat prostate diseases.
3. MERGER
On June 30, 1999, Endocare acquired all the outstanding units of Advanced
Medical Procedures, LLC, a Florida limited liability company ("AMP"). AMP
operates a mobile cryosurgery business which provides cryosurgical equipment for
the treatment of prostate and liver cancer on a procedural basis. The
acquisition was consummated pursuant to a Plan of Merger (the "AMP Merger
Agreement") by and among AMP, Endocare, and Advanced Medical Procedures, Inc.
("AMPI"), a Delaware corporation and wholly-owned subsidiary of Endocare.
Pursuant to the Merger Agreement, AMP was merged with and into AMPI, with AMPI
surviving as a wholly-owned subsidiary of Endocare. The AMP unitholders
received an aggregate of 260,000 shares of Endocare Common Stock in exchange for
all of their AMP units. The acquisition was accounted for as a
pooling-of-interests for financial reporting purposes. The pooling-of-interests
method of accounting is intended to present as a single interest two or more
common stockholders' interests which were previously independent; accordingly,
the historical financial statements for the periods prior to the merger have
been restated as though the companies had been combined. Fees and expenses
related to the merger were expensed as incurred and amounted to approximately
$50,000.
4. SUPPLEMENTAL FINANCIAL STATEMENT DATA
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
----------- ------------ ------------
Interest income (expense), net
Interest income. . . . . . . . . . . . . . . . . . . . $ 338,710 $ 315,864 $ 652,331
Interest Expense . . . . . . . . . . . . . . . . . . . (2,117) (791,842) (1,276,445)
----------- ------------ ------------
Interest income (expense), net . . . . . . . . . . . $ 336,593 $ (475,978) $ 624,114
=========== ============ ============
Cash paid for interest . . . . . . . . . . . . . . . . $ 2,117 $ 17,580 $ 8,993
=========== ============ ============
Inventories:
Raw materials. . . . . . . . . . . . . . . . . . . . . $ 481,141 $ 763,389
Work in process. . . . . . . . . . . . . . . . . . . . 310,651 288,480
Finished goods . . . . . . . . . . . . . . . . . . . . 486,993 491,864
----------- -----------
Total inventories. . . . . . . . . . . . . . . . . . $1,278,785 $ 1,543,733
=========== ============
Property and equipment:
Equipment. . . . . . . . . . . . . . . . . . . . . . . . $ 488,000 $ 616,360
Equipment -cryosurgical systems placed at customer sites 490,237 1,271,532
Furniture and fixtures . . . . . . . . . . . . . . . . . 442,531 530,388
Leasehold improvements . . . . . . . . . . . . . . . . . 86,440 100,034
----------- ------------
Total property and equipment, at cost. . 1,507,208 2,518,314
Accumulated depreciation and amortization. . . . . . . . (544,488) (1,022,161)
----------- ------------
Net property and equipment . . . . . . . $ 962,720 $ 1,496,153
=========== ============
5. DEBT
Convertible Debentures
On June 7, 1999 and July 30, 1999, the Company received $5,000,000 and
$3,000,000, respectively, from the sale of its 7% convertible debentures due in
three years (the "Debentures"). Interest was payable annually in cash or, at
the Company's option, in common stock at a price per share based on recent bid
prices prior to the date interest is paid. Under the financing arrangements,
the purchasers had options to purchase additional debentures for the aggregate
principal amounts of $5,000,000 and $3,000,000. Under the circumstances
described below, the Company could require the purchasers to exercise these
purchase options. The $5,000,000 principal amount of the Debentures was
originally due on June 7, 2002, and was eligible for conversion into the
Company's common stock in whole or in part at the purchasers' option at any time
on or prior to June 7, 2002 at a conversion price of $5.125 per share. The
$3,000,000 principal amount of the Debentures was originally due on July 29,
2002, and was eligible for conversion into the Company's common stock in whole
or in part at the purchasers' option at any time, subject to certain
restrictions, on or prior to July 29, 2002 at a conversion price of $6.00 per
share. The conversion prices were subject to certain anti-dilution adjustments.
In addition to the purchasers' option to convert the $5,000,000 principal amount
of the Debentures, the Company could have required the purchaser to convert the
Debentures into common stock at a conversion price of $5.125 per share (subject
to certain anti-dilution adjustments) if the bid price for the common stock as
listed for quotation was above $8.00 per share for twenty (20) trading days
during a consecutive (30) trading day period, and certain other conditions were
met. Subject to certain restrictions, the Company could have required that the
purchasers convert the $3,000,000 principal amount of the debentures into common
stock at a conversion price of $6.00 per share (subject to certain anti-dilution
adjustments) if the bid price for the common stock as listed for quotation was
above $9.00 per share for twenty (20) trading days during a consecutive thirty
(30) trading day period, and certain other conditions were met. During the
second quarter of 2000, the original $8,000,000 in convertible debentures sold
to the investors in 1999 were converted into 1,475,610 shares of common stock
under the terms of the original agreements.
