sv4
As filed with the Securities and Exchange Commission on
January 23, 2009
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
ENDOCARE, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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001-15063
(Primary Standard
Industrial
Classification Code Number)
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33-0618093
(I.R.S. Employer
Identification No.)
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201 Technology Drive
Irvine, California 92618
(949) 450-5400
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Michael R. Rodriguez
Senior Vice President, Finance and Chief Financial Officer
Endocare, Inc.
201 Technology Drive
Irvine, California 92618
(949) 450-5400
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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Clint B. Davis
Senior Vice President, Legal Affairs,
General Counsel and Secretary
Endocare, Inc.
201 Technology Drive
Irvine, California 92618
(949) 450-5400
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Michelle A. Hodges
David C. Lee
Gibson, Dunn & Crutcher LLP
3161 Michelson Drive, Suite 1200
Irvine, CA 92612
(949) 451-3800
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement and the
satisfaction or waiver of all other conditions to the Merger
described in the proxy statement/prospectus.
If the securities being registered on this Form are to be
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Amount of
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Securities to be Registered(1)
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Registered(2)
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Price per Share
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Offering Price(3)
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Registration Fee
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Common Stock, $0.001 par value per share
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15,524,565
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N/A
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$13,766,000
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$541
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(1)
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This registration statement relates
to common stock, $0.001 par value per share, of Endocare,
Inc., a Delaware corporation (Endocare), issuable to
holders of shares of Galil Medical Ltd., an Israeli corporation
(Galil), in the proposed merger of Orange
Acquisitions Ltd., a wholly owned subsidiary of Endocare, with
and into Galil. Each share of Endocares common stock
includes a right to purchase three one-thousandths of a share of
Series A Junior Participating Preferred Stock pursuant to the
Rights Agreement, dated as of March 31, 1999, between Endocare
and U.S. Stock Transfer Corporation, as amended.
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(2)
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The amount of Endocare common stock
to be registered has been determined based on the estimated
maximum number of shares to be issued in the merger, calculated
as the product of (i) the exchange ratio of 0.923077
by (ii) 16,818,277 shares (the number of issued and
outstanding shares of Endocare common stock as of
January 22, 2009, plus all outstanding options, warrants
and deferred stock units). Based on the current trading price of
Endocares common stock on the Nasdaq Capital Market, it is
expected that Endocare will issue approximately
11,092,330 shares of common stock in the proposed merger.
The remaining 4,432,235 shares that Endocare is registering
relate to outstanding options, warrants and deferred stock units
that are currently out-of-the-money.
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(3)
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Estimated solely for purposes of
calculating the registration fee in accordance with
Rule 457(c) and (f) of the Securities Act of 1933, as
amended, based upon the aggregate book value of the Galil
securities that will be cancelled in the merger, computed as of
September 30, 2008, the latest practicable date prior to
the date of filing of this registration statement.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. The prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
JANUARY 23, 2009
PROXY
STATEMENT/PROSPECTUS OF ENDOCARE, INC.
To the Stockholders of Endocare, Inc. and the Shareholders of
Galil Medical Ltd.:
On November 10, 2008, Endocare, Inc.
(Endocare), and Galil Medical Ltd.
(Galil), entered into an Agreement and Plan of
Merger (the Merger Agreement) pursuant to which
Orange Acquisitions Ltd., a wholly owned subsidiary of Endocare
(Merger Sub), will merge with and into Galil, with
Galil continuing after the merger as the surviving company and a
wholly owned subsidiary of Endocare (the Merger).
At the effective time of the Merger, each outstanding ordinary
share of Galil will be converted into the right to receive the
number of shares of Endocare common stock equal to the
product of (1) the sum of the number of shares of
Endocare common stock outstanding and the number of shares of
Endocare common stock subject to in-the-money options
immediately prior to the effective time of the Merger and
(2) the exchange ratio of 0.923077, divided by the
total number of Galil ordinary shares outstanding and the number
of ordinary shares of Galil subject to in-the-money options
immediately prior to the effective time of the Merger. It is
expected that 11,092,330 shares of Endocare common stock
will be issued in the Merger, including the shares that will be
deposited into escrow pursuant to the Merger Agreement (the
Escrow Shares). The exact conversion ratio cannot be
calculated until immediately prior to the effective time of the
Merger, but it is expected that approximately 33.0 ordinary
shares of Galil will be converted into one share of Endocare
common stock. Immediately following the effective time of the
Merger and attributing ownership to Galils shareholders of
the Escrow Shares, Galils shareholders will own
approximately 48%, and Endocares existing stockholders
will own approximately 52%, of Endocares common stock,
without giving effect to the shares issuable pursuant to the
concurrent financing described below. The Merger will have no
effect on the number of shares of common stock of Endocare owned
by existing Endocare stockholders.
Concurrent with the execution of the Merger Agreement, Endocare
and certain existing institutional accredited stockholders of
Endocare and Galil entered into a stock purchase agreement (the
Stock Purchase Agreement), relating to the private
placement by Endocare of 16,250,000 shares of Endocare
common stock at a purchase price of $1.00 per share (the
Financing). The offering proceeds to Endocare from
the Financing are expected to be $16,250,000. The closing of the
Financing is subject to the concurrent closing of the Merger and
certain other conditions. Upon consummation of the Merger and
the Financing and attributing ownership to Galils
shareholders of the Escrow Shares, existing Endocare
stockholders will own approximately 38.5% of Endocares
outstanding common stock and the shareholders of Galil will own
approximately 61.5% of Endocares outstanding common stock.
As a result, the Merger will be accounted for as a reverse
acquisition and equity recapitalization in accordance with
U.S. generally accepted accounting principles. Under this
method of accounting, after completion of the Merger and the
Financing, Endocare will be treated as the acquired
company for financial accounting and reporting purposes, and the
combined entitys results of operations prior to completion
of the Merger will be those of Galil.
Endocares common stock is currently listed on the Nasdaq
Capital Market under the symbol ENDO. On
[ ], 2009, the latest practicable date prior to
the date of this proxy statement/prospectus, the closing sale
price per share of Endocares common stock as reported on
the Nasdaq Capital Market was $[ ] per share.
Endocare is holding a special meeting of its stockholders to
obtain stockholder approval of the issuance of shares of
Endocare common stock in the Merger and the Financing in order
to comply with the requirements of Nasdaq Marketplace
Rule 4350(i)(1)(c)(ii). At the special meeting, which will
be held at [ ] a.m., local time, on
[ ], at the principal executive offices of
Endocare located at 201 Technology Drive, Irvine, California
92618, unless postponed or adjourned to a later date, Endocare
will ask its stockholders to approve (i) the issuance of
shares of Endocare common stock in the Merger pursuant to the
Merger Agreement, (ii) the issuance of up to
16,250,000 shares of Endocare common stock pursuant to the
Stock Purchase Agreement, (iii) the Endocare, Inc. 2009
Stock Incentive Plan, (iv) an amendment to Endocares
Restated Certificate of Incorporation, as amended, to increase
the total number of shares of capital stock that Endocare is
authorized to issue, and (v) an adjournment of the special
meeting, if necessary, to solicit additional proxies if there
are not sufficient votes in favor of Proposals 1 through 4.
Endocares board of directors unanimously recommends
that Endocares stockholders vote FOR each of the
proposals.
Galil is holding a special general meeting and class meetings of
shareholders in order to obtain the requisite shareholder
approval necessary to complete the Merger. At the special
general meetings and the class meetings, which will be held at
5:00 p.m., local time, on [ ], 2009, at
the office of Galil located at Tavor Building 1, Industrial
Park, Yokneam 20692, Israel, unless postponed or adjourned to a
later date, Galil will ask its shareholders to approve
(i) the Merger and the Merger Agreement, the Stock Purchase
Agreement, a Pre-Closing Shareholders Agreement among Galil and
certain major shareholders of Galil and all other ancillary
agreements to the Merger Agreement and the transactions
contemplated thereby, (ii) certain amendments to the
Articles of Association of Galil to be effective immediately
prior to the closing of the Merger, (iii) the cancellation
of any shares of Galil held in the treasury of Galil or owned by
Galil immediately prior to the closing of the Merger,
(iv) the grant to certain senior employees of Galil of
certain bonus payments and retention packages, (v) the
replacement of the Articles of Association of Galil with new
Articles of Association as of the effective time of the Merger,
and (vi) the designation of Martin J. Emerson as agent and
proxy for the purposes of proxies executed by optionees of
Galil. Galils board of directors unanimously recommends
that Galils shareholders vote FOR each of the
proposals.
More information about Endocare, Galil, the Merger, the Merger
Agreement, the Financing and the Stock Purchase Agreement is
contained in the accompanying proxy statement/prospectus.
Endocare encourages you to read the proxy
statement/prospectus carefully and in its entirety. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED
UNDER RISK FACTORS BEGINNING ON PAGE 12.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the
transactions described in this proxy statement/prospectus or the
Endocare common stock to be issued pursuant to the Merger
Agreement or the Stock Purchase Agreement or passed upon the
adequacy or accuracy of this proxy statement/prospectus. Any
representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated [ ],
2009, and is first being mailed to Endocare and Galil
shareholders on or about [ ], 2009.
ENDOCARE,
INC.
201 Technology Drive
Irvine, California 92618
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
To Be Held On
[ ], 2009
Dear Stockholder of Endocare, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
Endocare, Inc., a Delaware corporation (Endocare),
will be held at the principal executive offices of Endocare
located at 201 Technology Drive, Irvine, CA 92618, on
[ ], 2009 at [ ] a.m.,
local time for the following purposes:
1. To consider and vote upon a proposal to issue shares of
Endocare common stock, par value $0.001 per share, pursuant to
the Agreement and Plan of Merger by and among Endocare, Orange
Acquisitions Ltd., Endocares wholly owned merger
subsidiary, and Galil Medical Ltd. (Galil), pursuant
to which Endocare would acquire Galil through a merger of Orange
Acquisitions Ltd. with and into Galil so that Galil becomes a
wholly owned subsidiary of Endocare (the Merger);
2. To consider and vote upon a proposal to issue up to
16,250,000 shares of Endocare common stock, pursuant to the
Stock Purchase Agreement by and among Endocare and certain
existing institutional stockholders of Endocare and Galil;
3. To consider and vote upon a proposal to approve the
Endocare, Inc. 2009 Stock Incentive Plan;
4. To consider and vote upon a proposal to amend
Endocares Restated Certificate of Incorporation, as
amended, to increase the total number of shares of capital stock
that Endocare is authorized to issue from 51,000,000 shares
to 76,000,000 shares by increasing the total number of
authorized shares of common stock from 50,000,000 shares to
75,000,000 shares;
5. To consider and vote upon an adjournment of the special
meeting, if necessary, to solicit additional proxies if there
are not sufficient votes in favor of the foregoing
proposals; and
6. To transact such other business that properly comes
before the meeting or any adjournment or postponement thereof.
Endocares board of directors unanimously recommends
that you vote FOR each of the proposals.
The foregoing items of business are more fully described in the
proxy statement/prospectus accompanying this Notice. Only
stockholders of record at the close of business on
[ ], 2009 will be entitled to vote at the
special meeting. Our stock transfer books will remain open
between the record date and the date of the special meeting. A
list of stockholders entitled to vote at the special meeting
will be available for inspection at our principal executive
offices.
All stockholders are cordially invited to attend the special
meeting in person. Whether or not you plan to attend the special
meeting in person, please cast your proxy vote promptly by
Internet, telephone or mail. Voting instructions are included
with your proxy card. Should you receive more than one proxy
card because your shares are registered in different names or
addresses, each proxy card should be voted to assure that all
your shares are included in the vote. You may revoke your proxy
card at any time prior to the special meeting by following the
instructions in the proxy statement/prospectus. If you attend
the special meeting and vote by ballot, then your proxy vote
will be revoked automatically and only your vote by ballot at
the special meeting will be counted. Regardless of the number of
shares of Endocare you own or whether or not you plan to attend
the meeting, it is important that your shares be represented and
voted.
The approval of both Proposals 1 and 2 is required for
completion of the Merger. In addition, unless the Merger is
completed, neither the Endocare, Inc. 2009 Stock Incentive Plan
nor the amendment to Endocares Restated Certificate of
Incorporation, as amended, will be implemented, whether or not
approved by the Endocare stockholders.
By order of the board of directors of Endocare, Inc.,
Clint B. Davis
Senior Vice President, Legal Affairs,
General Counsel and Secretary
Irvine, California
[ ], 2009
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF
SHARES YOU OWN. WE ENCOURAGE YOU TO READ THE ATTACHED PROXY
STATEMENT/PROSPECTUS CAREFULLY AND IN ITS ENTIRETY AND CAST YOUR
PROXY VOTE AS PROMPTLY AS POSSIBLE.
ADDITIONAL
INFORMATION
This proxy statement/prospectus incorporates important business
and financial information about Endocare that is not included in
or delivered with this proxy statement/prospectus. Endocare will
provide without charge this information and any and all of the
documents referred to herein to each person to whom a copy of
this proxy statement/prospectus has been delivered, who makes a
written or oral request by writing or calling Endocare at the
following address or telephone number.
Corporate Secretary
Endocare, Inc.
201 Technology Drive
Irvine, California 92618
(949) 450-5400
If you would like to request any documents, please do so by
[ ], 2009, in order to ensure timely delivery
before the special meetings.
This proxy statement/prospectus forms a part of a registration
statement on
Form S-4
(Registration
No. 333- ),
filed by Endocare with the United States Securities and Exchange
Commission (the SEC). It constitutes a prospectus of
Endocare under Section 5 of the Securities Act of 1933, as
amended (the Securities Act), and the rules
thereunder, with respect to the shares of Endocare common stock
to be issued to holders of shares of Galil in the Merger. In
addition, it constitutes a proxy statement under
Section 14(a) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and the rules
thereunder, and a notice of meeting with respect to the special
meeting of stockholders at which Endocares stockholders
will consider and vote on the proposals to approve the issuance
of Endocare common stock issuable to the holders of Galil shares
pursuant to the Merger Agreement, to approve the issuance of
Endocare common stock issuable pursuant to the Stock Purchase
Agreement, to approve the Endocare, Inc. 2009 Stock Incentive
Plan, to approve an amendment to Endocares Restated
Certificate of Incorporation, as amended, to increase the total
number of shares of capital stock that Endocare is authorized to
issue, and to approve an adjournment of the special meeting, if
necessary, to solicit additional proxies if there are not
sufficient votes in favor of Proposals 1 through 4, each as
described in this proxy statement/prospectus. This proxy
statement/prospectus does not constitute a prospectus of Galil
or a proxy statement of Galil and is not being distributed to
Galil shareholders for the purpose of soliciting proxies for the
special general meeting and class meetings of Galil shareholders
referred to herein.
You should rely only on the information contained in this proxy
statement/prospectus or on information to which Endocare has
referred you. Endocare has not authorized anyone else to provide
you with any information. Endocare provided the information
concerning Endocare, and Galil provided the information
concerning Galil, appearing in this proxy statement/prospectus.
TABLE OF
CONTENTS
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Page
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FI-1
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A-1
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EX-5.1 |
EX-8.1 |
EX-23.1 |
EX-23.2 |
EX-99.1 |
EX-99.2 |
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETINGS AND THE
TRANSACTIONS
The following section provides answers to frequently asked
questions about the Endocare special meeting of stockholders and
the Galil special general and class meetings of shareholders.
This section, however, only provides summary information. These
questions and answers do not address all issues that may be
important to you as a stockholder of Endocare or shareholder of
Galil. We encourage you to read this proxy statement/prospectus
carefully and in its entirety, including each of the annexes.
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What are the proposed transactions? |
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Merger: It is proposed that Endocare
will acquire Galil through a merger of Orange Acquisitions Ltd.,
a newly formed, wholly owned subsidiary of Endocare, with and
into Galil so that Galil becomes a wholly owned subsidiary of
Endocare after the Merger. Immediately after the Merger, but
prior to the Financing, Endocares existing stockholders
will own approximately 52.0% of the outstanding shares of common
stock of Endocare and Galil shareholders will own approximately
48.0% of the outstanding shares of Endocare common stock. |
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Financing: On November 10, 2008,
concurrent with the execution of the Merger Agreement, Endocare
and certain existing institutional accredited stockholders of
Endocare and Galil entered into a Stock Purchase Agreement
relating to the private placement by Endocare of
16,250,000 shares of Endocare common stock at a purchase
price of $1.00 per share. The offering proceeds to Endocare are
expected to be approximately $16,250,000. Upon consummation of
the Merger and the Financing, and attributing ownership to
Galils shareholders of the Escrow Shares, existing
Endocare stockholders will own approximately 38.5% of the
outstanding shares of common stock of Endocare and the
shareholders of Galil will own approximately 61.5% of the
outstanding shares of common stock of Endocare. The Stock
Purchase Agreement is subject to the concurrent closing of the
Merger and certain other conditions, including the sale of
shares with a minimum aggregate purchase price of $12,000,000
and that Endocares common stock remains listed on the
Nasdaq Capital Market or the Over-The-Counter
Bulletin Board. |
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What will Endocare stockholders and Galil shareholders
receive in the Merger? |
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Endocare stockholders: The Merger will
have no effect on the number of shares of common stock of
Endocare owned by existing Endocare stockholders. |
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Galil shareholders: The Merger
Agreement provides that at the effective time of the Merger,
each outstanding ordinary share of Galil will be converted into
the right to receive the number of shares of Endocare common
stock equal to the product of (1) the sum of the
number of shares of Endocare common stock outstanding and the
number of shares of Endocare common stock subject to
in-the-money options immediately prior to the effective time of
the Merger and (2) the exchange ratio of 0.923077,
divided by the total number of Galil ordinary shares
outstanding and the number of ordinary shares of Galil subject
to in-the-money options immediately prior to the effective time
of the Merger. The exact conversion ratio cannot be calculated
until immediately prior to the effective time of the Merger, but
it is expected that approximately 33.0 ordinary shares of Galil
will be converted into one share of Endocare common stock. |
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When do you expect the Merger to be completed? |
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A. |
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We anticipate that consummation of the Merger will occur in the
period from the late first quarter of 2009 to the end of the
second quarter of 2009, as promptly as practicable after the
special meetings and following satisfaction or waiver of all
closing conditions. However, the exact timing of the
consummation of the Merger is not yet known. See the section
entitled The Merger Agreement Conditions to
the Completion of the Merger beginning on page 69 of
this proxy statement/prospectus. |
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When is the Endocare special stockholder meeting? |
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The special meeting of Endocares stockholders held to vote
on the proposals will be held at [ ] a.m.,
local time, on [ ], 2009 at: |
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Endocare, Inc.
201 Technology Drive
Irvine, California 92618 |
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At the special meeting, Endocare stockholders may cast one vote
per share of Endocare common stock held by them on the close of
business on [ ], 2009, the record date for the
special meeting. As of the record date,
[ ] shares of Endocare common stock were
outstanding and entitled to vote. Proposals 1, 2, 3 and 5
to be voted upon by Endocares stockholders will require
the approval by holders of a majority of the shares of Endocare
common stock present in person or by proxy and voting at the
Endocare special meeting called to vote on such proposals at
which a quorum is present. A quorum for the special meeting is
the presence of Endocare stockholders representing more than 50%
of the shares eligible to vote at the meeting. Proposal 4
to be voted upon by Endocare stockholders will require approval
of the holders of a majority of the outstanding shares of
Endocare common stock entitled to vote as of the record date. |
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Q. |
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When are the Galil special general and class shareholder
meetings? |
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A. |
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The special general meeting of Galils shareholders held to
vote on the proposals will be held at 5:00 p.m., local
time, on [ ], 2009. |
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The class meeting of the holders of Galils issued and
outstanding ordinary shares held to vote on the proposals will
be held at 5:30 p.m., local time, on [ ],
2009. |
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The class meeting of the holders of Galils issued and
outstanding
Series A-1
Preferred Shares held to vote on the proposals will be held at
6:00 p.m., local time, on [ ], 2009. |
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The class meeting of the holders of Galils issued and
outstanding
Series A-2
Preferred Shares held to vote on the proposals will be held at
6:30 p.m., local time, on [ ], 2009. |
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The special general meeting and each of the class meetings will
be held at Galils office located at: |
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Galil Medical Ltd.
Tavor Building 1
Industrial Park
Yokneam 20692
Israel |
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At the special general meeting, Galil shareholders may cast one
vote per each ordinary share of Galil held by them on the date
of the special general meeting and a number of votes equal to
the number of ordinary shares into which any
Series A-1
Preferred Share or any
Series A-2
Preferred Share held by such shareholders is then convertible
pursuant to Amended and Restated Articles of Association of
Galil as of the date of the special general meeting. At each
class meeting, Galil shareholders may cast one vote per each
ordinary share, or
Series A-1
Preferred Share, or
Series A-2
Preferred Share, as applicable, held by them on the date of the
applicable class meeting. The proposals to be voted upon by
Galils shareholders will require the approval by holders
of at least 75% of Galils issued and outstanding ordinary
shares, at least 75% of Galils issued and outstanding
Series A-1
Preferred Shares and at least 75% of Galils issued and
outstanding
Series A-2
Preferred Shares. A quorum for each class meeting is the
presence, in person or by proxy, of Galil shareholders
representing at least 50% of the shares eligible to vote at such
class meeting. In addition, the proposals to be voted upon by
Galils shareholders will require the approval of at least
75% of the holders of Galils issued and outstanding
ordinary shares,
Series A-1
Preferred Shares and
Series A-2
Preferred Shares, voting collectively on an as-converted basis.
A quorum for the special general meeting is the presence, in
person or by proxy, of: (i) Galil shareholders
representing at least 50% of the issued and outstanding share
capital of Galil (determined on as converted basis), and
(ii) shareholder(s) holding at least a majority of the
Series A-1
Preferred Shares. |
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Q. |
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What do I need to do now? |
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A. |
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Endocare stockholders: We encourage you
to read this proxy statement/prospectus carefully and in its
entirety, including each of the annexes, and to consider how the
issuance of shares pursuant to the Merger Agreement and Stock
Purchase Agreement affects you. If your shares are registered
directly in your name, you may vote in one of four different
ways. First, you can provide your proxy instructions over the
Internet at www.proxyvote.com, by following the instructions you
will find there. Second, you can provide your proxy instructions
by telephone at
1-800-690-6903,
by following instructions. Third, you can complete, date and
sign |
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the enclosed proxy card and mail it in the enclosed postage-paid
envelope. Alternatively, you can deliver your completed proxy
card in person or vote by completing a ballot in person at the
special meeting. |
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Galil shareholders: We encourage you to
read this proxy statement/prospectus carefully and in its
entirety, including each of the annexes, and to consider how the
approval of the Merger Agreement affects you. You may vote in
person or by proxy (as set forth in Galils Amended and
Restated Articles of Association) at the special general meeting
and the applicable class meeting(s). Galil is not soliciting
proxies in connection with the special general meeting or any of
the class meetings. |
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If the Merger is completed, Galil shareholders will have to
surrender their certificates representing Galil shares in order
to receive the Endocare common stock that they are entitled to
receive in the Merger. Galil shareholders do not need to do this
now, but will receive written instructions upon completion of
the Merger. |
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Q. |
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How does the Board of Directors of Endocare recommend the
Endocare stockholders vote? |
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A. |
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After careful consideration, Endocares board of directors
unanimously recommends that Endocares stockholders vote: |
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FOR Proposal 1 to approve the issuance of shares of
Endocare common stock in the Merger pursuant to the Merger
Agreement; |
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FOR Proposal 2 to approve the issuance of up to
16,250,000 shares of Endocare common stock pursuant to the
Stock Purchase Agreement; |
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FOR Proposal 3 to approve the Endocare, Inc. 2009
Stock Incentive Plan; |
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FOR Proposal 4 to approve an amendment to
Endocares Restated Certificate of Incorporation, as
amended, to increase the total number of shares of capital stock
that Endocare is authorized to issue from 51,000,000 shares
to 76,000,000 shares by increasing the total number of
authorized shares of common stock from 50,000,000 shares to
75,000,000 shares; and |
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FOR Proposal 5 to approve an adjournment of the
special meeting, if necessary, to solicit additional proxies if
there are not sufficient votes in favor of Proposals 1
through 4. |
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The approval of both Proposals 1 and 2 is required for
completion of the Merger. In addition, unless the Merger is
completed, neither the Endocare, Inc. 2009 Stock Incentive Plan
nor the amendment to Endocares Restated Certificate of
Incorporation, as amended, will be implemented, whether or not
approved by the Endocare stockholders. |
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Q. |
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How does the Board of Directors of Galil recommend the Galil
shareholders vote? |
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A. |
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The board of directors of Galil has determined that the Merger
Agreement and the proposed Merger is fair to, and in the best
interests of, Galil and its shareholders and unanimously
recommends that its shareholders vote FOR the adoption of
the Merger Agreement. In addition, the Galil shareholders are
also being asked to vote on certain other proposals not directly
related to the Merger as to which the board of directors of
Galil also unanimously recommends that the shareholders vote to
approve. |
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Q. |
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If my Endocare shares are held in street name by
my broker, will my broker vote my shares for me? |
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A. |
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Your broker will vote your shares only if you provide
instructions on how to vote. You should follow the directions
provided by your broker to vote your shares. If you do not
instruct your broker on how to vote, your shares will not be
voted. You cannot vote shares held in street name by
returning a proxy card to Endocare. |
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Q. |
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May I change my vote after I have mailed my signed proxy
card? |
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A. |
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Endocare stockholders: You may change
your vote at any time before your proxy is voted at the special
meeting. You can do this in one of three ways. First, you can
send a written notice to Endocare stating that you want to
revoke your proxy. Second, you can complete and submit a new
proxy card. If you choose either of these two methods, you must
submit your notice of revocation or your new proxy card to: |
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Endocare, Inc.
