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PROSPECTUS
This filing is made pursuant
to Rule 424(b)(2) under
the Securities Act of
1933 in connection with
Registration No. 333-23589
ENDOCARE, INC.
2,550,714 SHARES
COMMON STOCK
PAR VALUE $0.001 PER SHARE
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The 2,550,714 shares (the "Shares") of Common Stock, par value $0.001 per
share ("Common Stock"), of Endocare, Inc. (the "Company") offered hereby are to
be sold by the persons and entities named herein under "Selling Stockholders."
INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH IN THIS
PROSPECTUS BEGINNING ON PAGE 3 UNDER "RISK FACTORS" PRIOR TO PURCHASE.
Holders of the Shares may resell the Shares from time to time in
transactions on the Nasdaq SmallCap Market, and may sell the Shares through a
broker or brokers or in the over-the-counter market at prices prevailing on such
exchange or over-the-counter market, as appropriate, at the times of such sales.
The Selling Stockholders may also make private sales directly or through such
broker or brokers. See "Plan of Distribution." Sales of the Shares may be
effected by selling such securities to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the sellers thereof. Such sellers and any broker-dealer who
acts in connection with the sales of Shares may be deemed to be "underwriters"
as that term is defined in the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and profit on any resale
of the Shares might be deemed to be underwriting discounts and commissions under
the Securities Act.
None of the proceeds from the sale of the Shares will be received by the
Company. The Company has agreed to bear all expenses (other than underwriting
discounts and selling commissions and fees and expenses of counsel and other
advisors to the Selling Stockholders) in connection with the registration and
sale of the Shares being registered hereby. The Company has agreed to indemnify
the Selling Stockholders against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See "Plan of
Distribution."
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The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"ENDO." On August 1, 1997, the reported closing price of the Company's Common
Stock on the Nasdaq SmallCap Market was $3.50 per share.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained or incorporated by
reference in this Prospectus, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by any other person. All information contained in this Prospectus is as of
the date of this Prospectus. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or in the facts herein
set forth since the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of any offer to buy any security other than the
securities covered by this Prospectus, nor does it constitute an offer to or
solicitation of any person in any jurisdiction in which such offer or
solicitation may not lawfully be made.
THE DATE OF THIS PROSPECTUS IS AUGUST 1, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and the rules and regulations thereunder, and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such reports, proxy statements and other information
concerning the Company are also available for inspection at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. In addition
the Commission maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all exhibits, schedules, amendments, and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Common Stock offered by this Prospectus. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement (certain parts of which have been omitted in
accordance with the rules and regulations of the Commission). For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by reference to such exhibit. The Registration
Statement may be inspected and copied at the public reference facilities at the
Commission's offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at: Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any
part thereof may be obtained from such office upon payment of prescribed fees.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Annual Report of the Company on Form 10-K (File No. 0-27212)
for its fiscal year ended December 31, 1996, as filed with the Commission
on February 21, 1997, as amended by Amendment No. 1 on Form 10-K/A for the
fiscal year ended December 31, 1996, as filed with the Commission on March
4, 1997, by Amendment No. 2 on Form 10-K/A for the fiscal year ended
December 31, 1996, as filed with the Commission on May 30, 1997, and by
Amendment No. 3 on Form 10-K/A for the fiscal year ended December 31, 1996,
as filed with the Commission on July 8, 1997;
(2) The description of the Common Stock contained in a registration
statement on the Company's Form 10-SB/A Amendment No. 2, as filed with the
Commission on January 5, 1996;
(3) The definitive Proxy Statement of the Company, as filed with the
Commission on March 6, 1997;
(4) The Quarterly Report of the Company on Form 10-Q for the quarterly
period ended March 31, 1997, as filed with the Commission on May 20, 1997;
and
(5) All documents subsequently filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein, modified or
supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a
part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
which have been incorporated by reference herein, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to: Paul W. Mikus,
President, Endocare, Inc., 7 Studebaker, Irvine, California 92618, telephone
number (714) 595-4770.
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RISK FACTORS
An investment in the Shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the Common Stock
offered hereby should carefully review the following risk factors as well as the
other information set forth in this Prospectus.
This Prospectus, including the information set forth below, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are intended to be covered by the safe harbors created thereby.