Under a securities purchase agreement, the purchasers had a call option
exercisable at any time prior to June 7, 2002 to require that the Company sell
to the purchasers an additional $5,000,000 principal amount of debentures. The
additional debentures mature three years from the date they are issued, bear
interest at 7% per annum and are convertible in whole or in part at a conversion
price of $6.75 per share (subject to certain anti-dilution adjustments). The
Company had a put option to require the purchasers to buy the $5,000,000
principal amount of additional debentures if the closing bid price for the
common stock as listed for quotation was more that $10.00 per share for the
twenty (20) trading days in a consecutive (30) trading day period and on the
date the Company elected to exercise the put option, and if certain other
conditions were met. The purchasers also had a call option exercisable at any
time prior to July 29, 2002 to require the Company to sell to the purchasers an
additional $3,000,000 principal amount of debentures. The additional debentures
mature three years from the date they are issued, bear interest at 7% per annum
and are convertible in whole or in part at the option of the purchasers at any
time prior to maturity into common stock at a conversion price of $6.75 per
share (subject to certain anti-dilution adjustments). The Company had a put
option to require the purchasers to buy the $3,000,000 principal amount of
additional debentures if the closing bid price for the common stock as listed
for quotation was more than $9.00 per share for twenty (20) trading days in a
consecutive thirty (30) trading day period and on the date the Company elected
to exercise the put option, and certain other conditions were met. On May 5,
2000, the Company received $8,000,000 from the sale of the additional 7%
convertible debentures to institutional investors pursuant to the purchase
options discussed above of which $500,000 was converted into 74,074 shares of
common stock during the fourth quarter of 2000. Financing costs totaling
$585,000 associated with the transaction are being amortized to interest expense
over three years. The same investors originally purchased the $8,000,000 of
convertible debentures in 1999. In 2000, the Company issued 38,861 shares of
common stock for $549,098 in interest payable.
The fair value of the purchasers' two call options described above totaling
$1,600,000, was estimated using the Black-Scholes pricing model and was
reflected in deferred financing costs and other assets in the accompanying
condensed consolidated balance sheet as of December 31, 1999. This amount was
being amortized to interest expense over the original lives of the call options.
The net unamortized balance totaling $1,156,863 was reclassified to additional
paid in capital upon conversion of the original $8,000,000 of convertible
debentures into common stock.
Credit Facility
On July 29, 1999, the Company entered into a Loan and Security Agreement with a
lender which originally provided for a revolving credit line in the amount of
$2,000,000 plus up to an additional $1,000,000 based on eligible accounts
receivable of the Company (the "Loan"). In April 2000, the Company increased
the revolving portion of its credit facility from $2,000,000 to $4,000,000 in
addition to the $1,000,000 based on eligible accounts receivable of the Company.
As of December 31, 1999 and 2000, $2,000,000 and $1,000,000, respectively, of
the loan was outstanding. The Loan matures and all amounts must be repaid on
July 31, 2001. The Loan bears interest at the highest prime or equivalent rate
announced by certain designated banks, plus 2% for the option of the loan based
on eligible accounts receivable or 3.5%. The Loan is secured by a first
priority lien on all of the assets of the Company, except for intellectual
property, is fully guaranteed by the Company's subsidiary, and contains certain
restrictive covenants. The Company is in compliance with the restrictive
covenants of the agreement as of December 31, 2000.
Long-term debt is comprised of convertible debentures as of December 31, 2000.
Aggregate maturities of long-term debt are zero, zero and $7,500,000 for the
years ending December 31, 2001, 2002 and 2003, respectively. The balance of the
long-term liabilities of approximately $74,000 as of December 2000, consists
primarily of a capital lease obligation and equipment loan.
6. PRIVATE PLACEMENTS
In April 1998, the Company sold 2,000,000 shares of common stock at a price of
$3.50 per share in a direct private placement. After legal, accounting, filing
fees and other associated expenses of approximately $150,000, the net
contribution to the Company's capital was approximately $6,886,000.
In November 2000, the Company sold 1,509,440 shares of its common stock at a
price of $13.25 per share in a private placement. In addition, warrants to
purchase up to an aggregate of 188,680 shares of the Company's common stock were
issued to the investors at an exercise price of $13.9125 per share. The
warrants are exercisable for a term of five years from the date of issuance.
After transaction fees, legal, accounting, filing fees and other associated
expenses of approximately $1,648,000 the net contribution to the Company's
capital was approximately $18,352,000.
7. STOCK OPTIONS AND WARRANTS
At December 31, 2000, Endocare had two stock-based compensation plans, as
described below. Per FASB Statement No. 123, the Company has elected to apply
APB Opinion No. 25 and related Interpretations in accounting for its plans.
The 1995 Stock Plan authorizes the Board or one or more committees which the
Board may appoint from among its members (the "Committee") to grant options and
rights to purchase common stock to employees and certain consultants and
distributors. Options granted under the 1995 Stock Plan may be either "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as amended, or nonstatutory stock options, as determined by the Board or the
Committee. The exercise price of options granted under the 1995 Stock Plan is
equal to the fair market value of Endocare common stock on the date of grant.
Options generally vest 25% on the one year anniversary date, with the remaining
75% vesting monthly over the following three years. Options are exercisable for
ten years. A total of 3,649,449 shares of common stock have been reserved for
issuance under the 1995 Stock Plan, subject to an automatic annual share
increase to which the number of shares available for issuance under the plan
will automatically increase on the first trading day of each calendar year by 3%
of the total number of shares of the Company's common stock outstanding at the
end of the preceding calendar year, to a maximum of 500,000 shares each year. As
of December 31, 2000, options to purchase a total of 3,510,247 shares of the
Company's common stock have been granted under the 1995 Stock Plan.
The 1995 Director Option Plan (the "Director Plan") was adopted by the Board of
Directors (the "Board") in October 1995 and approved by the shareholders in
November 1995. It provides automatic, nondiscretionary grants of options to
Endocare's non-employee directors ("Outside Directors"). The Director Plan
provides that each Outside Director is granted an option to purchase 20,000
shares of Endocare common stock vested over a two-year period upon his or her
initial election or appointment as an Outside Director. Subsequently, each
Outside Director who has served for at least six months will be granted an
additional option to purchase 5,000 shares of Endocare common stock, on January
1 of each year, or the first trading day thereafter, so long as he or she
remains an Outside Director. The exercise price of options granted to Outside
Directors must be the fair market value of Endocare common stock on the date of
grant. Options granted to Outside Directors have ten-year terms, subject to an
Outside Director's continued service as a director. The Subsequent Options
granted to the Outside Directors become fully exercisable on the first
anniversary of the date of grant. A total of 300,000 shares of common stock has
been reserved for issuance under the Director Plan. As of December 31, 2000,
options to purchase a total of 130,000 shares of the Company's common stock have
been granted under the Director Plan.
