<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 JUNE 30, 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 August 10, 1999 was 10,758,394.
<PAGE> 2
ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. Financial Information
Item 1 Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk None
Part II. Other Information
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signature Page 14
</TABLE>
2
<PAGE> 3
\
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 292,676 $ 318,909 $ 689,993 $ 708,978
Procedures 313,834 171,557 573,638 293,746
Revenue from collaborative agreements -- 330,840 -- 351,672
------------ ------------ ------------ ------------
Total revenues 606,510 821,306 1,263,631 1,354,396
------------ ------------ ------------ ------------
Costs and expenses:
Cost of product sales 197,309 223,763 456,883 504,305
Cost of procedures 120,278 54,745 209,512 122,918
Research and development 790,033 495,622 1,321,325 833,784
Selling, general and administrative 2,082,861 1,354,533 3,754,847 2,283,059
------------ ------------ ------------ ------------
Total costs and expenses 3,190,481 2,128,663 5,742,567 3,744,066
------------ ------------ ------------ ------------
Loss from operations (2,583,971) (1,307,357) (4,478,936) (2,389,670)
Other income (expense), net 6,935 85,417 58,223 119,637
------------ ------------ ------------ ------------
Net loss $ (2,577,036) $ (1,221,940) $ (4,420,713) $ (2,270,033)
============ ============ ============ ============
Net loss per share of common stock -
basic and diluted $ (.24) $ (.12) $ (.41) $ (.24)
============ ============ ============ ============
Weighted average shares and
common stock equivalents outstanding 10,744,000 10,212,000 10,729,000 9,426,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ENDOCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,533,226 $ 6,285,799
Accounts receivable, net 543,895 407,602
Inventories 1,352,481 542,610
Other current assets 53,130 87,397
------------ ------------
Total current assets 8,482,732 7,323,408
Property and equipment, net 797,301 498,240
Other assets 1,605,552 170,206
------------ ------------
Total assets $ 10,885,585 $ 7,991,854
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,503,379 $ 653,548
Accrued liabilities 1,501,191 1,125,832
------------ ------------
Total current liabilities 3,004,570 1,779,380
Long term liabilities
Convertible debentures 5,000,000 --
Other long-term liabilities 181,585 201,274
Shareholders' equity:
Common Stock, $.001 par value; 20,000,000 shares
authorized; 10,750,790 and 10,698,354 issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively 10,750 10,698
Additional paid-in capital 17,618,833 16,509,952
Accumulated deficit (14,930,153) (10,509,450)
------------ ------------
Total shareholders' equity 2,699,430 6,011,200
------------ ------------
Total liabilities and shareholders' equity $ 10,885,585 $ 7,991,854
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
ENDOCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,420,713) $(2,270,033)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 143,781 120,900
Changes in operating assets and liabilities:
Accounts receivable (136,293) 60,221
Inventories (809,871) (9,424)
Accounts payable 849,831 72,884
Accrued liabilities 375,359 409,903
Other 3,921 (103,226)
----------- -----------
Net cash used in operating activities (3,993,985) (1,718,775)
Cash flows from investing activities:
Purchases of property and equipment (372,720) (89,957)
----------- -----------
Net cash used in investing activities (372,720) (89,957)
Cash flows from financing activities:
Issuance of common stock 38,820 6,860,800
Issuance of convertible debentures 5,000,000 --
Financing costs and other (424,688) 7,766
----------- -----------
Net cash provided by financing activities 4,614,132 6,868,566
----------- -----------
Net increase in cash and cash equivalents 247,427 5,059,834
Cash and cash equivalents, beginning of period 6,285,799 3,912,378
----------- -----------
Cash and cash equivalents, end of period 6,533,226 8,972,212
=========== ===========
Non-cash activities:
Fair value of convertible debenture purchase
option credited to additional paid in capital 1,000,000 --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ENDOCARE, INC.
