<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, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-27212
ENDOCARE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0618093
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
7 STUDEBAKER, IRVINE, CALIFORNIA 92618
(Address of principal executive office) (Zip Code)
(949) 595-4770
(Registrant's telephone number, including area code)
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 12, 1999 was 10,477,290.
<PAGE> 2
ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED March 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
Item 1 Financial Statements (unaudited)
Condensed Statements of Operations for the
three months ended March 31, 1999 and 1998 3
Condensed Balance Sheets at March 31, 1999
and December 31, 1998 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk None
Part II. Other Information
Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
Signature Page 12
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Net product sales $ 417,147 $ 390,069
Revenue from collaborative agreements -- 20,832
------------ ------------
Total revenues 417,147 410,901
Costs and expenses:
Cost of product sales 268,608 280,543
Research and development 531,292 338,162
Selling, general and administrative 1,536,720 888,977
------------ ------------
Total costs and expenses 2,336,620 1,507,682
------------ ------------
Loss from operations (1,919,473) (1,096,781)
Other income 51,288 35,120
------------ ------------
Net loss $ (1,868,185) $ (1,061,661)
============ ============
Net loss per share of common stock -
basic and diluted $ (.18) $ (.13)
============ ============
Weighted average shares and
common stock equivalents outstanding 10,454,000 8,381,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ENDOCARE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31,
(UNAUDITED) 1998
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,251,575 $ 6,288,567
Accounts receivable, net 439,475 269,207
Inventories 1,142,865 542,610
Other current assets 193,568 69,653
------------ ------------
Total current assets 6,027,483 7,170,037
Property and equipment, net 312,840 321,956
Other assets 352,705 305,206
------------ ------------
Total assets $ 6,693,028 $ 7,797,199
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,211,526 $ 632,948
Accrued liabilities 1,245,327 1,115,505
------------ ------------
Total current liabilities 2,456,853 1,748,453
Shareholders' equity:
Common stock, $.001 par value 10,477 10,438
Additional paid-in capital 16,362,528 16,306,962
Accumulated deficit (12,136,830) (10,268,654)
------------ ------------
Total shareholders' equity 4,236,175 6,048,746
------------ ------------
Total liabilities and
shareholders' equity $ 6,693,028 $ 7,797,199
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
ENDOCARE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,868,185) $(1,061,661)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 67,891 56,956
Changes in operating assets and liabilities:
Accounts receivable (170,268) 73,423
Inventories (600,255) 9,177
Accounts payable 578,578 14,386
Accrued liabilities 129,822 41,132
Other (171,414) (75,601)
----------- -----------
Net cash used in operating activities (2,033,831) (942,188)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (24,015) (12,358)
----------- -----------
Net cash used in investing activities (24,015) (12,358)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 20,854 1,406
----------- -----------
Net cash provided by financing activities 20,854 1,406
----------- -----------
Net decrease in cash and cash equivalents (2,036,992) (953,140)
Cash and cash equivalents, beginning of period 6,288,567 3,896,316
----------- -----------
Cash and cash equivalents, end of period $ 4,251,575 $ 2,943,176
=========== ===========
</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" or "Endocare") designs, manufactures, and
markets an array of innovative, temperature-based surgical devices and
technologies primarily to treat prostate diseases, including prostate cancer
and prostate enlargement. 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.
2. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by
generally accepted accounting principles and should be read in conjunction
with the audited financial statements and other information included in the
Company's Annual Report on Form 10-K for the year ended December, 31, 1998.
Financial results for this interim period are not necessarily indicative of
results to be expected for the full year 1999.
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.
4. Supplemental Financial Statement Data
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Inventories:
Raw materials $ 370,024 $ 260,222
Work in process 180,974 86,375
Finished goods 591,867 196,013
---------- ----------
Total inventories $1,142,865 $ 542,610
========== ==========
</TABLE>
5. Net Loss Per Share
The company has adopted SFAS No. 128, "Earnings Per Share." SFAS 128
simplifies the computation of earnings per share ("EPS") previously required
in Accounting Principles Board (APB) Opinion No. 15, "Earnings Per Shares,"
by replacing primary and fully diluted EPS with basic and diluted EPS. Under
SFAS 128, basic EPS is calculated by dividing net earnings (loss) by the
weighted-average common shares outstanding during the period. Diluted EPS
reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to
common shares using the treasury stock method based upon the
weighted-average fair value of the Company's common shares during the
period. In accordance with SFAS 128, the loss (numerator), shares
(denominator) and per-share amounts for the three months ended March 31,
1998 and March 31, 1999 are $1,061,661, 8,381,000, $(0.13), and $1,868,185,
10,454,000 and $(0.18), respectively. As the Company has been in a net loss
position for the periods presented, common share equivalents of 847,000 and
1,452,000 for the three months ended March 31, 1998 and 1999, respectively,
were not used to compute diluted loss per share as the effect was
antidilutive. Consequently, diluted EPS equals basic EPS.
