<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 SEPTEMBER 30, 2000
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 November 8, 2000 was 13,280,999.
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ENDOCARE, INC.
FORM 10-Q, QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets at September 30,
2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 1,522,718 $ 639,157 $ 4,053,680 $ 1,329,150
Mobile cryosurgical procedures 237,160 390,063 582,440 963,701
------------ ------------ ------------ ------------
Total revenues 1,759,878 1,029,220 4,636,120 2,292,851
------------ ------------ ------------ ------------
Costs and expenses:
Cost of product sales 727,371 326,917 1,879,528 783,800
Cost of procedures 126,004 160,598 343,863 370,110
Research and development 831,514 570,377 2,376,167 1,891,702
Selling, general and administrative 2,821,454 2,233,705 8,676,788 5,988,552
------------ ------------ ------------ ------------
Total costs and expenses 4,506,343 3,291,597 13,276,346 9,034,164
------------ ------------ ------------ ------------
Loss from operations (2,746,465) (2,262,377) (8,640,226) (6,741,313)
Interest income (expense), net (106,189) (248,252) (577,488) (190,029)
------------ ------------ ------------ ------------
Net loss $ (2,852,654) $ (2,510,629) $ (9,217,714) $ (6,931,342)
============ ============ ============ ============
Net loss per share of common stock -
basic and diluted $ (.22) $ (.23) $ (.75) $ (.65)
============ ============ ============ ============
Weighted average shares of common stock
outstanding 13,228,000 10,781,000 12,358,000 10,746,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,024,895 $ 7,364,951
Accounts receivable, net 1,284,909 958,145
Inventories 1,532,525 1,278,785
Prepaid expenses and other current assets 152,358 166,969
------------ ------------
Total current assets 12,994,687 9,768,850
Property and equipment, net 1,536,421 962,720
Deferred financing costs and other assets, net 1,554,310 2,264,803
------------ ------------
Total assets $ 16,085,418 $ 12,996,373
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 2,522,318 $ 1,517,470
Accrued compensation 1,293,613 910,103
Other accrued liabilities 1,653,973 896,210
Credit facility 4,000,000 --
------------ ------------
Total current liabilities 9,469,904 3,323,783
Convertible debentures 8,000,000 8,000,000
Credit facility and other liabilities 119,965 2,153,082
------------ ------------
Total liabilities 17,589,869 13,476,865
Shareholders' deficiency:
Preferred stock, $.001 par value; 1,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, $.001 par value; 13,264,630 and
11,248,323 issued and outstanding at
September 30, 2000 and December 31, 1999,
respectively 13,264 11,248
Additional paid-in capital 28,501,752 20,310,010
Note receivable from stock sale (1,028,125) (1,028,125)
Accumulated deficit (28,991,342) (19,773,625)
------------ ------------
Total shareholders' deficiency (1,504,451) (480,492)
------------ ------------
Contingencies
Total liabilities and shareholders' deficiency $ 16,085,418 $ 12,996,373
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ENDOCARE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,217,714) $ (6,931,342)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 455,081 123,812
Amortization of warrant value 242,911 104,283
Amortization of deferred financing costs 336,614 195,401
Changes in operating assets and liabilities:
Accounts receivable (326,764) (771,224)
Inventories (955,994) (1,127,103)
Prepaid expenses and other current assets (71,436) --
Other assets (231,927) --
Accounts payable 1,004,848 1,336,116
Accrued liabilities 1,289,274 830,307
Other -- (29,155)
------------ -------------
Net cash used in operating activities (7,475,107) (6,268,905)
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (188,125) (229,053)
------------ -------------
Net cash used in investing activities (188,125) (229,053)
Cash flows from financing activities:
Issuance of common stock 908,175 486,279
Issuance of convertible debentures 8,000,000 8,000,000
Net proceeds from credit facility 2,000,000 2,000,000
Financing costs (585,000) (853,905)
------------ -------------
Net cash provided by financing activities 10,323,175 9,632,374
------------ -------------
Net increase in cash and cash equivalents 2,659,943 3,134,417
Cash and cash equivalents, beginning of period 7,364,951 6,285,799
------------ -------------
Cash and cash equivalents, end of period $ 10,024,895 $ 9,420,216
============ ============
Non-cash activities:
Convertible debentures and accrued interest
converted to common stock, net of unamortized
deferred financing costs $ 6,606,164 $ --
Acquisition of trademark and domain name through
issuance of 20,000 shares of common stock 435,000 --
Transfer of inventory to property and equipment for
placement at customer sites 702,254 314,827
Fair value of convertible debenture purchase option
credited to additional paid in capital -- 1,600,000
------------ -------------
Total non-cash activities $ 7,743,418 $ 1,914,827
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ENDOCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations of the Company
Endocare, Inc. (the "Company" or "Endocare") is a medical device
company that develops, manufactures and markets cryosurgical and stent
technologies for applications in oncology and urology. The Company has
initially concentrated on developing devices for the treatment of the
two most common diseases of the prostate, prostate cancer and benign
prostate hyperplasia. The Company is also developing cryosurgical
technologies for treating tumors in other organs, including the kidney,
lung, breast and liver.