Forward-looking statements include statements regarding the Company's
development of new products, its ability to market and sell existing products
and obtain regulatory approvals, the trends in the markets served by the Company
and the Company's ability to meet its liquidity requirements. Prospective
purchasers are cautioned that all forward-looking statements are subject to
risks and uncertainties, including, without limitation, the risks outlined in
this section.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has a limited history of operations as an independent operating
entity. Since its inception, the Company has engaged primarily in research and
development, and the Company has minimal experience in manufacturing, marketing
and selling its products in commercial quantities. Additionally, the Company has
incurred annual operating losses since its inception, and expects to continue to
incur operating losses as new products will require substantial development,
clinical, regulatory, manufacturing and other expenditures. As of March 31,
1997, the Company's accumulated deficit was approximately $2.27 million. There
can be no assurance that ENDOcare will successfully develop or commercialize its
current or future products, that the Company will achieve significant revenues
from sales, or that the Company will achieve or sustain profitability in the
future. Additionally, successful completion of the Company's development program
and its transition to attaining profitable operations is dependent upon
achieving a level of revenues adequate to support the Company's cost structure
and obtaining additional financing adequate to fulfill its research and
development activities to continue refinement of existing products and to
develop and commercialize new products.
DECLINING SALES OF EXISTING PRODUCTS; UNCERTAIN MARKET ACCEPTANCE OF THE
COMPANY'S NEW PRODUCTS
Sales of several existing ENDOcare products, including Prolase(R) and
Diolase(TM), have declined and are expected to continue to decline over the next
two years and beyond. Certain of the Company's products, including ENDOcare's
CRYOcare Systems, which were introduced in the second quarter of 1996, are in
the early stages of development or market introduction. There can be no
assurance that any of the Company's products will be accepted by potential
customers. The Company's ability to successfully market its CRYOcare System is
dependent upon acceptance of cryosurgical procedures in the United States and
certain international markets. Although cryosurgery has existed for many years,
cryosurgery has not been widely accepted due to cost, competing products and
limited reimbursement by third party payers. The acceptance of cryosurgery by
the general population also may be affected adversely by its price, concerns
relating to its safety and efficacy, the accepted effectiveness of alternative
methods of correcting urological disorders and lack of reimbursement from third
party payers. Medicare does not currently reimburse for cryosurgical ablation of
the prostate, the approved use of the Company's eight probe CRYOcare System. In
addition, any future reported adverse events or other unfavorable publicity
involving patient outcomes from the use of cryosurgery, whether from the
Company's products or the products of the Company's competitors, could adversely
affect acceptance and reimbursement for cryosurgery. Emerging new technologies
and procedures to treat cancer, prostate enlargement and other prostate
disorders also may adversely affect the market acceptance of cryosurgery. There
can be no assurance that the Company's CRYOcare Systems will gain any
significant degree of market acceptance among physicians, patients and health
care payers.
UNCERTAINTY OF PRODUCT DEVELOPMENT; RISKS RELATED TO CLINICAL TRIALS
The Company's growth is substantially dependent upon its continued ability
to successfully develop, commercialize and market new products. ENDOcare's
future products are in varying stages of development.
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There can be no assurance that the Company will be successful in developing and
commercializing new products that achieve market acceptance or that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. There can be no
assurance that the Company's products in development will prove to be safe and
effective in clinical trials under applicable regulatory guidelines, and
clinical trials may identify significant technical or other obstacles that must
be overcome prior to obtaining necessary regulatory or reimbursement approvals.