6. Bank Line of Credit
The Company has a $1,000,000 line of credit with a bank which bears interest
at prime plus 1%. The line of credit is secured by the Company's assets,
excluding intellectual property, and is subject to certain financial and
other covenants. The line of credit expires this quarter and the Company
anticipates either renewing the existing line of credit or entering into a
new debt facility with another bank.
6
<PAGE> 7
7. Legal Proceedings
On November 27, 1996, Cryomedical Sciences, Inc. ("CMS") filed a complaint
in the Circuit Court for Montgomery County, Maryland against the Company and
Dr. ZhaoHua Chang, a former employee of CMS whom the Company retained as a
consultant, and, subsequently, as Vice President of Research and
Development. The suit alleged that, by entering into his consulting and
employment relationship with the Company, Dr. Chang breached his employment
contract with CMS (which included a post-termination
non-solicitation/non-competition clause), violated the Maryland Uniform
Trade Secrets Act ("MUTSA"), engaged in unfair competition, conspired with
the Company to injure CMS and committed a breach of fiduciary duty under
Maryland law. CMS further alleged that, by hiring Dr. Chang, the Company
tortiously interfered with the employment contract and CMS's prospective
business relations, violated the MUTSA, engaged in unfair competition, and
conspired with Dr. Chang to injure CMS. CMS sought injunctive relief,
compensatory damages of $10,000,000 and punitive damages of $20,000,000
jointly and severally against the Company and Dr. Chang. On March 26, 1999,
the lawsuit was dismissed by stipulation of the parties and order of the
court.
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. Management does not expect any material adverse effect on
financial condition or the results of operations because of such actions.
The Company, in the normal course of business, is subject to various other
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these other matters will not have a material adverse effect on the Company's
results of operations or financial condition.
7
<PAGE> 8
ITEM 2.
ENDOCARE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the unaudited financial
statements and notes thereto included in Part I--Item 1, the audited financial
statements, and notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
General
Endocare designs, manufactures, and markets an array of innovative,
temperature-based surgical devices and technologies to treat prostate diseases,
including prostate cancer and prostate enlargement. In late 1995, Endocare began
marketing two new disposable product families, the Uroloop and Vaporbar
electrosurgical cutting elements. In May 1996, the Company introduced its new
Cryocare cryosurgical system for the treatment of prostate cancer.
Endocare currently is developing additional, innovative therapies for prostate
enlargement. The Company does not expect to be profitable in the near future
because of increased operating expenses associated with product launches and
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.
Effective January 1, 1996, Endocare was spun out and began operating as an
independent corporation.
Results of Operations
Product Revenue for the three months ended March 31, 1999 increased 7% to
$417,000 compared to $390,000 in 1998. Although revenues were relatively
consistent between quarters, products sales for the first quarter 1999 resulted
solely from direct sales by the Company versus a combination of direct sales and
sales to Boston Scientific Corporation ("BSC") under a distribution agreement in
1998. The distribution agreement with BSC was terminated by Endocare in March
1999.
Revenue from collaborative agreements for the three months ended March 31, 1999
was zero, compared to $21,000 in 1998. The 1998 amount represented the
respective quarters' amortization of a lump-sum payment from BSC based upon the
original distribution agreement entered into in November 1996.
Gross margin on product sales was 36% for the three months ended March 31, 1999,
compared to 28% in 1998. The increase in gross margin resulted primarily from
economies of scale gained through higher manufacturing production levels.
Research and development expense increased 57% to $531,000 for the three months
ended March 31, 1999, compared to $338,000 in 1998. The increase reflects the
investment the Company has made in the form of additional personnel and related
infrastructure to support general product improvement, new product development
efforts and clinical costs associated with the Horizon Prostatic Stent.
Selling, general and administrative expense increased 73% to $1,537,000 for the
three months ended March 31, 1999, compared to $889,000 in 1998. The increase
reflects the addition of three regional sales managers and various product
marketing and clinical support personnel in the latter part of 1998.