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
consolidated financial statements and other information included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999. Financial results for this interim period are not necessarily
indicative of results to be expected for the full year 2000.
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Inventories:
Raw materials $ 566,245 $ 481,141
Work in process 333,141 310,651
Finished goods 633,139 486,993
---------- ----------
Total inventories $1,532,525 $1,278,785
========== ==========
</TABLE>
5. Net Loss Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share." 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 consolidated
loss (numerator), shares (denominator) and per-share amounts for the
three months ended September 30, 1999 and September 30, 2000 are
$(2,510,629), 10,781,000 and $(0.23), and $(2,852,654), 13,228,000 and
$(0.22), respectively. The loss (numerator), shares (denominator) and
per share amount for the nine months ended September 30, 1999 and 2000
are $(6,931,342), 10,746,000 and $(.65), and $(9,217,714), 12,358,000
and $(0.75), respectively. As the Company has been in a net loss
position for the periods presented, the potential dilution from the
conversion of options, warrants and convertible debentures to common
stock of approximately 4,807,000 and 4,306,000 for the three months
ended September 30, 1999 and 2000, respectively, and 4,237,000 and
4,551,000 for the nine months ended September 30, 1999 and 2000,
respectively, were not used to compute diluted loss per share as the
effect was antidilutive. Consequently, diluted EPS equals basic EPS.
6
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6. Merger
On June 30, 1999, Endocare acquired all the outstanding units of
Advanced Medical Procedures, LLC, a Florida limited liability company
("AMP"). AMP operates a mobile cryosurgery business which provides
cryosurgical equipment for the treatment of prostate and liver cancer
on a procedural basis. 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 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 and amounted to approximately
$50,000. Adjustments have been made to eliminate the impact of
intercompany activities from Endocare to AMP. Procedural revenue is
recognized upon completion of procedures.
7. Debt
Convertible Debentures
On June 7, 1999 and July 30, 1999, the Company received $5,000,000 and
$3,000,000, respectively, from the sale of its 7% convertible
debentures due in three years (the "Debentures"). Interest was 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 arrangements, the purchasers had options
to purchase additional debentures for the aggregate principal amounts
of $5,000,000 and $3,000,000. Under the circumstances described below,
the Company could require the purchasers to exercise these purchase
options. The $5,000,000 principal amount of the Debentures was
originally due on June 7, 2002, and was eligible for conversion 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 $3,000,000 principal amount of the Debentures was
originally due on July 29, 2002, and was eligible for conversion 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
prices were subject to certain anti-dilution adjustments. In addition
to the purchasers' option to convert the $5,000,000 principal amount of
the Debentures, the Company could have required the purchasers to
convert the Debentures into common stock at a conversion price of
$5.125 per share (subject to certain anti-dilution adjustments) if the
bid price for the common stock as listed for quotation was above $8.00
per share for twenty (20) trading days during a consecutive thirty (30)
trading day period, and certain other conditions were met. Subject to
certain restrictions, the Company could have required that the
purchasers convert the $3,000,000 principal amount of the debentures
into common stock at a conversion price of $6.00 per share (subject to
certain anti-dilution adjustments) if the bid price for the common
stock as listed for quotation was above $9.00 per share for twenty (20)
trading days during a consecutive thirty (30) trading day period, and
certain other conditions were met. During the three months ended June
30, 2000, the original $8,000,000 in convertible debentures sold to the
investors in 1999 was converted into 1,475,609 shares of common stock
under the terms of the original agreements.
Under a securities purchase agreement, the purchasers had 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 mature three years from
the date they are issued, bear interest at 7% per annum and are
convertible in whole or in part at a conversion price of $6.75 per
share (subject to certain anti-dilution adjustments). The Company had 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 was more that $10.00 per share for the
twenty (20) trading days in a consecutive thirty (30) trading day
period and on the date the Company elected to exercise the put option,
and if certain other conditions were met. The purchasers also had a
call option exercisable at any time prior to July 29, 2002 to require
the Company sell to the purchasers an additional $3,000,000 principal
amount of debentures. The additional debentures mature three years from
the date they are issued, bear interest at 7% per annum and are
convertible in whole or in part at the option of the purchasers at any
time prior to maturity into common stock at a conversion price of $6.75
per share (subject to certain anti-dilution adjustments). The Company
had 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 was 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 elected to exercise the put option,
and certain other conditions were met On May 5, 2000, the Company
7
<PAGE> 8
received $8,000,000 from the sale of the additional 7% convertible
debentures to institutional investors pursuant to the purchase options
discussed above. Financing costs totaling $585,000 associated with the
transaction are being amortized to interest expense over three years.
The same investors originally purchased $8,000,000 of convertible
debentures in 1999.
The fair value of the purchasers' two call options described above
totaling $1,600,000, was estimated using the Black-Scholes pricing
model and was reflected in deferred financing costs and other assets in
the accompanying condensed consolidated balance sheet as of December
31, 1999. This amount was being amortized to interest expense over the
original lives of the call options. The net unamortized balance
totaling $1,156,728 was reclassified to additional paid in capital upon
conversion of the original $8,000,000 of convertible debentures into
common stock.
