<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
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.
A DELAWARE CORPORATION I.R.S. EMPLOYER I.D. NO. 33-0618093
18 TECHNOLOGY DRIVE, SUITE 134
IRVINE, CALIFORNIA 92718
(714) 450-1410
--------------------------------------
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
-------- --------
The number of shares of the Registrant's Common Stock, par value $.001 per
share, outstanding on May 14, 1996 was 5,635,139.
<PAGE> 2
ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Operations for the three months 3
ended March 31, 1996 and 1995
Consolidated Balance Sheets at March 31, 1996 and 4
December 31, 1995
Consolidated Statements of Cash Flows for the three months 5
ended March 31, 1996 and 1995
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Signature Page 13
</TABLE>
- 2 -
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Revenues:
Net product sales $ 369,056 $ 316,322
Research revenues 1,600 59,768
-------------- -------------
Total revenues 370,656 376,090
Costs and expenses:
Cost of sales 241,305 103,474
Research and development 133,650 197,989
Selling, general and administrative 248,407 165,643
Impairment loss on long-lived assets 324,878 0
-------------- -------------
Total costs and expenses 948,240 467,106
-------------- -------------
Loss before income taxes (577,584) (91,016)
Provision for income taxes 0 0
-------------- -------------
Net loss $ (577,584) $ (91,016)
============== =============
Net loss per share of common stock $ (.09)
=======
Weighted average shares and common
stock equivalents outstanding 6,623,873
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 4
ENDOCARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
(unaudited) (audited)
------------- -----------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 485,610 $ 1,941
Accounts receivable, net 197,452 102,416
Inventories 166,178 219,298
Prepaid expenses and other current assets 30,054 7,335
-------------- -------------
Total current assets 879,294 330,990
Property and equipment, at cost 400,246 760,011
Less accumulated depreciation and amortization (283,191) (362,046)
-------------- -------------
Net property and equipment 117,055 397,965
Intangible assets 0 60,831
Other assets 15,907 15,907
-------------- -------------
Total assets $ 1,012,256 $ 805,693
============== =============
LIABILITIES AND SHAREHOLDERS'/DIVISION EQUITY
---------------------------------------------
Current liabilities:
Accounts payable $ 204,384 $ 0
Accrued payroll expenses 30,286 0
Other accrued liabilities 37,349 1,628
Customer deposits 10,000 932
-------------- -------------
Total current liabilities 282,019 2,560
Shareholders'/division equity:
Advances from Medstone International, Inc. 0 2,831,364
Common stock, $.001 par value 5,629 0
Additional paid-in capital 1,302,192 0
Accumulated deficit (577,584) (2,028,231)
------------- -------------
Total shareholders'/division equity 730,237 803,133
-------------- -------------
Total liabilities and equity $ 1,012,256 $ 805,693
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 5
ENDOCARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- - -------------------------------------
Net loss $ (577,584) $ (91,016)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 7,586 36,137
Impairment loss on long-lived assets 324,878 0
Changes in operating assets and liabilities:
Accounts receivable (95,036) 47,757
Inventories 53,120 9,240
Prepaid expenses and other current assets (22,719) (23,734)
Accounts payable 204,384 (4,968)
Accrued payroll expenses 30,286 (21,509)
Other accrued liabilities 35,721 (52)
Customer deposits 9,068 0
-------------- -------------
Net cash used in operating activities (30,296) (48,145)
Cash flows from investing activities:
- - -------------------------------------
Purchases of property and equipment (6,473) (5,264)
Proceeds from disposals of property and equipment 15,750 0
-------------- -------------
Net cash provided (used) in investing activities 9,277 (5,264)
Cash flows from financing activities:
- - -------------------------------------
Advances from Medstone 0 53,409
Issuance of common stock, Medstone Distribution 500,000 0
Issuance of common stock, other 4,688 0
-------------- -------------
Net cash provided by financing activities 504,688 53,409
-------------- -------------
Net increase in cash and cash equivalents 483,669 0
Cash and cash equivalents, beginning of period 1,941 0
-------------- -------------
Cash and cash equivalents, end of period $ 485,610 $ 0
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE> 6
ENDOCARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
Endocare, Inc. (the "Company") designs, manufactures, and markets medical
devices to treat prostate diseases worldwide.
