Attached files
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8-K/A - HEALTHTRONICS, INC. | f8ka072709fr.htm |
EX-23 - HEALTHTRONICS, INC. | exh231.htm |
EX-99 - HEALTHTRONICS, INC. | exh993.htm |
Exhibit 99.2
ENDOCARE, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) |
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
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2009 |
2008 |
2009 |
2008 | |||||||||||
Total revenues | $ | 7,830 | $ | 7,930 | $ | 16,007 | $ | 16,073 | ||||||
Costs and expenses: | ||||||||||||||
Cost of revenues | 2,101 | 2,347 | 4,436 | 4,852 | ||||||||||
Research and development | 705 | 570 | 1,284 | 1,138 | ||||||||||
Selling and marketing | 3,349 | 3,869 | 7,027 | 7,697 | ||||||||||
General and administrative | 5,618 | 3,243 | 9,078 | 6,283 | ||||||||||
Total costs and expenses | 11,773 | 10,029 | 21,825 | 19,970 | ||||||||||
Loss from operations | (3,943 | ) | (2,099 | ) | (5,818 | ) | (3,897 | ) | ||||||
Interest income, net | (268 | ) | 67 | (360 | ) | 176 | ||||||||
Net loss | $ | (4,211 | ) | $ | (2,032 | ) | $ | (6,178 | ) | $ | (3,721 | ) | ||
Net loss per share basic and diluted | (0.34 | ) | $ | (0.17 | ) | (0.51 | ) | $ | (0.32 | ) | ||||
Weighted average shares of common stock outstanding | 12,230 | 11,802 | 12,202 | 11,794 |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
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ENDOCARE, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share data) |
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June 30, 2009 |
December 31, 2008 | |||||||
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ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,566 | $ | 2,685 | ||||
Accounts receivable, net | 5,226 | 5,076 | ||||||
Inventories, net | 2,342 | 2,559 | ||||||
Prepaid expenses and other current assets | 464 | 518 | ||||||
Total current assets | 9,598 | 10,838 | ||||||
Property and equipment, net | 813 | 628 | ||||||
Intangibles, net | 2,325 | 2,576 | ||||||
Other assets | 72 | 75 | ||||||
Total assets | $ | 12,808 | $ | 14,117 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,156 | $ | 3,638 | ||||
Accrued compensation | 2,565 | 1,955 | ||||||
Other accrued liabilities | 4,926 | 3,007 | ||||||
Loan payable | 3,730 | 1,880 | ||||||
Obligations under capital lease current portion | 28 | 26 | ||||||
Total current liabilities | 14,405 | 10,506 | ||||||
Deferred compensation | 241 | 77 | ||||||
Obligations under capital lease less current portion | 45 | 62 | ||||||
Common stock warrants | 241 | -- | ||||||
Stockholders equity: | ||||||||
Preferred stock, $0.001 par value; 1,000 shares authorized; none issued and | ||||||||
outstanding | -- | -- | ||||||
Common stock, $0.001 par value; 50,000 shares authorized; 11,926,178 and | ||||||||
11,811,451 issued and outstanding as of June 30, 2009 and December 31, 2008, | ||||||||
respectively | 12 | 12 | ||||||
Additional paid-in capital | 202,214 | 201,632 | ||||||
Accumulated deficit | (204,350 | ) | (198,172 | ) | ||||
Total stockholders equity | (2,124 | ) | 3,472 | |||||
Total liabilities and stockholders equity | $ | 12,808 | $ | 14,117 |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
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ENDOCARE, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) |
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Six Months Ended June 30, | ||||||||
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2009 |
2008 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (6,178 | ) | $ | (3,721 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Inventory Reserve | 37 | -- | ||||||
Depreciation and amortization | 457 | 503 | ||||||
Stock-based compensation | 653 | 1,426 | ||||||
Interest Expense (net of interest income) on Common Stock Warrant | 207 | -- | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (150 | ) | (964 | ) | ||||
Inventories | (208 | ) | (459 | ) | ||||
Prepaid expenses and other assets | 57 | (44 | ) | |||||
Accounts payable | (482 | ) | 832 | |||||
Accrued compensation | 738 | (1,797 | ) | |||||
Other liabilities | 1,919 | (9 | ) | |||||
Net cash used in operating activities | (2,950 | ) | (4,233 | ) | ||||
Cash flows from investing activities: | ||||||||
Collection of note receivable | -- | 1,560 | ||||||
Purchases of property and equipment | (4 | ) | (48 | ) | ||||
Net cash provided by (used in) investing activities | (4 | ) | 1,512 | |||||
Cash flows from financing activities: | ||||||||
Payments under capital lease obligation | (15 | ) | (12 | ) | ||||
Borrowings on line of credit, net | 1,850 | -- | ||||||
Payroll tax on issuance of restricted stock | -- | (175 | ) | |||||
Net cash (used in) provided by financing activities | 1,835 | (187 | ) | |||||
Net (decrease) increase in cash and cash equivalents | (1,119 | ) | (2,908 | ) | ||||
Cash and cash equivalents, beginning of period | 2,685 | 7,712 | ||||||
Cash and cash equivalents, end of period | $ | 1,566 | $ | 4,804 | ||||
Non-cash activities: | ||||||||