Credit Facility
On July 29, 1999, the Company entered into a Loan and Security
agreement with a lender which originally provided 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"). In April 2000, the Company increased the revolving portion of
its credit facility from $2,000,000 to $4,000,000 in addition to the
$1,000,000 based on eligible accounts receivable of the Company. As of
December 31, 1999 and September 30, 2000, $2,000,000 and $4,000,000,
respectively, of the loan was outstanding. 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% for the portion of the loan based on eligible account
receivables 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 is in compliance with the
restrictive covenants of the agreement as of September 30, 2000.
8. 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.
9. Legal Proceedings
In March 2000, the Company filed patent infringement lawsuits against
Israeli-based Galil Medical, Ltd., and its U.S. affiliate, Galil
Medical USA, Inc. (collectively, "Galil"), and against Cryomedical
Sciences, Inc. The suits filed in the U.S. District Court for the
Central District of California, allege that these companies have begun
marketing cryosurgical systems and components that incorporate
Endocare's patented combination of cryocooling, ultrasound and
temperature monitoring technology. Endocare's suits seek damages and
injunctive relief with respect to products and procedures which are
found to infringe Endocare's proprietary technology. In August 2000,
Galil submitted counterclaims alleging that the Company's cryosurgical
system infringes two Galil patents. Galil seeks unspecified damages and
injunctive relief with respect to the Company's cryosurgical system.
Based on the Company's analysis of these patents, it believes it has
meritorious defenses to these claims and intends to defend the
litigation vigorously; however, defending the lawsuit could be costly
and the ultimate outcome cannot be determined at this time. The suits
are in the early stages of discovery. Management does not expect any
material adverse effect on the Company's consolidated 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 matters will not have a material adverse effect on the
Company's consolidated results of operations or financial condition.
8
<PAGE> 9
From time to time, the Company has received other 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 the consolidated financial condition or the results
of operations because of such actions.
9
<PAGE> 10
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 condensed
consolidated financial statements and notes thereto included in Part I--Item 1,
and the audited consolidated 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, 1999.
General
Endocare is a fully-integrated medical device company that develops,
manufactures and markets cryosurgical and stent technologies for applications in
oncology and urology. The Company has initially concentrated on developing
devices for the treatment of the two most common diseases of the prostate -
prostate cancer and benign prostate hyperplasia. The Company is also developing
its cryosurgical technologies for treating tumors in other organs, including the
kidney, lung, breast and liver.
On June 30, 1999, Endocare merged with Advanced Medical Procedures, LLC ("AMP"),
a company that operates a mobile cryosurgical business. AMP 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.
Results of Operations
Product revenue for the three months ended September 30, 2000 increased 138% to
$1,523,000 compared to $639,000 in 1999. The increase was attributable primarily
to continued commercialization of the Company's cryosurgical technology
following Medicare's July 1, 1999 implementation of national coverage for
localized prostate cancer. The Company has also experienced increased general
surgery system sales in Asia in 2000.
Product revenue for the nine months ended September 30, 2000 increased 205% to
$4,054,000 compared to $1,329,000 in 1999. The increase is due to the reasons
described above.
Revenue from mobile cryosurgical procedures for the three months ended September
30, 2000 decreased 39% to $237,000 compared to $390,000 in 1999. The decrease
corresponds to a change in procedure mix, including a reduction in higher margin
liver cryosurgical procedures in 2000.
Revenue from mobile cryosurgical procedures for the nine months ended September
30, 2000 decreased 40% to $582,000 compared to $964,000 in 1999. The decrease is
due to the reasons described above.
Gross margin on product sales was 52% for the three months ended September 30,
2000, compared to 49% in 1999. The increase is due to a mix of higher margin
cryosurgical probe and system sales in 2000 coupled with a reduction in product
costs due to increased manufacturing efficiencies.
Gross margin on product sales for the nine months ended September 30, 2000 was
54% compared to 41% for the same period in 1999. The increase is due to the
reasons described above.
Gross margin on mobile cryosurgical procedures was 47% for the three months
ended September 30, 2000, compared to 59% in 1999. The decrease is due to a
change in procedure mix, including fewer higher margin cryosurgical liver
procedures performed in 2000.
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<PAGE> 11
Gross margin on mobile cryosurgical procedures was 41% for the nine months ended
September 30, 2000, compared to 62% in 1999. The change in margins is
attributable to the reasons described above.
Research and development expense increased 46% to $832,000 for the three months
ended September 30, 2000, compared to $570,000 in 1999. 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.
Research and development expense for the nine months ended September 30, 2000
increased 26% to $2,376,000 compared to $1,892,000 for the same period in 1999.
The increase is attributable to the reasons described above.
Selling, general and administrative expense for the three months ended September
30, 2000 increased 26% to $2,821,000 compared to $2,234,000 in 1999. The
increase reflects increased sales and marketing costs associated with the
commercialization of Endocare's cryosurgical product for prostate cancer and an
approximate 50% increase in Endocare's direct sales and marketing personnel
between periods.