The following tables summarize Endocare's option activity under both plans:
1998 1999 2000
---- ---- ----
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE
OPTIONS PER OPTION OPTIONS PER OPTION OPTIONS PER OPTION
---------- ----------- ---------- ----------- ---------- -----------
Outstanding, beginning of year 1,499,916 $ 1.36 2,657,553 $ 1.96 2,959,184 $ 2.24
Granted during year. . . . . . 1,463,000 $ 2.70 749,500 $ 3.31 428,500 $ 11.09
Cancelled during year. . . . . (245,363) $ 2.84 (245,138) $ 3.04 (192,669) $ 5.61
Exercised. . . . . . . . . . . (60,000) $ 0.18 (202,731) $ 1.60 (458,425) $ 2.38
---------- ----------- ---------- ----------- ---------- -----------
Outstanding, end of year . . . 2,657,553 $ 1.96 2,959,184 $ 2.24 2,736,590 $ 3.37
========== =========== ========== =========== ========== ===========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED-AVG. EXERCISABLE
RANGE OF AT REMAINING WEIGHTED-AVG. AT WEIGHTED-AVG.
EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- ---------------
0.18 - 2.00 . 788,354 5.4 years $ 0.50 709,982 $ 0.34
2.03 - 4.00 . 1,402,831 7.3 years $ 2.65 960,310 $ 2.70
4.25 - 6.19 . 166,105 8.6 years $ 5.08 37,043 $ 5.08
6.81 - 9.00 . 178,300 9.0 years $ 8.93 6,083 $ 8.51
11.75 -13.88 . 154,500 9.8 years $ 12.38 5,000 $ 11.88
16.00 -16.75 . 46,500 9.4 years $ 16.23 -- $ --
------------------- ------------------- --------------- ------------------ --------------
0.18 -16.75. . 2,736,590 7.1 years $ 3.37 1,718,418 $ 1.82
=================== =================== =============== ================== ==============
The following table presents consolidated pro forma information as if the
Company recorded compensation cost using the fair value of the issued stock
options using the Black-Scholes valuation model consistent with SFAS 123:
1998 1999 2000
------------ ------------- -------------
Net loss:
- --------
As reported . . . . . . . . . . . $(4,924,564) $ (9,264,175) $(12,399,626)
Assumed stock compensation cost . (363,000) (896,000) (1,830,000)
------------ ------------- -------------
Pro forma, adjusted . . . . . . . $(5,287,564) $(10,160,175) $(14,229,626)
============ ============= =============
Net loss per share - basic and diluted:
- ---------------------------------------
As reported . . . . . . . . . . . $ (0.49) $ (0.86) $ (0.97)
Pro forma, adjusted . . . . . . . $ (0.53) $ (0.94) $ (1.12)
The weighted average fair value of the Company's options at the grant date was
approximately $1.35 in 1998, and $1.90 in 1999, and $3.22 in 2000. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions:
1998 1999 2000
-------- ------- --------
Stock volatility. . . . .1 .5 .9
Risk-free interest rate 6.00% 6.00% 4.7%
Option term in years. . 10 years 10 years 10 years
Stock dividend yield. . -- -- --
The Company issued warrants to purchase 5,000, 176,506 and 239,070 shares of the
Company's common stock in 1998, 1999, and 2000, respectively (see note 6).
Warrants generally vest over a one to five year period and have been provided in
conjunction with financing transactions, patent licenses and service contracts.
As of December 31, 2000, the Company had 469,326 warrants outstanding, of which
358,076 are exercisable. Warrant exercise prices range from $2.31 to $15.40 per
share. During 1999 and 2000, 136,250 and 186,400 warrants, respectively, were
exercised, and no warrants were exercised in 1998. The Company amortizes the
fair values of warrants associated with non-equity transactions, as determined
using the Black-Scholes option pricing method, to expense over the service
period of the related warrants. The Company records warrants issued in
connection with equity transactions in additional paid in capital, as
determined using the Black-Scholes option pricing model.
8. STOCKHOLDER RIGHTS PLAN
On March 5, 1999, the Company's Board of Directors adopted a Stockholder Rights
Plan ("Plan") in which preferred stock purchase rights will be distributed as a
dividend at the rate of one Right for each share of Common Stock held as of the
close of business on April 15, 1999. Each Right will entitle Stockholders to
buy one one-thousandth of a share of Series A Preferred Stock of the Company at
an Exercise Price of $25. The Rights are designed to guard against partial
tender offers and other coercive tactics that might be used in an attempt to
gain control of the Company or to deprive Stockholders of their interests in the
long-term value of the Company. The Rights will be exercisable only if a person
or group acquires 15% or more of the Company's Common Stock (subject to certain
exceptions stated in the Plan) or announces a tender offer, the consummation of
which would result in ownership by a person or group of 15% or more of the
Company's Common Stock. Each Right will entitle stockholders to buy one
one-thousandth of a share of new series of junior participating preferred stock
at an exercise price of $25 upon certain events. If a person or group acquires
15% or more of the Company's outstanding Common Stock (subject to certain
exceptions stated in the Plan), or a holder of 15% or more of the Company's
Common Stock engages in certain self-dealing transactions or a merger
transaction in which the Company is the surviving corporation and its Common
Stock remains outstanding, then each Right not owned by such person or certain
related parties will entitle its holder to purchase, at the Right's then-current
exercise price, units of the Company's Series A Preferred Stock (or, in certain
circumstances, Company Common Stock, cash, property or other securities of the
Company) having a market value equal to twice the then-current exercise price.