201 Technology Drive
Irvine, California 92618
Attention: Corporate Secretary |
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Third, you can attend the special meeting and vote in person.
Simply attending the meeting, however, will not revoke your
proxy; you must provide notice and vote at the meeting. If you
have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote. |
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Galil shareholders: Galil is not
soliciting proxies in connection with the special general
meeting or any of the class meetings. |
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Q. |
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What approval of Endocares stockholders and
Galils shareholders is required to consummate the
Merger? |
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A. |
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In order to consummate the Merger, the issuance of shares of
Endocare common stock pursuant to the Merger Agreement and Stock
Purchase Agreement must be approved by a majority of the shares
present in person or by proxy at the Endocare special meeting
called to vote on such proposal. |
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In addition, Galils shareholders must adopt the Merger
Agreement, which requires the affirmative vote of holders of at
least 75% of Galils issued and outstanding ordinary
shares, at least 75% of Galils issued and outstanding
Series A-1
Preferred Shares and at least 75% of Galils issued and
outstanding
Series A-2
Preferred Shares, in each case voting at a meeting at which at
least 50% of the holders of the respective class of Galil shares
are present in person or by proxy. In addition, approval of the
Merger Agreement requires the affirmative vote of at least 75%
of the holders of Galils issued and outstanding ordinary
shares,
Series A-1
Preferred Shares and
Series A-2
Preferred Shares, voting collectively on an as-converted basis
with the presence of (i) at least 50% of the then issued
and outstanding share capital of Galil (determined on as
converted basis), and (ii) shareholder(s) holding at least
a majority of the
Series A-1
Preferred Shares. As a condition to entering into the Merger
Agreement, Endocare required certain shareholders of Galil, who
collectively own more than 97.5% of the outstanding shares of
Galil, to enter into voting agreements in which they agreed to
vote in favor of the Merger and certain other transactions and
to execute an appropriate proxy in that respect. Such agreements
involve only Galils shareholders who hold (together with
their affiliated entities) 5% or more of the voting power of
Galil. |
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The proxies which were executed concurrently with the execution
of the Merger Agreement are irrevocable until such time as the
Voting Agreement dated as of November 10, 2008, among
Endocare, Orange Acquisitions Ltd. and certain shareholders of
Galil terminates in accordance with its terms. |
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Q. |
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Who can help answer my questions? |
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A. |
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Endocare stockholders: If you have more
questions about the proposals, you should contact: |
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Corporate Secretary
Endocare, Inc.
201 Technology Drive
Irvine, California 92618
(949) 450-5400 |
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Galil shareholders: If you have more
questions about the proposals, you should contact: |
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Chief Financial Officer
Galil Medical Ltd.
POB 224
Yokneam 20692, Israel
+972.4.909.3200 |
v
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information
that may be important to you. We encourage you to read this
proxy
statement/prospectus
carefully and in its entirety, including annexes, and the other
documents to which this proxy statement/prospectus refers to
fully understand the proposals. See Where You Can Find
More Information on page 208.
The
Companies
Endocare, Inc. (page 102)
201 Technology Drive
Irvine, CA 92618
(949) 450-5400
Endocare is an innovative medical device company focused on the
development of minimally invasive technologies for tissue and
tumor ablation. Endocare has initially concentrated on
developing cryoablation (freezing) technologies for the
treatment of prostate cancer and believes that its proprietary
technologies have broad applications across a number of markets,
including the ablation of tumors in the kidney, lung and liver
and palliative intervention (treatment of pain associated with
metastases).
Orange
Acquisitions Ltd. (page 114)
Orange Acquisitions Ltd. is a newly formed Israeli corporation
and wholly owned subsidiary of Endocare organized for the
purpose of completing the proposed Merger. It has engaged in no
business activities, and it has no assets or liabilities of any
kind, other than those incidental to its formation and those
incurred in connection with the Merger.
Galil Medical Ltd. (page 115)
Tavor Bldg. 1
Industrial Park
P.O. Box 224
Yokneam 20692, Israel
+972.4.909.3200
Galil is leading a new era of minimally invasive cryotherapy
solutions that enhance patient quality of life. Since its
foundation, Galil has dedicated extensive research toward
increasing the ease of use and precision of cryotherapy and
minimally invasive procedures in order for physicians to provide
patients with rapid recovery times and a high quality of life.
Summary
of the Merger (page 33)
In the Merger, Orange Acquisitions Ltd. will merge with and into
Galil. After the Merger, Galil will continue as the surviving
company and will be a wholly owned subsidiary of Endocare. Each
outstanding share of Galil will be cancelled at the effective
time of the Merger, and in exchange therefor, Endocare will
issue shares of Endocare common stock. Following the Merger,
Galil shareholders will no longer have any interest in Galil,
but will have an equity stake in Endocare, the new parent
company of Galils operations. Immediately after the
Merger, but prior to the Financing, and attributing ownership to
Galils shareholders of the Escrow Shares, existing
Endocare stockholders are expected to own approximately 52.0% of
the outstanding shares of Endocare common stock and the former
Galil shareholders are expected to own approximately 48.0% of
the outstanding shares of Endocare common stock. Upon
consummation of the Merger and Financing and attributing
ownership to Galils shareholders of the Escrow Shares,
existing Endocare stockholders will own approximately 38.5% of
the outstanding shares of common stock of Endocare and
Galil shareholders will own approximately 61.5% of the
outstanding shares of common stock of Endocare.
We have attached the Merger Agreement to this proxy
statement/prospectus as Annex A. The Merger Agreement
describes the terms of the Merger. We encourage you to read the
Merger Agreement. It is the legal document that governs the
Merger and its exact language prevails over the more general,
abbreviated descriptions in this proxy statement/prospectus.
1
Endocare stockholders and Galil shareholders are not third
party beneficiaries under the Merger Agreement and should not
rely on the representations, warranties and covenants or any
descriptions thereof as characterizations of the actual state of
facts or condition of Endocare, Galil or any of their respective
affiliates.
Galil
Share Options (page 49)
In the Merger, each share option to buy Galil ordinary shares
will become an option to buy Endocare common stock. Each option
will continue to be governed by the Galil share option plan and
other governing documents under which it was issued, except that
the number of shares subject to each share option, as well as
the exercise price of that share option, will be adjusted to
reflect the Merger exchange ratio.
Opinion
of Endocares Financial Advisor (page 43)
In connection with the Merger, Endocares board of
directors received a written opinion, dated November 10,
2008, of Endocares financial advisor,
Oppenheimer & Co. Inc. (Oppenheimer), as
to the fairness, from a financial point of view and as of the
date of the opinion, to Endocare of the 0.923077 aggregate
exchange ratio provided for in the Merger Agreement. The full
text of Oppenheimers written opinion, dated
November 10, 2008, which describes the assumptions made,
procedures followed, matters considered and limitations on the
review undertaken, is attached to this proxy
statement/prospectus as Annex E. Oppenheimers
opinion was provided to Endocares board of directors in
connection with its evaluation of the 0.923077 aggregate
exchange ratio from a financial point of view and does not
address any other aspect of the Merger or any related
transaction. Oppenheimers opinion does not address the
underlying business decision of Endocare to effect the Merger or
any related transaction, the relative merits of the Merger or
any related transaction as compared to any alternative business
strategies that might exist for Endocare or the effect of any
other transaction in which Endocare might engage and does not
constitute a recommendation to any stockholder as to how such
stockholder should vote or act with respect to any matters
relating to the Merger or any related transaction.
Our
Reasons for the Merger (page 41)
Endocare and Galil are proposing to merge because they believe
that the Merger will significantly benefit their respective
stockholders.
Endocare believes that a combination with Galil will:
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Permit a consolidation of resources that will result in greater
penetration of cryoablation technology in the marketplace;
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Create efficiency opportunities, through reorganization and
elimination of redundant administrative, sales &
marketing and research & development costs, by
bringing together the best technologies of both organizations to
provide greater combined innovative potential; and
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Result in a stronger international position, and allow the
combined company to better compete with other treatments.
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As a result, Endocares board believes that the Merger
should provide increased value to its stockholders.
Galil believes that a combination with Endocare will:
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Create opportunities for new innovation and technology synergies;
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Improve the product platform and allow penetration of a broader
market for cryoablation;
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Eliminate duplicate selling and administrative costs;
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Eliminate redundant clinical trials and studies; and
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Leverage existing sales and distribution.
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As a result, Galils board believes that the Merger should
provide increased value to its shareholders.
2
Overview
of the Merger Agreement
Merger
Consideration (page 59)
Pursuant to the Merger Agreement, Endocare will issue to
Galils shareholders and will assume Galils options
that are expected to equal an aggregate of approximately
11,857,248 shares of Endocares common stock.
Conditions
to Completion of the Merger (page 69)
Consummation of the Merger is subject to a number of conditions,
including among others, the following:
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the approval by Endocares stockholders of the issuance of
shares of Endocare common stock pursuant to the Merger Agreement
and Stock Purchase Agreement;
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the approval of the Merger, the Merger Agreement and the related
transactions by the holders of all classes of Galils
outstanding shares voting together at the special general
meeting and at each individual class meeting;
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the receipt of all governmental and other third party consents;
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no governmental investigation or proceeding that makes it
reasonably possible that an order will be issued enjoining or
restraining the Merger and the related transactions;
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the elapsing of the statutory waiting period as required by
Israel law;
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the receipt of a withholding tax ruling from the Israeli tax
authority with respect to the consideration payable to the
shareholders of Galil (or the receipt of applicable withholding
tax exemption certificates for each such shareholder);
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the receipt of an escrow tax ruling from the Israeli tax
authority, if applicable;
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the effectiveness of Endocares registration statement on
Form S-4,
of which this proxy statement/prospectus forms a part, with no
stop order suspending the effectiveness of the
Form S-4,
and no proceedings for that purpose initiated or threatened by
the SEC;
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no governmental authority enacting any law or order that is then
in effect and that enjoins, materially restrains or conditions,
or makes illegal or otherwise prohibits the consummation of the
Merger and the related transactions;
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no prospectus shall, in Endocares reasonable judgment, be
required to be filed in Israel for the issuance of shares of
Endocare common stock in connection with the Merger, the
Financing and the other transactions contemplated by the Merger
Agreement;
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the Financing, in all material respects consistent with the
Stock Purchase Agreement, shall close concurrent with the
closing of the Merger; and
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the absence of any change, event, or development or prospective
change, event or development that individually or in the
aggregate has had or is reasonably likely to have a material
adverse change on either Endocare or Galil.
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Exclusivity;
Change of Recommendation (page 66)
Each of Galil and Endocare agreed that, subject to specified
exceptions in the case of Endocare, Galil and Endocare shall
not, nor shall either of them authorize or permit any of their
respective subsidiaries or any of their or their
subsidiaries respective officers, directors, investment
bankers, attorneys, accountants or other advisors or
representatives to, directly or indirectly:
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solicit, initiate, encourage or take any other action designed
to facilitate any inquiries or the making of any proposal or
offer that constitutes, or could reasonably be expected to lead
to, any acquisition proposal, as defined in the
Merger Agreement; or
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enter into, continue or otherwise participate in any discussions
or negotiations regarding, furnish to any person any information
with respect to, assist or participate in any effort or attempt
by any person with respect to, or otherwise cooperate in any way
with, any acquisition proposal.
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Termination
of the Merger Agreement (page 73)
Before the Merger is completed, Endocare and Galil can mutually
agree to terminate the Merger Agreement. Also, either party can
terminate the Merger Agreement if either:
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an order permanently restraining, enjoining or otherwise
prohibiting the Merger shall be entered and becomes
nonappealable; or
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the Merger is not completed by June 30, 2009.
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Either party may also terminate the Merger Agreement under other
circumstances, including:
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if there has been a material breach by the other party of any
representation, warranty, covenant or agreement of such party
contained in the Merger Agreement that is not curable or, if
curable, not cured within the earlier of (i) 30 days
written notice to the breaching party or (ii) June 30,
2009; or
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if any of the parties respective closing conditions are
incapable of fulfillment.
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Termination
Fees and Expenses (page 75)
The Merger Agreement provides for the payment of a termination
fee of $900,000 by each of Endocare and Galil (in such
circumstances, the defaulting party) to the other
party, in the event of a willful breach of the Merger Agreement
by the defaulting party, a change of recommendation by the board
of directors of the defaulting party, a breach of the defaulting
partys covenant to call the meeting of such partys
shareholders in order to obtain the requisite shareholder
approval necessary to complete the Merger, a breach of the
non-solicit covenants by the defaulting party, or if a
shareholder of the defaulting party defaults on its obligation
to purchase shares of Endocare common stock in the Financing. In
each case, the defaulting party is also obligated to reimburse
the other party for the other partys expenses related to
the transaction in an amount not to exceed $850,000. In
addition, in the event of a material breach not covered by the
foregoing, in connection with termination of the Merger
Agreement, the breaching party will reimburse the other party
for its expenses related to the transaction in an amount not to
exceed $850,000.
Endocare
Per Share Market Price Information (page 10)
The stock of Endocare is listed on the Nasdaq Capital Market. On
November 7, 2008, the last trading day before Galil and
Endocare announced entry into the Merger Agreement, the closing
price of Endocares common stock was $1.14 per share. On
[ ], 2009, the latest practicable date before
the date of this proxy statement/prospectus, the closing price
of Endocares common stock was $[ ] per
share.
Stock
Purchase Agreement with certain Endocare Stockholders and Galil
Shareholders (page 77)
Concurrently with the execution of the Merger Agreement,
Endocare and certain existing institutional accredited
stockholders of Endocare and Galil entered into a Stock Purchase
Agreement, relating to the private placement of
16,250,000 shares of Endocare common stock, at a purchase
price of $1.00 per share. The shares to be purchased pursuant to
the Stock Purchase Agreement represent approximately
[ ]% of the outstanding shares of Endocare
common stock on [ ], 2009.
Upon consummation of the Merger and the Financing, the
beneficial ownership of Endocare is expected to be as set forth
on page 203. However, if any purchaser defaults on its
obligation to purchase its allocated shares under the Stock
Purchase Agreement, the other purchasers have a right to
purchase the defaulting partys allocated shares. This
could result in one party holding more shares of Endocares
outstanding common stock than currently expected. Under the
Stock Purchase Agreement, however, no party may purchase shares
in excess of 35% of the then outstanding shares of Endocare
common stock. The Stock Purchase Agreement is subject to the
concurrent closing of the Merger and certain other conditions,
including the sale of shares with a minimum aggregate purchase
4
price of $12,000,000 and that Endocares common stock
remains listed on the Nasdaq Capital Market or the
Over-The-Counter Bulletin Board.
Voting by
Endocare Directors and Executive Officers
(page 196)
On [ ], 2009, the record date set by the
Endocare board of directors for the Endocare special meeting,
the directors and executive officers of Endocare and their
affiliates owned and were entitled to
vote [ ] shares of Endocare common
stock, or approximately [ ]% of the shares of
Endocare common stock outstanding on that date. In order to
consummate the Merger, the issuance of shares of Endocare common
stock pursuant to the Merger Agreement and Stock Purchase
Agreement must be approved by a majority of the shares present
in person or by proxy at the Endocare special meeting called to
vote on such proposals, provided that a quorum is present.
Voting by
Galil Directors and Executive Officers (page 77)
As of [ ], 2009, directors and executive
officers of Galil and their affiliates owned and were entitled
to vote [ ] ordinary shares of Galil, or
approximately [ ]% of the ordinary shares of
Galil outstanding, [ ]
Series A-1
Preferred Shares, or [ ]% of the
Series A-1
Preferred Shares outstanding, and [ ]
Series A-2 Shares,
or [ ]% of the
Series A-2
Preferred Shares outstanding. As a condition to Endocare
entering into the Merger Agreement, shareholders of Galil
holding more than 97.5% of the outstanding shares of Galil on
that date have executed voting agreements agreeing to vote in
favor of the Merger and to certain other transactions and have
executed an appropriate proxy in that respect. Such agreements
involve only Galils shareholders who hold (together with
their affiliated entities) 5% or more of the voting power of
Galil. Galils shareholders must adopt the Merger
Agreement, which requires the affirmative vote of holders of at
least 75% of Galils issued and outstanding ordinary
shares, at least 75% of Galils issued and outstanding
Series A-1
Preferred Shares and at least 75% of Galils issued and
outstanding
Series A-2
Preferred Shares, in each case voting at a meeting at which at
least 50% of the holders of the respective class of Galil shares
are present in person or by proxy. In addition, approval of the
Merger Agreement requires the affirmative vote of at least 75%
of the holders of Galils issued and outstanding ordinary
shares,
Series A-1
Preferred Shares and
Series A-2
Preferred Shares, voting collectively on an as-converted basis,
with the presence of (i) at least 50% of the then issued
and outstanding share capital of Galil (determined on an
as-converted basis), and (ii) shareholder(s) holding at
least a majority of the
Series A-1
Preferred Shares.
Government
and Regulatory Matters (page 53)
Neither Endocare nor Galil is required to obtain approvals or
clearances from any antitrust regulatory authorities in the
United States or other countries to consummate the Merger.
United States Regulatory Approvals. In the
United States, Endocare must comply with applicable federal and
state securities laws and, to the extent Endocare is to remain
listed on the Nasdaq Capital Market, Nasdaq rules and
regulations in connection with the issuance of shares of
Endocares common stock pursuant to the Merger Agreement
and the Financing, including the filing with the SEC of its
Registration Statement on
Form S-4,
of which this proxy statement/prospectus forms a part.
Israeli Regulatory Approvals. Endocare and
Galil are also required to receive Israeli regulatory approvals,
including from the Investment Center, approval in principle of
which has been obtained, and to make certain regulatory filings.
Galil also made a required filing with the Office of the Chief
Scientist of the Israel Ministry of Industry, Trade and Labor,
approval of which has been obtained. The Merger will only take
effect after the making of certain filings with the Israel
Registrar of Companies regarding the provision of notices to
creditors and the receipt of shareholder approvals of the Merger
from each of the merging companies.
The
Endocare Board of Directors after the Merger
(page 52)
The board of directors of Endocare following the Merger will be
comprised of nine directors. Endocare has agreed to appoint four
current members of Galils board of directors to the board
of directors of Endocare upon completion of the Merger. It is
currently the parties intention that these individuals
will be Martin J. Emerson, Richard B. Emmitt, Doron Birger and
James E. Thomas. Endocare has also agreed to appoint a former or
current partner of Frazier Healthcare Ventures or the former or
current chief executive officer of one of Frazier Healthcare
5
Ventures portfolio companies to the board of directors of
Endocare upon consummation of the Merger. It is currently
intended that this individual will be Daniel A. Pelak. As of
December 31, 2008, Frazier Healthcare Ventures held
1,721,915 shares of Endocare common stock comprising 14.6%
of the total number of shares of Endocare common stock
outstanding as of that date. The remaining four directors will
be members of Endocares current board of directors. Those
individuals are currently expected to be Terrence A. Noonan,
David L. Goldsmith, Eric S. Kentor and Thomas R. Testman. The
parties have agreed that a member of Endocares pre-Merger
board of directors will be Chairman of the post-Merger board of
directors. It is the parties current intention that
Terrence A. Noonan will be the Chairman of the board of
directors after completion of the Merger.
Endocare
Management After The Merger (page 51)
Immediately following the effective time of the Merger, it is
intended that Martin J. Emerson, the current President and Chief
Executive Officer of Galil, will become the Chief Executive
Officer and President of Endocare and that Terrence A. Noonan,
Endocares Interim Chief Executive Officer and Interim
President will resign from such position, but will remain
Chairman of Endocares board of directors. The other
officers of Endocare will remain in their current positions.
Interests
of Endocares Directors and Executive Officers
(page 50)
In considering the recommendation of Endocares board of
directors with respect to the proposals to be acted upon by
Endocares stockholders at the special meeting, Endocare
stockholders should be aware that members of the board of
directors and executive officers of Endocare may have interests
in the Merger that may be different from, or in addition to,
interests they may have as Endocare stockholders.
Interests
of Galils Directors and Executive Officers
(page 51)
In considering the recommendation of Galils board of
directors with respect to the proposals to be acted upon by
Galils shareholders at the special general meeting and the
class meetings, Galils shareholders should be aware that
members of the board of directors and executive officers of
Galil may have interests in the Merger that may be different
from, or in addition to, interests they may have as Galil
shareholders. These interests include Endocares
assumption of Galils share options in the Merger and the
payment of standard annual retainers, meeting fees and equity
compensation to Galils directors who will serve on the
board of Endocare after the closing of the Merger and the
Financing. As a result of these interests, these officers may be
more likely to support the Merger than they might be if they did
not have these interests.
Material
Tax Consequences of the Merger to Stockholders
(page 55)
United States Tax Consequences. The Merger has
been structured to qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended (the Code), and it is a closing
condition to the Merger that Endocare and Galil receive opinions
of their respective counsel regarding such qualification. There
will be no United States federal income tax consequences to
Endocares stockholders as a result of the Merger. As a
result of the Mergers qualification as a reorganization,
Galils shareholders will not recognize gain or loss for
United States federal income tax purposes upon the exchange of
shares of Galil for shares of Endocares common stock.
Israeli Tax Consequences. The exchange of
shares of Galil for shares of Endocares common stock will
be a taxable transaction for Israeli tax purposes for
Galils shareholders, unless a specific exemption is
available under Israeli tax law or unless a double taxation
prevention treaty between Israel and the Galil
shareholders country of residence provides otherwise.
Galil shareholders may be subject to the Israeli withholding tax
(currently 30%), unless an exemption or relief is provided from
such withholding tax. Galil and Endocare have agreed to request
a pre-ruling from the Israeli tax authority that will provide an
exemption from Israeli withholding tax with respect to Galil
shareholders that are eligible for such exemption, or that will
provide instructions on how and when such withholding at source
is to be performed. In addition, Galil and Endocare have agreed
to request a pre-ruling from the Israeli tax authority that will
provide that payments out of the indemnity escrow fund pursuant
to the Merger
6
Agreement will not be subject to Israeli tax until actually
received by the persons entitled thereto. Israeli law generally
imposes a capital gains tax on the sale of capital assets by
both residents and non-residents of Israel.
This tax treatment may not apply to every Galil shareholder.
Determining your actual tax consequences of the Merger may be
complicated. They will depend on your specific situation and on
variables not within our control. You should consult your own
tax advisor for a full understanding of the Mergers tax
consequences to you.
Anticipated
Accounting Treatment (page 58)
The Merger will be treated by Endocare as a reverse merger and
equity recapitalization under the acquisition method of
accounting in accordance with U.S. generally accepted
accounting principles. For accounting purposes, Galil is
considered to be acquiring Endocare in the Merger.
Material
Differences in Rights of Shareholders (page 188)
Galil and Endocare are incorporated in different jurisdictions
having different corporate laws. In addition, the governing
documents of each company vary. As a result, Galil shareholders
will have different rights as an Endocare stockholder than those
they have as a Galil shareholder.