Even if a product overcomes these obstacles, the Company's products will not be
used unless they present an attractive alternative to other treatments and the
clinical benefits to the patient and cost savings achieved through use of the
Company's products outweigh the cost of such products. The Company believes that
recommendations and endorsements of physicians and patients and reimbursement by
health care payers will be essential for market acceptance of its products, and
there can be no assurance that any such recommendations, endorsements or
reimbursements will be obtained. Failure of the Company to successfully develop,
commercialize and market new products or the failure of the Company's products
to achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON BOSTON SCIENTIFIC; LIMITED SALES AND MARKETING EXPERIENCE
The Company has only limited experience marketing and selling its products,
and does not have experience marketing and selling its products in commercial
quantities. In November 1996, the Company entered into an eight year exclusive
distribution agreement whereby Boston Scientific agreed to market and distribute
the Company's CRYOcare Systems worldwide. As a result, future sales of the
CRYOcare System, the Company's main product, will be dependent on the marketing
efforts of Boston Scientific. The Company derives a majority of its revenues
from the sales of CRYOcare Systems and expects that sales of CRYOcare Systems
will continue to constitute the majority of net sales for the foreseeable
future. Accordingly, any factor adversely affecting the sales of CRYOcare
Systems would have a material adverse effect on the Company's business,
financial condition and results of its operations. Although the distributorship
agreement requires Boston Scientific to purchase a minimum number of products,
if and when there were a lack of sales as a result of unforeseen regulatory
(including lack of Medicare reimbursement of cryosurgical ablation of the
prostate) or clinical circumstances relating to a product or failure of the
Company to deliver products in a timely manner, the minimum purchase
requirements can be renegotiated. Currently, Medicare does not provide
reimbursement for cryosurgical ablation of the prostate, the approved use of the
Company's eight probe CRYOcare System.
The Company believes that to become and remain competitive, it will need to
continue to develop third party distribution channels and/or a substantial
direct sales force for its new and other products. Establishing marketing and
sales capabilities sufficient to support sales in commercial quantities will
require significant resources, and there can be no assurance that the Company
will be able to recruit and retain direct sales personnel, or that the Company
will succeed in establishing and maintaining any third party distribution
channels, or that the Company's future sales and marketing efforts will succeed
at all.
In addition, under the distribution agreement, Boston Scientific has a
right of first refusal to match any offer received by the Company from a third
party to purchase the assets related to the CRYOcare System for urological
applications, and a right to buy the assets and technology related to the
CRYOcare System for urological applications at purchase dates of twenty-four,
thirty-six and forty-eight months after the date that Medicare provides
reimbursement for cryosurgical ablation of the prostate, for a purchase price of
1.7, 1.5 and 1.3 times net sales for the product for the preceding twelve
months, but not less than $40 million, $50 million and $60 million,
respectively. This buyout provision may have the impact of creating a
theoretical cap on the value of the CRYOcare System for urological applications
and, indirectly, the market value of the Company.
PRIOR RELIANCE ON MEDSTONE; NEED FOR ADDITIONAL FINANCING
The Company operated as a division or wholly owned subsidiary of Medstone
from its commencement of operations until January 1996 and relied upon Medstone
for financial support and for assistance with personnel management and financial
administration. ENDOcare anticipates that its need for working capital through
the
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end of 1997 should be satisfied with the proceeds from the $7.8 million private
placement of Common Stock by Endocare which closed on January 27, 1997. Insofar
as the Company may elect to undertake or accelerate significant research and
development projects for new products or may pursue corporate acquisitions, it
may require additional outside financing prior to such time. The Company expects
that to meet its long-term needs it will need to raise substantial additional
funds through the sale of its equity securities, the incurrence of indebtedness
or through funds derived through entering into collaborative arrangements with
third parties. 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
the Company to relinquish rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION; RAPID TECHNOLOGICAL AND INDUSTRY CHANGE
ENDOcare competes in an established field of surgical device manufacturers,
and the competition in this field is intense. Many of the Company's competitors
are significantly larger than the Company and have greater financial, technical,
research, marketing, sales, distribution and other resources than the Company.
Additionally, the Company believes there will be intense price competition for
products developed in the Company's markets. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
and products, including drug-based treatments, that are more effective or
commercially attractive than any that are being developed or marketed by the
Company, or that such competitors will not succeed in obtaining regulatory
approval, introducing or commercializing any such products prior to the Company.
Such developments could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, there can be
no assurance that, even if the Company is able to compete successfully, it would
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. The Company's future
success will depend upon its ability to develop and introduce new cost effective
products in a timely manner. There can be no assurance that the Company's
products will not be rendered obsolete as a result of future innovations.
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in producing its 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. The
Company's failure to overcome these manufacturing problems could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company uses a combination of internal manufacturing capacity and third
party manufacturers in its manufacturing efforts. Most of the Company's
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. Any supply interruption from a single source
vendor would have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the ability of third
party manufacturing sources to deliver components or finished goods will affect
the Company's ability to commercialize its products, and the Company's
dependence on third party sources may adversely affect the Company's profit
margins.