In addition, if, after the Rights become exercisable, Endocare, Inc. is acquired
in a merger or other business combination transaction, or sells 50% or more of
its assets or earnings power, each Right will entitle its holder to purchase, at
the Right's then-current price, a number of the acquiring company's common
shares having a market value at the time of twice the Right's exercise price.
At any time on or prior to the close of business on the first date of a public
announcement that a person or group has acquired beneficial ownership of 15% or
more of the Company's Common Stock (subject to certain exceptions stated in the
Plan), the Rights are redeemable for one cent per Right at the option of the
Board of Directors. The Rights are intended to enable all stockholders to
realize the long-term value of their investment in the Company. The Rights will
not prevent a takeover attempt, but should encourage anyone seeking to acquire
the Company to negotiate with the Board prior to attempting to a takeover. The
dividend distribution was made on April 15, 1999 payable to stockholders of
record on that date. The Rights will expire on April 15, 2009.
9. INCOME TAXES
Income tax expense, which is included as an operating expense in the Company's
consolidated statements of operations, consisted of:
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
----- ------ ------
Current: Federal . . . . $ -- $ -- $ --
State and local 3,400 3,600 1,600
Deferred: Federal . . . . -- -- --
State and local -- -- --
------ ------ ------
Total . . $3,400 $3,600 $1,600
====== ====== ======
The following table summarizes the tax effects of temporary differences which
give rise to significant portions of the deferred tax assets at December 31:
1999 2000
------------- -------------
Deferred tax assets:
Product and other reserves
established for book purposes $ 42,000 $ 440,000
Property and equipment reserve . 96,000 112,000
Inventory obsolescence reserve . 52,000 119,000
Accounts receivable reserve. . . 107,000 172,000
Recognition of deferred revenue. 15,000 --
Net operating loss carryforwards 7,373,000 11,172,000
Other. . . . . . . . . . . . . . 267,000 716,000
------------- -------------
Gross deferred tax assets. . 7,952,000 12,731,000
Valuation allowance. . . . . . . ( 7,952,000) (12,731,000)
------------- -------------
Net deferred tax assets. . . $ -- $ --
============= =============
The valuation allowance increased by $3,812,000 and $4,779,000 during the years
ended December 31, 1999 and 2000, respectively. The Company has recognized that
it is not more likely than not that future tax benefits will be realized as a
result of future and current income. Accordingly, the valuation allowance has
been increased to fully reserve the deferred tax assets.
Actual income tax expense differs from amounts computed by applying the U.S.
federal income tax rate of 34% to pretax loss as a result of the following:
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
------------ ------------ ------------
Computed expected tax benefit . . . . . . $(1,644,000) $(3,150,000) $(4,216,000)
State income taxes net of federal benefit (282,000) (541,000) (506,000)
Nondeductible expenses. . . . . . . . . . 13,000 19,400 38,000
Change in valuation allowance . . . . . . 1,992,000 3,812,000 4,779,000
Provision to return adjustment. . . . . . -- (114,000) 3,000
Other . . . . . . . . . . . . . . . . . . (75,600) (22,800) (96,400)
------------ ------------ ------------
Actual tax expense. . . . . . $ 3,400 $ 3,600 $ 1,600
============ ============ ============
As of December 31, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $29,219,000 which are available to
offset future federal taxable income, if any, through the year 2020. For state
income tax purposes, the Company has net operating losses of approximately
$16,795,000 which are available to offset future state taxable income, if any,
through the year 2005.
In accordance with Internal Revenue Code Section 382, the annual utilization of
net operating loss carryforwards and credits existing prior to a change in
control may be limited. No such changes in control occurred during 2000.
10. COLLABORATIVE AGREEMENTS
Boston Scientific: In March 1999, Endocare exercised its right, at no cost to
the Company, to terminate a distribution agreement with Boston Scientific, which
was originally entered into in November 1996. This agreement granted Boston
Scientific exclusive worldwide marketing rights for Endocare's Cryocare System
for urology and a purchase right on the technology. Under the original
distribution agreement, Boston Scientific guaranteed Endocare certain minimum
purchases of Cryocare Systems over a five -year period, subject to certain
conditions and renegotiations. In addition, Boston Scientific committed to pay
Endocare four payments of $250,000 each, based upon meeting certain specified
milestones. The first milestone payment, based upon contract signing, was
received in November 1996, and revenue was recognized in the fourth quarter of
1996. Due to continuing obligations of the Company to Boston Scientific, cash
related to the second milestone of $250,000 was received in December 1996 and
was being recognized as earned. The remaining obligations relating to this
second milestone were fulfilled in 1998 and the remaining deferred revenue of
$166,672 recognized. In 1998, Boston Scientific paid additional nonrefundable
licensing payments of $475,000 to Endocare.
Sanarus Medical, Inc.: In October 1999, the Company entered into a strategic
alliance with Sanarus Medical, Inc. ("Sanarus") to commercialize Endocare's
proprietary cryosurgical technology in the treatment of breast tumors and
gynecological diseases. The terms of the related agreements included an equity
investment by Endocare in Sanarus totaling $300,000 and a warrant received by
Endocare to acquire at that time approximately 57% of Sanarus common stock in
consideration for entering into a manufacturing supply and license agreement.