Appraisal
Rights (page 55)
Israeli law does not afford Galils shareholders any
appraisal rights in connection with the Merger. Endocares
stockholders are also not entitled to appraisal rights in
connection with the Merger.
Risk
Factors (page 12)
The Merger, including the possibility that the Merger may not
be consummated, poses a number of risks to Endocare and its
stockholders (including, if the Merger is completed, the Galil
shareholders receiving Endocare common stock). In addition, both
Endocare and Galil are subject to various risks associated with
their businesses and their industries. The combined business
will also be subject to these and other risks. We encourage you
to read carefully the section of this proxy statement/prospectus
entitled Risk Factors.
7
SELECTED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
OF ENDOCARE AND GALIL
The following selected financial data from the unaudited pro
forma condensed combined statements of operations are based on
the individual historical consolidated statements of operations
of Endocare and Galil and combine the results of operations of
Endocare and Galil for the year ended December 31, 2007 and
the nine months ended September 30, 2008, giving effect to
the combination and concurrent financing as if it occurred on
January 1, 2007, reflecting only pro forma adjustments
expected to have a continuing impact on the combined results.
The unaudited pro forma condensed combined balance sheet
combines the historical consolidated balance sheets of Endocare
and Galil as of September 30, 2008, giving effect to the
combination as if it occurred on September 30, 2008.
These unaudited pro forma condensed combined financial
statements are for illustrative purposes only. They do not
purport to indicate the results that would have actually been
obtained had the Merger and Financing been completed on the
assumed date or for the periods presented, or that may be
realized in the future. To prepare the unaudited pro forma
financial information, Endocare, as the acquired party from an
accounting perspective, preliminarily allocated the estimated
purchase price to Endocares assets and liabilities at
September 30, 2008 using its best estimates of fair value.
These estimates are based on the most recently available
information. The unaudited pro forma financial information also
assumes that, at the effective time of the Merger, one share of
Endocare common stock will be issued in exchange for
approximately 33.0 ordinary shares held by Galil shareholders.
Since the Merger is expected to be consummated in 2009, the pro
forma financial information has been prepared under the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 141 (revised 2007), Business Combinations, or
SFAS No. 141(R). The final purchase accounting
will be based on the actual merger consideration and the assets
acquired and liabilities assumed from Endocare, measured at fair
value on the Merger effective date. To the extent there are
significant changes to Endocares share price, business and
financial results between the date of these pro forma financial
statements and the merger consummation date, actual results may
differ significantly from the assumptions and estimates herein.
Furthermore, the parties may have reorganization and
restructuring expenses as well as potential operating
efficiencies as a result of combining the companies. The pro
forma financial information does not reflect these potential
expenses and efficiencies. Upon completion of the Merger, final
valuations will be performed. The unaudited pro forma condensed
combined financial statements should be read in conjunction with
Endocares Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Galils Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
historical consolidated financial statements, including related
notes of Endocare and Galil, respectively, covering these
periods, included in this proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
Nine Months
|
|
|
For the
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Unaudited Pro Forma Condensed Combined Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
42,334
|
|
|
$
|
55,309
|
|
Research and development expenses
|
|
|
7,451
|
|
|
|
7,800
|
|
Selling and Marketing
|
|
|
24,549
|
|
|
|
33,359
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|
General and administrative expenses
|
|
|
12,742
|
|
|
|
16,509
|
|
Loss from operations
|
|
|
(31,950
|
)
|
|
|
(20,556
|
)
|
Net loss
|
|
|
(31,601
|
)
|
|
|
(19,000
|
)
|
Basic net loss per share
|
|
$
|
(0.81
|
)
|
|
$
|
(0.49
|
)
|
Diluted net loss per share
|
|
$
|
(0.81
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
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|
|
|
2008
|
|
|
Unaudited Pro Forma Condensed Combined Balance Sheet Data:
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|
|
|
|
Cash, cash equivalents, marketable securities and restricted cash
|
|
$
|
24,603
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|
Working capital
|
|
|
21,719
|
|
Total assets
|
|
|
73,133
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|
Accumulated deficit
|
|
|
(74,318
|
)
|
Total stockholders equity
|
|
|
47,090
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|
8
COMPARATIVE
HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The information below reflects the historical net loss and book
value per share of Endocares common stock and the
historical net loss and book value per share of Galils
common stock in comparison with the unaudited pro forma net loss
and book value per share after giving effect to the proposed
Merger of Endocare and Galil under the acquisition method of
accounting.
You should read the tables below in conjunction with the audited
and unaudited financial statements of Endocare beginning on page
FI-2 of this proxy statement/prospectus and audited and
unaudited financial statements of Galil commencing at page FII-1
of this proxy statement/prospectus and the related notes and the
unaudited pro forma condensed combined financial information and
notes related to such financial statements included elsewhere in
this proxy statement/prospectus. The pro forma financial
information is presented for illustrative purposes only and is
not necessarily indicative of the results of operations that
would have resulted if the Merger had been completed as of the
assumed dates or of the results that will be achieved in the
future.
The selected unaudited pro forma condensed combined financial
data as of and for the nine months ended September 30, 2008
and for the year ended December 31, 2007 are derived from
the unaudited pro forma condensed combined financial information
beginning on page 79 of this proxy statement/prospectus and
should be read in conjunction with that information. Please see
the section entitled Unaudited Pro Forma Condensed
Combined Financial Information beginning on page 79 of
this proxy statement/prospectus.
ENDOCARE
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|
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Nine Months
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|
|
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Ended
|
|
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Year Ended
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|
|
|
September 30,
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|
|
December 31,
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|
|
|
2008
|
|
|
2007
|
|
|
Historical Per Common Share Data:
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|
|
|
|
|
|
|
|
Basic net income (loss) per share
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|
$
|
(0.39
|
)
|
|
$
|
(0.80
|
)
|
Diluted net income (loss) per share
|
|
|
(0.39
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)
|
|
|
(0.80
|
)
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Book value per share
|
|
|
0.58
|
|
|
|
0.98
|
|
GALIL
|
|
|
|
|
|
|
|
|
|
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Nine Months
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|
|
|
|
|
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Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Historical Per Common Share Data:
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|
|
|
|
|
|
|
|
Basic net loss per share
|
|
|
(2.47
|
)
|
|
|
(0.85
|
)
|
Diluted net loss per share
|
|
|
(2.47
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)
|
|
|
(0.85
|
)
|
Book value per share
|
|
|
1.24
|
|
|
|
3.65
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|
ENDOCARE
AND GALIL
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|
|
|
|
|
|
|
|
|
|
Nine Months
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|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Pro Forma Per Common Share Data:
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.81
|
)
|
|
$
|
(0.49
|
)
|
Diluted net income (loss) per share
|
|
|
(0.81
|
)
|
|
|
(0.49
|
)
|
Book value per share
|
|
|
1.20
|
|
|
|
1.34
|
|
9
MARKET
PRICE AND DIVIDEND INFORMATION
Endocares common stock is listed on the Nasdaq Capital
Market under the symbol ENDO. On October 21,
2005, Endocares stock began to be quoted on the OTC
Bulletin Board or OTCBB. On October 10,
2007, Endocares stock became listed on the Nasdaq Capital
Market. The following table sets forth, for the periods
indicated, the intraday high and low per share sales prices for
Endocares common stock as reported on the OTCBB or the
Nasdaq Capital Market, as applicable. All prices have been
adjusted to reflect the one-for-three reverse stock split that
occurred on August 20, 2007.
Endocare
Common Stock
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|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2007
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|
|
|
|
|
|
|
|
First Quarter
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|
$
|
7.02
|
|
|
$
|
4.86
|
|
Second Quarter
|
|
$
|
8.85
|
|
|
$
|
5.25
|
|
Third Quarter
|
|
$
|
8.79
|
|
|
$
|
5.91
|
|
Fourth Quarter
|
|
$
|
10.00
|
|
|
$
|
6.65
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.70
|
|
|
$
|
5.03
|
|
Second Quarter
|
|
$
|
7.00
|
|
|
$
|
3.79
|
|
Third Quarter
|
|
$
|
4.98
|
|
|
$
|
1.16
|
|
Fourth Quarter
|
|
$
|
1.76
|
|
|
$
|
0.38
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First Quarter (through [ ], 2009)
|
|
|
[ ]
|
|
|
|
[ ]
|
|
On November 7, 2008, the last full trading day prior to the
public announcement of entry into the Merger Agreement, the
closing price per share of Endocares common stock as
reported on the Nasdaq Capital Market was $1.14, for an
aggregate market value of Endocare of approximately $13,465,000.
As of November 7, 2008, there were no in-the-money options
and warrants to purchase shares of Endocare common stock and
1,304,279 in-the-money options to purchase ordinary shares of
Galil. Accordingly, if the Merger had been consummated on that
day, the value attributable to the shares of Endocares
common stock issued to holders of Galils ordinary shares
and issuable to holders of Galils outstanding in-the-money
options in connection with the Merger would have been
approximately $12,645,256.
On [ ], 2009, the last practicable date before
the date of this proxy statement/prospectus, the closing price
per share of Endocares common stock as reported on the
Nasdaq Capital Market was $[ ], for an
aggregate market value of Endocare of approximately
$[ ]. As of [ ], 2009, there
were [ ] in-the-money options and warrants to
purchase shares of Endocare common stock and
[ ] in-the-money options to purchase ordinary
shares of Galil. Accordingly, if the Merger had been consummated
on that day, the value attributable to the shares of
Endocares common stock issued to holders of Galils
ordinary shares and issuable to holders of Galils
outstanding in-the-money options in connection with the Merger
would have been approximately $[ ].
Because the market price of Endocares common stock is
subject to fluctuation, the market value of the shares of
Endocares common stock that holders of Galils
ordinary shares and Galils outstanding stock options will
be entitled to receive in the Merger may increase or decrease.
The issuance of Endocare common stock in the Merger and the
Financing may constitute a change of control for
purposes of Nasdaq Marketplace Rule 4340(a). Whether a
change of control exists under Nasdaq Marketplace
Rule 4340(a) is a facts and circumstances determination
that is currently being undertaken by Nasdaq based on an
evaluation of certain factors, such as changes in
Endocares management, board of directors, voting power,
ownership and financial structure as a result of the Merger and
the Financing. If Nasdaq determines that the Merger and the
Financing constitute a change of control of Endocare, Endocare
will be required to submit a new original listing application
with Nasdaq and comply with the Nasdaq Capital Market initial
listing requirements, including a
10
$4.00 minimum bid price, in order for Endocares common
stock to continue to be listed on the Nasdaq Capital Market
after consummation of the Merger and the Financing.
Endocares common stock has traded below $4.00 since
July 21, 2008 and the closing price of Endocares
common stock as of [ ], 2009 was
$[ ]. Accordingly, there can be no assurance
that Endocare will be able to retain its listing on the Nasdaq
Capital Market if Nasdaq determines that the Merger and the
Financing constitute a change of control. If Nasdaq
determines that the Merger and the Financing do not constitute a
change of control, Endocares common stock,
including the shares issued in connection with the Merger and
the Financing, are expected to continue trading on the Nasdaq
Capital Market under the symbol ENDO.
As of [ ], 2009, Endocare had approximately
[ ] stockholders of record.
Endocare has never declared or paid cash dividends on its
capital stock. Endocare currently intends to retain earnings, if
any, to finance the growth and development of its business, and
does not expect to pay any cash dividends to its stockholders in
the foreseeable future. Payment of future dividends, if any,
will be at the discretion of Endocares board of directors.
There has never been, nor is there expected to be in the future,
a public market for any class of Galils shares.
11
RISK
FACTORS
Endocares stockholders and Galils shareholders
should consider the following risk factors and uncertainties,
together with the other information included and incorporated by
reference in this proxy statement/prospectus, in deciding how to
cast their votes on the proposals discussed herein.
Risks
Related to the Merger
If the
proposed Merger with Galil is consummated, Endocares
business could suffer materially and Endocares stock price
could decline.
Endocare is targeting a closing of the transactions in the
period from the late first quarter of 2009 to the end of the
second quarter of 2009. If the proposed Merger is consummated,
Endocare may be subject to a number of material risks, and its
business could be adversely affected, including the following:
|
|
|
|
|
some of Endocares suppliers, distributors and other
business partners may seek to adversely change or terminate
their relationships with Endocare as a result of the
consummation of the Merger;
|
|
|
|
as a result of the consummation of the Merger, current and
prospective employees could experience uncertainty about their
future roles within the combined company, and this uncertainty
may adversely affect Endocares ability to retain its key
employees, who may seek other employment opportunities;
|
|
|
|
as a result of the Merger, Endocare may assume significant known
and unknown liabilities of Galil, including liabilities with
respect to taxes; and
|
|
|
|
Endocares management team may be distracted from day to
day operations as a result of the consummation of the Merger and
the required integration processes.
|
We can give no assurance that we will be able to successfully
complete and integrate the acquisition of Galil.
In addition, the market price of Endocares common stock
after the Merger may decline for a number of other reasons,
including if:
|
|
|
|
|
the combined company does not achieve the perceived benefits of
the Merger as rapidly or to the extent anticipated, if at all,
by the combined company or financial or industry analysts;
|
|
|
|
the dilution of Endocares outstanding common stock as a
result of the issuance of shares of common stock in the Merger
and the Financing may negatively affect the trading price of
Endocares common stock; or
|
|
|
|
the effect of the Merger on the combined companys business
and prospects is not consistent with the expectations of
financial or industry analysts.
|
The
Merger may be completed even though material adverse changes may
result from the announcement of the Merger, industry-wide
changes and other causes.
In general, either party can refuse to complete the Merger if
there is a material adverse change affecting the other party
between the date of the Merger Agreement and the closing.
However, some types of changes do not permit either party to
refuse to complete the Merger, even if such changes would have a
material adverse effect on Endocare or Galil, including the
following:
|
|
|
|
|
changes or proposed changes in law or accounting standards or
interpretations thereof applicable to Endocare or Galil;
provided that such changes do not have a materially
disproportionate effect on Endocare or Galil, as the case may
be, relative to other companies operating in their industry;
|
|
|
|
changes in global, national or regional economic or political
conditions (including acts of war (whether or not declared),
armed hostilities, sabotage, military actions or the escalation
thereof (whether underway on the date of execution of the Merger
Agreement or thereafter commenced), and terrorism) or in general
financial, credit, business, or securities market conditions,
including changes in interest rates or the availability of
credit financing; provided that such changes do not have a
materially disproportionate effect on Endocare or Galil, as the
case may be, relative to other companies operating in their
industry;
|
12
|
|
|
|
|
changes generally applicable in the industries in which Endocare
and Galil operate;
|
|
|
|
any failure of Endocare or Galil, as the case may be, to meet
internal or analysts estimates, projections or forecasts
of revenues, earnings or other financial or business metrics (it
being understood that the cause of any such failure may be taken
into consideration when determining whether a material adverse
change has occurred or would be reasonably likely to
occur); or
|
|
|
|
a decline in the market price, or a change in the trading
volume, of the capital stock of Endocare (it being understood
that the cause of any such decline or change may be taken into
consideration when determining whether a material adverse change
has occurred or would be reasonably likely to occur).
|
If adverse changes occur but Endocare and Galil must still
complete the Merger, the combined companys stock price may
suffer.
Ownership
of Endocares common stock may be highly concentrated after
consummation of the Merger and the Financing.
After consummation of the Merger and the Financing, certain
stockholders will have beneficial ownership of significant
blocks of Endocares outstanding common stock. Such
stockholders, acting individually or as a group, will have
substantial influence over the outcome of a corporate action of
Endocare requiring stockholder approval, including the election
of directors, any approval of a merger, consolidation or sale of
all or substantially all of Endocares assets or any other
significant corporate transaction, even if the outcome sought by
such stockholders is not in the interest of Endocares
other stockholders. These stockholders, acting as a group, may
also delay or prevent a change in control of Endocare, even if
such change in control would benefit the other stockholders of
Endocare. In addition, pursuant to the Stock Purchase Agreement,
if a purchaser defaults on its obligation to purchase shares in
the Financing, the other parties to the Stock Purchase Agreement
may acquire the defaulting partys shares up to a maximum
of 35% of the then outstanding shares of Endocare common stock
after the Merger and the Financing. This could result in one or
more stockholders owning more shares of Endocares
outstanding common stock than currently expected. The
significant concentration of stock ownership may adversely
affect the value of Endocares common stock due to
investors perception that conflicts of interest may exist
or arise.
The
required repayment of pre-merger bridge financing of Galil will
decrease the funds available to Endocare after the consummation
of the Merger and the Financing.
Galils revenues have not been sufficient to sustain its
operations, and Galil has secured additional required funds
through bridge loans from certain current shareholders of Galil,
which will be repaid out of the proceeds of the Financing. As of
[ ], 2009, the amount of such bridge financing
is $[ ]. Galil may be required to seek
additional external funding from such date until the closing of
the Merger through one or more additional bridge loans. It is
expected that such loans would also be repaid out of the
proceeds of the Financing, which would reduce the amount of
funds available to Endocare after consummation of the Merger and
the Financing.
Antitrust
authorities may attempt to delay or prevent the consummation of
the Merger.
Although Endocare is not required to make a pre-merger filing
under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the HSR Act)
with the United States Federal Trade Commission (the
FTC) and Antitrust Division of the United States
Department of Justice (the DOJ), Endocare cannot
provide any assurance that the FTC or DOJ will not place
restrictions on the Merger or that there will not be any adverse
consequences to the business of Endocare or Galil resulting from
conditions that could be imposed in connection with any actions
taken by the FTC or DOJ, including required licensing,
divestitures or operating restrictions upon Endocare or the
combined company. The Merger is conditioned upon (i) the
lack of any governmental authority being in the process of
investigating or conducting proceedings regarding the Merger,
the Merger Agreement or transactions contemplated thereby that
upon reasonable determination by Endocare or Galil would lead to
the consummation of the Merger being enjoined and (ii) no
court or other authority prohibiting the consummation of the
Merger.
13
Endocare
may assume significant tax liabilities of Galil with respect to
which it may be dependent on third parties for indemnification
or for which it may not be entitled to indemnification at
all.
Endocare may assume significant potential tax liabilities of
Galil in connection with the Merger, which, if adversely
determined, could be substantial. While certain major
shareholders of Galil have agreed to indemnify Endocare for any
losses incurred by Endocare arising from certain specified tax
liabilities assumed in the Merger in excess of $2 million,
Endocare is not entitled to indemnification for the amount of
any such tax liability incurred in an amount less than
$2 million, except to the extent of the value of the shares
remaining in the indemnity escrow fund pursuant to the Merger
Agreement, at the time a claim for indemnification is made. In
addition, Endocare cannot be assured that the Galil shareholders
that have agreed to indemnify Endocare for such tax liabilities
will have the resources to pay it in such event, or that
Endocare will be able to recover such amounts.
Endocares
stockholders and Galils shareholders may not realize a
benefit from the Merger commensurate with the ownership dilution
they will experience in connection with the Merger and the
Financing.
If the combined company is unable to realize the strategic and
financial benefits currently anticipated from the Merger,
Endocares stockholders and Galils shareholders will
have experienced substantial dilution of their ownership
interest in connection with the Merger and the Financing without
receiving any commensurate benefit.
During
the pendency of the Merger, Endocare may not be able to
implement desirable business decisions or enter into a business
combination with another party because of restrictions in the
Merger Agreement.
Covenants in the Merger Agreement impede the ability of Endocare
to take any actions that are not in the ordinary course of
business pending completion of the Merger. As a result, whether
or not the Merger is completed, Endocare may be at a
disadvantage to its competitors. In addition, while the Merger
Agreement is in effect, and subject to limited exceptions,
Endocare is prohibited from soliciting, initiating, encouraging
or taking actions designed to facilitate any inquiries or the
making of any proposal or offer that could lead to entering into
certain extraordinary transactions with any third party, such as
a sale of assets, an acquisition of Endocares common
stock, a tender offer for Endocares common stock, or a
merger or other business combination outside the ordinary course
of business, whether or not any such transactions are favorable
to Endocares stockholders.
The
lack of a public market for Galils shares makes it
difficult to evaluate the fairness of the Merger consideration
payable to the Galil shareholders, and the Galil shareholders
may receive consideration in the Merger that is greater than the
fair market value of Galils shares.
The outstanding capital stock of Galil is privately held and is
not traded in any public market. The lack of a public market
makes it extremely difficult to determine the fair market value
of Galil. Since the percentage of Endocares equity to be
issued to Galils shareholders was determined based on
negotiations between the parties, it is possible that the value
of Endocares common stock to be issued in connection with
the Merger will be greater than the fair market value of Galil.
If any
of the events described in Risks Related to
Endocare, Risks Related to Galil or
Risks Related to Endocare and the Combined Company and the
Industry in Which They Will Operate occur, those events
could cause the potential benefits of the Merger not to be
realized.
Following the effective time of the Merger, the combined company
will be susceptible to many of the risks described in the
sections herein entitled Risks Related to Endocare,
Risks Related to Galil and Risks Related to
Endocare and the Combined Company and the Industry in Which They
Will Operate. To the extent any of the events in the risks
described in those sections occur, those events could cause the
potential benefits of the Merger not to be realized and the
market price of the combined companys common stock to
decline.
If the
proposed Merger with Galil is not consummated, Endocares
business could suffer materially and Endocares stock price
could decline.
The consummation of the proposed Merger with Galil is subject to
a number of closing conditions. Endocare is targeting a closing
of the transaction in the period from the late first quarter of
2009 to the end of the second quarter
14
of 2009. If the Merger is not consummated, Endocare may be
subject to a number of material risks, and its business and
stock price could be adversely affected, as follows:
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Endocare has incurred and expects to continue to incur
significant expenses related to the proposed Merger with Galil
even if the Merger is not ultimately consummated;
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the Merger Agreement contains covenants relating to
Endocares solicitation of competing acquisition proposals
and the conduct of Endocares business between the date of
signing the Merger Agreement and the closing of the Merger. As a
result, significant business decisions and transactions outside
of the ordinary course of business before the closing of the
Merger require the consent of Galil. Accordingly, Endocare may
be unable to pursue business opportunities that would otherwise
be in its best interest as a standalone company;
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if the Merger Agreement is terminated after Endocare has
invested significant time and resources in the transaction
process, Endocare will have a limited ability to continue its
current operations without obtaining additional financing to
fund its operations;
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the Financing is conditioned upon the consummation of the Merger
and, thus, if the Merger is not consummated, Endocare may be
forced to seek financing on less favorable terms or may not be
able to secure financing at all, which may require Endocare to
reduce or terminate operations;
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Endocare could be obligated to pay Galil a $900,000 termination
fee and to reimburse Galil for its expenses incurred in
connection with the Merger and the Financing up to $850,000, as
a result of the termination of the Merger Agreement, depending
on the reason for the termination; and
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Endocares customers, prospective customers, employees and
other business partners, and investors in general, may view the
failure to consummate the Merger as a poor reflection on
Endocares business or prospects.
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Risks
Associated with Endocares Business
We
have a limited operating history with significant losses and can
give no assurances when or whether we will ever be profitable or
have capital sufficient to sustain our operations.
We have yet to establish any history of profitable operations.
We have incurred losses from operations of $9.3 million,
$15.4 million and $16.6 million, respectively, during
the fiscal years ended December 31, 2007, 2006, and 2005,
and $4.8 million during the nine months ended
September 30, 2008. As a result, at December 31, 2007
we had an accumulated deficit of $189.8 million and as of
September 30, 2008, we had an accumulated deficit of
$194.4 million. We have incurred net losses from continuing
operations of $8.9 million, $11.1 million and
$14.8 million, respectively, during the fiscal years ended
December 31, 2007, 2006 and 2005, and $4.6 million
during the nine months ended September 30, 2008. We had an
operating cash flow deficit of $4.6 million,
$13.6 million and $14.7 million for the years ended
December 31, 2007, 2006 and 2005, and $4.4 million for
the nine months ended September 30, 2008. As of
September 30, 2008, we had cash and cash equivalents of
$5.3 million.
To date, our revenues have not been sufficient to sustain our
operations. We expect that our revenues as a standalone company
will not be sufficient to sustain our operations for the
foreseeable future. We can give no assurances when or whether we
will ever be profitable.