Additionally, the Company's success will depend in part upon its ability to
manufacture its products in compliance with the FDA's Good Manufacturing
Practices ("GMP") 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
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maintain compliance with GMP or other regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends to a significant degree upon the
continued service of key technical and senior management personnel, including
Paul W. Mikus, the President of the Company, none of whom is bound by an
employment agreement or covered by an insurance policy of which the Company is
the beneficiary. The Company's future success also depends on its continuing
ability to attract, retain and motivate highly qualified technical, managerial
and sales personnel. The inability to retain or attract qualified personnel
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
Governmental regulations in the United States and other countries are a
significant factor affecting the research and development, manufacture and
marketing of the Company's products. In the United States, the United States
Food and Drug Administration ("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. There can be no assurance that ENDOcare will be able to
obtain necessary approvals for clinical testing or for manufacturing or
marketing of its 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 regulation may be established which could prevent, delay,
modify or rescind regulatory approval of ENDOcare's products. There can be no
assurance that any such position by the FDA, or change of position by the FDA,
would not adversely impact the Company's business, financial condition or
results of operations.
Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which the Company's products may be marketed. In
addition, to obtain such approvals, the FDA and foreign regulatory authorities
may impose numerous other requirements on the Company. 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 the Company will be able to obtain
regulatory approvals for its 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 the Company's business, financial
condition and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's 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 the Company's products. Currently, Medicare
does not reimburse for cryosurgical ablation of the prostate, the approved use
of the Company's eight probe CRYOcare System. Without such reimbursement, market
acceptance and use of the product will be limited and may adversely affect the
Company's revenues from sales of the product. There can be no assurance that the
cost of medical procedures involving the Company's products will be reimbursed
by Medicare or other governmental, insurance or third party payers.
In addition, the Company anticipates that in a prospective payment system,
such as the DRG system utilized by Medicare, and in many managed care systems
used by private health care payers, the cost of the Company's products will be
incorporated into the overall cost of the procedure and that there will be no
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separate, additional reimbursement for the Company's products. Separate
reimbursement for the Company's products is not expected to be available in the
United States and there can be no assurance that reimbursement for the Company's
products will be available in international markets under either governmental or
private reimbursement systems.
Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payers,
particularly to the extent any such changes affect reimbursement for procedures
in which the Company's products are used. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payers for procedures involving the Company's products, or adverse
changes in governmental and private third party payers' policies toward
reimbursement for such procedures, could have a material adverse effect on the
Company's business, financial condition and results of operations.
PRODUCT LIABILITY AND RECALL RISKS
The manufacture and sale of medical products entails significant risk of
product liability claims or product recalls. There can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the clinical trials or
sales of its products. In addition, the Company may require increased product
liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is expected to
continue in the future, and market forces are expected to demand reduced costs.
The Company cannot predict what impact the adoption of any Federal or state
health care reform measures, future private sector reform or market forces may
have on its business.
DEPENDENCE ON PATENT AND PROPRIETARY RIGHTS
ENDOcare's success will depend in part on its ability to secure and protect
intellectual property rights relating to its technology. While ENDOcare believes
that the protection of patents or licenses is important to its business, it also
relies on trade secrets, know-how and continuing technological innovation to
maintain its competitive position. No assurance can be given that ENDOcare's
patent applications will be approved, that ENDOcare will develop any additional
proprietary products that are patentable and/or that any issued patents will
provide ENDOcare with a competitive edge or will not be challenged by any third
parties.
No assurance can be given that ENDOcare's 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 ENDOcare or at all. From time to time, the Company has 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 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.
The Company seeks to preserve the confidentiality of its technology by
entering into confidentiality agreements with its 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.
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LIQUIDITY
ENDOcare Common Stock began trading on the Nasdaq SmallCap Market on
February 28, 1997. Between February 20, 1996 and February 28, 1997, the Common
Stock traded on the Nasdaq electronic bulletin board. As a result, the Common
Stock has a limited trading history. If the Company is unable to maintain the
standards for quotation on the Nasdaq Small Cap Market, the ability of investors
to resell their shares after registration with the Securities and Exchange
Commission may be limited. In addition, the Company's securities may be
subjected to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. This could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of holders of the Company's securities to sell their securities in the
secondary market.