NOTES TO CONSOLIDATED 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. The Company also operates a mobile
cryosurgery business. 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
became a totally independent, publicly-owned corporation.
2. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated 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, and with the Company's current
reports on Form 8-K filed with the SEC on June 3, June 14 and July 6,
1999. 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>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Inventories:
Raw materials $ 329,250 $ 260,222
Work in process 360,536 86,375
Finished goods 662,695 196,013
---------- ----------
Total inventories $1,352,481 $ 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,
convertible debentures, 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 June 30, 1998 and June 30, 1999 are $(1,221,940),
10,212,000 $(0.12), and $(2,577,036), 10,744,000 and $(0.24),
respectively. The loss (numerator), shares (denominator) and per share
amount for the six months ended June 30, 1998 and 1999 are $(2,270,033),
9,426,000 and $(0.24) and $(4,420,713), 10,744,000 and $(.24),
respectively. As the Company has been in a net loss position for the
periods presented, common share equivalents of 850,000 and 1,826,000 for
the three months ended June 30, 1998 and 1999, respectively, and 855,000
and 1,639,000 for the six months ended June 30, 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. On June 30, 1999, Endocare acquired all the outstanding units of
Advanced Medical Procedures, LLC, a Florida limited liability company
("AMP"). The acquisition was consummated pursuant to a Plan of Merger
(the "AMP Merger Agreement") by and among AMP, Endocare, and Advanced
Medical Procedures, Inc. ("AMPI"), a Delaware corporation and
wholly-owned subsidiary of Endocare. Pursuant to the Merger Agreement,
AMP was merged with and into AMPI, with AMPI surviving as a wholly-owned
subsidiary of Endocare. The AMP unitholders received an aggregate of
260,000 shares of Endocare Common Stock in exchange
6
<PAGE> 7
for all of their AMP units. The acquisition was accounted for as a
pooling-of-interests for financial reporting purposes. The
pooling-of-interests method of accounting is intended to present as a
single interest two or more common stockholders' interests which were
previously independent; accordingly, the historical financial statements
for the periods prior to the acquisition have been restated as though
the companies had been combined. Fees and expenses related to the
acquisition were expensed as incurred.
The results of operations previously reported by the separate companies
and the combined amounts presented in the accompanying condensed
consolidated financial statements are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenue:
Endocare
Net product sales $ 324,756 $ 318,909 $ 741,903 $ 708,978
Revenue from collaborative
agreements -- 330,840 -- 351,672
AMP
Procedures 313,834 171,557 573,638 293,746
Adjustments (32,080) -- (51,910) --
----------- ----------- ----------- -----------
Combined $ 606,510 $ 821,306 $ 1,263,631 $ 1,354,396
=========== =========== =========== ===========
Net Loss:
Endocare $(2,537,574) $(1,228,988) $(4,405,759) $(2,289,749)
AMP (7,382) 7,048 36,956 19,716
Adjustments (32,080) -- (51,910) --
----------- ----------- ----------- -----------
$(2,577,036) $(1,221,940) $(4,420,713) $(2,270,033)
=========== =========== =========== ===========
</TABLE>
Adjustments have been made to eliminate the impact of intercompany sales
from Endocare to AMP. Additionally, a previously existing note payable
from Endocare to AMP of $135,000 and $185,000 at December 31, 1998 and
June 30, 1999, respectively, has been eliminated in the accompanying
condensed consolidated balance sheets. There were no other significant
transactions between Endocare and AMP prior to the combination.
Procedural revenue is recognized upon completion of procedures.
7. Bank Line of Credit
The Company had a $1,000,000 line of credit with a bank which expired
this quarter. The Company subsequently entered into a new debt facility
as discussed in note 11.