Endocare has historically financed its operations and growth
through borrowings and equity financings. In the short term,
Endocare expects to use existing cash reserves and working
capital through the sale of our products, and if the Merger and
Financing are consummated, the proceeds of the Financing, to
finance our projected operating and cash flow needs. However,
Endocares cash needs are not entirely predictable, and
additional cash may be required, including from its bank credit
facility. The credit facility is currently scheduled to expire
on February 26, 2009 and Endocare is in discussions with
the lender to extend the credit facility. Endocare may not be
able to renew its credit facility or replace the funds that are
available under the credit facility.
In addition, Endocares credit facility contains a minimum
tangible net worth covenant measured on a monthly basis.
Endocare was not in compliance with this covenant as of
December 31, 2008 and is currently in the process of
seeking a waiver from the bank with respect to this
noncompliance. Endocare believes that a waiver will be granted.
15
However, if the waiver is not granted, the bank could accelerate
the outstanding indebtedness under the credit facility and
terminate the credit facility.
Without access to the funds available under its credit facility,
Endocare may not have sufficient capital to fund its ongoing
operations. In addition, in the event that Endocares
available cash drops below $1.0 million for more than ten
business days, Galil has the right to terminate the Merger
Agreement.
Our
business may be materially and adversely impacted by the loss of
our largest customer or the reduction, delay or cancellation of
orders from this customer; in addition, our business may be
materially and adversely impacted if this customer delays
payment or fails to pay for products.
For the fiscal year ended December 31, 2007 and the nine
months ended September 30, 2008, our largest customer
accounted for 42.1% and 36.9%, respectively, of our revenues,
and as of September 30, 2008 this customer accounted for
21.0% of our accounts receivable. Our sales to this customer may
be materially and adversely impacted by various factors relating
to this customers business, financial condition, results
of operations and cash flows. Our business, financial condition,
results of operations and cash flows may be materially and
adversely impacted by the loss of this customer, or the
reduction, delay or cancellation of orders by this customer. In
addition, our business, financial condition, results of
operations and cash flows may be materially and adversely
impacted if this customer delays payment or fails to pay for
products sold. This customer is not obligated to purchase a
specific quantity of our products or provide binding forecasts
of purchases for any period.
We may
be required to make tax payments that exceed our settlement
estimates, which may result in a material adverse effect on our
financial condition, results of operations and cash
flows.
As of December 31, 2006 and 2007, and September 30,
2008 we estimated that we owed $2.8 million,
$2.2 million, and $2.1 million, respectively, as of
each balance sheet date in state and local taxes, primarily
sales and use taxes, in various jurisdictions in the United
States. We are in the process of negotiating resolutions of the
past due tax obligations with the applicable tax authorities.
While we hope that these obligations can be settled for less
than the amounts accrued, we cannot predict whether we will
obtain favorable settlement terms from the various tax
authorities, or that after settling, we will satisfy the
conditions necessary to avoid violating the settlements. Our
failure to obtain favorable settlement terms or to satisfy the
settlement conditions may result in a material adverse effect on
our business, financial condition, results of operations and
cash flows.
Our
facilities and systems are vulnerable to natural disasters or
other catastrophic events, which could interrupt our operations
for an extended period of time, and could have a material
adverse effect on our business.
Our headquarters, cryoablation products manufacturing
facilities, research facilities and much of our infrastructure,
including computer servers, are located in California, an area
that is susceptible to earthquakes, fires and other natural
disasters. A natural disaster or other catastrophic event, such
as an earthquake, fire, flood, severe storm, break-in, terrorist
attack or other comparable problems could cause interruptions or
delays in our business and loss of data or render us unable to
accept and fulfill customer orders in a timely manner, or at
all. We have no formal disaster recovery plan and our business
interruption insurance may not adequately compensate us for
losses that may occur. In the event that an earthquake, or other
natural disaster or other catastrophic event were to destroy any
part of our facilities or interrupt our operations for any
extended period of time, or if harsh weather conditions prevent
us from delivering products in a timely manner, it could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Risks
Associated with an Investment in Endocares Common
Stock
The
market price of our common stock is highly
volatile.
The market price of our common stock has been and is expected to
continue to be highly volatile in the future. This volatility is
in response to a number of factors, including:
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announcements of technological innovations by us or other
companies;
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regulatory matters;
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new or existing products or procedures;
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concerns about our financial position and operating results;
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litigation developments;
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government regulation;
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developments or disputes relating to agreements, patents or
proprietary rights;
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differences between our actual financial and operating results
and those expected by investors and analysts;
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fluctuations in our results of operations;
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changes in analysts recommendations or projections;
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changes in general valuations for medical device companies;
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changes in general economic or market conditions; and
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broad market fluctuations.
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As a result of any of these factors the market price of our
common stock may fall abruptly and significantly. Moreover,
recently the stock market in general has experienced extreme
price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by
many companies for reasons often unrelated to their operating
performance. These broad market fluctuations may adversely
affect the market price of our common stock, regardless of our
operating results. Any of these factors could have a material
adverse effect on your investment in our common stock. As a
result, you could lose some or all of your investment.
Historically
our common stock has a low trading volume and any sale of a
significant number of shares is likely to depress the trading
price.
Our common stock is listed on the Nasdaq Capital Market.
Traditionally, the trading volume of our common stock has
fluctuated significantly. Because of this periodic and limited
trading volume, our stockholders may not be able to sell quickly
any significant number of shares of our common stock, and any
attempted sale of a large number of our shares may have a
material adverse impact on the price of our common stock. In
addition, the price per share is subject to volatility and may
continue to be subject to rapid and significant price swings in
the future.
Future
sales of shares of our common stock, or the perception of
significant future sales, may negatively affect our stock
price.
We had an aggregate of [ ] shares of
common stock outstanding as of [ ], 2009. After
the Merger and the Financing are consummated, we expect to have
an aggregate of [ ] shares of our common
stock outstanding, including the Escrow Shares. The
16,250,000 shares of our common stock expected to be issued
in the Financing will be subject to restrictions on transfer.
Future sales of our common stock, including shares issued upon
the exercise of outstanding options and warrants, sales of
equity related securities, or hedging or other derivative
transactions with respect to our common stock, could have a
significant negative effect on the market price of our common
stock. These sales, or anticipated 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.
Investors in our financing consummated in March 2005 received
warrants to purchase an aggregate of 657,446 shares of our
common stock at an exercise price of $10.50 per share and
657,446 shares of our common stock at an exercise price of
$12.00 per share. These warrants have an anti-dilution clause
that in certain circumstances reduces the effective exercise
price of the warrants and proportionately increases the number
of shares underlying the warrants. As a result of our issuance
of shares of common stock in the Financing and prior issuances,
the exercise price of the Series A Warrants will be
decreased to $5.41 and provide holders the right to purchase an
additional 618,130 shares and the exercise price of the
Series B Warrants will be decreased to $6.07 and provide
holders the right to purchase an additional 642,834 shares.
17
We entered into registration rights agreements in connection
with other recent financings, and will enter into a registration
rights agreement in connection with the Financing, in each case
pursuant to which we agreed or will agree to register for resale
by the investors the shares of common stock issued. The sale or
anticipated sale of shares covered by these registration
statements could have a material adverse effect on the market
price of our shares.
If
Endocare fails to meet all applicable continued listing
requirements of the Nasdaq Capital Market and Nasdaq determines
to delist Endocares common stock, the market liquidity and
market price of Endocares common stock could
decline.
Our common stock is currently listed on the Nasdaq Capital
Market. In order to maintain that listing, Endocare must satisfy
minimum financial and other listing requirements. In addition,
the issuance of Endocare common stock in the Merger and the
Financing may constitute a change of control for
purposes of Nasdaq Marketplace Rule 4340(a). Whether a
change of control exists under Nasdaq Marketplace
Rule 4340(a) is a facts and circumstances determination
that is currently being undertaken by Nasdaq based on an
evaluation of certain factors, such as changes in
Endocares management, board of directors, voting power,
ownership and financial structure as a result of the Merger and
the Financing. If Nasdaq determines that the Merger and the
Financing constitute a change of control of Endocare, Endocare
will be required to submit a new original listing application
with Nasdaq and comply with the Nasdaq Capital Market initial
listing requirements, including a $4.00 minimum bid price, in
order for Endocares common stock to continue to be listed
on the Nasdaq Capital Market after consummation of the Merger
and the Financing. Endocares common stock has traded below
$4.00 since July 21, 2008 and the closing price of
Endocares common stock as of [ ], 2009
was $[ ]. Accordingly, there can be no
assurance that Endocare will be able to retain its listing on
the Nasdaq Capital Market if Nasdaq determines that the Merger
and the Financing constitute a change of control. If
Nasdaq determines that the Merger and the Financing do not
constitute a change of control, Endocares
common stock, including the shares issued in connection with the
Merger and the Financing, are expected to continue trading on
the Nasdaq Capital Market under the symbol ENDO.
If Endocare fails to meet all applicable listing requirements of
the Nasdaq Capital Market at any time and Nasdaq determines to
delist its common stock, an active trading market for
Endocares common stock may not be sustained and the market
price of Endocares common stock could decline. If an
active trading market for Endocares common stock is not
sustained, it will be difficult for Endocares stockholders
to sell shares of Endocares common stock without further
depressing the market price of such common stock, if at all. A
delisting of Endocares common stock also could make it
more difficult for Endocare to obtain financing for the
continuation of operations and could result in the loss of
confidence by investors, suppliers and employees.
The
anti-takeover provisions in our charter, our stockholder rights
plan and certain provisions of Delaware law could prevent a
third party from acquiring us or limit the price that investors
may be willing to pay for shares of our common
stock.
Provisions of our Restated Certificate of Incorporation, as
amended and our amended and restated 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 Endocare. Our Restated Certificate of Incorporation, as
amended, authorizes our board of directors to issue preferred
stock without stockholder approval. Depending on the rights and
terms of any series of preferred stock created, and the reaction
of the market to the series, the rights or the value of your
Endocare common stock could be negatively affected. For example,
subject to applicable law, the board of directors could create a
series of preferred stock with preferential rights to dividends
or assets upon liquidation, or with superior voting rights to
the existing common stock. In addition, we have adopted a
stockholder rights plan in which preferred stock purchase rights
were distributed as a dividend. The stockholder rights plan is
currently scheduled to terminate on March 31, 2009. These
provisions may prevent or delay a third party from acquiring us,
even if doing so would be beneficial to our stockholders.
We are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law.
Subject to specified exceptions, this section provides that a
corporation may not engage in any business combination with any
interested stockholder during the three-year period following
the time that such stockholder becomes an interested
stockholder. This provision could have the effect of delaying or
preventing a change of
18
control of Endocare. The foregoing factors could reduce the
price that investors or an acquirer might be willing to pay in
the future for shares of our common stock. Our board of
directors has taken all action necessary to exempt Galils
shareholders from the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law as it
relates to shares of Endocare common stock acquired in the
Merger and the Financing.
The
issuance of common stock in the Merger and the Financing will
trigger an ownership change that will negatively impact our
ability to utilize net operating loss and capital loss deferred
tax assets in the future.
As of December 31, 2007, we had a domestic federal net
operating loss carryforward of approximately
$124.6 million. Companies are subject to a change of
ownership test under Section 382 of the Code that, if met,
can limit the annual utilization of the carryforward. We believe
such test will be met as a result of the issuance of common
stock in the Merger and Financing.
Generally, under that section, the yearly limitation on our
ability to utilize such deductions will be equal to the product
of the applicable long term tax exempt rate (presently
5.49 percent) and the value of our common stock immediately
before the ownership change. Our ability to utilize depreciation
deductions during the five-year period following the ownership
change would also be limited under Section 382, together
with NOLs, to the extent that such deductions reflect a net loss
that was built-in to our assets immediately prior to
the ownership change.
Similar rules under Section 383 of the Code will also limit
our ability to utilize capital loss carryforwards. As of
December 31, 2007, we had domestic federal capital loss
carryforwards of approximately $39.6 million.
Because an ownership change will be triggered as a result of the
issuance of common stock in the Merger and the Financing, our
ability to use the net operating loss carryforward and capital
loss carryforwards to offset future income will be substantially
limited. Therefore, we may suffer higher-than-anticipated tax
expense, and consequently lower net income, in those future
years.
Risks
Related to Galil
Galil
is incorporated under the laws of, and its principal offices are
located in, the State of Israel and therefore its business
operations may be harmed by adverse political, economic and
military conditions affecting Israel.
Galil is incorporated under the laws of, and its principal
executive offices and research and development facilities are
located in, the State of Israel. In addition, some of its
subcontractors are located in Israel. Accordingly, political,
economic and military conditions in Israel may directly affect
its business. The Israeli economy has suffered in the past and
may suffer in the future from instability, which may adversely
affect Galils financial condition and results of
operations.
Following the recession and the instability that characterized
the Israeli economy during the years 2001 and 2003, the Israeli
economy showed signs of improvement during 2004, 2005, 2006 and
2007. The Israeli economy has also been subject to significant
changes, as a result of implementation of new economic policies
and privatization. If the results of these changes are
unsuccessful or the economic situation in Israel deteriorates,
it may also adversely affect Galils financial conditions,
its results of operations and its ability to obtain financing
from Israeli banks.
In addition, since the establishment of the State of Israel in
1948, a number of armed conflicts have occurred between Israel
and its Arab neighbors. Any hostilities involving Israel or the
interruption or curtailment of trade between Israel and its
present trading partners could affect adversely Galils
operations. Since October 2000, terrorist violence in Israel has
increased significantly, primarily in the West Bank and Gaza
Strip, and Israel has experienced terrorist incidents within its
borders. Recently, there has been a further escalation in
violence among Israel, Hamas, the Palestinian Authority and
other groups. In addition, since July 2006, there have been
extensive hostilities along Israels northern border with
Lebanon and in the Gaza Strip. Since June 2007, the Hamas
militant group has taken over the Gaza Strip from the
Palestinian Authority, and the hostilities along Israels
border with the Gaza Strip have increased. Beginning in late
December of 2008, open hostilities between Israel and Hamas in
the Gaza Strip have intensified significantly. Ongoing and
increased hostilities or other Israeli political or economic
19
factors could harm Galils operations and product
development and cause its sales to decrease. Furthermore,
several countries still restrict business with Israel and
Israeli companies. These restrictive laws and policies may
seriously limit Galils ability, and that of the combined
company, to sell its products in these countries.
Galil
has a limited operating history with significant
losses.
Galil has yet to establish any history of profitable operations.
Galil has incurred losses from operations of $9.9 million,
$1.95 million and $0.5 million, respectively, during
the fiscal years ended December 31, 2007, 2006, and 2005
and $27.2 million during the nine months ended
September 30, 2008. The loss of $27.2 million for the
nine months ended September 30, 2008 includes a
one-time
non-cash
charge of $16.8 million relating to goodwill impairment. As
a result, at December 31, 2007 Galil had an accumulated
deficit of $45.6 million and as of September 30, 2008,
Galil had an accumulated deficit of $73.2 million. Galil
has incurred net losses of $9.5 million, $13.0 million
and $7.7 million, respectively, during the fiscal years
ended December 31, 2007, 2006 and 2005 and
$27.4 million during the nine months ended
September 30, 2008. Galil had an operating cash flow
deficit of $3.8 million, $0.6 million and
$3.0 million for the years ended December 31, 2007,
2006 and 2005. It has an operating cash flow deficit of
$10.2 million for the nine months ended September 30,
2008. As of September 30, 2008, Galil had cash and cash
equivalents of $3.5 million.
To date, Galils revenues have not been sufficient to
sustain Galils operations. Galil expects that its revenues
as a standalone company will not be sufficient to sustain its
operations for the foreseeable future. There can be no
assurances as to when or whether Galil will ever be profitable.
Tax
benefits Galil receives through operating in Israel may be
terminated or reduced in the future, which would increase
Galils costs.
If Galil generates income, it may be able to take advantage of
tax exemptions and reductions resulting from the Approved
Enterprise and Benefited Enterprise status of
Galils facilities in Israel. To remain eligible for these
tax benefits, Galil must continue to meet certain conditions,
including making specified investments in property and
equipment. If Galil fails to meet these conditions in the
future, the tax benefits would be canceled. In addition, these
tax benefits may not be continued in the future at their current
levels or at any level. The termination or reduction of these
tax benefits may increase Galils expenses in the future,
which would reduce its expected profits or increase its losses.
Additionally, if Galil increases its activities outside of
Israel, the increased activities generally will not be eligible
for inclusion in Israeli tax benefit programs. Under the
original approved plan, Galil enjoyed a tax holiday for the
years 2001 through 2003. On January 1, 2004 the plan was
cancelled. A base turnover was determined at $2.5 million
dollars. Galil received the Investment Centers approval
for its second plan and will be entitled to a tax holiday for
10 years commencing on the first year of taxable income
(but not later than the year 2016).
On September 2007, Galil applied to the Israeli tax authority
for approval of a new Benefited Enterprise status
and requested the year 2007 to be the year of election. Galil
expects to receive the taxation decision soon.
The
Israeli government grants Galil has received for research and
development expenditures restrict its ability to manufacture
products and transfer technologies outside of Israel and require
it to satisfy specified conditions.
Until 2003, Galil received grants totaling $2.3 million
from the government of Israel through the Office of the Chief
Scientist of the Israeli Ministry of Industry, Trade and Labor
(OCS), including the Magnet Division, for the
financing of a portion of its research and development
expenditures for its cryoablation products. Under Israeli law,
Galil is prohibited from manufacturing products incorporating
know-how developed with grants from the OCS outside of Israel,
unless prior approval of a governmental committee is obtained.
Even if Galil receives approval to manufacture its products
outside of Israel, it may be required to pay an increased total
amount of royalties, which may be up to 300% of the aggregate
grants amount plus interest (less royalties which have been paid
to date), depending on the manufacturing volume that is
performed outside of Israel. These restrictions may impair its
ability to outsource manufacturing or engage in similar
arrangements for those products or technologies. In addition,
Galil is prohibited from transferring to third parties the
technology developed with these grants without the prior
approval of a governmental committee and, possibly, the payment
of a fee.
20
Galils
operations may be disrupted by the obligation of its personnel
to perform military service.
Some of Galils officers and employees in Israel are
obligated to perform annual military reserve duty in the Israeli
Defense Forces and may be called to active duty under emergency
circumstances at any time. If a military conflict or war arises,
these individuals could be required to serve in the military for
extended periods of time. Galils operations could be
disrupted by the absence for a significant period of one or more
of its officers or key employees or a significant number of its
other employees due to reserve duty. Any such disruption in
Galils operations may harm its business.
Galil
is subject to risks arising from currency exchange rates, which
could increase its costs and may have a negative effect on its
results of operations.
A majority of Galils revenues and a substantial portion of
its expenses are denominated in U.S. dollars. However, a
small portion of its revenues and a portion of its costs,
including manufacturing and research and development, are
incurred in New Israeli Shekels and Euro. Inflation in Israel or
Europe or a weakening of the U.S. dollar against other
currencies may have the effect of increasing the
U.S. dollar cost of Galils operations in that
jurisdiction, which may have a material adverse impact on its
results of operations. During 2007, the New Israeli Shekel
appreciated against the U.S. dollar by approximately 9%,
which contributed to a significant increase in the
U.S. dollar cost of Galils operations in Israel. In
addition, during 2007, the Euro appreciated against the
U.S. dollar by approximately 11.7%, which contributed to a
significant increase in the U.S. dollar cost of
Galils operations in Europe. From the beginning of 2008
through September 30, 2008, the New Israeli Shekel
appreciated against the U.S. dollar by approximately 11%,
and the Euro depreciated against the U.S. dollar by
approximately 1%. If the U.S. dollar continues to decline
in value in relation to one or more of these currencies, it will
become more expensive for Galil to fund its operations in the
jurisdictions that use those other currencies.
Although Galil may use hedging techniques to reduce the risk
associated with fluctuations in currency exchange rates, it may
not be able to eliminate the effects of currency fluctuations.
Thus, exchange rate fluctuations could have a material adverse
impact on Galils results of operations.
Risks
Related to Endocare and the Combined Company
and the Industry in Which They Will Operate
We may
require additional financing in the future to sustain our
operations and without it we may not be able to continue
operations.
Endocare and Galil have each historically incurred losses from
operations and experienced negative cash flows. As of
September 30, 2008, Endocare and Galil had combined cash
and cash equivalents of $8.8 million. We currently
anticipate that the cash proceeds from the Financing will
provide the combined company sufficient cash to enable it to
reach profitability. However, we can give no assurance that we
will be able to successfully integrate the acquisition of Galil
and achieve profitability, or that this will be done without the
need for additional capital.
As a result, we may be required to seek additional capital,
whether from sales of equity or by borrowing money, to fund our
operations. The availability of additional capital, whether from
private capital sources (including banks) or the public capital
markets, fluctuates as market conditions change. There may be
times when the private capital markets and the public debt or
equity markets lack sufficient liquidity or when our securities
cannot be sold at attractive prices, in which case we would not
be able to access capital from these sources. In addition, a
weakening of our financial condition or strength could adversely
affect our ability to obtain necessary funds.
Even if available, additional financing could be costly or have
adverse consequences. If additional funds are raised through the
issuance of stock, dilution to stockholders will result. In
addition, our Restated Certificate of Incorporation, as amended,
also authorizes our board of directors to issue blank
check preferred stock without stockholder approval. If any
such series of preferred stock was created, depending on the
rights and terms of any new series created, and the reaction of
the market to the series, the rights or the value of our common
stock could be negatively affected. If additional funds are
raised through the incurrence of debt, we will incur increased
debt
21
servicing costs and may become subject to additional restrictive
financial and other covenants. We can give no assurance as to
the terms or availability of additional capital.
In addition, under our current credit agreement with Silicon
Valley Bank, which expires on February 26, 2009, funds
available for borrowing under this facility are based on
eligible trade receivables and inventory as defined therein. The
credit agreement contains a subjective acceleration clause and a
requirement to maintain a lockbox with the lender to which all
receivable collections are deposited. Under the subjective
acceleration clause, the lender may accelerate repayment of
amounts borrowed
and/or cease
making advances to us if it determines that a material adverse
change has occurred in our business or our ability to meet our
obligations under the credit agreement. In addition, the
proceeds from the lockbox will be applied to reduce the
outstanding borrowings upon an event of default (including the
occurrence of a material adverse change) or if trigger events
occur. Our ability to access funds under the credit agreement is
subject to our ability to meet all restrictive covenants and
comply with all representations and warranties.
Our
success is reliant on the acceptance by doctors and patients of
our cryoablation systems as a preferred treatment for tumor
ablation.
Cryoablation has existed for many years, but has not been widely
accepted primarily due to concerns regarding safety and efficacy
and widespread use of alternative therapies. Because the
technology previously lacked precise monitoring capabilities,
prostate cryoablation procedures performed in the 1970s resulted
in high cancer recurrence and negative side effects, such as
rectal fistulae and incontinence, and gave cryoablation
treatment negative publicity. To overcome these negative side
effects, we have developed ultrasound guidance and temperature
sensing to enable more precise monitoring in our cryoablation
systems. Nevertheless, we need to overcome the earlier negative
publicity associated with cryoablation in order to obtain market
acceptance for our products. In addition, use of our
cryoablation systems requires significant physician education
and training. As a result, we may have difficulty obtaining
adoption of the technology and recommendations and endorsements
of physicians and patients for our cryoablation systems. We may
also have difficulty raising the brand awareness necessary to
generate interest in our cryoablation systems. Any adverse side
effects, including impotence or incontinence, recurrence of
cancer or future reported adverse events or other unfavorable
publicity involving patient outcomes from the use of
cryoablation, whether from our products or the products of our
competitors, could adversely affect acceptance of cryoablation.
In addition, emerging new technologies and procedures to treat
prostate cancer may negatively affect the market acceptance of
cryoablation. If our cryoablation systems do not achieve broad
market acceptance, we will likely remain unprofitable.
If we
are unable to continue to enhance our cryoablation systems, our
business will suffer.
Our growth depends in part on continued ability to successfully
develop, manufacture and commercialize enhancements to our
cryoablation systems. We may experience difficulties that could
delay or prevent the successful development, manufacturing and
commercialization of these 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 before obtaining necessary regulatory or
reimbursement approvals. In addition, our competitors may
succeed in developing commercially viable products that render
our products obsolete or less attractive. Failure to
successfully develop, manufacture and commercialize new products
and enhancements could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Our
intangible assets could become impaired.
Intangible assets acquired in a purchase, such as intellectual
property or developed technology, are generally amortized over
various periods depending on their anticipated economic benefits
or useful lives. Long-lived assets, including amortizable
intangibles, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to undiscounted future net cash flows expected to be
generated by the asset. Following a review, if such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying value of the assets
exceeds the fair value of the assets. Any impairment could have
a material adverse effect on our financial conditions and
results of operations.