Transfer of inventory to property and equipment for placement at customer sites. | $ | 392 | $ | 248 | ||||
Transfer of Cryocare Surgical Systems from property and equipment to inventory for | ||||||||
sale | $ | 5 | $ | 54 |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
1. Organization and Operations
Endocare, Inc. (Endocare or we or us) is a medical device company focused on developing, manufacturing and
selling cryoablation products which have the potential to assist physicians in improving and extending life by
use in the treatment of cancer and other tumors. We were formed in 1990 as a research and development division of
Medstone International, Inc. (Medstone), a manufacturer of shockwave lithotripsy equipment for the treatment of
kidney stones. Following our incorporation under the laws of the state of Delaware in 1994, we became an
independent, publicly-owned corporation upon Medstones distribution of our stock to the existing stockholders on
January 1, 1996. |
2. Basis of Presentation
Following the rules and regulations of the Securities and Exchange Commission (SEC), we have omitted footnote
disclosures in this report that would substantially duplicate the disclosures contained in our annual audited
financial statements. The accompanying condensed consolidated financial statements should be read together with
the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K, filed
with the SEC on March 30, 2009. |
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3. Bank Line of Credit
On October 26, 2005, we entered into a one-year credit facility with Silicon Valley Bank (the Lender), which
initially provided up to $4.0 million in borrowings for working capital purposes in the form of a revolving line
of credit and term loans (not to exceed $500,000). On May 26, 2009, the agreement was extended to expire on
August 27, 2009. The terms of the agreement were modified to increase the maximum borrowing capacity from $4.0
million to $5.0 million, the tangible net worth covenant was replaced with a maximum net loss covenant, and the
fee in the case of an early termination was increased from one percent to two percent of the maximum borrowing
capacity under the credit facility. |
4. Capital Stock and Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the respective periods. Basic earnings per share also include contingently issuable shares (such as fully vested deferred and restricted stock units) as of the date all necessary conditions for issuance have been met. Diluted loss per share, calculated using the treasury stock method, gives effect to the potential dilution that could occur upon the exercise of certain stock options, warrants, deferred stock units and restricted stock units that were outstanding during the respective periods presented. For periods when we reported a net loss, these potentially dilutive common shares were excluded from the diluted loss per share calculation because they were anti-dilutive. The total number of shares excluded from the calculation of diluted net loss per share, prior to application of the treasury stock method for options and warrants was 3.0 million and 3.9 million for the six months ended June 30, 2009 and 2008, respectively. |
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Under the Companys equity incentive plans, in the event of a change in control transaction (as defined), equity awards not assumed by the buyer or surviving company will automatically vest and be canceled if not exercised prior to the change in control event. Pursuant to the HealthTronics Merger Agreement, none of Endocares equity awards would be assumed by HealthTronics. Due to the significant decrease in the Companys stock price, substantially all options and restricted stock units were not exercised and were canceled upon the HealthTronics merger in July 2009. |
5. Common Stock Warrants
At June 30, 2009 and December 31, 2008, there were 1,383,750 common stock warrants outstanding, which would
expire on May 1, 2010. These warrants were issued in conjunction with the private placement of our common stock
on March 11, 2005. At June 30, 2009, 689,113 of the warrants were exercisable at $10.02 per share and 694,637 of
the warrants were exercisable at $11.37 per share. |
6. Stock-Based Compensation
Our equity incentive programs include stock options, restricted stock units and deferred stock units. Some awards
vest based on continuous service while others vest or vest on an accelerated basis based on performance
conditions, such as profitability and sales goals. We account for equity awards in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123 (revised), Share-Based Payment (SFAS No. 123R), which
requires measurement and recognition of compensation expense for all share-based awards made to employees and
directors. |
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7. Inventories
Inventories, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost or
market, with cost determined by the first-in, first-out method. Reserves for slow-moving and obsolete inventories