Selling, general and administrative expense for the nine months ended September
30, 2000 increased 45% to $8,677,000 compared to $5,989,000 for the same period
in 1999. The increase is attributable to the reasons described above.
Interest income (expense), net for the three months ended September 30, 2000 was
($106,000) compared to ($248,000) in 1999. The decrease was due primarily to a
reduction in interest expense as a result of the conversion of the initial
$8,000,000 in convertible debentures, net of related deferred financing cost, to
equity in May 2000.
Interest income (expense), net for the nine months ended September 30, 2000 was
($577,000) compared to ($190,000) in 1999. The increase was due to interest
expense, including the amortization of deferred financing costs, associated with
the issuance of debt in the middle of 1999 and 2000, partially offset by
interest income.
Endocare's net loss for the three months ended September 30, 2000 was
$2,853,000, or 22 cents per share on 13,228,000 weighted average shares
outstanding, compared to a net loss of $2,511,000, or 23 cents per share on
10,781,000 weighted average shares outstanding for the same period in 1999. The
increase in net loss resulted from higher research and development costs and
higher selling, and general and administrative expenses, partially offset by
increased revenues and related gross margins and lower interest expense.
Endocare's net loss for the nine months ended September 30, 2000 was $9,218,000
or 75 cents per share on 12,358,000 weighted average shares outstanding,
compared to a net loss of 6,931,000 or 65 cents per share on 10,746,000 weighted
average shares outstanding for the same period in 1999. The increase in net loss
resulted from higher research and development costs, higher selling, general and
administrative expenses and increased interest expense, partially offset by
increased revenue and related gross margins.
Liquidity and Capital Resources
At September 30, 2000, Endocare's cash and cash equivalent balance was
$10,025,000 compared to $7,365,000 at December 31, 1999.
For the nine months ended September 30, 2000, net cash used by operating
activities was approximately $7,475,000 compared to $6,269,000 for the same
period in 1999. Working capital has been used as Endocare's operations have
increased in 2000. Net accounts receivable was $1,285,000 at September 30, 2000,
compared to $958,000 at December 31, 1999. In conjunction with the
commercialization of Endocare's cryosurgical technology for prostate cancer,
inventory increased to $1,533,000 at September 30, 2000, compared to $1,279,000
at the beginning of the year. Additions to property and equipment during the
first nine months of 2000 were approximately $188,000. Additionally, $702,000 of
inventory was transferred to property and equipment in 2000 under the Company's
cryosurgical placement program. Working capital was provided as accounts payable
and accrued liabilities increased to $5,470,000 from $3,324,000 at December 31,
1999. The Company's credit facility increased to $4,000,000 from $2,000,000 at
December 31, 1999.
At September 30, 2000, Endocare's net working capital was $3,525,000 and the
ratio of current assets to current liabilities was 1.4 to 1.
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<PAGE> 12
In June and July 1999, Endocare received a total of $8,000,000 from the sale of
its 7% convertible debentures which were originally due in three years. In the
second quarter of 2000, the $8,000,000 in convertible debentures was converted
into 1,475,609 shares of common stock. In July 1999, the Company entered into a
Loan and Security Agreement which provided 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"). In April 2000, the aggregate
credit line was increased to $5,000,000. As of September 30, 2000, $4,000,000 of
the Loan is outstanding. 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. In May 2000, the Company received an additional
$8,000,000 through the sale of its 7% convertible debentures which are due in
three years. Costs associated with the financing were approximately $585,000.
The Company expects to incur operating losses because its products will require
substantial expenditures relating to among other matters, development, clinical
testing, regulatory compliance, manufacturing and marketing. However, 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 to the middle of 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 longer-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. The Company also expects to renew its credit line which expires in
July 2001.
Other Matters
Accounting Principles
In December 1999, the United States Securities and Exchange commission issued
Staff Accounting Bulletin (SAB) No. 101-"Revenue Recognition in Financial
Statements," which as amended, is effective on October 1, 2000. SAB No. 101
summarizes certain of the staff's view in applying generally accepted accounting
principles to revenue recognition in financial statements. We believe that
implementation of SAB No. 101 will have no material impact on our consolidated
financial statements.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employees for purposes of applying Opinion 25, (b) the
criteria for determining whether a stock plan qualifies as a non compensatory
plan, (c) the accounting consequences of various modifications to the terms of
previously fixed stock options or awards, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occurred after
either December 15, 1998 or January 12, 2000. Adoption of FIN 44 did not have a
material effect on our financial position or results of operations.
Factors that May Affect Future Results and Trading Price of Common Stock
Before deciding to invest in the Company, or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information in this report and our other filings with the SEC. The
risks and uncertainties described below are not the only ones facing the
Company. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations. If any of
these risks actually occur, our business, financial condition or results of
operations could be seriously harmed. In that event, the market price for our
common stock could decline and you may lose all or part of your investment.