8. Convertible Debentures
On June 7, 1999, the Company received $5,000,000 from the sale of its 7%
Convertible Debentures due June 7, 2002 (the "Debentures"). Interest is
payable annually in cash, or at the Company's option, in common stock at
a price per share based on recent bid prices prior to the date interest
is paid. Under the financing arrangement, the purchasers have the option
to purchase an additional $5,000,000 in aggregate principal amount of
Debentures and, under the circumstances described below, the Company may
require the purchasers to exercise this purchase option.
The $5,000,000 principal amount of the Debentures must be repaid in full
in cash on June 7, 2002, but may be converted into the Company's common
stock in whole or in part at the purchasers' option at any time on or
prior to June 7, 2002 at a conversion price of $5.125 per share. The
conversion price is subject to certain anti-dilution adjustments.
In addition to the purchasers' option to convert the Debentures, the
Company may require that the purchasers convert the Debentures into
Common Stock at $5.125 per share (as may be adjusted as described above)
if the bid price for the Common Stock as listed for quotation is above
$8.00 per share for twenty (20) trading days during a consecutive thirty
(30) trading day period, and certain other conditions are met.
Under a Securities Purchase Agreement, the purchasers have a call option
exercisable at any time prior to June 7, 2002 to require that the
Company sell to the purchasers an additional $5,000,000 principal amount
of debentures. The additional debentures will mature three years from
the date they are issued, will bear interest at 7% per annum and will be
convertible in whole or in part at a conversion price of $6.75 per share
(subject to adjustment as described above). The fair value of the
purchasers' call option of $1,000,000 has been estimated using the
Black-Scholes pricing model and is reflected in other long-term assets
in the accompanying condensed consolidated balance sheet as of June 30,
1999. The Company has a put option to require the purchasers to buy the
$5,000,000 principal amount of additional debentures if the closing bid
price for the common stock as listed for quotation is more than $10.00
per share for twenty (20) trading days in a consecutive thirty (30)
trading day period and on the date the Company elects to exercise the
put option, and certain other conditions are met.
Certain events will trigger an event of default under the Debentures. An
event of default gives the purchasers the right to accelerate all
indebtedness under the Debentures and declare it due immediately. Upon
an event of default, interest thereafter accrues at 20.00% per annum and
a default premium is added to the principal amount of the Debentures.
The premium is the greater of 20.00% of the principal amount, or higher
based on recent trading prices of the Company's Common Stock. The amount
due upon an event of default (including the purchaser's option in an
equivalent value of shares of Common Stock of the Company) is calculated
based on the average bid price per share of the Common Stock for a
certain number of days prior to the acceleration of the indebtedness by
the purchasers.
7
<PAGE> 8
9. Stockholders Rights Plan
In April 1999, the Company adopted a stockholder rights plan in which
preferred stock purchase rights will be distributed as a dividend at
the rate of one right for each share of common stock held as of the
close of business on April 15, 1999. The rights are designed to guard
against partial tender offers and other abusive and coercive tactics
that might be used in an attempt to gain control of the Company or to
deprive Endocare stockholders of their interest in the long-term value
of the Company. The rights will be exercisable only if a person or
group acquires 15% or more of the Company's common stock (subject to
certain exceptions stated in the Plan) or announces a tender offer the
consummation of which would result in ownership by a person or group of
15% or more of the Company's common stock. At any time on or prior to
the close of business on the first date of a public announcement that a
person or group has acquired beneficial ownership of 15% or more of the
Company's common stock (subject to certain exceptions stated in the
Plan), the rights are redeemable for one cent per right at the option
of the Board of Directors.
10. Legal Proceedings
The Company, in the normal course of business, is subject to various
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these matters will not have a material adverse effect on the Company's
results of operations or financial condition.
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.