Since its formation in 1990, Endocare operated first as a research and
development department, then later as a division of Medstone International,
Inc. ("Medstone"). Effective January 1, 1996, Endocare became a totally
independent, publicly-owned corporation. At the beginning of 1996,
Endocare, Inc. issued 5,616,528 shares of Endocare common stock to Medstone
in exchange for $500,000 cash and the accounts receivable, inventory, and
other net assets of the Endocare Division. On February 6, 1996, Medstone
distributed to existing Medstone shareholders a stock dividend of one share
of Endocare common stock for each share of Medstone common stock
outstanding on December 29, 1995.
All 1995 comparative amounts shown in the accompanying financial statements
reflect operations while Endocare was a division of Medstone. In
particular, the December 31, 1995 Balance Sheet is before Medstone's
conversion of its net advance to equity and before Medstone's contribution
of $500,000 cash.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Endocare, Inc. in accordance with Securities and Exchange Commission rules
and regulations. In the opinion of Company management, the unaudited
financial statements include all entries and adjustments necessary for a
fair presentation.
These financial statements should be read in conjunction with the audited
financial statements and other information included in the Company's Form
10-K for the year ended December 31, 1995. Financial results for this
interim three-month period are not necessarily indicative of results to be
expected for the full year 1996.
3. 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 revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
- 6 -
<PAGE> 7
4. SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
Inventories:
------------
Raw materials $ 78,451 $ 168,788
Work in process 34,969 2,849
Finished goods 52,758 47,661
-------------- --------------
Total inventories $ 166,178 $ 219,298
============== ==============
Property and Equipment:
-----------------------
Production equipment $ 112,031 $ 721,104
Furniture and fixtures 39,784 38,907
Leasehold improvements 1,309 0
Assets held for disposal (net of reserves) 247,122 0
-------------- --------------
Total property and equipment, at cost 400,246 760,011
Accumulated depreciation (283,191) (362,046)
-------------- --------------
Net property and equipment $ 117,055 $ 397,965
============== ==============
</TABLE>
5. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENT: ASSET IMPAIRMENT
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Effective January 1, 1996, Endocare adopted this pronouncement. In
accordance with this standard, the Company reviewed the cash flows being
generated by certain assets which were not expected to be utilized fully
in the Company's operations after its spin-out from Medstone
International, Inc. Based upon this review, effective January 1, 1996,
Endocare reduced the value of certain property and equipment by $264,047
and intangible organizational costs by $60,831 to their estimated fair
market values. These adjustments were charged to operations in the
quarter ended March 31, 1996.
The majority of the property and equipment adjustment pertained to laser
machines which were no longer generating sales of the Company's ProLase
laser catheters. At the December 31, 1995 spin-out date, these sixteen
lasers had a net book value of $311,665. Effective January 1, 1996,
Endocare reduced them to their estimated disposal value of $50,000, of
which $15,750 was realized in the first quarter of 1996.
The $60,831 adjustment to intangible organizational costs is described in
Note 6 below.
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<PAGE> 8
6. INTANGIBLE ASSETS
At the end of 1995, Medstone International, Inc. incurred significant
legal, accounting, and other professional expenses in connection with its
Distribution of its subsidiaries, Endocare and Urogen, to its existing
Medstone shareholders. Medstone elected to capitalize these expenses as
deferred organizational costs on its Balance Sheet. At the time of the
actual Distribution, $60,831 was allocated by Medstone to Endocare,
appearing as Intangible Assets on Endocare's initial December 31, 1995
Balance Sheet. Effective January 1, 1996, in accordance with the new
accounting standard described in Note 5 above, Endocare wrote off these
amounts entirely.
7. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENT:
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Effective January 1, 1996, Endocare adopted
this pronouncement. In accordance with this standard, the Company has
elected to follow the guidance of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Per this election,
compensation related to stock options is calculated as the difference
between the grant price and the fair market value of the underlying
common shares at the grant date. Endocare's usual practice is to issue
stock options with a grant price equal to the fair market value of the
Company's common stock on the grant date. Hence, this difference
typically will be zero.
8. EARNINGS PER SHARE
Earnings per share data for the period is computed using the weighted
average number of common shares and dilutive common stock options
outstanding, at the average market price for the period. Fully diluted
earnings per share amounts are not presented because they approximate
primary earnings per share.
Earnings per share data is not presented for 1995, because at that time
Endocare was operating as a division of Medstone. Endocare, Inc. shares
were not outstanding at any time during 1995.
- 8 -
<PAGE> 9
ITEM 2.
ENDOCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Endocare, Inc. (the "Company") designs, manufactures, and markets medical
devices to treat diseases of the prostate, i.e., benign prostate enlargement
and prostate cancer. Endocare's business strategy addresses three time frames,
representing immediate, intermediate, and long-term opportunities:
o Endocare's Surgical Disposable devices are being actively marketed at
present. Since 1993, Endocare has marketed its ProLase line of
disposable laser catheters. In the fourth quarter of 1995, Endocare
introduced two new product lines, UroLoops and VaporBars, which accounted
for the majority of the Company's revenue in the first quarter of 1996.
o Endocare's Surgical Systems are intended to provide intermediate growth.
In the second quarter of 1996, Endocare introduced its CryoCare system.
This equipment allows treatment of prostate cancer using minimally
invasive probes which produce rapid, controlled freezing and destruction
of the tumor.
o Endocare's proposed Office-Based Therapy products are envisioned as the
foundation for its long-term growth. If successfully developed, this
therapeutic approach would offer a pain-free way to provide immediate
relief of prostate obstruction in an office-based setting.
Since its formation in 1990, Endocare operated first as a research and
development department, then later as a division of Medstone International,
Inc. ("Medstone"). In this form, Endocare shared facilities and certain
personnel with its parent. Effective January 1, 1996, Endocare began operating
as a totally independent corporation. Comparisons of financial results for
1996 with those of 1995 may be impacted significantly by these two very
different organizational structures. In 1995 Endocare received direction,
services, actual funding, and accounting allocations from Medstone. In 1996
Endocare is independent. All 1996 charges are directly incurred by Endocare as
it replaces services previously provided by Medstone with its own resources.
- 9 -
<PAGE> 10
RESULTS OF OPERATIONS
The following table summarizes the three-month Statements of Operations for
1996 and 1995.
<TABLE>
<CAPTION>
Dollars (thousands) Percentages
Three Months Ended Three Months Ended
March 31, March 31, Percent
------------------ -------------------- Increase
1996 1995 1996 1995 (Decrease)
------ ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales $ 369 $ 316 99 % 84 % +17%
Research revenues 2 60 1 16 -97%
------ ------ -------- --------
Total revenues 371 376 100 % 100 % -1%
Costs and expenses:
Cost of sales 241 103 65 27 +133%
Research and development 134 198 36 53 -32%
Selling, general and administrative 249 166 67 44 +50%
Impairment loss on long-lived assets 325 0 88 0 ---
------ ------ -------- --------
Total costs and expenses 949 467 256 124 +103%
------ ------ -------- --------
Loss before income taxes (578) (91) (156) (24) +535%
Provision for income taxes 0 0 0 0
------ ------ -------- --------
Net loss $(578) $ (91) (156) % (24) % +535%
====== ====== ======== ========
</TABLE>
Overall revenue in the first quarters of 1996 and 1995 was virtually the same,
approximately $370,000. However, the mix of products sold changed
significantly from year to year. In the first quarter of 1995, $60,000 of
engineering services were provided to Medstone by Endocare personnel. In 1996,
only $1,600 of this research revenue was generated, as Endocare's engineers
focused on developing Endocare's own products. Product sales in the first
quarter of 1995 consisted almost entirely of ProLase laser catheters. In the
first quarter of 1996, overall product sales increased 17% to $369,000 from
$316,000 in the first quarter of 1995. ProLase sales dropped to approximately
$100,000. However, the new UroLoops and VaporBars contributed approximately
$170,000 of revenue in the first quarter of 1996, compared to approximately
$110,000 of revenue when introduced in the fourth quarter of 1995. The
remaining $100,000 of first quarter revenue came from sales of the Company's
DioLase laser machines.
First quarter cost of sales as a percent of revenue increased from 27% in 1995
to 65% in 1996. Resulting in decreased margins of $143,000, this change is
largely attributable to the shift in product mix described above. In 1995,
revenue consisted of high margin ProLase sales and engineering services. In
1996, competitive market pressures reduced both revenue and margins for ProLase
products, and there was virtually no high margin engineering service revenue.
These revenue declines were offset by UroLoops and VaporBars, which had high
margins, but also by $100,000 of lower margin DioLase sales.
- 10 -
<PAGE> 11
First quarter research and development expense declined $64,000 to $134,000 in
1996 from $198,000 in 1995 for several reasons. As noted previously, Endocare
performed virtually no engineering services for Medstone, concentrating its
efforts on its own Endocare products. Also, Endocare was at a low point in two
product development cycles. CryoCare had already completed regulatory
approvals, requiring only limited fine-tuning in preparation for its second
quarter market introduction. The major new research and development effort,
Office-Based Therapy, was in the relatively low-cost startup phase, acquiring
the desired licenses and patents.
