<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 92618
(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 November 8, 1996 was 5,645,139.
<PAGE> 2
ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Statements of Operations for the three and
nine months ended September 30, 1996 and 1995 3
Condensed Balance Sheets at September 30, 1996 and
December 31, 1995 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signature Page 15
</TABLE>
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<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 499,073 $ 161,445 $ 1,287,914 $ 749,192
Research revenues 0 107,049 1,600 215,290
----------- ----------- ----------- -----------
Total revenues 499,073 268,494 1,289,514 964,482
Costs and expenses:
Cost of sales 233,542 73,932 709,706 260,154
Research and development 323,161 167,744 686,816 619,508
Selling, general and administrative 309,432 136,318 907,317 467,057
Impairment loss on long-lived assets 0 0 324,878 0
----------- ----------- ----------- -----------
Total costs and expenses 866,135 377,994 2,628,717 1,346,719
----------- ----------- ----------- -----------
Loss before income taxes (367,062) (109,500) (1,339,203) (382,237)
Provision for income taxes 0 0 0 0
----------- ----------- ----------- -----------
Net loss $ (367,062) $ (109,500) $(1,339,203) $ (382,237)
=========== =========== =========== ===========
Net loss per share of common stock $ (.07) $ (.24)
=========== ===========
Weighted average shares and common
stock equivalents outstanding 5,638,943 5,633,068
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
ENDOCARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(unaudited) (audited)
----------- -----------
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 687,835 $ 1,941
Accounts receivable, net 175,045 102,416
Inventories 278,921 219,298
Prepaid expenses and other current assets 70,361 7,335
----------- -----------
Total current assets 1,212,162 330,990
Property and equipment, at cost 362,214 760,011
Less accumulated depreciation and amortization (256,064) (362,046)
----------- -----------
Net property and equipment 106,150 397,965
Intangible assets 0 60,831
Other assets 5,907 15,907
----------- -----------
Total assets $ 1,324,219 $ 805,693
=========== ===========
LIABILITIES AND SHAREHOLDERS'/DIVISION EQUITY
Current liabilities:
Accounts payable $ 429,186 $ 0
Accrued payroll expenses 52,331 0
Other accrued liabilities 61,138 1,628
Customer deposits 2,268 932
----------- -----------
Total current liabilities 544,923 2,560
Convertible note payable 750,000 0
Shareholders'/division equity:
Advances from Medstone International, Inc. 0 2,831,364
Common stock, $.001 par value 5,645 0
Additional paid-in capital 1,362,854 0
Accumulated deficit (1,339,203) (2,028,231)
----------- -----------
Total shareholders'/division equity 29,296 803,133
----------- -----------
Total liabilities and equity $ 1,324,219 $ 805,693
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
ENDOCARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
----------- ---------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,339,203) $(382,237)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 25,385 125,005
Impairment loss on long-lived assets 324,878 0
Changes in operating assets and liabilities:
Accounts receivable (72,628) 110,756
Inventories (59,623) (59,405)
Prepaid expenses and other current assets (63,025) 4,430
Other assets 10,000 (14,328)
Accounts payable 429,186 32,942
Accrued payroll expenses 52,331 (88,484)
Other accrued liabilities 59,509 (122)
Customer deposits 1,336 0
----------- ---------
Net cash used in operating activities (631,854) (271,443)
Cash flows from investing activities:
Purchases of property and equipment (24,991) (19,814)
Disposals of property and equipment 27,374 26,594
----------- ---------
Net cash provided by investing activities 2,383 6,780
Cash flows from financing activities:
Advances from Medstone 0 264,663
Borrowing on convertible note payable 750,000 0
Issuance of common stock, Medstone Distribution 500,000 0
Issuance of common stock, other 65,365 0
----------- ---------
Net cash provided by financing activities 1,315,365 264,663
----------- ---------
Net increase in cash and cash equivalents 685,894 0
Cash and cash equivalents, beginning of period 1,941 0
----------- ---------
Cash and cash equivalents, end of period $ 687,835 $ 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 nine-month period are not necessarily indicative of results to be
expected for the full year 1996.
During its third quarter of 1996, the Company recognized a sale relating to
the shipment of product to an international distributor. The total revenue
recognized on this sale approximated $140,000. Due to the lack of payment
by the customer, the Company provided an allowance for doubtful accounts
for a substantial portion of the sale in the fourth quarter of 1996.
However, the Company became aware that the product had not been shipped to
the customer. As a result, the Company has restated the results of
operations for the third quarter of 1996. In addition, the above
restatement is reflected in the Company's balance sheet as of September 30,
1996, primarily as a reduction of net accounts receivable and certain
current liabilities and an increase in inventories.
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.