11. Subsequent Events
Sale of Convertible Debentures
On July 30, 1999, Endocare received an additional $3,000,000 from the
sale of its 7% Convertible Debentures due July 29, 2002 (the
"Convertible Debentures"). Interest is payable annually in cash, or at
the Company's option, in Common Stock at a price per share based on
recent bid prices prior to the date interest is paid, and certain other
conditions are met. Under the financing agreement, the purchasers have
the option to purchase an additional $3,000,000 in aggregate principal
amount of Convertible Debentures and, under the circumstances described
below, the Company may require the purchasers to exercise this purchase
option.
The $3,000,000 principal amount of the Convertible Debentures must be
repaid in full in cash on July 29, 2002, but may be converted into the
Company's Common Stock in whole or in part at the purchasers' option at
any time, subject to certain restrictions, on or prior to July 29, 2002
at a conversion price of $6.00 per share. The conversion price is
subject to certain anti-dilution adjustments.
In addition to the purchasers' option to convert the Convertible
Debentures, the Company, subject to certain restrictions, may require
that the purchasers convert the Convertible Debentures into Common Stock
at $6.00 per share (as may be adjusted as described above) if the bid
price for the Common Stock as listed for the quotation is above $9.00
per share for twenty (20) trading days during a consecutive thirty (30)
trading day period, and certain other conditions are met.
Under a Securities Purchase Agreement, the purchasers have a call option
exercisable at any time prior to July 29, 2002 to require that the
Company sell to the purchasers an additional $3,000,000 principal amount
of debentures. The additional debentures will mature three years from
the date they are issued, will bear interest at 7% per annum and will be
convertible in whole or in part at the option of the purchaser at any
time prior to maturity into Common Stock at a conversion price of $6.75
per share. The Company has a put option to require the purchasers to buy
the $3,000,000 principal amount of additional debentures if the closing
bid price for the Common Stock as listed for quotation is more than
$9.00 per share for twenty (20) trading days in a consecutive thirty
(30) trading day period and on the date the Company elects to exercise
the put option, and certain other conditions are met.
Certain events will trigger an event of default under the Convertible
Debentures. Such events are similar to those discussed in note 8.
Credit Facility
On July 29, 1999, the Company entered into a Loan and Security Agreement
with Transamerica Business Credit Corporation ("TBCC") which provides
for a revolving credit line in the amount of $2,000,000 plus up to an
additional $1,000,000 based on eligible accounts receivable of the
Company (the "Loan"). The Loan matures and all amounts must be repaid on
July 31, 2001. The Loan bears interest at the highest prime or
equivalent rate announced by certain designated banks, plus 2% or 3.5%.
The Loan is secured by a first priority lien on all of the assets of the
Company, except for intellectual property, is fully guaranteed by the
Company's subsidiary, and contains certain restrictive covenants.
8
<PAGE> 9
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, and with the Company's
current reports on Form 8-K filed with the SEC on June 3, June 14 and July 6,
1999.
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. Additionally, Endocare is
currently 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.
On June 30, 1999, Endocare acquired a company that operates a mobile
cryosurgical business. The company provides urologists and surgical specialists
the option of utilizing Endocare's targeted cryosurgery for the treatment of
prostate and liver cancer on a procedural basis. Endocare recognizes procedural
revenue upon the completion of procedures. The acquisition was accounted for as
a pooling-of-interests for financial reporting purposes. The pooling-of-
interests method of accounting is intended to present as a single interest two
or more common stockholders' interests which were previously independent;
accordingly, the historical financial statements for the periods prior to the
acquisition have been restated as though the companies had been combined.
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 June 30, 1999 decreased 8% to
$293,000 compared to $319,000 in 1998. The decrease was attributable to a
decline in the sale of surgical disposables.
Product revenue for the six months ended June 30, 1999 was $690,000 and
comparable to $709,000 in 1998.
Revenue from collaborative agreements for the three months ended June 30, 1999
was zero, compared to $331,000 in 1998. The 1998 amount represented a licensing
fee and the respective quarters' amortization of a lump-sum payment from Boston
Scientific Corporation ("BSC") based upon a previous distribution agreement
entered into in November 1996. The distribution agreement with BSC was
terminated by Endocare in March 1999.