22
Significant estimates, including assumptions regarding future
events and circumstances that cannot be easily predicted, are
required to perform an analysis of the value of intangible
assets. These estimates and assumptions may differ materially
from actual outcomes and occurrences.
We are
faced with intense competition and rapid technological and
industry change, which may make it more difficult for us to
achieve significant market penetration.
The medical device industry generally, and the cancer treatment
market in particular, are characterized by rapid technological
change, changing customer needs and frequent new product
introductions. If our competitors existing products or new
products are more effective than or considered superior to our
products, the commercial opportunity for our products will be
reduced or eliminated. We face intense competition from
companies offering other treatment options, including radical
prostatectomy, radiation therapy and hormone therapy. If we are
successful in penetrating the market for treatment of prostate
cancer with our cryoablation treatment, other medical device
companies may be attracted to the marketplace. Many of our
competitors and potential competitors are significantly larger
than we are and have greater financial, technical, research,
marketing, sales, distribution and other resources than we do.
We believe there will be intense price competition for products
developed to treat cancer. Our competitors may develop or market
technologies and products that are more effective or
commercially attractive than any that we are developing or
marketing. Our competitors may obtain regulatory approval and
introduce and commercialize products before we do. These
developments could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. Even if we are able to compete successfully, we may not
be able to do so in a profitable manner.
There
is uncertainty relating to third-party reimbursement, which is
critical to market acceptance of our products.
Hospitals and other health care providers in the United States
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 private health insurers in some
areas of the United States provide reimbursement for procedures
in which our products are used, we can provide no assurance that
private insurance reimbursement will be adopted nationally or by
additional insurers. Furthermore, those private insurance
companies currently paying for procedures in which our products
are used may terminate such coverage. If reimbursement levels
from Medicare, Medicaid, other governmental health care programs
or private insurers are not sufficient, physicians may choose
not to recommend, and patients may not choose, procedures using
our products.
International market acceptance of our products may depend, in
part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care
payment systems in international markets vary significantly by
country, and include both government sponsored health care and
private insurance. We may not obtain international reimbursement
approvals in a timely manner, if at all, and international
reimbursement approvals, once obtained, may be subsequently
withdrawn or reduced. Our failure to receive and maintain
international reimbursement approvals may negatively impact
market acceptance of our products in the international markets
in which those approvals are sought.
From time to time significant attention has been focused on
reforming the health care system in the United States and
other countries. Any changes in Medicare, Medicaid or
third-party medical expense reimbursement, which may arise from
health care reform, may have a material adverse effect on
reimbursement for our products or procedures in which our
products are used and may reduce the price we are able to charge
for our products. In addition, changes to the health care system
may also affect the commercial acceptance of products we are
currently developing and products we may develop in the future.
Potential changes that have been considered include controls on
health care spending and price controls. Several proposals have
been made in the United States Congress and various state
legislatures recently that, if adopted, would potentially reduce
health care spending, which may result in a material adverse
effect on our business, financial condition, results of
operations and cash flows.
If we
fail to protect our intellectual property rights, our
competitors may take advantage of our ideas and compete directly
against us.
Our success will depend to a significant degree on our ability
to secure and protect intellectual property rights and to
enforce patent and trademark protections relating to our
technology. From time to time, litigation may be
23
advisable to protect our intellectual property position.
However, these legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or
keep any competitive advantage. Any litigation in this regard
could be costly, and it is possible that we will not have
sufficient resources to fully pursue litigation or to protect
our other intellectual property rights. Litigation could result
in the rejection or invalidation of our existing and future
patents. Any adverse outcome in litigation relating to the
validity of our patents, or any failure to pursue litigation or
otherwise to protect our patent position, could have a material
adverse effect on our business, financial condition, results of
operations and cash flows. Also, even if we prevail in
litigation, the litigation would be costly in terms of
management distraction as well as in terms of cash resources. In
addition, confidentiality agreements with our employees,
consultants, customers, and key vendors may not prevent the
unauthorized disclosure or use of our technology. It is possible
that these agreements could be breached or that they might not
be enforceable in every instance, and that we might not have
adequate remedies for any such breach. Enforcement of these
agreements may be costly and time consuming. Furthermore, the
laws of foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States.
Because
the medical device industry is litigious, we may be sued for
allegedly violating the intellectual property rights of
others.
The medical technology industry has in the past been
characterized by a substantial amount of litigation and related
administrative proceedings regarding patents and intellectual
property rights. In addition, major medical device companies
have used litigation against emerging growth companies as a
means of gaining or preserving a competitive advantage.
Should third parties file patent applications or be issued
patents claiming technology also claimed by us in pending
applications, we may be required to participate in interference
proceedings in the United States Patent and Trademark Office to
determine the relative priorities of our inventions and the
third parties inventions. We could also be required to
participate in interference proceedings involving our issued
patents and pending applications of another entity. An adverse
outcome in an interference proceeding could require us to cease
using the technology or to license rights from prevailing third
parties. If we are required to license rights from a third
party, such license may be expensive and on terms that are
unacceptable to us.
Third parties may claim we are using their patented inventions
and may go to court to stop us from engaging in our normal
operations and activities. These lawsuits are expensive to
defend and conduct and would also consume and divert the time
and attention of our management. A court may decide that we are
infringing a third partys patents and may order us to
cease the infringing activity. A court could also order us to
pay damages for the infringement. These damages could be
substantial and could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
If we are unable to obtain any necessary license following an
adverse determination in litigation or in interference or other
administrative proceedings, we would have to redesign our
products to avoid infringing a third partys patent and
could temporarily or permanently have to discontinue
manufacturing and selling some or all of our products. If this
were to occur, it would negatively impact future sales and, in
turn, our business, financial condition, results of operations
and cash flows.
Our
ability to conduct medical research and receive medical
information may be hampered by the privacy regulations developed
under the Health Insurance Portability and Accountability Act of
1996, referred to as HIPAA.
The privacy regulations of HIPAA place limitations on a
covered entitys use and disclosure of
identifiable patient information, including research data. While
Endocare is not a covered entity under HIPAA,
Endocares relationships with covered entities, such as
hospitals and physicians, sometimes implicate HIPAA. We believe
that we have implemented appropriate measures to ensure that our
relationships with covered entities are appropriate and
consistent with HIPAA. However, there are many uncertainties
remaining about how HIPAA applies to medical device companies,
and no assurance can be given that HIPAA will not be interpreted
in a manner that will hamper our ability to conduct medical
research and receive medical information for other purposes as
well.
24
If we
fail to obtain or maintain necessary regulatory clearances or
approvals for products, or if approvals are delayed or
withdrawn, we will be unable to commercially distribute and
market our products or any product modifications.
Government regulation has 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 Food and Drug Administration (the FDA) has broad
authority under the Federal Food, Drug and Cosmetic Act (the
FD&C Act) to regulate the development,
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 clearances and approvals (collectively,
regulatory approvals) is lengthy and expensive. We
may not be able to obtain or maintain necessary regulatory
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 or withdrawal of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In
addition, new or additional governmental regulations may be
established which could prevent, delay, modify or rescind
regulatory approval of our products. Any of these actions by the
FDA or foreign regulatory authority, or change in FDA
regulations or those of a foreign regulatory authority, could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Regulatory approvals, if granted, may include significant
limitations on the indicated uses for which our products may be
marketed. In addition, to obtain such regulatory approvals, the
FDA and foreign regulatory authorities may impose numerous other
requirements on us. FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses. In
addition, regulatory approvals can be withdrawn for failure to
comply with regulatory standards or as a result of unforeseen
problems following initial marketing. We may not be able to
obtain or maintain regulatory approvals for our products on a
timely basis, or at all, and delays in receipt of or failure to
receive such regulatory approvals, the loss of previously
obtained regulatory approvals or failure to comply with existing
or future regulatory requirements could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
We may
be required to modify our agreements, operations, marketing and
expansion strategies in response to changes in the statutory and
regulatory environment.
We regularly monitor developments in statutes and regulations
relating to our business. However, we may be required to modify
our agreements, operations, marketing and expansion strategies
from time to time in response to changes in the statutory and
regulatory environment. We plan to structure all of our
agreements, operations, marketing and strategies in accordance
with applicable law, although we can provide no assurance that
our arrangements will not be challenged successfully or that
required changes may not have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Our
products may be subject to product recalls even after receiving
FDA clearance or approval, which would harm our reputation and
our business.
The FDA and similar governmental authorities in other countries
have the authority to request and, in some cases, require the
recall or similar actions for our products in the event of
material deficiencies or defects in design, manufacture or
labeling or in the event of patient injury. A governmental
mandated or voluntary recall by us could occur as a result of
component failures, manufacturing errors or design defects. Any
recall of product would divert managerial and financial
resources and harm our reputation with customers and our
business, impact our ability to distribute the recalled product
in the future, require costly redesign or manufacturing changes
and leave Endocare vulnerable to additional regulatory sanctions
and product liability litigation.
We are
subject to risks associated with doing business
internationally.
The conduct of our business internationally is subject to
certain risks inherent in international business, many of which
are beyond our control. These risks include, among other things:
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adverse changes in tariff and trade protection measures;
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changes in foreign regulatory requirements;
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potentially negative consequences from changes in or
interpretations of tax laws;
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differing labor regulations;
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differing product liability regimes;
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changing economic conditions in countries where our products are
sold or manufactured or in other countries;
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differing local product preferences and product requirements,
including regulatory requirements;
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exchange rate risks;
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restrictions on the repatriation of funds;
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political unrest and hostilities;
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differing degrees of protection for intellectual property; and
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difficulties in coordinating and managing foreign operations.
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In addition, foreign sales subject us to numerous stringent
United States and foreign laws, including the Foreign Corrupt
Practices Act (FCPA), and comparable foreign laws
and regulations which prohibit improper payments or offers of
payments to foreign governments and their officials and
political parties by United States and other business entities
for the purpose of obtaining or retaining business. As we expand
our international operations, there is some risk of unauthorized
payments or offers of payments by one of our employees,
consultants, sales agents or distributors, which could
constitute a violation by us of various laws including the FCPA,
even though such parties are not always subject to our control.
Safeguards that we implement to discourage these practices may
prove to be less than effective and violations of the FCPA and
other laws may result in severe criminal or civil sanctions, or
other liabilities or proceedings against us, including class
action lawsuits and enforcement actions from the SEC, Department
of Justice and overseas regulators, which could adversely affect
our reputation, business, financial condition and results of
operations.
Any of these factors, or any other international factors, could
have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance
that we can successfully manage these risks or avoid their
effects.
We
could be negatively impacted by future interpretation or
implementation of the federal anti-kickback and Stark Laws and
other federal and state anti-self-referral and anti-kickback
laws.
The Centers for Medicare & Medicaid Services
(CMS) recently issued a final rule which includes
amendments to the regulations that implement the physician
self-referral law (Section 1877 of the Social Security
Act), popularly known as the Stark Law. Certain
elements of the final rule that will be effective
October 1, 2009 likely will require restructuring of our
contracts with physician-owned entities that provide equipment
and services in connection with our arrangements to furnish
equipment, products and services to hospitals. CMS is
prohibiting per-click lease arrangements in which a
physician-owned entity is the lessor and receives a
per-click payment, either directly or indirectly,
from a provider of designated health services
(DHS) such as a hospital for space or equipment used
by the hospital in the provision of services to patients who
were referred by the lessor to the lessee. These arrangements
where we hold the hospital contract and subcontract with a
physician-owned entity constitute less than 20% of our urology
business, and we are actively pursuing various restructuring
options. At this time, we are unable to predict whether, and to
what the extent, such restructuring will affect our business or
future business arrangements, but there is no guarantee that it
will not have an adverse effect on our business.
In addition, for the same reasons as noted above, by
October 1, 2009, physician-owned entities that purchase our
equipment and disposables and then furnish the equipment,
disposables, and technical support services to hospitals on a
per click basis will be required to restructure
their per click contracts with the hospital or
potentially divest the physician-owners. Although there is a
reasonable position at this time that these entities can avoid
divesture of their physician-owners, these entities will likely
have to be restructured to address the Stark Law rule change
effective October 1, 2009. A significant percentage of the
urology cases using our equipment in hospitals involves the
aforementioned per-click arrangement. We understand
that these entities are also actively pursuing potential
restructuring options. We expect that our arrangements and those
of our customers involved in furnishing our products will be
fully compliant with the new regulatory requirements before the
October 1, 2009
26
deadline. Although too early to assess, it is possible that such
restructuring will have an adverse effect on our business.
Interventional radiology services outside of the urology
business that involve use of our products generally do not
involve physician-owned businesses, and therefore will not be
affected by the new rule.
The new rules also may make physician investment in mobile
service providers and other ventures that purchase our equipment
and products and furnish them to hospitals potentially less
attractive. At this time, we are unable to predict whether, and
to what extent, implementation of the changes made necessary by
the new rules will affect our business or future business
arrangements.
If we
become subject to product liability claims, we may be required
to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims
that are inherent in the testing, production, marketing and sale
of medical devices. While we believe that we are reasonably
insured against these risks, we may not maintain insurance in
amounts or scope sufficient to provide us with adequate
coverage. A claim in excess of our insurance coverage or not
covered by our insurance carriers would have to be paid out of
our cash reserves, which could have a material adverse effect on
our business, financial condition, results of operations and
cash flows. In addition, any product liability claim could harm
our reputation in the industry and our business.
If our
products are not accepted by the medical community, or if our
products are replaced by new technologies, our business may
suffer.
The success of our existing products depends on acceptance of
these products by the medical community, which acceptance levels
we cannot predict. The success of any products we develop in the
future will depend on their adoption by our targeted markets. We
cannot predict how quickly, if at all, the medical community
will accept our future products, or the extent to which those
products will be used. If we encounter difficulties introducing
future products into our targeted markets, our operating results
and business may be substantially impaired. In addition, new
technologies and techniques may be developed which may render
obsolete our current products, along with those under
development.
Our
future growth is dependent upon the development of new products,
which requires significant investment in research and
development and clinical trials, and may not result in
commercially viable products.
Our future growth is dependent upon the development of new
products, which requires that significant resources be devoted
to research and development activities and clinical trials. In
order to develop new products and improve current product
offerings, we focus our research and development programs
largely on the development of next-generation and new technology
offerings. If we are unable to develop and launch new products
as anticipated or if our R&D efforts do not achieve
products with technical feasibility, or take longer than
anticipated, our ability to maintain or expand our market
position may be adversely impacted.
Our
success will depend on our ability to attract and retain key
skilled personnel and if we are not successful, our business
will be adversely affected.
In order to execute our business plan, we need to attract,
retain and motivate a significant number of highly qualified
managerial, technical, financial and sales personnel. If we fail
to attract and retain skilled scientific and sales personnel,
our research and development and sales and marketing efforts
will be hindered. Our future success depends to a significant
degree upon the continued services of key management personnel.
None of our key management personnel is covered by an insurance
policy of which we are the beneficiary.
Endocare
and the combined company will be subject to each of the risks
described in the sections above entitled Risks Related to
Endocare and Risks Related to Galil. If any of
those risks occur, it may have a negative effect on our results
of operations and our stock price could decline.
Following the effective time of the Merger, Endocare and the
combined company will be subject to each of the risks described
in the sections above entitled Risks Related to
Endocare and Risks Related to Galil. If any of
those risks occur, it may have a negative effect on our results
of operations and our stock price could decline.
27
FORWARD-LOOKING
STATEMENTS
This proxy statement/prospectus contains forward-looking
statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements may include statements regarding,
among other things:
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the proposed Merger with Galil and the Financing, including the
expected time period for closing the Merger and the Financing;
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future financial and operating results, including cash
requirements;
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benefits and synergies of the Merger;
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future opportunities of the combined company;
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our growth strategies;
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anticipated trends in our industry;
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effects of regulatory developments;
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our future financing plans; and
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our anticipated needs for working capital.
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Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are
generally identifiable by use of the words may,
will, should, expect,
anticipate, estimate,
believe, intend, or project
or the negative of these words or other variations on these
words or comparable terminology.
Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual
results, performance, or achievements to be materially different
from the future results, performance, or achievements expressed
or implied by any forward-looking statements. Actual events or
results may differ materially from those discussed in
forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under
Risk Factors and matters described in this proxy
statement/prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the
forward-looking statements contained in this proxy
statement/prospectus will in fact occur. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements.
Except as required by law, we assume no obligation to update
these forward-looking statements, or to update the reasons
actual results could differ materially from those anticipated
from these forward-looking statements, even if new information
becomes available in the future.
28
NOTICE TO
CANADIAN RESIDENTS
Resale
Restrictions
The distribution of the common stock in the Merger in Canada is
being made only on a private placement basis exempt from the
requirement that we prepare and file a prospectus with the
securities regulatory authorities in each province where trades
of common stock are made. Any resale of the common stock in
Canada must be made under applicable securities laws which will
vary depending on the relevant jurisdiction, and which may
require resales to be made under available statutory exemptions
or under a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Affected Galil
stockholders are advised to seek legal advice prior to any
resale of the common stock.
Representations
of Purchasers
By acquiring common stock in Canada, a purchaser is representing
to us and the dealer from whom the purchase confirmation is
being received that:
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the purchaser is entitled under applicable provincial securities
laws to acquire the common stock without the benefit of a
prospectus qualified under those securities laws, where required
by law, that the purchaser is purchasing as principal and not as
agent, the purchaser is an accredited investor as
this term is defined by applicable securities laws in
Canada, and
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the purchaser has reviewed the text above under Resale
Restrictions.
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Rights of
Action Ontario Purchasers Only
Under Ontario securities legislation, a purchaser who purchases
common stock offered by this proxy statement/prospectus during
the period of distribution will have a statutory right of action
for damages, or while still the owner of the common stock, for
rescission against us in the event that this proxy
statement/prospectus contains a misrepresentation without regard
to whether the purchaser relied on the misrepresentation. The
right of action for damages is exercisable not later than the
earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and
three years from the date on which payment or other
consideration is made for the common stock. The right of action
for rescission is exercisable not later than 180 days from
the date on which payment is made or deemed to be made for the
common stock. If a purchaser elects to exercise the right of
action for rescission, the purchaser will have no right of
action for damages against us. In no case will the amount
recoverable in any action exceed the consideration at which the
common stock was offered to the purchaser and if the purchaser
is shown to have purchased the common stock with knowledge of
the misrepresentation, we will have no liability. In the case of
an action for damages, we will not be liable for all or any
portion of the damages that are proven to not represent the
depreciation in the value of the common stock as a result of the
misrepresentation relied upon. These rights are in addition to,
and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario
purchasers should refer to the complete text of the relevant
statutory provisions.
Enforcement
of Legal Rights
Any of the issuers directors and officers as well as the
experts named herein may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect
service of process within Canada upon the issuer or such
persons. All or a substantial portion of the assets of the
issuer and such persons may be located outside of Canada and, as
a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment
obtained in Canadian courts against such issuer or persons
outside of Canada.
29
ENDOCARE
SPECIAL MEETING
General
We are sending you this proxy statement/prospectus as part of
the solicitation of proxies by Endocares board of
directors for use at the special meeting of Endocares
stockholders and any adjournments or postponements of the
meeting. We are first mailing this proxy statement/prospectus,
including a notice of the special meeting of Endocare
stockholders and a form of proxy on or about
[ ], 2009.
The special meeting is scheduled to be held on:
,
2009
at a.m., local time at:
Endocare, Inc.
201 Technology Drive,
Irvine, California 92618
Purpose
of the Special Meeting
The purpose of the Endocare special meeting is to vote on:
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the issuance of shares of Endocare common stock in the Merger
pursuant to the Merger Agreement;
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the issuance of up to 16,250,000 shares of Endocare common
stock pursuant to the Stock Purchase Agreement;
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the approval of the Endocare, Inc. 2009 Stock Incentive Plan;
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the approval of an amendment to Endocares Restated
Certificate of Incorporation, as amended, to increase the total
number of shares of capital stock that Endocare is authorized to
issue from 51,000,000 shares to 76,000,000 shares by
increasing the total number of authorized shares of common stock
from 50,000,000 shares to 75,000,000 shares;
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to approve an adjournment of the special meeting, if necessary,
to solicit additional proxies if there are not sufficient votes
in favor of Proposals 1 through 4; and
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to transact such other business that properly comes before the
special meeting or any adjournment or postponement thereof. We
know of no other matters to be brought before the special
meeting. However, if any other matters are properly presented
for action at the Endocare special meeting, including a motion
to adjourn or postpone the meeting to another time or place, the
persons named in the enclosed proxy form will have the
discretion, unless otherwise noted on any proxy form, to vote on
those matters, subject to applicable law. No proxy form that is
voted against Proposals 1 or 2 will be voted in favor of
any adjournment or postponement of the special meeting.
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The approval of both of Proposals 1 and 2 is required
for completion of the Merger. In addition, unless the Merger is
completed, neither the Endocare, Inc. 2009 Stock Incentive Plan
nor the amendment to Endocares Restated Certificate of
Incorporation, as amended, will be implemented, whether or not
approved by the Endocare stockholders. In the event that either
Proposal 1 or Proposal 2, or both, are not approved by
the Endocare stockholders at the special meeting, the Merger
will not be consummated.
Recommendation
of Endocares Board of Directors
After careful consideration, Endocares board of directors
unanimously recommends that Endocares stockholders vote
FOR Proposal 1 to approve the issuance of shares of
Endocare common stock in the Merger pursuant to the Merger
Agreement, FOR Proposal 2 to approve the issuance of
up to 16,250,000 shares of Endocare common stock pursuant
to the Stock Purchase Agreement, FOR Proposal 3 to
approve the Endocare, Inc. 2009 Stock Incentive Plan, FOR
Proposal 4 to approve an amendment to Endocares
Restated Certificate of Incorporation, as amended, to increase
the total number of shares of common stock that Endocare is
authorized to issue, and FOR
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Proposal 5 to approve an adjournment of the special
meeting, if necessary, to solicit additional proxies if there
are not sufficient votes in favor of Proposals 1 through 4.
Voting
Each stockholder is entitled to one vote for each share of our
common stock held by such stockholder on [ ],
2009, the record date for determining which stockholders are
entitled to vote at the special meeting. On
[ ], 2009 there were [ ]
issued and outstanding shares of Endocare common stock.
Endocares amended and restated bylaws provide that a
majority of the shares entitled to vote, represented in person
or by proxy, will constitute a quorum for transaction of
business at the special meeting.
You can vote your shares in two ways: either by proxy or in
person at the special meeting by written ballot. See below under
Proxies for information about voting by proxy.
The proposals, other than Proposal 4, will require the
approval of the holders of a majority of our outstanding common
stock present in person or represented by proxy at the special
meeting.
Proposal 4 to approve an amendment to Endocares
Restated Certificate of Incorporation, as amended, to increase
the number of shares of common stock that Endocare is authorized
to issue will require the approval of the holders of a majority
of the outstanding shares of Endocare common stock entitled to
vote as of the record date.
Votes will be counted by the inspector of election appointed for
the meeting, who will separately count For,
Against and Abstain votes, as well as
broker non-votes. Broker non-votes occur when a
nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have
discretionary voting power with respect to that proposal and has
not received instructions with respect to that proposal from the
beneficial owner (despite voting on at least one other proposal
for which the nominee does have discretionary authority or for
which it has received instructions).
Proxies
If you choose to vote by proxy, you may do so via the Internet,
by telephone or by mail. Even if you plan to attend the meeting,
the Endocare board of directors recommends that you vote by
proxy.
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Proxy Voting via the Internet. Go to
www.proxyvote.com. Use the Internet to transmit your
voting instructions up until 11:59 p.m. Eastern time
on [ ], 2009. Have your proxy card in hand when
you access the website and follow the instructions to obtain
your records and to create an electronic voting instruction form.
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Proxy Voting by Telephone. Call
1-800-690-6903.
Use any touch-tone telephone to transmit your voting
instructions up until 11:59 p.m. Eastern time on
[ ], 2009. Have your proxy card in hand when
you call and then follow the instructions.
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Proxy Voting by Mail. Mark, sign and date your
proxy card and return it in the postage-paid envelope we have
provided or return it to Endocare Inc.,
c/o Proxy
Services, Post Office Box 9111, Farmingdale, NY 11735
- 9543. Proxy cards must be received by [ ],
2009.