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<PAGE> 7
4. SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Inventories:
Raw materials $ 161,209 $ 168,788
Work in process 45,249 2,849
Finished goods (restated) 72,463 47,661
--------- ---------
Total inventories $ 278,921 $ 219,298
========= =========
</TABLE>
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<PAGE> 8
5. 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 employee 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.
6. 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
7. CONVERTIBLE LOAN PAYABLE
On August 26, 1996, Endocare obtained a two-year $1,500,000 borrowing
facility from four partnerships managed by Technology Funding, a venture
capital firm. At September 30, 1996, $750,000 was outstanding under this
loan. The remaining $750,000 may be borrowed by Endocare under the loan
at any time prior to August 26, 1998, if Endocare meets certain financial
requirements.
The loan accrues interest at the rate of 16% per year, which is due and
payable in arrears on the maturity date. The outstanding principal and
interest under the loan is convertible into common stock of Endocare at a
conversion price of $2.50 per share, subject to certain conditions. All
of the obligations under the loan are secured by a security interest in
all present and after acquired personal property of Endocare.
In connection with entering into this loan, Endocare issued to such
partnerships warrants to purchase an aggregate of up to 150,000 shares of
Endocare common stock. The warrants are exercisable at any time on or
before August 26, 2001, at an exercise price of $3.00 per share, subject
to adjustment.
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<PAGE> 10
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, including prostate cancer and
prostate enlargement. Endocare began marketing disposable surgical devices in
1993 with the introduction of the ProLase laser catheter. In late 1995,
Endocare began marketing two new disposable product families, the UroLoop and
VaporBar electrosurgical cutting elements, which became the more significant
portion of revenue in early 1996. In May 1996, the Company introduced its new
CryoCare cryosurgical system for the treatment of prostate cancer. The Company
expects surgical systems to comprise a larger portion of revenue generated in
the future.
Endocare currently is developing additional, innovative therapies for prostate
enlargement. The Company does not expect to be profitable in the foreseeable
future because of increased operating expenses from expanded research and
development efforts and support of clinical trials for products currently under
development.
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.
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<PAGE> 11
RESULTS OF OPERATIONS
Product revenue for the nine months ended September 30, 1996 increased 72% to
$1,288,000 compared to $749,000 for the nine months ended September 30, 1995.
For the three months ended September 30, 1996, product revenue increased 209%
to $499,000 from $161,000 in the corresponding quarter in 1995. These
increases have resulted from the introduction of new products. In 1995 product
sales consisted almost entirely of ProLase laser catheters, the volumes of
which had dropped considerably by the end of 1995. At the beginning of 1996,
Endocare's newly introduced UroLoops and VaporBars began contributing
significant revenue. In May 1996, Endocare introduced its new CryoCare
surgical system, which generated $162,000 of revenue in the second quarter and
$339,000 in the third quarter of 1996.
Research revenue was $1,600 and zero for the nine and three month periods ended
September 30, 1996. In 1996 Endocare is focusing its research efforts on its
own internal product development rather than performing research services for
its former parent, Medstone. In 1995 Medstone reported $215,000 and $107,000
of Endocare research revenue for the nine and three month periods,
respectively.
Gross margins on product sales for the three months ended September 30 were 53%
in 1996 and 55% in 1995. However, product margins for the nine months ended
September 30 were 44% in 1996 and 65% in 1995. These differences are caused by
changes in Endocare's product revenue mix as new products were introduced and
older products exhibited margin declines. The 1996 nine month margin is
significantly lower than 1995 because 1995's margins were high in the beginning
of the year and then declined, while 1996's margins were low in the beginning of
the year and then rose. In 1995 Endocare's revenue was almost entirely from
ProLase, where margins were eroding from quarter to quarter as newer
technologies became more popular. In 1996 this trend has been reversed by
increasing revenue and higher margins on the new UroLoop and VaporBar products
introduced in the fourth quarter of 1995 and on the CryoCare systems introduced
in May, 1996.
Research and development expense increased to $687,000 and $323,000 for the nine
and three month periods ended September 30, 1996, compared to $620,000 and
$168,000 for the corresponding periods in 1995. The 1996 amounts represent
increases of 11% and 107% compared to the corresponding periods in 1995. These
increases primarily reflect increased development efforts completing development
of the new CryoCare system in the beginning of 1996 and initiation of other new
product development in the second and third quarters.
Selling, general and administrative expense increased to $907,000 and $309,000
for the nine and three month periods ended September 30, 1996, compared to
$467,000 and $136,000 for the corresponding periods in 1995. The 1996 amounts
represent increases of 94% and 127% compared to the corresponding periods in
1995. These increases reflect the higher administrative expense of operating
as an independent, publicly-traded company, as well as general investment in
sales and marketing resources to establish a foundation for future revenue
growth. Also, during the second quarter of 1996, sales and marketing expenses
increased for the introduction of the new CryoCare system.