Revenue from collaborative agreements for the six months ended June 30, 1999 was
zero compared to $352,000 in 1998. The decrease was due to the reasons described
above.
Revenue from procedures for the three months ended June 30, 1999 was $314,000,
compared to $172,000 in 1998. The increase corresponds to a greater number of
procedures performed in 1999.
Revenue from procedures for the six months ended June 30, 1999 was $574,000
compared to $294,000 in 1998. The increase is due to the reason described above.
Gross margin on product sales was 32% for the three months ended June 30, 1999
and comparable to 30% in 1998.
Gross margin on product sales for the six months ended June 30, 1999 was 32% and
comparable to 29% for the same period in 1998.
Gross margin on procedures was 61% for the three months ended June 30, 1999
compared to 68% in 1998. The decrease in gross margin resulted from procedure
mix with a greater number of lower margin prostate cancer procedures performed
in 1999.
Gross margin on procedures was 64% for the six months ended June 30, 1999,
compared to 58% in 1998. The change in margins is attributable to procedure mix
noted above and higher surgery rental costs in 1998.
9
<PAGE> 10
Research and development expense increased 59% to $790,000 for the three months
ended June 30, 1999, compared to $496,000 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 and
womens' healthcare cryosurgical product.
Research and development expense for the six months ended June 30, 1999
increased 58% to $1,321,000, compared to $834,000 for the same period in 1998.
The increase is attributable to the reasons described above.
Selling, general and administrative expense increased 54% to $2,083,000 for the
three months ended June 30, 1999, compared to $1,354,000 in 1998. The increase
reflects increased sales and marketing costs associated with the launch of
Endocare's cryosurgical product for prostate cancer, an expanded presence at the
annual AUA exhibition and conference, and the addition of three regional sales
managers and various product marketing and clinical support personnel in the
latter part of 1998.
Selling, general and administrative expense for the six months ended June 30,
1999 increased 65% to $3,755,000 compared to $2,283,000 for the same period in
1998. The increase is attributable to the reasons described above.
Other income (expense), net decreased 92% to $7,000 for the three months ended
June 30, 1999, compared to $85,000 in 1998. The decrease in 1999 was due to
interest income offset by interest expense associated with the recent issuance
of convertible debentures.
Other income (expense), net for the six months ended June 30, 1999 decreased to
$58,000 compared to $120,000 in 1998. The decrease is due to the reasons
described above.
Endocare's net loss for the three months ended June 30, 1999 was $2,577,000, or
24 cents per share on 210,744,000 weighted average shares outstanding, compared
to a net loss of $1,222,000 or 12 cents per share on 10,212,000 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.
Endocare's net loss for the six months ended June 30, 1999 was $4,421,000 or 41
cents per share on 10,729,000 weighted average shares outstanding, compared to a
net loss of $2,270,000 or 24 cents per share on 9,426,000 weighted average
shares outstanding for the same period in 1998. The increase in net loss is
attributable to the reasons described above.
Liquidity and Capital Resources
At June 30, 1999, Endocare's cash and cash equivalent balance was $6,533,000
compared to $6,286,000 at December 31, 1998.
Working capital has been used as Endocare's operations have increased in 1999.
Net accounts receivable increased to $544,000 at June 30, 1999, compared to
$408,000 at December 31, 1998. Inventory increased to $1,352,000 at June 30,
1999, compared to $543,000 at the beginning of the year. Additions to property
and equipment during the first six months of 1999 were approximately $372,720.
Working capital was provided as accounts payable and other current liabilities
increased to $3,005,000 from $1,779,000 at December 31, 1998.
At June 30, 1999, Endocare's net working capital was $5,478,000 and the ratio of
current assets to current liabilities was 2.8 to 1.
In June 1999, Endocare received $5,000,000 from the sale of its 7% convertible
debentures. In July 1999, the Company received an additional $3,000,000 from the
sale of 7% convertible debentures.