There can be no assurance regarding the price at which the ENDOcare Common
Stock will trade before or after the date of this Prospectus. The market prices
for securities of emerging companies have historically been highly volatile.
Future announcements concerning ENDOcare or its competitors, including the
Company's operating results, technological innovations or new commercial
products, corporate collaborations, government regulations, developments
concerning proprietary rights, litigation or public concern as to safety of
ENDOcare's products, as well as investor perception of the Company and industry
and general economic and market conditions, may have a significant impact on the
market price of ENDOcare's Common Stock. 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, and are often unrelated to their operating performance.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Sales of Common Stock (including shares issued upon the exercise of
outstanding options and warrants) after the date of this Prospectus could
materially adversely affect the market price of the Common Stock. Such sales
also might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
would deem appropriate. As of July 15, 1997, the Company had 8,231,270 shares of
Common Stock outstanding, of which 5,652,389 shares may be freely traded (unless
held by an affiliate of the Company), and the remaining 2,578,881 shares were
restricted securities within the meaning of the Securities Act. Of the 2,578,881
restricted shares of Common Stock, 2,550,714 are being registered in connection
with this offering. As a result, upon completion of this offering, 28,167 shares
of Common Stock will be restricted securities. In addition, as of July 15, 1997
warrants to purchase 382,497 shares of Common Stock were outstanding. Also, as
of July 15, 1997 stock options to purchase 1,511,500 shares of Common Stock had
been granted under the Company's stock option plans, subject to various vesting
schedules. Stock options to purchase an additional 638,500 shares of Common
Stock may be issued by the Company from time to time under such option plans and
up to 250,000 shares of Common Stock may be purchased under the Company's
Employee Stock Purchase Plan. An aggregate of 2,000,000 shares of Common Stock
may be issued under the Company's 1995 Stock Plan, 150,000 shares of Common
Stock may be issued under the Company's 1995 Director Option Plan and up to
250,000 shares of Common Stock may be issued under the Company's Employee Stock
Purchase Plan. Exercise of these options or warrants may result in substantial
dilution to investors. In addition, the Company has granted certain shareholders
and warrantholders piggyback registration rights with respect to 357,497 shares
of Common Stock.
The price of the Shares to be sold in this offering may be substantially
higher than the book value per share of Common Stock. Of the 2,550,714 shares to
be sold in this offering, 2,218,714 shares were purchased by the Selling
Stockholders for a purchase price of $3.50 per share in a private placement
which occurred on January 27, 1997. The remaining 332,000 shares offered hereby
were issued by the Company on January 27, 1997 upon conversion of promissory
notes issued on August 26, 1996 at a conversion price of $2.50 per share of
Common Stock. Investors purchasing the Shares offered hereby may therefore incur
immediate, substantial dilution.
8
<PAGE> 9
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS; POSSIBLE NEGATIVE EFFECT ON STOCK
PRICE
Certain provisions of the Company's Certificate of Incorporation and the
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
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. For
example, certain of these provisions allow the Company to issue Preferred Stock
without any vote or further action by the shareholders, eliminate the ability of
shareholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for shareholders to take certain corporate actions and may have
the effect of delaying or preventing a change in control of the Company.
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<PAGE> 10
THE COMPANY
ENDOcare develops, manufactures and markets minimally invasive medical
devices to treat a variety of urological conditions. The Company has focused its
efforts on the development of surgical devices for the treatment of the two most
common diseases of the prostate; benign prostatic hyperplasia ("BPH") and
prostate cancer. To date, the Company has received marketing clearance by the
FDA for six of its products and has an attractive research and development
pipeline for other novel urological devices.
ENDOcare has developed and recently introduced an innovative, second
generation cryosurgical system for the treatment of prostate cancer. The
CRYOcare(TM) System offers the advantage of controlled, targeted freezing of the
tumor with the benefit of faster patient recovery and minimal complications. In
November, 1996, the Company entered into an exclusive worldwide distribution
agreement with Boston Scientific Corporation ("Boston Scientific") to market and
sell the CRYOcare System for urological applications. The Company expects that
the partnership with Boston Scientific will allow the proper clinical and market
development necessary to position the CRYOcare System as an accepted outpatient
therapy for the treatment of prostate cancer. See "Risk Factors -- Dependence on
Boston on Scientific; Limited Marketing Experience."