- 11 -
<PAGE> 12
Endocare's net loss was $1,339,000 and $367,000 for the nine and three month
periods ended September 30, 1996. These amounts compare to losses of $382,000
and $110,000 for the corresponding periods in 1995. This increase was
primarily due to the increase in selling, general and administrative costs
described above. In addition, a major factor contributing to 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.
Within 1996, the quarterly losses decreased from $578,000 in the first quarter
to $395,000 in the second quarter and $367,000 in the third quarter. This
improvement mainly results from increasing quarterly revenue and gross margin
contributions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, Endocare's cash balance was $688,000, compared to $2,000
at December 31, 1995. This cash increase was provided by product sales as well
as two financing transactions.
In connection with the January 1996 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.
In August, 1996, Endocare obtained a two-year $1,500,000 secured borrowing
facility with four partnerships managed by Technology Funding, a venture
capital firm. At September 30, 1996, $750,000 was outstanding under this loan.
Additional working capital has been used as Endocare's operations have
increased in 1996. With higher revenue levels, net accounts receivable
increased to $175,000 at September 30, 1996, compared to approximately $100,000
at both December 31, 1995, and June 30, 1996. To support higher production
levels, inventory increased to $279,000 at September 30, 1996, approximately
$60,000 higher than at the beginning of the year. Fixed asset additions during
the nine months ended September 30, 1996 were approximately $25,000. As
described in Note 5 to the financial statements, implementation of a new
accounting standard resulted in a non-cash write-off of $325,000 of non-current
assets effective January 1, 1996. Working capital was provided as accounts
payable and other current liabilities grew to an operating level of
approximately $550,000, starting from the initial zero balance at the January
1, 1996, spin-out from Medstone.
- 12 -
<PAGE> 13
At September 30, 1996, the ratio of current assets to current liabilities was
2.2 to 1. Per its current financial operating plans, the Company believes that
its existing cash resources and anticipated cash flows from future operations
can provide sufficient resources to meet present and reasonably foreseeable
working capital requirements and other cash needs through at least the first
quarter of 1997. Insofar as the Company may elect to undertake or accelerate
significant research and development projects for new products, it may require
additional outside financing prior to such time.
The preceding forward-looking statements are subject to uncertainties in
economic conditions, regulatory issues, and other risk factors highlighted in
the Company's Form 10-K for the period ended December 31, 1995. Such factors
may cause actual future results to differ significantly from management's
current expectations.
- 13 -
<PAGE> 14
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
The Company has prepared this Amendment No. 1 to its Form 10-Q/A
for the quarter ended September 30, 1996. See Note 2 to the
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 Calculation of Earnings Per Share page 16
Exhibit 27 Financial Data Schedule page 17
(b) Reports on Form 8-K
September 10, 1996: Convertible note agreement with
Technology Funding.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 to the report
to be signed on its behalf by the undersigned, thereunto duly authorized.
ENDOCARE, INC.
(Registrant)
Date: May 29, 1997 /s/ PAUL W. MIKUS
---------------------------------
Paul W. Mikus
Chairman of the Board,
Chief Executive Officer, President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
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<PAGE> 1
EXHIBIT 11.
ENDOCARE, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net loss $ (367,062) $ (1,339,203)
=============== =============
Weighted average number of common shares
outstanding during the period 5,638,943 5,633,068
=============== =============
Primary net loss per share $ (.07) $ (.24)
=============== =============
Fully diluted net loss per share $ (.07) $ (.24)
=============== =============
</TABLE>
Notes: Earnings per share data is not presented for 1995 because
Endocare was operating as a division of Medstone
International, Inc. at that time.
The effect of potential exercise of common stock options is
not included in these calculations because such effect would
be anti-dilutive.
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 687,835
<SECURITIES> 0
<RECEIVABLES> 104,843
<ALLOWANCES> 70,202
<INVENTORY> 278,921
<CURRENT-ASSETS> 1,212,162
<PP&E> 362,214
<DEPRECIATION> 256,064
<TOTAL-ASSETS> 1,324,219
<CURRENT-LIABILITIES> 544,923
<BONDS> 0
0
0
<COMMON> 5,645
<OTHER-SE> 104,451
<TOTAL-LIABILITY-AND-EQUITY> 1,324,219
<SALES> 1,287,914
<TOTAL-REVENUES> 1,289,514
<CGS> 709,706
<TOTAL-COSTS> 709,706
<OTHER-EXPENSES> 1,919,011
<LOSS-PROVISION> 28,715
<INTEREST-EXPENSE> 11,935
<INCOME-PRETAX> (1,339,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,339,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,339,203)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