On July 29, 1999, the Company entered into a Loan and Security Agreement which
provides for a revolving credit line in the amount of $2,000,000 plus up to an
additional $1,000,000 based on eligible accounts receivable of the Company (the
"Loan"). The Loan matures and all amounts must be repaid on July 31, 2001. The
Loan bears interest at the highest prime or equivalent rate announced by certain
designated banks, plus 2% or 3.5%. The Loan is secured by a first priority lien
on all of the assets of the Company, except for intellectual property, is fully
guaranteed by the Company's subsidiary, and contains certain restrictive
covenants.
The Company believes that its existing cash resources and credit facility will
provide sufficient resources to meet present and reasonably foreseeable working
capital requirements and other cash needs for the next year. 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
10
<PAGE> 11
substantial additional funds through the sale of its equity securities, the
incurrence of additional 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
remediation plans with respect to substantially all of the Company's
non-information systems. 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 September 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 September
30, 1999.
This Form 10Q 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
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.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, in the normal course of business, is subject to various
legal matters. While the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of
these matters will not have a material adverse effect on the Company's
results of operations or financial condition.
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.
Item 2. Changes in Securities
Stock Options
During the period from April 1, 1999 through June 30, 1999, the Company
granted stock options to 6 individuals covering an aggregate of 55,000
shares of its common stock. All such options were granted at exercise
prices equaling fair market value on the date of grant, vest over a four
year period, and 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
The Company's Annual Meeting of Stockholders was held on June 15, 1999.
Proposal 1, submitted to a vote of security holders at the meeting was
the election of Directors. The following Directors, being all the
Directors of the Company, were elected at the meeting, with the total
number of votes cast or withheld:
<TABLE>
<CAPTION>
VOTES AGAINST
NAME VOTES FOR OR WITHHELD ABSTENTIONS
---- --------- ------------- -----------
<S> <C> <C> <C>
Paul W. Mikus 9,263,372 0 31,970
Peter F. Bernardoni 9,263,372 0 31,970
Robert F. Byrnes 9,263,372 0 31,970
Benjamin Gerson, M.D. 9,263,372 0 31,970
Alan L. Kaganov, Sc.D. 9,263,372 0 31,970
Michael J. Strauss, M.D. 9,263,372 0 31,970
</TABLE>
There were no broker non-votes recorded.
Proposal 2, submitted to a vote of security holders at the meeting, was
to ratify the appointment of KPMG LLP as the Company's independent
auditors for fiscal year 1999. Votes cast were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- ------- ------- ----------------
<S> <C> <C> <C>
9,260,822 25,400 9,120 0
</TABLE>
The proposal was approved.
12
<PAGE> 13
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4* Rights Agreement, dated as of March 31, 1999, between
the Company and U.S. Stock Transfer Corporation,
which includes the form of Certificate of Designation
for the Series A Junior Participating Preferred Stock
as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase
Series A Preferred Shares as Exhibit C (filed as
Exhibit 4 to Form 8-K filed on June 3, 1999).
4.1* Debenture dated June 7, 1999 between the Company and
Brown Simpson Strategic Growth Fund, Ltd. (filed as
Exhibit 4.1 to Form 8-K filed on June 14, 1999).
4.2* Debenture dated June 7, 1999 between the Company and
Brown Simpson Strategic Growth Fund, L.P. (filed as
Exhibit 4.2 to Form 8-K filed on June 14, 1999).
10.1* Securities Purchase Agreement dated June 7, 1999
among the Company and the Purchasers (filed as
Exhibit 10.1 to Form 8-K filed on June 14, 1999).
10.2* Registration Rights Agreement dated June 7, 1999
among the Company and the Purchasers (filed as
Exhibit 10.2 to Form 8-K filed on June 14, 1999).