First quarter selling, general and administrative expense increased to $248,000
in 1996 from $166,000 in 1995. This increase reflected the higher
administrative expense of operating as an independent, publicly-traded company,
as well as investment in sales and marketing resources to establish a
foundation for future revenue growth.
The overall loss for the first quarter increased to $578,000 in 1996 from
$91,000 in 1995. The predominant factor in the loss was the effect of adopting
the new accounting pronouncement requiring review of long-lived assets for
possible impairment. As described in Note 5 to the financial statements,
review of the assets contributed to Endocare by Medstone resulted in a
write-down of $325,000 effective January 1, 1996.
Apart from this one-time adjustment, the quarterly loss was $253,000, a
$162,000 rise from 1995. The $83,000 increase in selling, general and
administrative expense was largely offset by the $64,000 decrease in research
and development expense. The remaining $143,000 increase corresponds to the
margin decrease due to the revenue mix change described above.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the spin-out, Medstone contributed $500,000 cash to
Endocare. In addition, Endocare took possession of $102,000 of its accounts
receivable and $219,000 of inventory. Medstone retained responsibility for all
financial liabilities incurred before January 1, 1996. With this initial base
of current assets, Endocare was able to manage its operations so that only
$14,000 of the original $500,000 cash had been consumed by March 31, 1996.
Accounts receivable increased to $197,000, primarily due to several large
system sales in March. Fixed asset additions were less than $10,000 during
the quarter. As described in Note 5 to the financial statements,
implementation of a new accounting standard resulted in write-off of $325,000
of non-current assets effective January 1, 1996. As expected, starting from
the initial balance of zero, accounts payable and other current liabilities
grew to a more normal operating level of approximately $250,000.
At March 31, 1996, the ratio of current assets to current liabilities was 3.1
to 1. Per its current financial operating plans, the Company believes that its
existing cash resources, combined with anticipated cash flows from future
operations, possibly supplemented by a modest bank line of credit currently
under negotiation, can provide sufficient resources to meet present and
reasonably foreseeable working capital requirements and other cash needs
through the end of the fiscal year. Insofar as the Company elects to undertake
or accelerate significant research and development projects for new products,
it may require additional outside financing at that time.
- 11 -
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
As described in Note 1 to the financial statements, in January 1996
Endocare was spun-out from its previous parent company, Medstone
International, Inc., becoming a totally independent,
publicly-traded corporation. In the first quarter of 1996,
Endocare, Inc. issued 5,616,528 shares of Endocare common stock to
Medstone in exchange for $500,000 cash and the accounts receivable,
inventory, and other net assets of the Endocare Division. On
February 6, 1996, Medstone distributed to existing Medstone
shareholders a stock dividend of one share of Endocare common stock
for each share of Medstone common stock outstanding on December 29,
1995.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 Calculation of Earnings Per Share page 14
Exhibit 27 Financial Data Schedule page 15
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1996.
- 12 -
<PAGE> 13
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.
(Registrant)
Date: May 14, 1996 /s/ PAUL W. MIKUS
----------------------------------
Paul W. Mikus
Chairman of the Board,
Chief Executive Officer, President,
Chief Financial Officer
- 13 -
<PAGE> 1
EXHIBIT 11.
ENDOCARE, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1996
--------------
<S> <C>
Net loss $ (577,584)
=============
Weighted average number of common shares
outstanding during the period 5,625,122
Incremental common stock equivalent shares
attributable to potential exercise of
outstanding stock options 998,751
-------------
Common and common stock equivalent shares
outstanding for purpose of calculating
primary net loss per share 6,623,873
Incremental shares to reflect full dilution 84,149
-------------
Total shares for purpose of calculating fully
diluted net loss per share 6,708,022
=============
Primary net loss per share $ (.09)
=======
Fully diluted net loss per share $ (.09)
=======
</TABLE>
Note: Earnings per share data is not presented for 1995 because
Endocare was operating as a division of Medstone
International, Inc. at that time.
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 485,610
<SECURITIES> 0
<RECEIVABLES> 247,156
<ALLOWANCES> 49,704
<INVENTORY> 166,178
<CURRENT-ASSETS> 879,294
<PP&E> 400,246
<DEPRECIATION> 283,191
<TOTAL-ASSETS> 1,012,256
<CURRENT-LIABILITIES> 282,019
<BONDS> 0
0
0
<COMMON> 1,307,821
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,012,256
<SALES> 369,056
<TOTAL-REVENUES> 370,656
<CGS> 241,305
<TOTAL-COSTS> 241,305
<OTHER-EXPENSES> 706,935
<LOSS-PROVISION> 7,465
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (577,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (577,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (577,584)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