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PLEASE DO NOT MAIL BACK YOUR PROXY CARD IF YOU ARE VOTING BY THE
INTERNET OR TELEPHONE.
Endocares board of directors has selected Terrence A.
Noonan and Clint B. Davis, and each of them, to serve as
proxyholders for the special meeting. If a stockholder properly
votes by proxy, the proxyholders will vote the shares
represented by such proxy at the special meeting in accordance
with the stockholders proxy vote. If the proxy does not
specify how the shares are to be voted, the proxy will be voted
FOR the approval of each of the proposals. Properly executed
proxies, other than proxies voting against Proposals 1
through 4, also will be voted for any adjournment of the special
meeting for the purpose of soliciting additional votes to
approve Proposals 1 through 4, if necessary. In addition,
the shares represented by the proxy will be voted in accordance
with the discretion of the proxyholders on any other matters
that properly come before the special meeting.
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We do not know of any other matters to be presented for
consideration at the special meeting. However, if any other
matters properly come before the special meeting, it is the
intention of the persons named in the enclosed form of proxy to
vote the shares they represent as Endocares board of
directors may recommend. Discretionary authority with respect to
such other matters is granted by means of your proxy vote.
Revocation
of Proxies
You can revoke your proxy at any time before it is exercised at
the special meeting by taking any one of the following actions:
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you can deliver a valid written proxy with a later date or
follow the instructions given for changing your vote by the
Internet or telephone;
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you can notify the Secretary of Endocare in writing that you
have revoked your proxy (by mailing the Secretary at
Endocares principal executive offices located at 201
Technology Drive, Irvine, California 92618); or
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you can vote in person by written ballot at the special meeting.
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Solicitation
Endocare will bear the entire cost of soliciting proxies,
including the preparation, assembly, printing and mailing of
this proxy statement/prospectus, the Endocare proxy and any
additional solicitation material furnished to stockholders.
Copies of solicitation material will be furnished to brokerage
firms, banks, nominees, custodians and fiduciaries holding
shares in their names that are beneficially owned by others so
that they may forward this solicitation material to such
beneficial owners. In addition, Endocare may reimburse such
persons for their costs of forwarding the solicitation materials
to such beneficial owners. The original solicitation of proxies
by mail may be supplemented by solicitation by telephone or
other means by Endocares directors, officers, employees or
agents. No additional compensation will be paid to
Endocares directors, officers or employees for any such
services.
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THE
MERGER
This section and the section entitled The Merger
Agreement beginning on page 59 of this proxy
statement/prospectus
describe the material terms of the Merger, including the Merger
Agreement. While Endocare believes that this description covers
the material terms of the Merger and the Merger Agreement, it
may not contain all of the information that is important to you.
We encourage you to read this proxy statement/prospectus
carefully and in its entirety, including the Merger Agreement,
which is attached as Annex A to this proxy
statement/prospectus, and the other documents to which Endocare
has referred you.
General
The boards of directors of both Endocare and Galil have
unanimously approved the Merger Agreement, which provides for
the acquisition by Endocare of Galil through the Merger. The
Merger will result in Orange Acquisitions Ltd., a wholly owned
subsidiary of Endocare, merging with and into Galil, so that
Galil will become a wholly owned subsidiary of Endocare. At the
effective time of the Merger, each outstanding ordinary share of
Galil will be converted into the right to receive the number of
shares of Endocare common stock equal to the product of
(1) the sum of the number of shares of Endocare common
stock outstanding and the number of shares of Endocare common
stock subject to in-the-money options immediately prior to the
effective time of the Merger and (2) the exchange ratio of
0.923077, divided by the total number of Galil ordinary
shares outstanding and the number of ordinary shares of Galil
subject to in-the-money options immediately prior to the
effective time of the Merger. The exact conversion ratio cannot
be calculated until immediately prior to the effective time of
the Merger, but it is expected that approximately 33.0 ordinary
shares of Galil will be converted into one share of Endocare
common stock. Immediately following the effective time of the
Merger and attributing ownership to Galils shareholders of
the Escrow Shares, Galils shareholders will own
approximately 48.0%, and Endocares existing stockholders
will own approximately 52.0%, of Endocares common stock,
without giving effect to the shares issuable pursuant to the
concurrent Financing. The Merger will have no effect on the
number of shares of common stock of Endocare owned by existing
Endocare stockholders.
Background
of the Merger
As part of their ongoing management of the business and affairs
of their respective companies over the past several years, the
board of directors of Endocare (the Endocare Board)
and the board of directors of Galil (the Galil
Board) frequently evaluated potential strategic
alternatives and considered ways to enhance their respective
companys performance and prospects in light of current
business and economic conditions. For each company, these
reviews have included consideration of potential strategic
transactions with other companies in the health care industry
and the potential benefits and risks of such transactions. In
particular, Endocare and Galil each considered the potential
benefits of a combination of the two companies and, on several
occasions during the past several years, Endocare and Galil
engaged in exploratory discussions regarding a potential
strategic combination of the two companies. However, until 2008
these discussions remained entirely exploratory and did not
result in any negotiations, agreement, arrangement or
understanding between Endocare and Galil with respect to a
business combination. Set forth below is a summary of material
contacts and ultimately negotiations between Endocare and Galil
over the past two years, as well as additional information
describing the background of the Merger.
On December 10, 2006, Galil announced a $52 million
financing led by Thomas, McNerney & Partners and The
Vertical Group, and joined by Investor Growth Capital, all
U.S. venture capital funds. Of the $52 million,
$40 million was used to purchase new equity securities from
Galil $8 million was used to purchase shares from existing
Galil shareholders and $3.6 million related to conversion
to equity of a loan granted to Galil in 2004 by several of its
then shareholders. Galil also announced its acquisition of the
cryoablation business from Oncura, Inc., a jointly held
affiliate that Galil had formed in 2003 with GE Champion
Services, an affiliate of General Electric Company. In
connection with this financing, James E. Thomas (a partner with
Thomas, McNerney & Partners), Stephen M. Campe (a
partner with Investor Growth Capital) and Richard B. Emmitt (a
partner with The Vertical Group) joined the Galil Board.
Later in December 2006, Craig T. Davenport (who was
Endocares then Chairman, Chief Executive Officer and
President) and Michael R. Rodriguez (Endocares Chief
Financial Officer) met with a representative of
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Montgomery & Co., an investment banking firm, to
discuss Endocares business and potential strategic
opportunities. During this meeting, the representative of
Montgomery & Co. indicated that one of the principals
of Montgomery & Co. knew Mr. Thomas. The
representative of Montgomery & Co. offered to contact
Mr. Thomas to determine whether Galil had any interest in
discussing a potential business combination.
In early February 2007, the representative of
Montgomery & Co. informed Messrs. Davenport and
Rodriguez that he had spoken with Mr. Thomas and that
Mr. Thomas had indicated that he and Chen Barir (who was
Galils then President and Chief Executive Officer) would
be interested in a meeting to discuss a potential business
combination.
On February 28, 2007, the representative of
Montgomery & Co. contacted Messrs. Thomas and
Barir and requested that they provide certain limited financial
information regarding Galil in order to make the proposed
meeting more productive. It was tentatively planned that the
meeting would occur at the end of March 2007.
On March 1, 2007, Mr. Barir provided to
Mr. Davenport, David L. Goldsmith (an Endocare director)
and the Montgomery & Co. representative the limited
financial information that Galil was willing to share prior to
the planned meeting.
On March 3, 2007, the Montgomery & Co.
representative communicated with Mr. Barir and indicated
that Endocare would be prepared to move forward with scheduling
a meeting and signing a mutual nondisclosure agreement.
Over the following weeks, Endocare and Galil negotiated a mutual
nondisclosure agreement, signing it on March 26, 2007.
On March 29, 2007, a meeting was held in New York City.
Participants in the meeting included Messrs. Davenport,
Goldsmith, Thomas and Barir, as well as the
Montgomery & Co. representative. At this meeting, the
participants engaged in preliminary discussions regarding a
potential business combination between Endocare and Galil.
Following this meeting, Montgomery & Co. prepared a
preliminary financial review of the potential business
combination based on the limited financial information provided
by Galil and publicly available research analysts
estimates for Endocare contained in the then latest analyst
report issued by Montgomery & Co.
On April 19, 2007, Messrs. Davenport and Goldsmith had
a call with representatives of Montgomery & Co. It was
decided that Galil would need to provide additional financial
information in order for Endocare to assess whether it was
worthwhile for the parties to engage in additional discussions
regarding a potential business combination. The representatives
of Montgomery & Co. stated that they would contact
Messrs. Barir and Thomas to request such additional
information.
After such request, several weeks passed without Galil providing
any additional information, and Endocare decided that it would
focus on obtaining additional financing and negotiating a new
licensing arrangement relating to cardiology, as well as
exploring a variety of other potential strategic opportunities.
On May 29, 2007, Endocare announced a $7 million
investment by Frazier Healthcare Ventures. On June 19,
2007, CryoCath Technologies, Inc. and ATS Medical, Inc. entered
into definitive agreement under which ATS acquired
CryoCaths cardiac surgery cryoablation business. In
conjunction with that transaction, Endocare entered into an
agreement with CryoCath and ATS in which Endocare agreed to
bifurcate the prior agreement with CryoCath to give ATS the same
rights with respect to the cardiac surgery market as CryoCath
had prior to ATSs purchase.
In August 2007, Endocare effectuated a reverse stock split in
connection with Endocares application to list its common
stock on the Nasdaq Capital Market. On October 10, 2007,
Endocares common stock began to trade on the Nasdaq
Capital Market.
At a regularly scheduled meeting of the Endocare Board on
November 15, 2007, a representative of Seven Hills
Partners, an Endocare financial advisor, reviewed and discussed
with the Endocare Board a range of potential strategic
opportunities. It was agreed that Mr. Davenport, together
with Seven Hills Partners, should devote a significant amount of
time to exploring potential strategic opportunities in the
months ahead. Mr. Davenport provided regular updates to the
Endocare Board regarding these activities.
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On February 2, 2008, Mr. Emmitt (a member of the Galil
Board as noted above) approached Mr. Davenport at a urology
conference in Florida and requested a meeting with
Mr. Davenport to discuss the possibility of Galil
participating in Endocares COLD Registry. The following
day, on February 3, 2008, Messrs. Davenport and Emmitt
met and during this meeting Mr. Emmitt suggested that
Endocare and Galil consider restarting discussions regarding a
potential business combination. Following this meeting,
Mr. Davenport reported informally to each of the members of
the Endocare Board the interest indicated by Mr. Emmitt in
restarting discussions.
On February 5, 2008, the Endocare Board held a telephonic
meeting during which Mr. Davenport provided a further
report to the Endocare Board regarding his meeting with
Mr. Emmitt.
On February 14, 2008, Endocare signed a nondisclosure
agreement with Frazier Healthcare Ventures, Endocares
largest stockholder, to enable Endocare to obtain Fraziers
input regarding the possibility of restarting discussions with
Galil. On February 15, 2008, Mr. Davenport had a
telephone conversation with Nathan Every, M.D., a partner
of Frazier Healthcare Ventures, in which Mr. Davenport
discussed several items that he believed Galil needed to address
in order for it to be worthwhile to restart discussions
regarding a potential business combination. Dr. Every, who
knew Mr. Emmitt through his industry activities, stated
that he would discuss these items with Mr. Emmitt in an
effort to facilitate the process of restarting discussions
between Endocare and Galil.
Shortly thereafter, Dr. Every reported to
Mr. Davenport that he had spoken to Mr. Emmitt, and
Mr. Emmitt had indicated that Galil planned to send a
letter to Endocare in order to address the items raised by
Mr. Davenport.
On February
27-28, 2008,
the Endocare Board held a regularly scheduled meeting. During
this meeting, Mr. Davenport and a representative of Seven
Hills Partners conducted a detailed review of various potential
strategic opportunities. One of these opportunities was a
potential business combination with Galil.
During March 2008, in addition to exploring other potential
strategic opportunities, Seven Hills Partners reviewed with
Messrs. Davenport and Rodriguez certain publicly available
information regarding Galil. During March and April 2008,
Messrs. Davenport and Rodriguez also discussed various
additional potential strategic opportunities with
representatives of Oppenheimer & Co. Inc., or
Oppenheimer, which subsequently was engaged as Endocares
financial advisor.
On March 25, 2008, Galil announced the appointment of
Martin J. Emerson as its President and Chief Executive Officer.
On April 18, 2008, Mr. Barir (who was transitioning
out of the role of President and Chief Executive Officer)
contacted Mr. Davenport and stated that Galil continued to
be highly interested in discussing the feasibility of a business
combination. Mr. Barir stated that Galil was in the process
of preparing a letter to address the items raised by
Mr. Davenport in February 2008 and planned to finalize the
letter within the next few weeks, prior to the annual meeting of
the American Urological Association (AUA), which was scheduled
to be held in Orlando, Florida on
May 17-22,
2008. Mr. Barir suggested that representatives of Endocare
and Galil meet during the AUA annual meeting. Mr. Barir
suggested that Mr. Davenport and he speak by telephone in
advance of Galil providing the letter to Endocare. On
April 23, 2008, Mr. Davenport responded to
Mr. Barir, stating that Endocare remained open and
interested in any and all possible strategic initiatives and
actions that could lead to increased stockholder value. On
April 25, 2008, Mr. Davenport further communicated
with Mr. Barir, requesting that Galil provide the letter in
time for consideration by the Endocare Board at its next
meeting, scheduled to be held on May
14-15, 2008.
On April 30, 2008, Messrs. Davenport and Barir had a
telephone call in which they discussed the possibility of
restarting conversations between Endocare and Galil regarding a
potential business combination. Later that day,
Mr. Davenport contacted Mr. Barir suggesting
participants for a meeting during the AUA annual meeting and
requesting that Galil sign a consent under the nondisclosure
agreement signed in March 2007 to permit Endocare to share with
Frazier Healthcare Ventures additional information regarding the
discussions with Galil. On May 5, 2008, Mr. Barir
provided Mr. Davenport with the signed consent.
On May 14, 2008, Mr. Barir sent to Mr. Davenport
a letter from Galil. This letter stated that the Galil Board was
very interested in discussing the feasibility of a business
combination. The letter described several reasons that the Galil
Board believed a business combination was compelling. The letter
also sought to address the items that Mr. Davenport had
identified in February 2008 as needing to be addressed in order
for further discussions between Endocare and Galil to be
worthwhile for Endocare.
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On May
14-15, 2008,
the Endocare Board held a regularly scheduled meeting at which
Dr. Every was present. During this meeting the Endocare
Board, senior management and Dr. Every engaged in an
extended discussion regarding the letter received from Galil and
the planned meeting with Galil representatives in Orlando,
Florida on May 18, 2008 during the AUA annual meeting.
Dr. Every then left the meeting and the Endocare Board and
senior management discussed several other potential strategic
opportunities.
On May 18, 2008, Messrs. Davenport and Goldsmith, on
behalf of Endocare, and Messrs. Emerson and Emmitt, on
behalf of Galil, met along with Dr. Every to restart
discussions between Endocare and Galil relating to a potential
business combination. Among other things, the parties discussed
initial financial modeling, the exchange of basic financial
information and Galils capitalization. At the end of this
meeting, it was agreed that the parties should reconvene in the
first week of June 2008 for another meeting.
On May 18, 2008, the Endocare Board held a telephonic
meeting during which Messrs. Davenport and Goldsmith
discussed with the Endocare Board at length the meeting held
with Galil earlier that day. Mr. Davenport, with
Mr. Goldsmiths input, then updated the Endocare Board
regarding other potential strategic opportunities and the Board
discussed its preliminary views on how these opportunities
compared with the Galil opportunity.
Following the May 18, 2008 meeting between Endocare and
Galil, the parties each provided financial information to
Frazier Healthcare Ventures in order for Frazier Healthcare
Ventures to undertake initial financial modeling for discussion
by the parties at the meeting to be held during the first week
of June 2008.
On June 3, 2008, the parties met in Chicago. The
participants in this meeting included Messrs. Davenport,
Goldsmith, Rodriguez, Emerson, Thomas and Emmitt, in addition to
Terrence A. Noonan (who was then Endocares Lead
Independent Director), Clint B. Davis (Endocares General
Counsel) and Karen Sarid (Galils Chief Financial Officer
and General Manager of Galils Israeli operations). Also
present were Dr. Every and Sam Brasch of Frazier Healthcare
Ventures. At this meeting, the parties reviewed and discussed
the initial financial model prepared by Frazier Healthcare
Ventures. The parties also engaged in a preliminary discussion
regarding the general nature of a possible business combination,
including valuation, management and governance matters and the
timeline for the proposed transaction.
Later on June 3, 2008, Mr. Rodriguez provided
Ms. Sarid with the outline of a proposed due diligence
plan. It was agreed that they would have a telephone call on
June 9, 2008 to discuss the due diligence process.
On June 4, 2008, Messrs. Goldsmith, Davenport,
Rodriguez and Davis met with representatives of Oppenheimer to
discuss a potential strategic opportunity referred to as
Project Mandarin. During this meeting,
Messrs. Goldsmith, Davenport, Rodriguez and Davis also
discussed with representatives of Oppenheimer a potential
business combination with Galil.
On June 9, 2008, Messrs. Rodriguez and Davis had a
call with Ms. Sarid to discuss the proposed due diligence
process.
On June 10, 2008, the Endocare Board held a telephonic
meeting during which Messrs. Davenport, Goldsmith and
Noonan provided an update to the Endocare Board regarding the
meeting with Galil that had been held on June 3, 2008. The
Endocare Board provided input regarding valuation, governance
and management matters. The Endocare Board also discussed other
strategic opportunities. In addition, the Endocare Board
discussed the engagement of Oppenheimer as Endocares
financial advisor in connection with a potential business
combination with Galil as well as Project Mandarin. Following
additional discussion, the Endocare Board established a Special
Committee to review and address matters and consult with
management relative to the potential business combination with
Galil and Project Mandarin, as well as other strategic
opportunities that may arise. Mr. Goldsmith was appointed
Chairman of the Special Committee and Mr. Noonan and Eric
S. Kentor were also appointed to the Special Committee. The
Endocare Board also authorized the Special Committee to
negotiate and approve an engagement letter with Oppenheimer,
which was subsequently executed.
On June 11, 2008, Mr. Davis sent to Ms. Sarid a
draft due diligence request list. Over the following few weeks,
the parties finalized the due diligence request list and agreed
upon the process.
On June 12, 2008, the parties exchanged summary balance
sheet, revenue and gross profit information.
36
On June 13, 2008, the Endocare Special Committee held a
telephonic meeting to discuss the latest communications with
Galil regarding principal valuation, governance and management
matters.
On June 19, 2008, the Endocare Special Committee held a
telephonic meeting to discuss financial information received
from Galil and potential relative contributions that could be
made by Endocare and Galil to the future financial performance
of the combined company. Also participating in this meeting were
Endocare senior management and Endocares financial
advisor. The Committee also discussed the proposed attendees and
objectives for the meeting with Galil scheduled to be held in
Chicago on June 27, 2008. The Endocare Special Committee
also received an update regarding the status of Project Mandarin.
On June 24, 2008, the Endocare Special Committee held a
telephonic meeting, in which Endocares senior management
and financial advisor participated, during which it again
reviewed and discussed with Endocares financial advisor
potential relative contributions that could be made by Endocare
and Galil. The Endocare Special Committee also reviewed a
preliminary transaction timeline for the Galil transaction. The
Endocare Special Committee also discussed a draft nonbinding
letter of intent for the Galil transaction being prepared by
Gibson Dunn & Crutcher LLP, Endocares corporate
legal counsel (Gibson Dunn) Mr. Davenport also
provided an update to the Endocare Special Committee regarding
another potential strategic opportunity under consideration,
referred to as Project Energy.
On June 27, 2008, the parties held a second meeting in
Chicago. Participants at this meeting included
Messrs. Davenport, Goldsmith, Noonan, Emerson, Emmitt and
Thomas and Ms. Sarid. Also present were representatives of
Endocares financial advisor and representatives of Piper
Jaffray & Co., Galils financial advisor
(Piper Jaffray). The parties discussed valuation,
governance and management matters, as well as the proposed
timeline for the transaction.
On June 30, 2008, the Endocare Special Committee held a
telephonic meeting during which the Endocare Special Committee
discussed with Messrs. Davenport, Rodriguez and Davis and
representatives of Endocares financial advisor the status
of negotiations with Galil. The Endocare Special Committee also
discussed the status of Project Mandarin and Project Energy.
On July 2, 2008, Mr. Davenport notified the Endocare
Board that the other party in Project Energy had communicated
through its investment banker earlier that day that it was not
interested in pursuing a potential strategic transaction with
Endocare for a number of reasons. At approximately the same
time, the other party to Project Mandarin and Endocare
determined to terminate negotiations as a result of changes in
their respective businesses.
On July 3, 2008, the Endocare Board held a telephonic
meeting to review and discuss with Messrs. Davenport,
Goldsmith and Noonan and representatives of Endocares
financial advisor valuation, governance and management matters
covered by the parties at the meeting held in Chicago on
June 27, 2008.
On July 10, 2008, the Endocare Board held a telephonic
meeting to engage in further review and discussion regarding
valuation, governance and management matters in connection with
a potential Galil transaction. Also on the call were
Messrs. Rodriguez and Davis and representatives of
Endocares financial advisor. The Endocare Board also
discussed the latest draft of Endocares nonbinding letter
of intent.
On July 10, 2008, Mr. Davis sent to Mr. Thomas
Endocares initial draft nonbinding letter of intent
relating to a potential business combination between Endocare
and Galil. From July 10, 2008 to August 4, 2008, the
parties negotiated this letter of intent.
On July 11, 2008, Mr. Goldsmith had a call with
Mr. Thomas to discuss Galils reaction to certain
terms included in Endocares draft nonbinding letter of
intent.
On July 14, 2008, the independent directors on the Endocare
Board held a telephonic executive session to discuss management
matters relating to the Galil transaction. In particular, the
scope of the proposed post-closing Chairman position was
discussed.
On July 16, 2008, the Endocare Board held a telephonic
meeting, with Messrs. Rodriguez and Davis present, to
discuss the proposed post-closing Chairman position and other
matters relating to Endocares draft letter of intent.
37
On July
24-25, 2008,
the Endocare Board held a regularly scheduled meeting. During
the executive session of this meeting, the Endocare Board
discussed the Galil transaction and proposed revisions to
Endocares draft letter of intent.
On July 29, 2008, Mr. Davis sent to Mr. Thomas a
revised draft letter of intent. Between July 29, 2008 and
August 4, 2008, the parties held a number of telephone
calls and exchanged further revised drafts of the letter of
intent.
On August 4, 2008, Endocare and Galil executed the letter
of intent relating to the proposed combination.
On August 6, 2008, HealthTronics Inc. announced an
unsolicited proposal to acquire all outstanding shares of
Endocare common stock for cash.
On August 11, 2008, the Endocare Board held a telephonic
meeting to discuss HealthTronics proposal. During this
meeting, Gibson Dunn reviewed with the Endocare Board the
fiduciary duties applicable to it in connection with any
business combination. The Endocare Board also discussed the
status of the Galil transaction. Oppenheimer discussed with the
Endocare Board financial aspects of the Galil transaction. After
discussion, the Endocare Board unanimously resolved to reject
HealthTronics proposal as inadequate and not in the best
interest of Endocares stockholders.
On August
11-12, 2008,
in connection with his likely appointment as Chief Executive
Officer of the combined company at the closing of the Galil
transaction, as contemplated by the letter of intent that was
executed by Endocare and Galil on August 4, 2008,
Mr. Emerson met with several of Endocares independent
directors and several members of Endocares senior
management.
During the week of August 11, 2008, Endocare and Galil
began the due diligence process by giving each other access to
their respective virtual data rooms. Endocare and Galil each
took appropriate measures to maintain the confidentiality of
competitively sensitive information throughout the due diligence
process. The due diligence process was largely completed by
mid-September 2008. The process included a visit by Endocare
representatives to Galils offices in Yokneam, Israel,
Plymouth Meeting, Pennsylvania and London, England. The process
also included a visit by Galil representatives to
Endocares offices in Irvine, California.