We have only a limited operating history and we expect to continue to generate
losses. Since our inception, we have engaged primarily in research and
development and have minimal experience in manufacturing, marketing and selling
our products in commercial quantities.
We have incurred annual operating losses since inception. For the fiscal years
ended December 31, 1997, 1998 and 1999 and the nine month period ended September
30, 2000, we had net losses of approximately $4.0 million, $4.9 million, $9.3
million and $9.2 million, respectively. As of September 30, 2000, our
accumulated deficit was approximately $29 million. We may not be able to
successfully develop or commercialize our current or future products, achieve
significant revenues from sales or procedures or achieve or sustain
profitability. We expect to continue to incur operating losses because our
products will require substantial expenditures relating to, among other matters,
development, clinical testing, regulatory compliance, manufacturing and
marketing.
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Our products may not achieve market acceptance, which could limit our future
revenue. Certain of our products, including our Cryocare System, are in the
early stages of market introduction. Our products may not be accepted by
potential customers. We believe that recommendations and endorsements of
physicians and patients and sufficient reimbursement by health care payers will
be essential for market acceptance of our Cryocare System and other products,
and these recommendations and endorsements may not be obtained and sufficient
reimbursement may not be forthcoming. Cryosurgery has existed for many years,
but has not been widely accepted due to concerns regarding safety and efficacy
of first generation technologies, limited reimbursement by third party payers
and widespread use of alternative therapies. Our ability to successfully market
our Cryocare System is dependent upon acceptance of cryosurgical procedures in
the United States and certain international markets. Any future reported adverse
events or other unfavorable publicity involving patient outcomes from the use of
cryosurgery, whether from our products or the products of our competitors, could
adversely affect acceptance of cryosurgery. Emerging new technologies and
procedures to treat cancer, prostate enlargement and other prostate disorders
also may negatively affect the market acceptance of cryosurgery. Our Cryocare
System and our other products may not gain any significant degree of market
acceptance among physicians, patients and health care payers. If our products do
not achieve market acceptance, our future revenue will be limited.
We may not be successful in developing or marketing our products. Our growth
depends in large part on continued ability to successfully develop and
commercialize our current products under development or any new products.
Several of our products are in varying stages of development. Our stents are in
pre-clinical studies or clinical trials and have not been approved for marketing
in the United States. We also are developing enhancements to our Cryocare
System. We may experience difficulties that could delay or prevent the
successful development and commercialization of our current products under
development or any new products. Our products in development may not prove safe
and effective in clinical trials. Clinical trials may identify significant
technical or other obstacles that must be overcome prior to obtaining necessary
regulatory or reimbursement approvals. Our failure to successfully develop and
commercialize new products or to achieve significant market acceptance would
have a significant negative effect on our financial condition.
There is uncertainty relating to third party reimbursement which is critical to
market acceptance of our products. In the United States, health care providers,
such as hospitals and physicians, that purchase our products generally rely on
third party payers, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or part of the cost of medical
procedures involving our products. While certain private health insurance
companies pay for the procedures in which our products are used in certain areas
of the United States, private insurance reimbursement may not be adopted
nationally or by additional insurers. Reimbursement levels from Medicare or
private insurers may not be sufficient to induce physicians to perform, and
patients to elect, procedures utilizing our products. Further, we anticipate
that, under the prospective payment system used by private health care payers,
the cost of our products will be incorporated into the overall cost of the
procedures in which they are used and that there will be no separate, additional
reimbursement for our products. This also may discourage the use of our
products. Furthermore, we could be negatively affected by changes in
reimbursement policies of government or private health care payers, particularly
to the extent any such changes affect reimbursement for procedures in which our
products are used. Failure by physicians, hospitals and other users of our
products to obtain sufficient reimbursement from health care payers for
procedures involving our products could have a significant negative effect on
our financial condition.
We have limited sales and marketing experience and if we are unable to expand
our sales and marketing capabilities, we may not be able to effectively
commercialize our products. We have limited experience marketing and selling our
products, and do not have experience marketing and selling our products in
commercial quantities.
We derive the majority of our revenues from the sales of Cryocare Systems and
expect that sales of Cryocare Systems will continue to constitute the majority
of sales for the foreseeable future. Any factor negatively impacting the sales
or usage of Cryocare Systems would have a significant effect on our business. In
March 1999, we exercised our right to terminate our exclusive worldwide
distribution agreement with Boston Scientific Corporation pursuant to which
Boston Scientific had agreed to market and distribute the Cryocare System, our
principal product. As a result, future sales of the Cryocare System will be
dependent on our marketing efforts. We may not be able to successfully expand
our sales and marketing capabilities in order to effectively commercialize the
Cryocare System product.
We believe that, to become and remain competitive, we will need to continue to
develop third party international distribution channels and a direct sales force
for our products. If we enter into third party marketing arrangements, our
percentage share of product revenues is likely to be lower than if we directly
marketed and sold our products through our own sales force. Establishing
marketing and sales capabilities sufficient to support sales in commercial
quantities will require significant resources. We may not be able to
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<PAGE> 14
recruit and retain direct sales personnel, succeed in establishing and
maintaining any third party distribution channels or succeed in our future sales
and marketing efforts.