In the event Endocare were to exercise the warrant, the Company would then own a
majority equity position in Sanarus. As of December 31, 2000, the Company owns
less than 5% of the outstanding shares in Sanarus and the investment is
reflected at cost, which approximates fair market value, as it does not have
significant influence over the operations of Sanarus. The investment is
included in other assets in the accompanying consolidated balance sheets as of
December 31, 1999 and 2000.
11. COMMITMENTS AND CONTINGENCIES
Commitments
In February 1997, the Company signed a five-year lease for a 16,100 square foot
facility in Irvine, California. Rent expense on this lease was $153,860 in 1998,
$157,727 in 1999 and $161,754 in 2000. Future minimum commitments on this
operating lease are $165,460 in 2001, and $34,639 in 2001.
The Company also leases other space and various office equipment under operating
leases, with lease commitments through 2003 totaling $17,686 in 2001, $6,809 in
2002, and $6,809 in 2003.
As of December 31, 2000, the Company has no other facility leases, capital
leases, or other long-term commitments.
Contingencies
In March 2000, the Company filed patent infringement lawsuits against
Israeli-based Galil Medical, Ltd., and its U.S. affiliate, Galil Medical USA,
Inc. (collectively, "Galil"). The suit against Galil filed in the U.S. District
Court for the Central District of California ("District Court"), alleges that
Galil has marketed and sold cryosurgical systems that infringe Endocare's
patented combination of cryocooling, ultrasound and temperature monitoring
technology. Endocare's suit seek damages and injunctive relief with respect to
products and procedures which are found to infringe Endocare's proprietary
technology. In August 2000, Galil submitted counterclaims alleging that the
Company's cryosurgical probes infringe Galil's probe patents. Galil seeks
unspecified damages and injunctive relief with respect to the Company's
cryosurgical system. The Company believes it has adequate defenses to these
claims and intends to defend the litigation vigorously if necessary. All
proceedings in the action were stayed by the District Court on December 13, 2000
pending the outcome of the settlement discussions by the parties. The parties
are currently engaged in settlement discussions. Management does not expect any
material adverse effect on the Company's consolidated financial condition or the
results of operations because of such actions.
In March 2000, the Company filed a similar suit to the one discussed above
against Cryomedical Sciences, Inc. ("CMSI"). In December 2000, the parties
reached a settlement in this action. In the settlement agreement, CMSI
stipulated for purposes of the agreement that the Company's patent combining
cryo-cooling, ultrasound and temperature monitoring technology is valid and
enforceable. On December 20, 2000, as part of the settlement, the District
Court signed a Consent Judgment validating the settlement agreement in which
CMSI stipulated for purposes of the agreement that the Endocare patent combining
cryo-cooling, ultrasound and temperature monitoring technology is valid and
enforceable. The settlement resulted in certain cross-licensing agreements.
The Company, in the normal course of business, is subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, the Company believes that the final outcome of these matters will not
have a material adverse effect on the Company's consolidated results of
operations or financial condition.
From time to time, the Company has received other correspondence alleging
infringement of proprietary rights of third parties. No assurance can be given
that any relevant claims of third parties would not be upheld as valid and
enforceable, and therefore that the Company could be prevented from practicing
the subject matter claimed or would be required to obtain licenses from the
owners of any such proprietary rights to avoid infringement. Management does
not expect any material adverse effect on the consolidated financial condition
or the results of operations because of such actions.
12. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company currently operates in one industry segment - the design, manufacture
and marketing of surgical devices and related procedures to treat prostate
diseases. The Company markets and sells its devices worldwide to distributors of
medical devices and directly to hospitals and other medical professional
organizations. Until the Company exercised its right to terminate the
distribution agreement with Boston Scientific in March 1999 (see Note 10), the
Company's Cryocare System was distributed exclusively by Boston Scientific for
urological applications.
Customer credit may be extended based upon evaluation of the customer's
financial condition. The Company maintains reserves for credit losses, and
Company management considers such reserves to be adequate based upon historical
experience. International shipments are billed and collected by the Company in
U.S. dollars.
During the year ended December 31, 2000, no customer accounted for more that 10%
of the Company's total revenues. As of December 31, 2000, two customers
accounted for approximately 29% of net accounts receivable. The Company derived
16% of its total revenues from foreign customers during the year ended December
31, 2000. By significant geographic area, approximately 10%, 6% and 84% of
revenues were from Asia, other foreign countries and the United States,
respectively.
During the year ended December 31, 1999, no customer accounted for more than 10%
of the Company's total revenues. As of December 31, 1999, one customer accounted
for approximately 11% of net accounts receivable. The Company derived 12% of
its total revenues from foreign customers during the year ended December 31,
1999. By significant geographic area, approximately 9%, 3% and 88% of revenues
were from Asia, other foreign countries and the United States, respectively.
During the year ended December 31, 1998, Boston Scientific accounted for 41% of
the Company's revenues. As of December 31, 1998, four customers accounted for
approximately 98% of net accounts receivable. The Company derived 8% of its
total revenues from foreign customers during the year ended December 31, 1998.
13. RELATED PARTY TRANSACTIONS
Relationship with AMP
The Company originally had a $135,000 note payable from AMP (see Note 3). The
loan bore interest at prime plus 1% and was originally repayable beginning
September 30, 2000 in equal monthly installments of principal and interest over
a twelve month period. The loan was secured by the assets of AMP and Robert F.
Byrnes, a former member of AMP and a member of Endocare's Board of Directors.
In June 1999, Endocare acquired all of the outstanding units of interest in AMP
in exchange for 260,000 shares of common stock. Mr. Byrnes received 102,413
shares of common stock for his ownership interest in AMP.