ENDOcare also is developing new therapies for the improved treatment of
BPH. The Company's initial product development efforts for BPH involve the use
of stent technology to provide both immediate and long-term relief to BPH
patients. ENDOcare is implementing a two-part strategy for the commercialization
of its stent-based BPH therapies. The first stage is the development of the
Company's Horizon Temporary Stent(TM). This nitinol-based stent has shape memory
characteristics for easy placement via a catheter following surgical
intervention of the prostate and convenient nontraumatic removal of the stent
following the healing process. The Company believes that its Horizon Temporary
Stent will address one of the major issues of BPH therapy, the immediate relief
of patients following thermotherapy and surgical resection. ENDOcare has
recently commenced preclinical studies for the Horizon Temporary Stent and
expects to begin clinical trials in late 1997.
The second stage in developing the Company's stent technology will combine
the Company's nitinol stent with a catheter system which will deliver
thermotherapy. The Company believes that this Hot Stent(TM) will provide
immediate and long-term therapy in a one-step process. Both stent applications
are being designed to be performed on an outpatient basis. The ability to
perform BPH therapy in this manner is expected to result in an increase in the
number of BPH sufferers who will seek curative surgical procedures.
The Company also markets disposable surgical devices for the treatment of
BPH. The Prolase fiber optic catheter was introduced in 1993, the Diolase 60, a
surgical laser, was introduced in 1994 to be used with the Prolase laser fiber
and the Uroloop and Vaporbar electrosurgical cutting elements were introduced in
late 1995.
ENDOcare became an independent public company effective as of January 1,
1996, through a tax-free spinout by its former parent company, Medstone
International, Inc. ("Medstone") The core operations of ENDOcare commenced in
1990, first as the research and development arm of Medstone and ultimately as a
separate division focusing on the development of novel urological devices.
ENDOcare and its management team successfully developed and launched innovative
devices to improve the performance of existing urological procedures by
minimizing trauma to patients. Over the past five years, the Company has
expanded its research efforts, which have resulted in the development of
products that offer multiple opportunities to treat BPH and prostate cancer less
invasively on an outpatient basis.
The Company's principal executive offices are located at 7 Studebaker,
Irvine, California 92618, and its telephone number is (714) 595-4770.
USE OF PROCEEDS
The Shares are being sold by the Selling Stockholders and, accordingly, the
Company will receive none of the proceeds therefrom.
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<PAGE> 11
THE SELLING STOCKHOLDERS
All of the shares of Common Stock offered hereby are offered by the Selling
Stockholders. Any sales of such Shares will be for the account of such persons
or entities and none of the proceeds of such offering will be received by the
Company. The following table sets forth, with respect to the Selling
Stockholders, the number of shares of Common Stock and percentage of Common
Stock owned by each Selling Stockholder prior to this offering, the number of
shares of Common Stock offered for each Selling Stockholder's account and the
number of shares of Common Stock and percentage of Common Stock owned by each
Selling Stockholder after the anticipated completion of this offering.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF SHARES OF
COMMON COMMON SHARES OF COMMON PERCENT OF
STOCK OWNED STOCK OWNED COMMON STOCK OWNED COMMON
PRIOR TO PRIOR TO STOCK OFFERED AFTER STOCK OWNED
THIS THIS IN THIS THIS AFTER THIS
NAME OF SELLING STOCKHOLDER OFFERING OFFERING OFFERING OFFERING OFFERING
- -------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Pharmaceutical/Medical Technology
Fund, L.P. 85,714 1.0 85,714 0 *
Essex Special Growth Opportunities
Fund, L.P. 55,000 * 55,000 0 *
Harris & Harris Group, Inc. 150,000 1.8 150,000 0 *
Health Reform Opportunities, L.P. 30,000 * 30,000 0 *
The Kaufman Fund, Inc. 1,000,000 12.2 1,000,000 0 *