Other income increased 46% to $51,000 for the three months ended March 31, 1999,
compared to $35,000 in 1998. The increase in 1999 was due to increased interest
income on a higher balance of cash and cash equivalents.
Endocare's net loss for the three months ended March 31, 1999 was $1,868,000, or
18 cents per share on 10,454,000 weighted average shares outstanding, compared
to a net loss of $1,062,000 or 13 cents per share on 8,381,000 weighted average
shares outstanding for the same period in 1998. The increase in net loss
resulted from higher research and development costs and higher selling, general
and administrative expenses as discussed above.
8
<PAGE> 9
Liquidity and Capital Resources
At March 31, 1999, Endocare's cash and cash equivalent balance was $4,252,000,
compared to $6,289,000 at December 31, 1998. The cash decrease resulted from
cash used in operating activities.
Working capital has been used as Endocare's operations have increased in 1999.
Net accounts receivable increased to $439,000 at March 31, 1999, compared to
$269,000 at December 31, 1998. Inventory increased to $1,143,000 at March 31,
1999, compared to $543,000 at the beginning of the year. Additions to property
and equipment during the first three months of 1999 were approximately $24,000.
Working capital was provided as accounts payable and other current liabilities
increased to $2,457,000 from $1,748,000 at December 31, 1998.
At March 31, 1999, Endocare's net working capital was $3,571,000 and the ratio
of current assets to current liabilities was 2.5 to 1.
In April 1998, Endocare sold 2 million shares of common stock at a price of
$3.50 per share in a private placement. After deducting expenses of the sale,
this offering added approximately $6.9 million cash to Endocare's capital base.
The Company has a $1,000,000 bank line of credit which is available for working
capital purposes. The line of credit is secured by the Company's assets,
excluding intellectual property, and is subject to certain financial and other
covenants. The line of credit expires this quarter and the Company anticipates
either renewing the existing line of credit or entering into a new debt facility
with another bank. There is no assurance the Company will be able to obtain
another debt facility on favorable terms, or at all.
The Company believes that its existing cash resources and anticipated cash flow
from future operations will provide sufficient resources to meet present and
reasonably foreseeable working capital requirements and other cash needs through
the end of 1999. If the Company elects to undertake or accelerate significant
research and development projects for new products or pursue corporate
acquisitions, it may require additional outside financing prior to such time.
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 agreements with third parties.
Other Matters
Many existing computer systems and applications, and other control devices, use
only two digits to identify a year in the date field, without considering the
impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000 and beyond. The Company relies on
its systems, applications and devices in operating and monitoring all major
aspects of its business, including financial systems (such as general ledger,
accounts receivable, accounts payable and payroll modules), customer services,
infrastructure, networks and telecommunications equipment, and end products. The
Company has initially assessed how it may be impacted by the Year 2000 and has
commenced a plan to address the following aspects of the Year 2000 problem:
Information systems, non-information systems, products, suppliers and customers.
The plan as it related to information systems, involved a combination of
upgrades and replacement. The Company has completed remediation of its
information systems. The Company has also completed the assessment and
development of remediation plans with respect to substantially all of the
Company's non-information systems and expects remediation to be complete by June
30, 1999. The Company has completed an assessment of its products and has
determined its products do not contain specific calendar year functions.
However, there can be no assurance that unforeseen problems will not be
encountered when the Company's products are used in conjunction with equipment
which is non-Year 2000 compliant. The Company is currently assessing Year 2000
issues with respect to major suppliers and customers and expects this process to
be completed by June 30, 1999; however, the Company can provide no assurance
that Year 2000 compliance plans will be successfully completed by suppliers and
customers in a timely manner. The Company currently estimates that the costs
associated with the Year 2000 issues will not have a material effect on the
results of operations or financial assessment and remediation have not been
material to the results of operations. If the Company is not successful in
implementing its Year 2000 compliance plan, there may be a material adverse
impact on the Company's results of operations and financial condition. The
Company believes its greatest risks related to the Year 2000 issue involve
interrupted product flow from suppliers and a possible redirect or interruption
of purchasing activities from key customers due to their potential failure to
fully address their own Year 2000 issues. Due to the importance of addressing
these risks, and the need for the Company to focus attention to remediation
efforts, the Company expects to develop contingency plans to address those Year
2000 problems which may not be corrected by implementation of the Company's Year
2000 compliance plan. Contingency plans are expected to be complete by June 30,
1999.