On August 18, 2008, the Endocare Board held a telephonic
meeting to discuss with representatives of Gibson Dunn and
Endocares financial advisor the terms of the initial draft
definitive merger agreement for the Galil transaction prepared
by Gibson Dunn, with input from Mr. Davis, Endocares
financial advisor and Endocares Israeli legal counsel,
intellectual property legal counsel and health care regulatory
legal counsel. In addition, Mr. Davis updated the Endocare
Board regarding the status of due diligence. The Endocare Board
also discussed with Endocares financial and legal advisors
the potential size and terms of the financing expected to occur
in connection with the Galil transaction.
On August 20, 2008, Gibson Dunn sent the initial draft
definitive merger agreement to Galils corporate legal
counsel, Arnold & Porter LLP. From August 20,
2008 to November 10, 2008, the parties and their respective
legal counsel and financial advisors had numerous telephone
calls and exchanged numerous drafts of the definitive merger
agreement and ancillary agreements.
On September 5, 2008, the Endocare Special Committee held a
telephonic meeting during which Endocares senior
management updated the Endocare Special Committee regarding the
meetings with Galil and related site visits that occurred the
weeks of August 25, 2008 and September 1, 2008. The
Endocare Special Committee also discussed with Endocares
senior management and financial advisor financial forecasts for
Endocare prepared by Endocares management that were
circulated prior to the meeting. The Endocare Special Committee
also discussed with Endocares senior management the
outstanding due diligence matters. In addition, the Endocare
Special Committee discussed HealthTronics reaffirmation of
its unsolicited proposal.
On September 11, 2008, the Endocare Special Committee held
a telephonic meeting to review and discuss with Endocares
senior management, legal and financial advisors various
outstanding matters relating to the Galil transaction, including
the terms of the definitive merger agreement. The Endocare
Special Committee also engaged in further discussion regarding
HealthTronics reaffirmation of its unsolicited proposal.
Later that day, HealthTronics announced that it had decided to
withdraw its unsolicited proposal.
38
On September 17, 2008, the Endocare Board held a regularly
scheduled meeting. During this meeting, the Board met with
Messrs. Rodriguez and Davis and representatives of
Endocares legal and financial advisors to discuss various
aspects of the merger agreement and proposed financing.
On September 25, 2008, the parties, represented by
Messrs. Thomas, Goldsmith and Kentor, and their respective
senior management, legal counsel and financial advisors held a
lengthy telephone conference in an effort to finalize the merger
agreement.
Over September 26 and 27, 2008, Mr. Davenport contacted
Endocares independent directors and indicated that he was
considering resigning from his positions with Endocare to assume
the position of Chief Executive Officer at a privately held
health care company.
On September 28, 2008, the Endocare Board held a telephonic
meeting, which included an executive session, to discuss
Mr. Davenports possible resignation. On
September 29, 2008, the independent directors on the
Endocare Board held a telephonic meeting to engage in further
discussion regarding Mr. Davenports possible
resignation.
On September 30, 2008, Mr. Davenport notified the
Endocare Board that he was resigning from his positions with
Endocare.
From mid-September 2008 until early November 2008, Endocare and
a third party had several telephone conferences and a meeting to
discuss a possible transaction; however, the Endocare Board
ultimately determined that a transaction with Galil appeared
more likely to maximize stockholder value, among other
considerations, and did not pursue a transaction with such third
party.
On October 2, 2008, the Endocare Board held a telephonic
meeting during which, among other matters, Mr. Noonan was
appointed Interim Chief Executive Officer and Interim President.
In addition, the Endocare Board discussed the status of the
proposed Galil transaction.
On October 6, 2008, the Endocare Special Committee held a
telephonic meeting during which it discussed with
representatives of Endocares legal and financial advisors
various matters relating to the proposed Galil transaction and
proposed financing.
On October 7, 2008, the parties, including
Messrs. Thomas, Goldsmith, Kentor and Noonan, and their
respective legal counsel and financial advisors, and Willkie
Farr & Gallagher LLP (Willkie Farr), legal
counsel to the U.S. based Galil shareholders in connection
with the Merger and the proposed financing, held a lengthy
telephone conference in effort to resolve open items. After a
brief break, the conference call resumed and Mr. Thomas
presented a proposal to Mr. Goldsmith with respect to the
open items.
Between October 7, 2008 and the date of execution of the
Merger Agreement and the Stock Purchase Agreement, Willkie Farr
participated on various conference calls with the parties and
counsel to Endocare and Galil with respect to the negotiation of
the terms of the Merger, the voting agreements and the proposed
financing on behalf of the U.S. based Galil shareholders.
In addition, Frazier Healthcare Ventures was represented by
Goodwin Procter LLP in connection with its participation in the
proposed financing.
On October 8, 2008, the Endocare Board held a telephonic
meeting to discuss proposed resolutions to the open items.
Topics covered included, among other matters, the exchange
ratio, financing allocations,
lock-ups,
breakup provisions, indemnification and constitution of the
Endocare Board after the Merger. Following this meeting,
Mr. Goldsmith communicated Endocares counterproposal
on these open terms to Mr. Thomas.
On October 9, 2008, the Endocare Special Committee held a
telephonic meeting with Endocares senior management and
financial advisor in which Mr. Goldsmith updated the
participants on the status of negotiations and the Special
Committee discussed the developments.
On October 13, 2008, the Endocare Special Committee held a
telephonic meeting with Endocares senior management,
Gibson Dunn, Oppenheimer and Endocares primary tax advisor
relative to the transaction to discuss the status of
negotiations with Galil and several matters relating to the
proposed financing.
39
On October 22, 2008, the Endocare Special Committee held a
telephonic meeting with Endocares senior management and
legal and financial advisors to discuss Galils latest
proposal to address the outstanding issues received earlier in
the day.
On October 28, 2008, the Endocare Special Committee held a
telephonic meeting with Endocares senior management and
legal, financial and tax advisors to review the status of
negotiations with Galil. In addition, the Endocare Special
Committee approved the engagement of Oppenheimer as placement
agent in connection with the proposed financing and Endocare
subsequently executed an engagement letter with Oppenheimer for
such purpose.
On October 30, 2008, the Endocare Special Committee held a
telephonic meeting with Endocares senior management and
legal and financial advisors to discuss the status of
negotiations with Galil and the proposed financing. Gibson Dunn
advised the Endocare Special Committee regarding a number of
legal considerations relative to the proposed Galil transaction
and proposed financing in light of the decline in the trading
price of Endocares common stock and the related increase
in post-closing ownership of the Galil shareholders and
financing participants.
On October 31, 2008 and November 4, 2008, the Endocare
Special Committee held telephonic meetings with Endocares
senior management and legal and financial advisors to discuss
the latest drafts of the merger agreement, stock purchase
agreement and other draft transaction documents.
On November 7, 2008, the Endocare Special Committee held a
telephonic meeting with Endocares senior management and
legal and financial advisors to discuss the status of
negotiations with Galil and the transaction agreements.
Oppenheimer provided an update regarding financing efforts and
market conditions for the proposed financing. The Endocare
Special Committee discussed the pricing of the financing. After
discussion, it was agreed that the financing would be priced at
$1.00 per share, subject to Endocare Board approval and the
signing of the stock purchase agreement with investors by
November 10, 2008. The Endocare Special Committee then
reviewed and discussed the proposed agenda for the meeting of
the Endocare Board to be held on November 8, 2008 to
consider approval of the proposed Galil transaction and the
proposed financing and the related documents.
On November 8, 2008, the Endocare Board met, with
Endocares senior management and legal and financial
advisors in attendance, to consider approval of the Galil
transaction and the proposed financing. At this meeting, Gibson
Dunn again reviewed with the Endocare Board the fiduciary duties
applicable to the Galil transaction and proposed financing under
Delaware law, and the Endocare Board discussed related
considerations. The Endocare Board then discussed the pro forma
ownership at closing, cash requirements, financing terms and
post-closing projections. Gibson Dunn reviewed with the Endocare
Board the principal terms of the merger agreement, stock
purchase agreement and other transaction agreements. The
Endocare Board then reviewed the strategic reasons for the Galil
transaction, including, among other considerations,
Endocares financial performance over the past several
quarters, market conditions and the extremely difficult
financing environment, Endocares liquidity and capital
resources, the view that the merger with Galil would result in a
combined company with the potential for enhanced future growth
and value as compared to Endocare remaining as an independent,
standalone company, and the belief that the merger was more
favorable to Endocares stockholders than any other
alternative reasonably available to Endocare and its
stockholders, including the alternative of remaining an
independent, standalone company. Gibson Dunn reviewed with the
Endocare Board, and the Endocare Board discussed, the principal
risk factors related to the proposed merger and the proposed
financing. Also at this meeting, Oppenheimer reviewed with the
Endocare Board its financial analysis of the aggregate exchange
ratio provided for in the proposed merger and informed the
Endocare Board that, assuming no material change in the terms of
the proposed merger or in the totality of the information it
considered in connection with its financial analysis,
Oppenheimer believed it would be in a position to render to the
Endocare Board in connection with the execution of the merger
agreement an opinion as to the fairness, from a financial point
of view and as of the date of the opinion, to Endocare of the
aggregate exchange ratio provided for in the merger. Following
these discussions, and after further review and discussion, the
Endocare Board unanimously approved the Galil transaction and
proposed financing, subject to satisfactory resolution of the
terms of the standstill agreement and indemnification relating
to potential claims by a certain shareholder of Galil and
delivery of Oppenheimers opinion once the merger agreement
was ready to be executed.
On the morning of November 10, 2008, the Endocare Board
held a telephonic meeting with Endocares senior management
and legal and financial advisors. During this meeting, the
Endocare Board discussed with Gibson Dunn the negotiated terms
of the indemnification relating to potential claims by a certain
shareholder of Galil and
40
confirmed resolution of the terms of the standstill agreement.
Also at this meeting, Oppenheimer rendered to the Endocare Board
an oral opinion, which was confirmed by delivery of a written
opinion dated November 10, 2008, to the effect that, as of
that date and based on and subject to the matters described in
its opinion, the 0.923077 aggregate exchange ratio provided for
in the Merger Agreement was fair, from a financial point of
view, to Endocare. After discussion, the Endocare Board
unanimously approved Endocare proceeding with the Galil
transaction and proposed financing, consistent with the
Boards approval at its meeting held on November 8,
2008 and the terms presented to the Endocare Board at the
November 10, 2008 meeting.
Later on November 10, 2008, the parties executed the Merger
Agreement and ancillary agreements and Endocare and the
investors in the Financing executed the stock purchase
agreement. After the close of the market, the parties issued a
joint press release to announce the execution of the Merger
Agreement and Stock Purchase Agreement. On November 11,
2008, the parties held a joint conference call to discuss the
Merger and Financing with investors, analysts and other
interested persons.
In January 2009, the third party with which Endocare had
previously discussed a possible transaction from mid-September
2008 until early November 2008 informed Mr. Noonan that it
was still interested in pursuing a transaction with Endocare if
the transaction with Galil encountered difficulties.
Endocares
Reasons for the Merger
In evaluating the Merger, Endocares board of directors
consulted with senior management and Endocares legal and
financial advisors, and, in the course of reaching its
determination to approve the Merger Agreement, Endocares
board of directors considered a number of factors, including the
following:
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historical and current information concerning Endocares
business, including trends in its financial performance,
financial condition, operations and competitive position;
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current financial market conditions, and historical market
prices, volatility and trading information with respect to
Endocares common stock;
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historical and current information concerning Galils
business, financial performance, financial condition, operations
and management, including the results of Endocares due
diligence investigation of Galil;
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the view that the Merger with Galil would result in a combined
company with the potential for enhanced future growth and value
as compared to Endocare as an independent, standalone company,
because joining the two companies would result in greater
financial resources, a larger annual revenue base, a reduction
in administrative costs and duplicative costs of separate
clinical trials, complementary geographic markets resulting in a
broader global reach, complementary technology, a complementary
patent base, the ability to consolidate overhead expenses, a
more competitive position against larger and better capitalized
technologies such as robotic surgery and intensity-modulated
radiation therapy (IMRT), and a greater combined innovative
potential;
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economic considerations supporting the Merger with Galil,
including improving the platform to grow patient and physician
demand for cryoablation as an alternative to procedures using
robotic and IMRT technologies, realizing efficiencies by
eliminating duplicative selling and administrative costs, and
eliminating redundant clinical trials and studies;
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the view that the Merger with Galil would result in greater
marketplace efficiency through a strong focus on promoting
cryoablation demand and awareness, a worldwide reach, a large
customer base, a solid reputation among physicians and
hospitals, efficient marketing, and experienced sales and
R&D teams, thus providing near-term and long-term savings
opportunities for the combined company by implementing more
efficient manufacturing processes, and by reducing redundant
sales and marketing programs, surplus facilities, duplicative
senior management, repetitive G&A functions, and redundant
regulatory and other programs;
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an ability to achieve economies of scale, consistent with the
overall trend in the industry;
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the opportunity for Endocares stockholders to participate
in the potential future value of the combined company;
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the belief, after considering numerous potential strategic
alternatives over many months, that the Merger was more
favorable to Endocares stockholders than other
alternatives reasonably available to Endocare and its
stockholders, including the alternative of remaining an
independent, standalone company;
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Oppenheimers opinion, dated November 10, 2008, to
Endocares board of directors as to the fairness, from a
financial point of view and as of the date of the opinion, to
Endocare of the 0.923077 aggregate exchange ratio provided for
in the Merger Agreement, as more fully described below under the
caption Opinion of Endocares Financial
Advisor; and
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the terms and conditions of the Merger Agreement, including:
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the determination that the relative percentage ownership of the
combined company by Endocares stockholders and
Galils shareholders is consistent with Endocares
perceived valuations of each company at the time Endocares
board of directors approved the Merger Agreement;
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the non-solicitation provisions limiting Galils ability to
engage in discussions or negotiations regarding, or to furnish
to any person any information with respect to, assist or
participate in any effort or attempt by any person with respect
to, or otherwise cooperate in any way with, an alternative
acquisition proposal;
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Endocares rights under the Merger Agreement to pursue
alternative acquisition proposals received independently under
specified circumstances;
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the conditions to the closing of the Merger and the likelihood
of those conditions being satisfied;
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the absence of any terms providing for an adjustment to the
exchange ratio based on the amount of cash or working capital at
closing for Endocare or Galil;
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the requirement that holders of more than 97.5% of the shares of
Galils outstanding share capital enter into agreements
providing that such shareholders vote in favor of adoption of
the Merger Agreement and against any proposal made in opposition
to, or in any competition with, the Merger; and
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Endocares board of directors belief that the
$900,000 termination fee payable to Galil in the circumstances
set forth in the Merger Agreement, and reimbursement of its
expenses, up to $850,000, was reasonable in the context of
termination fees that were payable in other comparable
transactions and would not be likely to preclude another party
from making a superior acquisition proposal.
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In the course of its deliberations, Endocares board of
directors also considered a variety of risks and other
countervailing factors related to entering into the Merger
Agreement and the Stock Purchase Agreement, including the
following:
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the risk that the Merger might not be completed in a timely
manner or at all due to failure to satisfy the closing
conditions, a number of which are outside of Endocares
control;
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if the Merger is not completed, the potential adverse effect of
the public announcement of the Merger on Endocares
business, including its significant supplier, distributor and
other key business relationships, Endocares ability to
attract and retain key personnel and Endocares overall
competitive position;
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the immediate and substantial dilution of the equity interests
and voting power of Endocares stockholders upon completion
of the Merger and the Financing;
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the ability of Galils current shareholders to
significantly influence the combined companys business
after the completion of the Merger and the Financing;
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the risk that the combined company may need additional
financing, and be unable to raise such additional capital and
that such additional capital, even if available, will be further
dilutive to Endocares stockholders and may be at a lower
valuation than reflected in the Merger and the Financing;
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the restrictions that the Merger Agreement imposes on soliciting
competing acquisition proposals;
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the fact that Endocare would be obligated to pay the $900,000
termination fee to Galil, and reimbursement of its expenses up
to $850,000, under certain specified circumstances;
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the possibility that one or more participants in the Financing
will default on its or their obligation to purchase shares of
Endocare common stock pursuant to the Stock Purchase Agreement,
which could prevent the Merger from closing;
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the restrictions on the conduct of Endocares business
prior to the completion of the Merger, which require Endocare to
carry on its business in the usual, regular and ordinary course
in substantially the same manner as previously conducted,
subject to specific additional restrictions;
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the purchase price of the Endocare common stock under the Stock
Purchase Agreement relative to the historical trading price of
Endocares common stock;
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the challenges and costs of integrating the administrative and
other operations of the two companies, including operations
outside of the United States, and the substantial expenses to be
incurred in connection with the Merger, including the risks that
delays or difficulties in completing the administrative
integration, and such other expenses, could adversely affect the
combined companys operating results and preclude the
achievement of some benefits anticipated from the Merger;
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the possible volatility, at least in the short term, of the
trading price of Endocares common stock resulting from the
announcement and pendency of the Merger and the Financing;
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the possible loss of key management or other personnel of
Endocare;
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the risk of diverting managements attention from
day-to-day operations to implement the Merger and the subsequent
integration of the two companies;
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the interests of Endocares executive officers and
directors in the transactions contemplated by the Merger
Agreement, as described in the section of this proxy
statement/prospectus entitled Interests of Endocares
Directors and Executive Officers in the Merger; and
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various other applicable risks associated with the business and
financial performance of Galil and the combined company and the
Merger, including those described in the section of this proxy
statement/prospectus
entitled Risk Factors.
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The foregoing discussion of the factors considered by
Endocares board of directors is not intended to be
exhaustive, but is believed to set forth the principal factors
considered by Endocares board of directors.
Endocares board of directors collectively reached the
unanimous conclusion to approve the Merger with Galil in light
of the various factors described above and other factors that
each member of Endocares board of directors deemed
relevant. In view of the wide variety of factors considered by
the members of Endocares board of directors in connection
with their evaluation of the Merger Agreement and the Stock
Purchase Agreement and the complexity of these matters,
Endocares board of directors did not consider it
practical, and did not attempt, to quantify, rank or otherwise
assign relative weights to the specific factors it considered in
reaching its decision. Endocares board of directors made
its decision based on the totality of information presented to
and considered by it. In considering the factors discussed
above, individual directors may have given different weights to
different factors.
Endocares board of directors unanimously determined that
Proposals 1 and 2 are in the best interests of
Endocares stockholders and unanimously approved the Merger
Agreement and Financing. Endocares board of directors
unanimously recommends that Endocares stockholders approve
Proposals 1 and 2.
Opinion
of Endocares Financial Advisor
Endocare has engaged Oppenheimer as its financial advisor in
connection with the Merger. In connection with this engagement,
Endocares board of directors requested that Oppenheimer
evaluate the fairness, from a financial point of view, to
Endocare of the 0.923077 aggregate exchange ratio provided for
in the Merger Agreement. On November 10, 2008, Oppenheimer
delivered a written opinion, dated November 10, 2008, to
Endocares board of directors to the effect that, as of
that date and based on and subject to the matters described in
its opinion, the 0.923077 aggregate exchange ratio provided for
in the Merger Agreement was fair, from a financial point of
view, to Endocare.
43
The full text of Oppenheimers written opinion, dated
November 10, 2008, which describes the assumptions made,
procedures followed, matters considered and limitations on the
review undertaken, is attached to this proxy
statement/prospectus as Annex E. Oppenheimers
opinion was provided to Endocares board of directors in
connection with its evaluation of the 0.923077 aggregate
exchange ratio from a financial point of view and does not
address any other aspect of the Merger or any related
transaction. Oppenheimers opinion does not address the
underlying business decision of Endocare to effect the Merger or
any related transaction, the relative merits of the Merger or
any related transaction as compared to any alternative business
strategies that might exist for Endocare or the effect of any
other transaction in which Endocare might engage and does not
constitute a recommendation to any stockholder as to how such
stockholder should vote or act with respect to any matters
relating to the Merger or any related transaction. The
summary of Oppenheimers opinion described below is
qualified in its entirety by reference to the full text of its
opinion.
In arriving at its opinion, Oppenheimer:
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reviewed the Merger Agreement;
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reviewed audited financial statements of Endocare and Galil for
fiscal years ended December 31, 2005, December 31,
2006 and December 31, 2007 and unaudited financial
statements of Endocare and Galil for the nine months ended
September 30, 2008;
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reviewed financial forecasts and estimates relating to Endocare
and Galil for fiscal years ending 2008 through 2010 prepared by
the managements of Endocare and Galil and estimates as to
potential synergies and strategic benefits anticipated by the
managements of Endocare and Galil to result from the Merger;
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held discussions with the senior managements of Endocare and
Galil with respect to the businesses and prospects of Endocare
and Galil;
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reviewed historical market prices of Endocare common stock;
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reviewed and analyzed certain publicly available financial data
for companies that Oppenheimer deemed relevant in evaluating
Endocare and Galil;
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|
reviewed and analyzed certain publicly available information for
transactions that Oppenheimer deemed relevant in evaluating the
Merger;
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|
reviewed and analyzed the relative contributions of Endocare and
Galil to selected operational metrics of the combined company
using historical financial data of Endocare and Galil and
financial forecasts and estimates relating to Endocare and Galil
prepared by the managements of Endocare and Galil;
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reviewed certain potential pro forma financial effects of the
Merger on Endocare based on financial forecasts and estimates
relating to Endocare and Galil prepared by the managements of
Endocare and Galil and estimates as to potential synergies and
strategic benefits anticipated by the managements of Endocare
and Galil to result from the Merger;
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reviewed other public information concerning Endocare; and
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performed such other analyses, reviewed such other information
and considered such other factors as Oppenheimer deemed
appropriate.
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In rendering its opinion, Oppenheimer relied upon and assumed,
without independent verification or investigation, the accuracy
and completeness of all of the financial and other information
provided to or discussed with Oppenheimer by Endocare, Galil and
their respective employees, representatives and affiliates or
otherwise reviewed by Oppenheimer. Oppenheimer was advised that
financial forecasts relating to Endocare and Galil beyond the
fiscal year ending 2010 were not prepared by the managements of
Endocare and Galil and, accordingly, Oppenheimer did not
undertake an analysis of the future financial performance of
Endocare and Galil beyond such period. With respect to the
financial forecasts and estimates relating to Endocare and Galil
utilized in Oppenheimers analyses (including estimates as
to potential synergies and strategic benefits anticipated by the
managements of Endocare and Galil to result from the Merger),
Oppenheimer was advised and, at the direction of the managements
of Endocare and Galil and with Endocares consent, assumed,
without independent verification or
44
investigation, that such forecasts and estimates were reasonably
prepared on bases reflecting the best available information,
estimates and judgments of the managements of Endocare and
Galil, as the case may be, as to the future financial condition
and operating results of Endocare and Galil and such synergies
and strategic benefits and that the financial results reflected
in such forecasts and estimates (including estimates as to
potential synergies and strategic benefits) would be achieved at
the times and in the amounts projected. Oppenheimer relied, at
Endocares direction, without independent verification or
investigation, on the assessments of Endocares management
as to (i) the existing and future products, technology and
intellectual property of Endocare and Galil and the risks
associated with such products, technology and intellectual
property and (ii) Endocares ability to integrate the
businesses of Endocare and Galil and to retain key customers and
suppliers of Endocare and Galil. Oppenheimer assumed, with
Endocares consent, that the Merger would qualify for
federal income tax purposes as a reorganization under
Section 368(a) of the Code. Oppenheimer also assumed, with
Endocares consent, that the Merger and related
transactions, including the Financing contemplated to be
consummated concurrently with the Merger, would be consummated
in accordance with their respective terms without waiver,
modification or amendment of any material term, condition or
agreement and in compliance with all applicable laws and other
requirements and that, in the course of obtaining the necessary
regulatory or third party approvals, consents and releases with
respect to the Merger or any related transaction, no delay,
limitation, restriction or condition would be imposed that would
have an adverse effect on Endocare, Galil or the Merger
(including the contemplated benefits to Endocare of the Merger).
Oppenheimer neither made nor obtained any independent
evaluations or appraisals of the assets or liabilities,
contingent or otherwise, of Endocare or Galil.