Par Investment Partners, L.P. 275,000 3.4 275,000 0 *
Porter Partners, L.P. 145,000 1.7 145,000 0 *
EDJ Limited 25,000 * 25,000 0 *
Technology Funding Partners III,
L.P.(1) 474,000(2) 5.8 354,000 120,000 (2) 1.5
Technology Funding Venture Partners
IV, an Aggressive Growth Fund,
L.P.(1) 15,800(3) * 11,800 4,000 (3) *
Technology Funding Venture Partners V,
an Aggressive Growth Fund, L.P.(1) 15,800(4) * 11,800 4,000 (4) *
Technology Funding Medical Partners I,
L.P.(1) 126,400(5) 1.5 94,400 32,000 (5) *
Opco Senior Executive Investment
Partnership, L.P.(6) 43,000 * 43,000 0 *
Westfield Performance Fund, L.P. 70,000 * 70,000 0 *
Educational Employees Supplementary
Retirement System of Fairfax County 56,450 * 56,450 0 *
NCR Pension Trust 15,450 * 15,450 0 *
Newell Pension Investment Committee 54,600 * 54,600 0 *
Robinson Companies Profit Sharing
Trust 4,900 * 4,900 0 *
AT&T Investment Management Corp. 34,700 * 34,700 0 *
Local 25 S.E.I.U. Employers Pension
Plan 5,350 * 5,350 0 *
Sisters of St. Joseph Carondelet 11,700 * 11,700 0 *
Tracor, Inc. 16,850 * 16,850 0 *
--------- --------- -------
TOTALS: 2,710,714 2,550,714 160,000
========= ========= =======
</TABLE>
- ---------------
* Less than 1%.
(1) Peter F. Bernardoni is an officer of Technology Funding Inc. and a partner
of Technology Funding Ltd., each a general partner of Technology Funding
Partners III, L.P., Technology Funding Venture Partners IV, an Aggressive
Growth Fund, L.P., Technology Funding Ventures Partners V, an Aggressive
Growth Fund, L.P., and Technology Funding Medical Partners I, L.P.
(collectively, the "Funds"). Mr. Bernardoni has sole voting and shared
investment power with respect to all shares owned by the Funds, and
therefore may be deemed to be a beneficial owner of such shares. Mr.
Bernardoni has served on the Company's Board of Directors since November
1995 and is a member of the Compensation
11
<PAGE> 12
Committee and Audit Committee of the Board of Directors. As compensation for
being an outside director, Mr. Bernardoni has been granted stock options to
purchase 15,000 shares of Common Stock of the Company. In August 1996, the
Company obtained a two-year $1,500,000 borrowing facility from the Funds. In
connection with such loan, the Funds also received warrants for the purchase
of up to 150,000 shares of Common Stock of the Company, exercisable at any
time on or before August 26, 2001 at the price of $3.00 per share, and
received an origination fee of 10,000 shares of Common Stock on that same
date. On January 27, 1997, the outstanding principal balance of $750,000
under such loan was converted, at the option of the holders, into 300,000
shares of Common Stock at a conversion price of $2.50 per share. Interest on
the loan had accrued at a rate of 16% per year, and all $50,000 was
converted into 20,000 shares on that same date at $2.50 per share. The Funds
received an additional 12,000 shares of Common Stock ($50,250 total market
value) to induce conversion of the loan at that time. At the Company's
election, the remaining borrowing facility was cancelled on that same date.
(2) Includes warrants to purchase an additional 112,500 shares of Common Stock.
(3) Includes warrants to purchase an additional 3,750 shares of Common Stock.
(4) Includes warrants to purchase an additional 3,750 shares of Common Stock.
(5) Includes warrants to purchase an additional 30,000 shares of Common Stock.
(6) Oppenheimer & Co., Inc., an entity affiliated with Opco Senior Executive
Investment Partnership, L.P., acted as placement agent for the offering and
sale of 2,218,714 shares of Common Stock of the Company in a private
placement which closed on January 27, 1997. Oppenheimer & Co., Inc. received
a placement fee of $543,585, a warrant to purchase 177,497 shares of Common
Stock of the Company, exercisable at any time between January 28, 1998 and
January 27, 2002 at an exercisable price of $4.20 per share, and
reimbursement for certain out-of-pocket expenses.
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"). Such summary does not purport to be complete
and is subject to, and is qualified in its entirety by, all of the provisions of
the Certificate of Incorporation.
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $0.001 par value, and 1,000,000 shares of Preferred Stock, $0.001
par value ("Preferred Stock").