are provided based on historical experience and product demand. We evaluate the adequacy of these reserves
quarterly. |
June 30, 2009 |
December 31, 2009 |
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Raw Materials | $ | 1,391 | $ | 1,831 | ||||||||||
Work in process | 330 | 119 | ||||||||||||
Finished goods | 944 | 1,096 | ||||||||||||
Total inventories | 2,665 | 3,046 | ||||||||||||
Less: inventory reserve | (323 | ) | (487 | ) | ||||||||||
Inventories, net | $ | 2,342 | $ | 2,559 |
8. Commitments and Contingencies
On June 5, 2009, we sent notice to Galil Medical Ltd., an Israeli corporation (Galil) terminating the previously
announced Agreement and Plan of Merger, dated November 10, 2008 (the Galil Merger Agreement), by and among
Endocare, Orange Acquisitions Ltd. (Orange Acquisitions), a wholly owned subsidiary of Endocare, and Galil
Medical Ltd., which provided for the merger of Orange Acquisitions with and into Galil (the Galil Merger) with
Galil surviving the Galil Merger and becoming a wholly-owned subsidiary of Endocare. We terminated the Galil
Merger Agreement as a result of the failure by the United States Federal Trade Commission to close its
investigation into whether the Galil Merger violated certain U.S. antitrust laws, which caused certain conditions
to closing of the Galil Merger to become incapable of fulfillment. Pursuant to the Galil Merger Agreement, each
party had the unilateral right to terminate the Galil Merger Agreement under such circumstances.
On June 9, 2009, Galil filed a lawsuit in the Court of Chancery of the State of Delaware against Endocare seeking enforcement
of the Galil Merger Agreement and unspecified damages.
As discussed in
Note 10, the litigation was settled on July 7, 2009 for a payment of $1.75 million to Galil. At June 30, 2009,
the settlement liability was included in other accrued liabilities. The advance did not affect the purchase price
payable in the HealthTronics Offer. |
9. Income Taxes
We reported no income tax expense during the six months ended June 30, 2009 and 2008 due to our operating
losses. Due to our history of operating losses, management has determined that it is more likely than not that
our deferred tax assets will not be realized through future earnings. Accordingly, valuation allowances were
recorded to fully reserve the deferred tax assets as of June 30, 2009 and December 31, 2008. |
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10. Subsequent Events
In accordance with the terms and conditions of the Merger Agreement, dated as of June 7, 2009 (the HealthTronics
Merger Agreement), by and among Endocare, HealthTronics, Inc. (HealthTronics) and HT Acquisition, Inc., a
wholly-owned subsidiary of HealthTronics (Offeror), on June 17, 2009, Offeror commenced an exchange offer (the
Offer) to acquire all of the outstanding shares of common stock, par value $0.001 per share (Common Stock) of
Endocare (the Shares) in which each validly tendered Share would be exchanged, at the election of the holder,
for the following consideration: (i) $1.35 in cash, without interest (the Cash Consideration), or (ii) 0.7764
of a share of common stock of HealthTronics (the Stock Consideration), in each case subject to proration. The offer
was consummated on July 27, 2009. Following consummation of the Offer, on July 27, 2009, Endocare was merged into Offeror
pursuant to a short-form merger under Delaware law (the Merger). |
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11. Fair Value Measurement
We adopted the provisions of SFAS No. 157, Fair Value Measurements, effective January 1, 2008, for our financial
assets and liabilities. Under this standard, fair value is defined as the exchange price that would be received
to sell an asset or paid to transfer a liability (i.e., the exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date.
In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS No. 157 until January 1, 2009, with respect to the fair value measurement requirements for
non-financial assets and liabilities that are not re-measured on a recurring basis (at least annually). We
adopted the provisions of SFAS No. 157 with respect to non-financial assets and liabilities that are not
re-measured on a recurring basis on January 1, 2009. The adoption did not have a material impact on our condensed
consolidated financial statements. |
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12. New Pronouncements
In May 2009, the FASB issued Statement No. 165, Subsequent Events (SFAS No. 165). SFAS No. 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 was effective for interim or annual financial periods ending after June 15, 2009. We adopted SFAS No. 165 during the second quarter of 2009 and its application did not affect our consolidated financial position, results of operations, or cash flows. We evaluated subsequent events through the date the accompanying financial statements were issued, which was October 9, 2009. |
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