Loan to Officers
In November 1999, the Company received a full recourse promissory note for
$1,028,125 in connection with the sale of 175,000 shares of its common stock to
Jerry W. Anderson, the Company's Senior Vice President, Sales and Marketing.
The note bears interest at 5.99% per annum, payable annually, and the principal
is payable in September 2003. The stock was sold at the fair market value of
the common stock on the date of sale. As of December 31, 1999, the Company had
loans and related accrued interest due from various other officers totaling
$93,725, which was included in other assets in the accompanying 1999
consolidated balance sheet. The loans accrued interest at 5.41% and all
interest and principal were forgiven and recorded as compensation to the
officers in 2000.
14.SUBSEQUENT EVENTS
In February 2001, $1,000,000 of the convertible debentures were converted into
148,418 shares of common stock at a conversion price of $6.75. In addition,
accrued interest related to these debentures of $6,482 was also converted into
482 additional shares of common stock at an average of $13.45 per share.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
TOTAL NET LOSS
REVENUE NET LOSS PER SHARE
---------- ------------ -----------
Quarter Ended:
December 31, 2000. $2,034,828 $(3,181,412) $ (0.23)
September 30, 2000 1,759,878 (2,852,654) (0.22)
June 30, 2000. . . 1,565,213 (3,351,393) (0.27)
March 31, 2000 . . 1,311,030 (3,013,668) (0.27)
December 31, 1999. $1,169,023 $(2,332,833) $ (0.21)
September 30, 1999 1,029,220 (2,510,629) (0.23)
June 30, 1999. . . 606,510 (2,577,036) (0.24)
March 31, 1999 . . 657,121 (1,843,677) (0.17)
December 31, 1998. $ 601,788 $(1,463,302) $ (0.14)
September 30, 1998 538,666 (1,191,229) (0.11)
June 30, 1998. . . 821,306 (1,221,940) (0.12)
March 31, 1998 . . 533,090 (1,048,093) (0.12)
ENDOCARE, INC. AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR
DOUBTFUL RECEIVABLES
AND SALES RETURNS
-------------------
Balance at December 31, 1997 192,000
Charges to operations . . 34,736
Deductions. . . . . . . . (140,736)
Other . . . . . . . . . . --
-------------------
Balance at December 31, 1998 86,000
Charges to operations . . 254,238
Deductions. . . . . . . . (70,238)
Other . . . . . . . . . . --
-------------------
Balance at December 31, 1999 270,000
Charges to operations . . 379,885
Deductions. . . . . . . . (243,246)
Other . . . . . . . . . . --
-------------------
Balance at December 31, 2000 $ 406,639
===================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT *
ITEM 11. EXECUTIVE COMPENSATION *
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT *
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS *
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
*The information called for by items 10, 11, 12 and 13 is omitted from this
Report and is incorporated by reference to the definitive Proxy Statement to be
filed by us no later than 120 days after December 31, 2000, the close of our
fiscal year, for the annual meeting of our stockholders to be held on May 22,
2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
(1) Index to Financial Statements
Independent Auditors' Report
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000
Consolidated Balance Sheets at December 31, 1999 and 2000
Consolidated Statements of Shareholders' Equity (Deficiency)
for the years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1999 and 2000
(All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.)
(3) Exhibits
2.1 Distribution Agreement between the Registrant and Medstone
International, Inc., dated October 31, 1995(1)
3.1 Certificate of Incorporation of the Company(2)
3.2 Amended and Restated Bylaws of the Company(3)
4.1 Specimen Certificate of the Company's Common Stock(4)
10.1 Form of Indemnification Agreement(2)
10.2 1995 Stock Plan(1)
10.3 1995 Director Option Plan(1)
10.4 Patent License Agreement between the Company and Brigham and Women's
Hospital, Inc., dated April 17, 1996(5)
10.5 Form of Warrant to purchase an aggregate of 150,000 shares of common
stock, dated August 26, 1996(6)
10.6 Common Stock Purchase Agreement by and among the Company and the
persons listed on the Schedule of Investors attached thereto as Exhibit
A, dated January 21, 1997(7)
10.7 Facility Lease dated January 31, 1997 for 7 Studebaker(8)
10.8 Common Stock Purchase Agreements by and among the Company and the
persons indicated therein, dated April 15 and April 11, 1998(3)
10.9 Rights Agreement, dated as of March 31, 1999, between the Company and
U.S. Stock Transfer Corporation, which includes the form of Certificate
Of Designation for the Series A Junior Participating Preferred Stock as
Exhibit A, the form of Rights Certificate as Exhibit B and the Summary
of Rights to Purchase Series A Preferred Shares as Exhibit C (filed as
Exhibit 4 to Form 8-K filed on June 3, 1999) (9)
10.10 Debenture dated June 7, 1999 between the Company and Brown Simpson
Strategic Growth Fund, Ltd. (filed as Exhibit 4.1 to Form 8-K filed on
June 14, 1999) (10)
10.11 Debenture dated June 7, 1999 between the Company and Brown Simpson
Strategic Growth Fund, L.P. (filed as Exhibit 4.2 to Form 8-K filed on
June 14, 1999) (10)
10.12 Securities Purchase Agreement dated June 7, 1999 among the Company and
the Purchasers .(filed as Exhibit 10.1 to Form 8-K filed on June 14,
1999) (10)
10.13 Registration Rights Agreement dated June 7, 1999 among the Company and
the Purchasers. (filed as Exhibit 10.2 to Form 8-K filed on June 14,
1999) (10)
10.14 Debenture dated July 29, 1999 between the Company and Brown Simpson
Strategic Growth Fund, Ltd. (filed as Exhibit 4.1 to Form 8-K filed on
August 6, 1999) (11)
10.15 Debenture dated July 29, 1999 between the Company and Brown Simpson
Strategic Growth Fund, L.P. (filed as Exhibit 4.2 to Form 8-K filed on
August 6, 1999) (11)
10.16 Securities Purchase Agreement dated July 29, 1999 among the Company and
the Purchasers .(filed as Exhibit 10.1 to Form 8-K filed on August
6, 1999) (11)
10.17 Registration Rights Agreement dated July 29, 1999 among the Company and
the Purchasers. (filed as Exhibit 10.2 to Form 8-K filed on August
6, 1999) (11)
10.18 Loan and Security Agreement dated July 29, 1999 between the Company and
TBCC. (filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.19 Streamlined Facility Agreement dated July 29, 1999 between the Company
and TBCC (filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.20 Continuing Guaranty dated July 29, 1999 by the AMP in favor of TBCC.
(filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.21 Security Agreement dated July 29, 1999 between AMP and TBCC. (filed as
Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.22 Debenture for $3 million dated May 4, 2000 between the Company and Brown
Simpson Partners I, Ltd. (12)
10.23 Debenture for $5 million dated May 4, 2000 between the Company and Brown
Simpson Strategic Partners I, Ltd. (12)
10.24 Amendment to Loan Agreement dated April 24, 2000 between the Company
and TBCC (12)
10.25 Common Stock Purchase Agreement dated November 22, 2000 by and among the
Company and the Investors (13)
10.26 Form of Stock Purchase Warrant dated November 24, 2000 (13)
23.1 Consent of KPMG LLP*
__________
(1) Previously filed with the Company's Application for Registration on Form
10-SB under the Securities Exchange Act of 1934, filed on November 14, 1995, and
incorporated herein by reference. Each such exhibit had the same exhibit number
in that filing, except that the 1995 Stock Plan was exhibit number 10.6 and the
1995 Director Option Plan was exhibit 10.7.
(2) Previously filed with Amendment number 1 to Company's Application for
Registration on Form 10-SB, filed on December 21, 1995, and incorporated herein
by reference.
(3) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on April 23, 1998, and incorporated
herein by reference.
(4) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(5) Previously filed with the Company's Current Report on Form 8-K, as
amended, as filed with the Securities and Exchange Commission on April 26, 1996,
and incorporated herein by reference.
(6) Previously filed with the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on September 10, 1996, and
incorporated herein by reference.
(7) Previously filed with the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on January 31, 1997, and
incorporated herein by reference.
(8) Previously filed with the Company's Annual Report on Form 10-K/A
(Amendment No. 3) for the year ended December 31, 1996, and incorporated herein
by reference.
(9) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on June 3, 1999, and incorporated
herein by reference.
(10) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on June 14, 1999, and incorporated
herein by reference.
(11) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on August 6, 1999, and incorporated
herein by reference.
(12) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on May 11, 2000, and incorporated
herein by reference.
(13) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on December 15, 2000, and
incorporated herein by reference.
* Filed herewith.
(b) REPORTS ON FORM 8-K
On December 15, 2000, the Company filed a Form 8-K with the Securities and
Exchange Commission dated November 22, 2000 reporting the sale of an aggregate
of 1,509,440 shares of its common stock at $13.25 per share and issued warrants
to purchase up to an aggregate of 188,680 shares at an exercise price of
$13.1925 per share for an aggregate gross proceeds of $20,000,000 to the
Company. The Form 8-K also reported that the Company granted the investors the
right to purchase, subject to certain exceptions on restrictions, a pro rata
portion of any of the Company's capital stock which the Company may, from time
to time, propose to sell and issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENDOCARE, INC.
By: /s/ PAUL W. MIKUS
---------------
Paul W. Mikus
Chief Executive Officer and
President
Dated: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2001.
SIGNATURE TITLE
--------- -----
/s/ PAUL W. MIKUS
- -------------------
Paul W. Mikus Chief Executive Officer, President,
and Chairman of the Board
/s/ WILLIAM R. HUGHES
- -----------------------
William R. Hughes Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ PETER F. BERNARDONI
- ---------------------------
Peter F. Bernardoni Director
/s/ ROBERT F. BYRNES
- ------------------------
Robert F. Byrnes Director
/s/ BENJAMIN GERSON, M.D.
- -----------------------------
Benjamin Gerson, M.D. Director
/s/ ALAN L. KAGANOV, SC.D
- ------------------------------
Alan L. Kaganov, Sc.D Director
/s/ MICHAEL J. STRAUSS, M.D.
- ---------------------------------
Michael J. Strauss, M.D. Director
ENDOCARE, INC.