COMMON STOCK
As of July 15, 1997, there were 8,231,270 shares of Common Stock issued and
outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights applicable to the Common Stock.
Subject to the preferences or other rights applicable to shares of
Preferred Stock that may be issued from time to time, holders of shares of
Common Stock are entitled to participate ratably in dividends, if, when and as
declared by the Board of Directors from funds legally available therefor and are
entitled, in the event of liquidation or dissolution of the Company, to share
ratably in all assets available for distribution to stockholders after payment
of liabilities and preferred stock preferences, if any.
The authorized but unissued shares of Common Stock are available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange on which
the Common Stock may be listed. Shares of Common Stock are not redeemable and
there are no sinking fund provisions.
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<PAGE> 13
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Company's Board
of Directors, without any vote or action by the holders of Common Stock, to
issue Preferred Stock from time to time in one or more series. The Board is
authorized to determine the number of shares and designation of any series of
Preferred Stock and the dividend rights, dividend rate, conversion rights and
terms, voting rights (full or limited, if any), redemption rights and terms,
liquidation preferences and sinking fund terms and the other designations,
preferences and relative, participating, optional and other special rights and
such qualifications, limitations or restrictions of any series of Preferred
Stock. The Preferred Stock would be subject to the applicable rules of The
Nasdaq Stock Market, Inc. or other organizations on whose systems the stock of
the Company may then be quoted or listed. Depending upon the terms of Preferred
Stock established by the Board, any or all series of Preferred Stock could have
preference over the Common Stock with respect to dividends and other
distributions and upon liquidation of the Company. Issuance of any such shares
with voting powers, or issuance of additional shares of Common Stock, would
dilute the voting power of the outstanding Common Stock. As of July 15, 1997,
the Company had no outstanding shares of Preferred Stock.
NO PREEMPTIVE RIGHTS
No holder of any capital stock of the Company has any preemptive rights to
subscribe for or purchase any securities of any class or kind of the Company.
TRANSFER AGENT
The Company's registrar and transfer agent for the Common Stock is U.S.
Stock Transfer Corporation.
PLAN OF DISTRIBUTION
The Shares are being registered to permit public secondary sales of the
Shares by the Selling Stockholders from time to time until the earlier of:
January 27, 2000; such date as all of the Shares offered hereby have been sold;
or such time as all of the Shares offered hereby can be sold within a given
three-month period without compliance with the registration requirements of the
Securities Act pursuant to Rule 144 promulgated thereunder. The Company has
agreed, among other things, to bear all expenses (other than underwriting
discounts, selling commissions and fees and the expenses of counsel and other
advisors to the Selling Stockholders) in connection with the registration and
sale of the Shares. The Company has agreed to indemnify the Selling Stockholders
against certain liabilities, including certain liabilities under the Securities
Act.
The Company anticipates that the Selling Stockholders may sell all or a
portion of the Shares from time to time on the Nasdaq SmallCap Market, and may
sell the Shares through a broker or brokers or in the over-the-counter market at
prices prevailing on such exchange or over-the-counter market, as appropriate,
at the times of such sales. The Selling Stockholders may also make private sales
directly or through such broker or brokers. Brokers participating in such
transactions may receive customary brokerage commissions from the Selling
Stockholders. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. In
connection with such sales, the Selling Stockholders and brokers participating
in such sales may be deemed to be underwriters within the meaning of the
Securities Act and may be deemed by the National Association of Securities
Dealers to have received underwriting compensation for purposes of the
Association's Rules of Fair Practice. The Company will receive no proceeds from
this offering.
LEGAL OPINION
The validity of the Shares offered hereby is passed upon for the Company by
Riordan & McKinzie, a Professional Law Corporation, Orange County, California.
13
<PAGE> 14
EXPERTS
The financial statements and schedule of Endocare, Inc. as of December 31,
1996 and for the year ended December 31, 1996, have been incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the
December 31, 1996 financial statements refers to the restatement of the
financial statements of Endocare, Inc. as of December 31, 1996, and for the year
then ended, and to a change in the accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of.
The financial statements and schedule of Endocare, Inc. for the years ended
December 31, 1995 and 1994 appearing in Endocare, Inc.'s Annual Report (Form
10-K) for the year ended December 31, 1996 have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
14