We may not be able to obtain effective patents to protect our technologies from
use by other companies with competitive products, and patents of other companies
could prevent us from developing or marketing our products. Our success will
depend, to a significant degree, on our ability to secure and protect
intellectual property rights relating to our technology. While we believe that
the protection of patents or licenses is important to our business, we also rely
on trade secrets, know-how and continuing technological innovation to maintain
our competitive position. We cannot ensure that (1) we were the first to invent
the technologies covered by our patents or pending patent applications, (2) we
were the first to file patent applications for these inventions, (3) any of our
pending patent applications will result in issued patents, (4) others will not
independently develop similar or alternative technologies or duplicate any of
our technologies, (5) our patents will provide a basis for commercially viable
products or will provide us with any competitive advantages, and (6) our
processes or products do not or will not infringe patents or proprietary rights
of others. As discussed in the Legal Proceedings section of this report, we
recently filed complaints for patent infringement in the U.S. District Court for
the Central District of California against two competitors. The complaints seek
damages and injunctive relief to prevent these competitors from marketing
cryosurgical systems and components incorporating our patented combination of
cryocooling, ultrasound and temperature monitoring technology. Counterclaims
have been made against us by one of our competitors in this litigation alleging
that our cryosurgical system infringes on the competitor's proprietary rights.
This litigation and any other litigation necessary to protect our patent
position could be costly, and it is possible that we will not have sufficient
resources to fully pursue this litigation or to protect our other patent rights.
If we are unsuccessful in these lawsuits, our competitors may be able to use
certain of our cryosurgical systems technology. This outcome, or any adverse
outcome in litigation relating to the validity of our patents, or any other
failure to pursue litigation or otherwise to protect our patent position, could
materially harm our business and financial condition. In addition, from time to
time, we have received correspondence alleging infringement of proprietary
rights of third parties. We may have to pay substantial damages, possibly
including treble damages, for past infringement if it is ultimately determined
that our products infringe a third party's patents. Further, we may be
prohibited from selling our products before we obtain a license, which, if
available at all, may require us to pay substantial royalties. Even if
infringement claims against us are without merit, defending a lawsuit takes
significant time, may be expensive and may divert management attention from
other business concerns. We try to preserve the confidentiality of our
technology by entering into confidentiality agreements with our employees,
consultants, customers, and key vendors and by other means. These measures may
not, however, prevent the unauthorized disclosure or use of such technology.
We are faced with intense competition and rapid technological and industry
change and, if our competitors' existing products or new products are more
effective than our products, the commercial opportunity for our products will be
reduced or eliminated. The commercial opportunity for our products will be
reduced or eliminated if our competitors develop and market products that are
superior to our products. We face intense competition from other surgical device
manufacturers, as well as, in some cases, from pharmaceutical companies. Many of
our competitors are significantly larger than us and have greater financial,
technical, research, marketing, sales, distribution and other resources than us.
We believe there will be intense price competition for products developed in our
markets. Our competitors may develop or market technologies and products,
including drug-based treatments, that are more effective or commercially
attractive than any that we are developing or marketing. Our competitors may
succeed in obtaining regulatory approval, and introducing or commercializing
products before we do. Such developments could have a significant negative
effect on our financial condition. Even if we are able to compete successfully,
we may not be able to do so in a profitable manner. The medical device industry
generally, and the urological disease treatment market in particular, are
characterized by rapid technological change, changing customer needs, and
frequent new product introductions. Our products may be rendered obsolete as a
result of future innovations.
If we are unable to obtain additional capital to fund our operations when
needed, our product development efforts would be adversely affected, causing our
business, operating results, financial condition and prospects to be materially
harmed. If we undertake or accelerate significant research and development
projects for new products or pursue corporate acquisitions, we may require
additional outside financing. We expect that, to meet our long-term needs, we
will need to raise substantial additional funds through the sale of our equity
securities or the incurrence of additional debt or through collaborative
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
us to relinquish rights to certain of our technologies, products or marketing
territories. Our failure to raise capital when needed could have a significant
negative effect on our business, operating results, financial condition and
prospects.
We have limited manufacturing experience. We have limited experience in
producing our products in commercial quantities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. Our failure to overcome these manufacturing
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<PAGE> 15
problems could negatively impact our business and financial condition. We use
internal manufacturing capacity in our manufacturing efforts. Certain of our
purchased components and processes are currently available from or performed by
a single vendor. Any supply interruption from a single source vendor would have
a significant negative effect on our ability to manufacture our products until a
new source of supply is qualified and, as a result, could have a significant
negative effect on our business and financial condition. Further, the ability of
third party manufacturing sources to deliver components will affect our ability
to commercialize our products, and our dependence on third party sources may
have a negative effect on our profit margins. Our success will depend in part
upon our ability to manufacture our products in compliance with the FDA's Good
Manufacturing Practices regulations and other regulatory requirements in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. Failure to increase production volumes in a
timely or cost-effective manner or to maintain compliance with the FDA's Good
Manufacturing Practices or other regulatory requirements could have a
significant negative effect on our financial condition.