This Form 10-Q contains forward looking statements. The Company's business and
results of operations are subject to risk and uncertainties including, but not
limited to, those discussed under the caption "Factors That May Effect Future
9
<PAGE> 10
Results and Trading Price of Common Stock" included in the Company's Annual
Report on Form 10-K, and in risk factors contained in other periodic reports
filed with the Securities and Exchange Commission. Such risk factors include,
but are not limited to, limited operating history of the Company with a history
of losses; fluctuations in the Company's order levels; uncertainty regarding
market acceptance of the Company's new products; uncertainty of product
development and the associated risks related to clinical trials, the rapid pace
of technological change in the Company's industry; the Company's limited sales,
marketing and manufacturing experience; uncertainty regarding the impact Year
2000 system failures may have if experienced by the Company, its suppliers and
customers, and the ability to convince health care professionals and third party
payers of the medical and economic benefits of the Company's CRYOcare System.
The actual results that the Company achieves may differ materially from any
forward looking statements due to such risks and uncertainties.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 27, 1996, Cryomedical Sciences, Inc. ("CMS") filed a
complaint in the Circuit Court for Montgomery County, Maryland against
the Company and Dr. ZhaoHua Chang, a former employee of CMS whom the
Company retained as a consultant, and, subsequently, as Vice President
of Research and Development. The suit alleged that, by entering into
his consulting and employment relationship with the Company, Dr. Chang
breached his employment contract with CMS (which included a
post-termination non-solicitation/non-competition clause), violated the
Maryland Uniform Trade Secrets Act ("MUTSA"), engaged in unfair
competition, conspired with the Company to injure CMS and committed a
breach of fiduciary duty under Maryland law. CMS further alleged that,
by hiring Dr. Chang, the Company tortiously interfered with the
employment contract and CMS's prospective business relations, violated
the MUTSA, engaged in unfair competition, and conspired with Dr. Chang
to injure CMS. CMS sought injunctive relief, compensatory damages of
$10,000,000 and punitive damages of $20,000,000 jointly and severally
against the Company and Dr. Chang. On March 26, 1999, the lawsuit was
dismissed by stipulation of the parties and order of the court.
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. Management does not expect any material
adverse effect on financial condition or the results of operations
because of such actions.
The Company, in the normal course of business, is subject to various
other legal matters. While the results of litigation and claims cannot
be predicted with certainty, the Company believes that the final
outcome of these other matters will not have a material adverse effect
on the Company's results of operations or financial condition.
Item 2. Changes in Securities
Stock Options
During the period from January 1, 1999 through March 31, 1999, the
Company granted stock options to 15 individuals covering an aggregate
of 400,000 shares of its common stock. All such options were granted at
exercise prices equaling fair market value on the date of grant,
generally vest over a four year period, and are exercisable over a ten
year period. In addition, pursuant to the Company's 1995 Directors'
Option Plan (a formula plan), options for 40,000 shares of common stock
were granted to two non-employee directors which vest over two years
and options of 15,000 shares of common stock were granted to three
non-employee directors which vest over one year. These directors
options were granted at fair market value, and all are exercisable over
a ten year period. No consideration was paid for any of such options.
Such grants were exempt from the registration requirement of the
Securities Act as not involving the sale of a security.
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 27 -- Financial Data Schedule
(b) Reports on Form 8-K -- None
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements 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.
Date: May 14, 1999 By: /s/ Paul W. Mikus
--------------------------------
Paul W. Mikus
Chief Executive Officer and
President
(Duly Authorized Officer )
By: /s/ William R. Hughes
--------------------------------
William R. Hughes
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<PAGE> 13
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,251,575
<SECURITIES> 0
<RECEIVABLES> 515,407
<ALLOWANCES> 75,932
<INVENTORY> 1,142,865
<CURRENT-ASSETS> 6,027,483
<PP&E> 863,200
<DEPRECIATION> (550,360)
<TOTAL-ASSETS> 6,693,028
<CURRENT-LIABILITIES> 2,456,853
<BONDS> 0
0
0
<COMMON> 10,477
<OTHER-SE> 16,362,528
<TOTAL-LIABILITY-AND-EQUITY> 6,693,028
<SALES> 417,147
<TOTAL-REVENUES> 417,147
<CGS> 268,608
<TOTAL-COSTS> 268,608
<OTHER-EXPENSES> 2,068,012
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,868,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,868,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,868,185)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