27 Financial Data Schedule.
-----------
* Incorporated herein by reference.
(b) Reports on Form 8-K
On June 14, 1999, the Company filed a Form 8-K with the Securities and
Exchange Commission dated July 29, 1999 reporting the receipt of funds
from the sale of its 7% Convertible Debentures due June 7, 2002 for an
aggregate of $5 million. The Debentures were sold pursuant to a
Securities Purchase Agreement dated June 7, 1999. The full principal
amount of the Debentures must be repaid in full on or prior to June 7,
2002, but may be converted into the Company's Common Stock in whole or
in part at the purchasers' option at a conversion price of $5.125 per
share.
On June 3, 1999, the Company filed a Form 8-K with the Securities and
Exchange Commission dated April 15, 1999, reporting the Company's
adoption of a stockholder rights plan in which preferred stock purchase
rights will be distributed as a dividend at the rate of one right for
each share of Common Stock held as of the close of business on April 15,
1999. The rights are designed to guard against partial tender offers and
other abusive and coercive tactics that might be used in an attempt to
gain control of the Company or to deprive Endocare stockholders of their
interest in the long-term value of the Company. The rights will be
exercisable only if a person or group acquires 15% or more of the
Company's Common Stock (subject to certain exceptions stated in the
Plan) or announces a tender offer the consummation of which would result
in ownership by a person or group of 15% or more of the Company's Common
Stock. At any time on or prior to the close of business on the first
date of a public announcement that a person or group has acquired
beneficial ownership of 15% or more of the Company's Common Stock
(subject to certain exceptions stated in the Plan), the rights are
redeemable for one cent per right at the option of the Board of
Directors.
13
<PAGE> 14
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: August 12, 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)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
4* Rights Agreement, dated as of March 31, 1999, between
the Company and U.S. Stock Transfer Corporation, which
includes the form of Certificate of Designation for the
Series A Junior Participating Preferred Stock as Exhibit A,
the form of Rights Certificate as Exhibit B and the Summary
of Rights to Purchase Series A Preferred Shares as Exhibit C
(filed as Exhibit 4 to Form 8-K filed on June 3, 1999).
4.1* Debenture dated June 7, 1999 between the Company and
Brown Simpson Strategic Growth Fund, Ltd. (filed as Exhibit
4.1 to Form 8-K filed on June 14, 1999).
4.2* Debenture dated June 7, 1999 between the Company and
Brown Simpson Strategic Growth Fund, L.P. (filed as Exhibit
4.2 to Form 8-K filed on June 14, 1999).
10.1* Securities Purchase Agreement dated June 7, 1999 among
the Company and the Purchasers (filed as Exhibit 10.1 to
Form 8-K filed on June 14, 1999).
10.2* Registration Rights Agreement dated June 7, 1999 among
the Company and the Purchasers (filed as Exhibit 10.2 to
Form 8-K filed on June 14, 1999).
27 Financial Data Schedule.
- -----------
* Incorporated herein by reference.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,533,226
<SECURITIES> 0
<RECEIVABLES> 682,791
<ALLOWANCES> 138,896
<INVENTORY> 1,352,481
<CURRENT-ASSETS> 8,482,732
<PP&E> 1,453,294
<DEPRECIATION> 655,993
<TOTAL-ASSETS> 10,885,585
<CURRENT-LIABILITIES> 3,004,570
<BONDS> 5,000,000
0
0
<COMMON> 10,750
<OTHER-SE> 17,618,833
<TOTAL-LIABILITY-AND-EQUITY> 10,885,585
<SALES> 1,263,631
<TOTAL-REVENUES> 1,263,631
<CGS> 666,395
<TOTAL-COSTS> 666,395
<OTHER-EXPENSES> 5,076,172
<LOSS-PROVISION> 4,376,325
<INTEREST-EXPENSE> 44,388
<INCOME-PRETAX> (4,420,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,420,713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,420,713)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