INDEX TO EXHIBITS
2.1 Distribution Agreement between the Registrant and Medstone
International, Inc., dated October 31, 1995(1)
3.1 Certificate of Incorporation of the Company(2)
3.2 Amended and Restated Bylaws of the Company(3)
4.1 Specimen Certificate of the Company's Common Stock(4)
10.1 Form of Indemnification Agreement(2)
10.2 1995 Stock Plan(1)
10.3 1995 Director Option Plan(1)
10.4 Patent License Agreement between the Company and Brigham and Women's
Hospital, Inc., dated April 17, 1996(5)
10.5 Form of Warrant to purchase an aggregate of 150,000 shares of common
stock, dated August 26, 1996(6)
10.6 Common Stock Purchase Agreement by and among the Company and the
persons listed on the Schedule of Investors attached thereto as Exhibit
A, dated January 21, 1997(7)
10.7 Facility Lease dated January 31, 1997 for 7 Studebaker(8)
10.8 Common Stock Purchase Agreements by and among the Company and the
persons indicated therein, dated April 15 and April 11, 1998(3)
10.9 Rights Agreement, dated as of March 31, 1999, between the Company and
U.S. Stock Transfer Corporation, which includes the form of Certificate of
Designation for the Series A Junior Participating Preferred Stock as Exhibit A,
the form of Rights Certificate as Exhibit B and the Summary of Rights to
Purchase Series A Preferred Shares as Exhibit C (filed as Exhibit 4 to Form 8-K
filed on June 3, 1999) (9)
10.10 Debenture dated June 7, 1999 between the Company and Brown Simpson
Strategic Growth Fund, Ltd. (filed as Exhibit 4.1 to Form 8-K filed on
June 14, 1999) (10)
10.11 Debenture dated June 7, 1999 between the Company and Brown Simpson
Strategic Growth Fund, L.P. (filed as Exhibit 4.2 to Form 8-K filed on
June 14, 1999) (10)
10.12 Securities Purchase Agreement dated June 7, 1999 among the Company and
the Purchasers. (filed as Exhibit 10.1 to Form 8-K filed on June 14,
1999) (10)
10.13 Registration Rights Agreement dated June 7, 1999 among the Company and
the Purchasers. (filed as Exhibit 10.2 to Form 8-K filed on June 14,
1999) (10)
10.14 Debenture dated July 29, 1999 between the Company and Brown Simpson
Strategic Growth Fund, Ltd. (filed as Exhibit 4.1 to Form 8-K filed on
August 6, 1999) (11)
10.15 Debenture dated July 29, 1999 between the Company and Brown Simpson
Strategic Growth Fund, L.P. (filed as Exhibit 4.2 to Form 8-K filed on
August 6, 1999) (11)
10.16 Securities Purchase Agreement dated July 29, 1999 among the Company and
the Purchasers.(filed as Exhibit 10.1 to Form 8-K filed on August 6,
1999) (11)
10.17 Registration Rights Agreement dated July 29, 1999 among the Company and
the Purchasers. (filed as Exhibit 10.2 to Form 8-K filed on August 6,
1999) (11)
10.18 Loan and Security Agreement dated July 29, 1999 between the Company and
TBCC.(filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.19 Streamlined Facility Agreement dated July 29, 1999 between the Company
and TBCC.(filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.20 Continuing Guaranty dated July 29, 1999 by the AMP in favor of TBCC.
(filed as Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.21 Security Agreement dated July 29, 1999 between AMP and TBCC. (filed as
Exhibit 10.3 to Form 8-K filed on August 6, 1999) (11)
10.22 Debenture for $3 million dated May 4, 2000 between the Company and Brown
Simpson Partners I, Ltd. (12)
10.23 Debenture for $5 million dated May 4, 2000 between the Company and Brown
Simpson Strategic Partners I, Ltd. (12)
10.24 Amendment to Loan Agreement dated April 24, 2000 between the Company
and TBCC (12)
10.25 Common Stock Purchase Agreement dated November 22, 2000 by and among the
Company and the Investors (13)
10.26 Form of Stock Purchase Warrant dated November 24, 2000 (13)
23.1 Consent of KPMG LLP*
__________
(1) Previously filed with the Company's Application for Registration on Form
10-SB under the Securities Exchange Act of 1934, filed on November 14, 1995, and
incorporated herein by reference. Each such exhibit had the same exhibit number
in that filing, except that the 1995 Stock Plan was exhibit number 10.6 and the
1995 Director Option Plan was exhibit 10.7.
(2) Previously filed with Amendment number 1 to Company's Application for
Registration on Form 10-SB, filed on December 21, 1995, and incorporated herein
by reference.
(3) Previously filed with the Company's current report on Form 8-K as filed
with he Securities and Exchange Commission on April 23, 1998, and incorporated
herein by reference.
(4) Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(5) Previously filed with the Company's Current Report on Form 8-K, as
amended, as filed with the Securities and Exchange Commission on April 26,
1996, and incorporated herein by reference.
(6) Previously filed with the Company's Current Report on Form 8-K as filed
with he Securities and Exchange Commission on September 10, 1996, and
incorporated herein by reference.
(7) Previously filed with the Company's Current Report on Form 8-K as filed
with the Securities and Exchange Commission on January 31, 1997, and
incorporated herein by reference.
(8) Previously filed with the Company's Annual Report on Form 10-K/A
(Amendment No. 3) for the year ended December 31, 1996, and incorporated herein
by reference.
(9) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on June 3, 1999, and incorporated
herein by reference (10) Previously filed with the Company's current report
on Form 8-K as filed with the Securities and Exchange Commission on June 14,
1999, and incorporated herein by reference.
(11) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on August 6, 1999, and incorporated
herein by reference.
(12) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on May 11, 2000, and incorporated
herein by reference.
(13) Previously filed with the Company's current report on Form 8-K as filed
with the Securities and Exchange Commission on December 15, 2000, and
incorporated herein by reference.
* Filed herewith.
(b) REPORTS ON FORM 8-K
On December 15, 2000, the Company filed a Form 8-K with the Securities and
Exchange Commission dated November 22, 2000 reporting the sale of an aggregate
of 1,509,440 shares of its common stock at $13.25 per share and issued warrants
to purchase up to an aggregate of 188,680 shares at an exercise price of
$13.1925 per share for an aggregate gross proceeds of $20,000,000 to the
Company. The Form 8-K also reported that the Company granted the investors the
right to purchase, subject to certain exceptions and restrictions, a pro rata
portion of any of the Company's capital stock which the Company may, from time
to time, propose to sell and issue.