Failure to attract and retain skilled personnel could hinder our research and
development and sales and marketing efforts and our ability to obtain financing.
Our future success depends to a significant degree upon the continued services
of key technical and senior management personnel, including Paul W. Mikus, our
Chief Executive Officer. None of these individuals is bound by an employment
agreement or covered by an insurance policy of which we are the beneficiary. Our
future success also depends on our continuing ability to attract, retain and
motivate highly qualified managerial, technical and sales personnel. The
inability to retain or attract qualified personnel could have a significant
negative effect upon our research and development and sales and marketing
efforts and our ability to obtain financing and thereby materially harm our
business and financial condition.
Government regulation can have a significant impact on our business. Government
regulation in the United States and other countries is a significant factor
affecting the research and development, manufacture and marketing of our
products. In the United States, the FDA has broad authority under the federal
Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the
distribution, manufacture and sale of medical devices. Foreign sales of drugs
and medical devices are subject to foreign governmental regulation and
restrictions which vary from country to country. The process of obtaining FDA
and other required regulatory approvals is lengthy and expensive. We may not be
able to obtain necessary approvals for clinical testing or for the manufacturing
or marketing of our products. Failure to comply with applicable regulatory
approvals can, among other things, result in fines, suspension of regulatory
approvals, product recalls, operating restrictions, and criminal prosecution. In
addition, governmental regulations may be established which could prevent,
delay, modify or rescind regulatory approval of our products. Any such position
by the FDA, or change of position by the FDA, may adversely impact our business
and financial condition. Regulatory approvals, if granted, may include
significant limitations on the indicated uses for which our products may be
marketed. In addition, to obtain such approvals, the FDA and foreign regulatory
authorities may impose numerous other requirements on us. FDA enforcement policy
strictly prohibits the marketing of approved medical devices for unapproved
uses. In addition, product approvals can be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. We may not be able to obtain regulatory approvals for our products on
a timely basis, or at all, and delays in receipt of or failure to receive such
approvals, the loss of previously obtained approvals, or failure to comply with
existing or future regulatory requirements would have a significant negative
effect on our financial condition. In addition, the health care industry in the
United States is generally subject to fundamental change due to regulatory, as
well as political, influences. We anticipate that Congress and state
legislatures will continue to review and assess alternative health care delivery
and payment systems. Potential approaches that have been considered include
controls on health care spending through limitations on the growth of private
purchasing groups and price controls. We cannot predict what impact the adoption
of any federal or state health care reform measures may have on our business.
We may be negatively impacted by product liability and product recall. The
manufacture and sale of medical products entails significant risk of product
liability claims or product recalls. Our existing insurance coverage limits may
not be adequate to protect us from any liabilities we might incur in connection
with the clinical trials or sales of our products. We may require increased
product liability coverage as our products are commercialized. Insurance is
expensive and may not be available on acceptable terms, or at all. A successful
product liability claim or series of claims brought against us in excess of our
insurance coverage, or a recall of our products, could have a significant
negative effect on our business and financial condition.
We may experience fluctuations in our future operating results. If our revenue
declines in a quarter from the revenue in the previous quarter, our earnings
will likely decline because many of our expenses are relatively fixed. In
particular, research and development, sales and marketing and general and
administrative expenses are not affected directly by variations in revenue. In
some future quarter or quarters, due to a decrease in revenue or for some other
reason, our operating results likely will be below the expectations of
securities analysts or investors. In this event, the market price of our common
stock may fall abruptly and significantly.
Our business is exposed to risks related to acquisitions and mergers. As part of
our strategy to commercialize our products, we may acquire one or more
businesses, such as a related company that would use our products in clinical
applications. In June 1999, we
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consummated a business combination with Advanced Medical Procedures, LLC, a
regional mobile cryosurgery service company that provides our cryosurgical
equipment for the treatment of prostate and liver cancer on a procedural basis.
We may not be able to effectively integrate our business with that of Advanced
Medical Procedures or any other business we may acquire or merge with or
effectively utilize the business acquired to develop and market our products.
The failure to integrate an acquired company or acquired assets into our
operations may cause a drain on our financial and managerial resources, and
thereby have a significant negative effect on our business and financial
results.
If we fail to satisfy the continued listing requirements of the Nasdaq National
Market or Nasdaq SmallCap Market, our stock could become subject to the SEC's
Penny Stock Rules, making the stock difficult to sell. Our common stock began
trading on the Nasdaq SmallCap Market on February 28, 1997 and has a limited
trading history. Our common stock was recently listed and is currently traded on
the Nasdaq National Market. If we are unable to maintain the standards for
quotation on the Nasdaq National Market or the Nasdaq SmallCap Market, the
ability of our investors to resell their shares may be limited. In addition, our
securities may be subjected to "penny stock" rules that impose additional sales
practice and market making requirements on broker-dealers who sell or make a
market in such securities. This could affect the ability or willingness of
broker-dealers to sell or make a market in our securities and the ability of
holders of our securities to sell their securities in the secondary market.
Our stock price may fluctuate significantly, making it difficult to resell
shares when an investor wants to at prices they find attractive. The market
prices for securities of emerging companies have historically been highly
volatile. Future announcements concerning us or our competitors could cause such
volatility including: our operating results, technological innovations or new
commercial products, corporate collaborations, government regulation,
developments concerning proprietary rights, litigation or public concern as to
the safety of our products, investor perception of us and our industry, and
general economic and market conditions. In addition, the stock market is subject
to price and volume fluctuations that affect the market prices for companies in
general, and small-capitalization, high technology companies in particular,
which are often unrelated to the operating performance of these companies.
The future sales of shares of our common stock may negatively affect our stock
price. Future sales of our common stock (including shares issued upon the
exercise of outstanding options and warrants and the conversion of convertible
debentures) could have a significant negative effect on the market price of our
common stock. Such sales also might make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
we would deem appropriate.
Anti-takeover provisions in our charter may have a possible negative effect on
our stock price. Certain provisions of our Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
us. In March 1999, our board of directors adopted a stockholder rights plan in
which preferred stock purchase rights were distributed as a dividend. These
provisions may make it more difficult for stockholders to take certain corporate
actions and may have the effect of delaying or preventing a change in control.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of our common stock.
Some of the information in this report contains forward-looking statements
within the meaning of the federal securities laws. These forward-looking
statements include statements about our plans, objectives, expectations and
intentions and other statements contained in this report that are not historical
facts. You can find these statements under "Factors That May Affect Future
Results and Trading," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report and in other
documents filed with the SEC.
We typically use terms such as "may," "will," "expect," "anticipate," "intend,"
"plan," "believe," "seek" and "estimate" and similar words to identify
forward-looking statements, although we express some forward-looking statements
differently. You should be aware that these statements are not guarantees of
future performance and are subject to certain risks and uncertainties, some of
which are beyond our control and are difficult to predict, and that our actual
results could differ materially from those expressed or forecasted in the
forward-looking statements due to a number of factors, including:
- failure to successfully commercialize our products
- failure to develop new products
- competitive factors
- general economic conditions
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- failure to achieve positive results in clinical trials
- uncertainty regarding our patents and patent rights and costs
of patent litigation (including the material harm to us if
there were an unfavorable outcome of any such litigation)
- government regulation
- technological change
You should also consider carefully the statements under "Factors That May Affect
Future Results and Trading" and other sections of this report and in the other
documents filed with the SEC, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements. You should not place undue reliance on our forwarding-looking
statements, which reflect our management's view only as of the date of this
report. We have no plans to update these forward-looking statements.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's financial instruments include cash, cash equivalents and notes
receivable. At September 30, 2000, the carrying values of its financial
instruments approximated their fair values.
The Company's policy is not to enter into derivative financial instruments. The
Company does not have any significant foreign currency exposure since it does
not transact business in foreign currencies. Therefore, the Company does not
have significant overall currency exposure. In addition, the Company does not
enter into any futures or forward contracts and therefore it does not have
significant market risk exposure with respect to commodity prices.
The Company maintains a $5,000,000 credit facility bearing interest at the
highest prime rate or equivalent rate announced by certain designated banks,
plus 2% or 3.5%. The current rate of interest on the credit facility is
approximately 12.5%. This is the Company's only debt which does not have a
fixed-rate of interest. A significant change in interest rates would not
materially impact the Company's consolidated financial statements. The credit
facility expires in July 2001.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 2000, the Company filed patent infringement lawsuits against
Israeli-based Galil Medical, Ltd., and its U.S. affiliate, Galil
Medical USA, Inc. (collectively, "Galil"), and against Cryomedical
Sciences, Inc. The suits filed in the U.S. District Court for the
Central District of California, allege that these companies have begun
marketing cryosurgical systems and components that incorporate
Endocare's patented combination of cryocooling, ultrasound and
temperature monitoring technology. Endocare's suits seek damages and
injunctive relief with respect to products and procedures which are
found to infringe Endocare's proprietary technology. In August 2000,
Galil submitted counterclaims alleging that the Company's cryosurgical
system infringes two Galil patents. Galil seeks unspecified damages and
injunctive relief with respect to the Company's cryosurgical system.
Based on the Company's analysis of these patents, it believes it has
meritorious defenses to these claims and intends to defend the
litigation vigorously; however, defending the lawsuit could be costly
and the ultimate outcome cannot be determined at this time. The suits
are in the early stages of discovery. Management does not expect any
material adverse effect on the Company's consolidated 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 matters will not have a material adverse effect on the
Company's consolidated results of operations or financial condition.
From time to time, the Company has received other 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 the consolidated financial condition or the results
of operations because of such actions.
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Item 2. Changes in Securities
Stock Options
During the period from July 1, 2000 through September 30, 2000, the
Company granted stock options to 14 individuals covering an aggregate
of 69,000 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
Date: November 13, 2000
ENDOCARE, INC.
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)
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EXHIBIT INDEX
NO. DESCRIPTION
--- -----------
27 Financial Data Schedule