Oppenheimers opinion relates to the relative values of
Endocare and Galil. Oppenheimer did not express any opinion as
to the underlying valuation, future performance or long-term
viability of Endocare or Galil, the actual value of Endocare
common stock when issued or the price at which Endocare common
stock would trade at any time. Oppenheimer expressed no view as
to, and its opinion did not address, any terms or other aspects
or implications of the Merger (other than the 0.923077 aggregate
exchange ratio to the extent expressly specified in its opinion)
or any related transaction or any aspect or implication of any
other agreement, arrangement or understanding entered into in
connection with the Merger or otherwise, including, without
limitation, the form or structure of the Merger or any terms or
other aspects or implications of the financing contemplated to
be consummated concurrently with the Merger. In addition,
Oppenheimer expressed no view as to, and its opinion did not
address, the fairness of the amount or nature of, or any other
aspect relating to, the compensation to be received by any
individual officers, directors or employees of any parties to
the Merger, or any class of such persons, relative to the
0.923077 aggregate exchange ratio. Oppenheimer also expressed no
view as to, and its opinion did not address, the underlying
business decision of Endocare to effect the Merger or any
related transaction, the relative merits of the Merger or any
related transaction as compared to any alternative business
strategies that might exist for Endocare or the effect of any
other transaction in which Endocare might engage.
Oppenheimers opinion was necessarily based on the
information available to it and general economic, financial and
stock market conditions and circumstances as they existed and
could be evaluated by Oppenheimer on the date of its opinion.
The credit, financial and stock markets were experiencing
unusual volatility as of the date of Oppenheimers opinion
and Oppenheimer expressed no opinion or view as to the potential
effects, if any, of such volatility on Endocare, Galil or the
proposed Merger. Although subsequent developments may affect its
opinion, Oppenheimer does not have any obligation to update,
revise or reaffirm its opinion. Except as described above,
Endocare imposed no other instructions or limitations on
Oppenheimer with respect to the investigations made or the
procedures followed by it in rendering its opinion.
This summary is not a complete description of Oppenheimers
opinion or the financial analyses performed and factors
considered by Oppenheimer in connection with its opinion. The
preparation of a financial opinion is a complex analytical
process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances
and, therefore, a financial opinion is not readily susceptible
to summary description. Oppenheimer arrived at its ultimate
opinion based on the results of all analyses undertaken by it
and assessed as a whole, and did not draw, in isolation,
conclusions from or with regard to any one factor or method of
analysis for purposes of its opinion. Accordingly, Oppenheimer
believes that its analyses and this summary must be considered
as a whole and that selecting portions of its analyses and
factors or focusing on information presented in tabular format,
without considering all analyses and factors or the
45
narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying
Oppenheimers analyses and opinion.
In performing its analyses, Oppenheimer considered industry
performance, general business, economic, market and financial
conditions and other matters existing as of the date of its
opinion, many of which are beyond the control of Endocare and
Galil. No company or transaction used in the analyses is
identical to Endocare, Galil or the Merger, and an evaluation of
the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and
other factors that could affect the acquisition, public trading
or other values of the companies or transactions analyzed.
The forecasts and estimates contained in Oppenheimers
analyses and the ranges of valuations resulting from any
particular analysis are not necessarily indicative of actual
values or future results, which may be significantly more or
less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold.
Accordingly, the forecasts and estimates used in, and the
results derived from, Oppenheimers analyses are inherently
subject to substantial uncertainty.
The type and amount of consideration payable in the Merger were
determined through negotiation between Endocare and Galil, and
the decision to enter into the transaction was solely that of
Endocares board of directors. Oppenheimers opinion
and financial analyses were only one of many factors considered
by Endocares board of directors in its evaluation of the
Merger and should not be viewed as determinative of the views of
Endocares board of directors or management with respect to
the Merger or the 0.923077 aggregate exchange ratio provided for
in the Merger Agreement.
The following is a summary of the material financial analyses
performed in connection with Oppenheimers opinion, dated
November 10, 2008, to Endocares board of directors.
The financial analyses summarized below include information
presented in tabular format. In order to fully understand
Oppenheimers financial analyses, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Considering the data in the tables below without considering the
full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Oppenheimers
financial analyses. In performing the financial analyses
summarized below, Oppenheimer utilized estimated financial data
of Galil and Endocare based on internal estimates of
Galils management and Endocares management,
respectively. In calculating implied equity values of Galil and
Endocare, net cash was adjusted to exclude operating cash in the
case of Galil and to exclude working capital-related debt and
operating cash in the case of Endocare.
Selected
Companies Analysis
Oppenheimer reviewed financial and stock market information of
Endocare and the following 11 selected publicly held companies
in the medical devices industry:
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American Medical Systems Holdings, Inc.
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ATS Medical, Inc.
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Biosphere Medical, Inc.
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Bovie Medical Corporation
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Endologix, Inc.
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HealthTronics, Inc.
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LeMaitre Vascular, Inc.
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SenoRx, Inc.
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STAAR Surgical Company
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Urologix, Inc.
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Uroplasty, Inc.
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Oppenheimer reviewed, among other things, enterprise values of
the selected companies, calculated as market value based on
closing stock prices on November 7, 2008, plus straight
debt and preferred stock, out-of-the-money convertible
securities and minority interests, less cash, cash equivalents
and investments in unconsolidated
46
affiliates, as a multiple of latest 12 months revenue and,
to the extent publicly available, calendar years 2008 and 2009
estimated revenue. Financial data of the selected companies were
based on publicly available research analysts estimates,
public filings and other publicly available data. Based on
implied equity reference ranges for Galil and Endocare,
calculated by applying a range of selected multiples of latest
12 months revenue and calendar years 2008 and 2009
estimated revenue derived from the selected companies to
corresponding data of Galil and Endocare, this analysis
indicated the following implied aggregate exchange ratio
reference ranges, as compared to the 0.923077 aggregate exchange
ratio provided for in the Merger Agreement:
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Implied Aggregate
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Merger Aggregate
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Financial Metric
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Exchange Ratio Reference Range
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Exchange Ratio
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LTM Revenue
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0.604182x - 1.105926x
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2008 Revenue
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0.601057x - 1.100204x
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0.923077x
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2009 Revenue
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0.621478x - 1.137584x
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Selected
Precedent Transactions Analyses
Oppenheimer reviewed certain publicly available information for
selected transactions involving urology applications companies
in the medical devices industry, given that both Galil and
Endocare are primarily focused on developing urology
applications, as well as selected transactions in the medical
devices industry generally:
Selected Urology Transactions. Oppenheimer
reviewed the transaction values of the following five selected
transactions involving urology application companies announced
from November 20, 1997 through September 25, 2008,
referred to as the selected urology transactions:
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Announcement Date
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Acquiror
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Target
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9/25/2008
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Medtronic, Inc.
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CryoCath Technologies Inc.
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1/29/2007
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AngioDynamics, Inc.
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RITA Medical Systems Inc.
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4/12/2002
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Medtronic, Inc.
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VidaMed, Inc.
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9/1/1999
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INAMED Corporation
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Collagen Aesthetics, Inc.
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11/20/1997
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Johnson & Johnson
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Gynecare, Inc.
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Oppenheimer reviewed transaction values in the selected urology
transactions, calculated as the equity value implied for the
target company based on the consideration payable in the
selected transaction, plus straight debt and preferred stock,
out-of-the-money convertible securities and minority interests,
less cash, cash equivalents and investments in unconsolidated
affiliates, as a multiple, to the extent publicly available, of
latest 12 months revenue. Financial data for the selected
urology transactions were based on publicly available
information at the time of announcement of the relevant
transaction. Based on implied equity reference ranges for Galil
and Endocare, calculated by applying a range of selected
multiples of latest 12 months revenue derived from the
selected urology transactions, excluding the multiple for the
Medtronic, Inc./VidaMed, Inc. transaction as an outlier, to
corresponding data of Galil and Endocare for the latest
12 months (as of September 30, 2008), this analysis
indicated the following implied aggregate exchange ratio
reference range, as compared to the 0.923077 aggregate exchange
ratio provided for in the Merger Agreement:
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Implied Aggregate
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|
Merger Aggregate
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Exchange Ratio Reference Range
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Exchange Ratio
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0.604182x - 1.105926x
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0.923077x
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47
Selected Medical Devices
Transactions. Oppenheimer also reviewed the
transaction values of the following 12 selected transactions
involving companies in the medical devices industry announced
from January 19, 2006 through July 7, 2008, referred
to as the selected medical devices transactions:
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Announcement Date
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Acquiror
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Target
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7/7/2008
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Thermage, Inc.
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Reliant Technologies, Inc.
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11/13/2007
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Regeneration Technologies, Inc.
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Tutogen Medical, Inc.
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10/30/2007
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Bracco Diagnostics, Inc.
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E-Z-EM, Inc.
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10/09/2007
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Natus Medical Incorporated
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Excel Tech Ltd.
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8/6/2007
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Inverness Medical Innovations, Inc.
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HemoSense, Inc.
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7/22/2007
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ev3 Inc.
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FoxHollow Technologies, Inc.
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6/4/2007
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Inverness Medical Innovations, Inc.
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Cholestech Corporation
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2/12/2007
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Cytyc Corporation
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Adeza Biomedical Corporation
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1/8/2007
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Advanced Medical Optics, Inc.
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IntraLase Corp.
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6/20/2006
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GE Healthcare Ltd.
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Biacore International AB
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6/5/2006
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American Medical Systems Holdings,
Inc.
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Laserscope
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1/19/2006
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Royal Philips Electronics
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Lifeline Systems, Inc.
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Oppenheimer reviewed transaction values in the selected medical
devices transactions as a multiple of latest 12 months
revenue and, to the extent publicly available, one-year and
two-year forward estimated revenue. Financial data for the
selected medical devices transactions were based on publicly
available information at the time of announcement of the
relevant transaction. Based on implied equity reference ranges
for Galil and Endocare, calculated by applying a range of
selected multiples of latest 12 months revenue and one-year
and two-year forward estimated revenue derived from the selected
medical devices transactions to corresponding data of Galil and
Endocare for the latest 12 months (as of September 30,
2008) and calendar years 2008 and 2009, this analysis
indicated the following implied aggregate exchange ratio
reference ranges, as compared to the 0.923077 aggregate exchange
ratio provided for in the Merger Agreement:
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Implied Aggregate
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|
Merger Aggregate
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|
Financial Metric
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|
Exchange Ratio Reference Range
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|
Exchange Ratio
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|
LTM Revenue
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0.604182x - 1.105926x
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|
2008 Revenue
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0.601057x - 1.100204x
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0.923077x
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2009 Revenue
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0.621478x - 1.137584x
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Contribution
Analysis
Oppenheimer reviewed the relative contributions of Endocare and
Galil to various financial metrics, including the pro forma
revenue and gross profit of the combined company for calendar
year 2007, the latest 12 months (as of September 30,
2008) and calendar years 2008 through 2010. Oppenheimer
then compared the implied equity ownership percentages of
Galils shareholders in the combined company derived from
the relative contributions of Endocare and Galil to such
financial metrics to the pro forma equity ownership percentages
of Galils shareholders in the combined company upon
consummation of the Merger implied by the 0.923077 aggregate
exchange ratio provided for in the Merger. This analysis
indicated the following range of implied pro forma equity
ownership percentages for Galils shareholders, as compared
to the pro forma equity ownership percentage for Galils
shareholders upon consummation of the Merger implied by the
0.923077 aggregate exchange ratio provided for in the Merger
Agreement:
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Galil Pro Forma Equity Ownership
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Galil Implied Pro Forma Equity
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Percentage Implied by Aggregate
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Ownership Percentage Reference Range
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Merger Exchange Ratio
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44.8% - 48.6%
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48.0
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%
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Accretion/Dilution
Analysis
Oppenheimer reviewed the potential pro forma effect of the
Merger on Endocares calendar years 2008, 2009 and 2010
estimated earnings per share, referred to as EPS, taking into
account the full impact in each calendar year observed of
potential synergies for calendar year 2010 anticipated by the
managements of Endocare and Galil to
48
result from the Merger before giving effect to transaction costs
and the number of shares of Endocare common stock to be issued
in the financing contemplated to be consummated concurrently
with the Merger. Based on the aggregate Merger exchange ratio
and an assumed Merger closing date of January 1, 2008, this
analysis indicated that the Merger could reduce Endocares
calendar year 2008 estimated loss per share and could be
accretive to Endocares calendar years 2009 and 2010
estimated EPS. Actual results may vary from projected results
and the variations may be material.
Miscellaneous
Endocare has agreed to pay Oppenheimer for its financial
advisory services in connection with the Merger an aggregate fee
of $800,000, a portion of which was payable upon
Oppenheimers engagement by Endocare, a portion of which
was payable upon delivery of Oppenheimers opinion and a
significant portion of which is contingent upon consummation of
the Merger. Endocare also has agreed to reimburse Oppenheimer
for its reasonable expenses, including reasonable fees and
expenses of its legal counsel, and to indemnify Oppenheimer and
related parties against liabilities, including liabilities under
the federal securities laws, relating to, or arising out of, its
engagement. Oppenheimer is acting as placement agent in
connection with the financing contemplated to be consummated
concurrently with the Merger, for which Oppenheimer expects to
receive compensation. In the ordinary course of business,
Oppenheimer and its affiliates may actively trade securities of
Endocare for Oppenheimers and its affiliates own
accounts and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
The issuance of Oppenheimers opinion was approved by an
authorized committee of Oppenheimer. Endocare selected
Oppenheimer as its financial advisor based on Oppenheimers
reputation and experience. Oppenheimer is an internationally
recognized investment banking firm and, as a part of its
investment banking business, is regularly engaged in valuations
of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities,
private placements and valuations for other purposes.
Merger
Consideration
At the effective time of the Merger, each outstanding ordinary
share of Galil will be converted into the right to receive the
number of shares of Endocare common stock equal to the
product of (1) the sum of the number of shares of
Endocare common stock outstanding and the number of shares of
Endocare common stock subject to in-the-money options
immediately prior to the effective time of the Merger and
(2) the exchange ratio of 0.923077, divided by the
total number of Galil ordinary shares outstanding and the number
of ordinary shares of Galil subject to in-the-money options
immediately prior to the effective time of the Merger. The exact
conversion ratio cannot be calculated until immediately prior to
the effective time of the Merger, but it is expected that
approximately 33.0 ordinary shares of Galil will be converted
into one share of Endocare common stock.
At the closing of the Merger, Endocare will deposit with
Deutsche Bank National Trust Company, as escrow agent, a
number of shares of Endocare common stock equal to 7.5% of the
total number of shares of Endocare common stock comprising the
aggregate Merger consideration rounded down to the nearest whole
share, for the purpose of satisfying any indemnification
obligations to Endocare and its affiliates arising under the
Merger Agreement. Any portion of the shares remaining in escrow
after payment of indemnification claims pursuant to the Merger
Agreement, if any, will be released to Galils shareholders
upon expiration of the escrow period, which is defined under the
Merger Agreement as the period beginning on the closing date of
the Merger and continuing through the due date (without regard
to any extensions) of Endocares required filing with the
SEC of its Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
Each outstanding option to purchase Galil ordinary shares issued
pursuant to the Galil 1997 Option Plan, the Galil
2000 Share Option Plan and the Galil 2003 Share Option
Plan will be converted into an option to purchase, on the same
terms and conditions as applied to the Galil share option, a
number of shares of Endocare common stock (rounded up to the
nearest whole share) equal to the number of shares of Endocare
common stock that the holder of such Galil stock option would
have been entitled to receive in the Merger had such holder
exercised the option in full immediately prior to the Merger.
The exercise price per share of Endocare common stock for these
converted options will be equal to the former aggregate exercise
price for Galil ordinary shares that otherwise could have been
49
purchased under the Galil share option, divided by the number of
shares of Endocare common stock for which such option will
become exercisable (rounded down to the nearest whole cent). In
addition, in the case of options intended to be treated as
incentive stock options under the Code, the option
price, the number of shares that could be purchased and the
terms and conditions of exercise will be determined in order to
comply with the applicable provisions of the Code.
Assuming ownership by Galils shareholders of the Escrow
Shares, the shares of Endocare common stock issued to
Galils shareholders in connection with the Merger are
expected to represent approximately 48.0%, and Endocares
existing stockholders will own approximately 52.0%, of the
shares of Endocares common stock.
No certificate representing fractional shares of Endocares
common stock will be issued in connection with the Merger. The
aggregate number of shares which each holder of Galil shares is
entitled to receive in the Merger will be rounded down to the
nearest whole share and such shareholder shall not be entitled
to any rights with respect to any fractional share or any cash
in lieu thereof.
The Merger Agreement provides that, at the effective time of the
Merger, Endocare will deposit with the exchange agent designated
by Endocare and reasonably acceptable to Galil the shares of
Endocares common stock issuable to Galils
shareholders and any dividends or distributions to which holders
of such stock certificates may be entitled. Endocare anticipates
that Computershare, Endocares transfer agent, will act as
exchange agent.
The Merger Agreement provides that, as soon as practicable after
the effective time of the Merger, the exchange agent will mail
to each record holder of Galil shares immediately prior to the
effective time of the Merger a letter of transmittal and
instructions for surrendering and exchanging the record
holders Galil share certificates. Upon surrender of a
Galil share certificate for exchange to the exchange agent,
together with a duly signed letter of transmittal, and such
other documents as the exchange agent may reasonably require,
the holder of the Galil share certificate will be entitled to
receive the following:
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a certificate representing the number of whole shares of
Endocares common stock that such holder has the right to
receive pursuant to the provisions of the Merger
Agreement; and
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dividends or other distributions, if any, to which they are
entitled under the terms of the Merger Agreement.
|
All Galil share certificates surrendered will be cancelled.
At the effective time of the Merger, all holders of certificates
representing Galil shares that were outstanding immediately
prior to the effective time of the Merger will cease to have any
rights as shareholders of Galil. In addition, no transfer of
Galil shares after the effective time of the Merger will be
registered on the share transfer books of Galil.
If any Galil share certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
person claiming such certificate to be lost, stolen or destroyed
and, if required by Endocare or the exchange agent, the posting
by such person of a bond in such reasonable amount as Endocare
or the exchange agent may direct as indemnity against any claim
that may be made against it with respect to such certificate,
the exchange agent shall issue in exchange for such lost, stolen
or destroyed certificate the shares of Endocares common
stock and any unpaid dividends and distributions on such shares
of Endocares common stock.
Interests
of Endocares Directors and Executive Officers in the
Merger
In considering the recommendation of Endocares board of
directors with respect to the proposals, Endocares
stockholders should be aware that members of the board of
directors and executive officers of Endocare may have interests
in the Merger that may be different from, or in addition to, the
interests of Endocares stockholders. Endocares
directors were aware of these potential conflicts of interest
and considered them, among other matters, in reaching their
respective decisions to approve the Merger, the Merger Agreement
and the Merger, and to recommend that Endocares
stockholders vote to approve the proposals.
50
Payments
Upon a Change in Control
Upon a Change in Control for purposes of
Section 409A of the Code, the following table lists the
directors and executive officers of Endocare that are entitled
to be issued shares of Endocare common stock pursuant to
Endocares Employee Deferred Stock Unit Program and
Endocares Non-Employee Director Deferred Stock Unit
Program as of January 15, 2009:
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Number of Shares of
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Endocare Common Stock
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Issuable Upon a
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Change of Control
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for Purposes of 409A
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Name
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Position with Endocare
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of the Code
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John R. Daniels, M.D.
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Director
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44,226
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David L. Goldsmith
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Director
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85,260
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Eric S. Kentor
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Director
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58,854
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Thomas R. Testman
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Director
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53,161
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Terrence A. Noonan
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Chairman, Interim Chief Executive Officer & Interim
President
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40,810
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Michael R. Rodriguez
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Senior Vice President, Finance and Chief Financial Officer
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3,941
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(1)
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Clint B. Davis
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Senior Vice President, Legal Affairs, General Counsel and
Secretary
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30,347
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(2)
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(1) |
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All 3,941 shares underlying Mr. Rodriguezs
Deferred Stock Units are scheduled to be issued pursuant to
their terms on March 31, 2009. |
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(2) |
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16,356 shares underlying Mr. Davis Deferred
Stock Units are scheduled to be issued pursuant to their terms
on March 31, 2009. |
Management
of the Combined Company
All current Endocare officers, other than Terrence A. Noonan,
Interim Chief Executive Officer and Interim President, will
remain in their respective positions after the Merger. It is
intended that Martin J. Emerson, the current President and Chief
Executive Officer of Galil, will become the Chief Executive
Officer and President of Endocare after the Merger. All current
directors other than Dr. John R. Daniels will remain on the
board of directors.
Interests
of Galils Directors and Executive Officers in the
Merger
Members of the board of directors and executive officers of
Galil may have interests in the Merger that are different from,
or are in addition to, the interests of Galils
shareholders generally. These interests generally include, among
other things, the assumption by Endocare of Galils share
options in the Merger, the potential for such persons to occupy
positions as officers or directors of the combined company, to
collect directors fees and other related equity and
non-equity compensation, and to receive potential benefits under
employment arrangements as a result of the Merger. The members
of Galils board of directors were aware of these interests
and considered them, among other matters, in approving the
Merger Agreement and in determining to recommend that
Galils shareholders vote to approve and adopt the Merger
Agreement.
Board
of Directors and Management of the Combined
Company
Pursuant to the Merger Agreement, Endocare has agreed to appoint
four current members of Galils board of directors to
Endocares board of directors upon completion of the
Merger. It is currently the parties intention that these
individuals will be Martin J. Emerson, Richard B. Emmitt, Doron
Birger and James E. Thomas. Each of these individuals voted, in
their capacity as directors, to approve the adoption of the
Merger Agreement and have recommended to the shareholders of
Galil that they vote to approve the Merger Agreement and the
Merger.
51
In addition, it is intended that Martin J. Emerson, who is the
President and Chief Executive Officer of Galil, will become the
Chief Executive Officer and President of Endocare upon closing
of the Merger. Mr. Emerson participated in the negotiation
and approval of the terms of the Merger on behalf of Galil.
Indemnification
and Directors and Officers Insurance
Pursuant to the Merger Agreement, prior to the effective time of
the Merger, Galil may purchase a tail policy under
Galils existing directors and officers
insurance policy which (i) has an effective term of seven
years from the effective time of the Merger, (ii) covers
those persons who are currently covered by Galils
directors and officers insurance policy in effect as
of November 10, 2008 for actions and omissions occurring on
or prior to the effective time of the Merger, and
(iii) contains terms and conditions that are no less
favorable, in the aggregate, to the insured than those of
Galils directors and officers insurance policy
in effect as of November 10, 2008.
In addition, for a period of seven years following the effective
time of the Merger, to the fullest extent permitted by
applicable law, Endocare and Galil shall fulfill and honor in
all respects the obligations of Galil to the current officers
and directors of Galil or any of its subsidiaries and each other
person who is or was a director or officer of Galil or any of
its subsidiaries at or at any time prior to the effective time
of the Merger, pursuant to all rights to any indemnification and
exculpation from liabilities for acts or omissions contained in
Galils charter documents or available under applicable law.
Stock
Option Plans
As of [ ], 2009, directors and officers of
Galil held in the aggregate options to purchase approximately
[ ] ordinary shares of Galil. Under the terms
of the Merger Agreement, these options will be converted into
options to purchase approximately
[ ] shares of Endocare common stock as
described above.
Financing
On November 10, 2008, concurrently with the execution of
the Merger Agreement, Endocare and certain existing
institutional accredited stockholders of Endocare and Galil,
including certain directors and officers of Galil, entered into
the Stock Purchase Agreement, relating to the sale by Endocare
of 16,250,000 shares of Endocare common stock at a purchase
price of $1.00 per share. Directors of Galil and their
affiliates will purchase 13,050,000 shares in the
Financing, representing approximately 33.33% of the outstanding
common stock of Endocare immediately after consummation of the
Merger and the Financing.
Composition
of Endocares Board of Directors Following the
Merger
The board of directors of Endocare following the Merger will be
comprised of nine directors. Endocare has agreed to appoint four
current members of Galils board of directors to the board
of directors of Endocare upon completion of the Merger. It is
currently the parties intention that these individuals
will be Martin J. Emerson, Richard B. Emmitt, Doron Birger and
James E. Thomas. Endocare has also agreed to appoint a current
or former partner of Frazier Healthcare Ventures or the current
or former chief executive officer of one of Frazier Healthcare
Ventures portfolio companies to its board of directors
upon consummation of the Merger. It is currently intended that
this individual will be Daniel A. Pelak. As of December 31,
2008, Frazier Healthcare Ventures held 1,721,915 shares of
Endocare common stock comprising 14.6% of the total number of
shares of Endocare Common Stock outstanding as of that date. The
remaining four directors will be members of Endocares
current board of directors. Those individuals are currently
expected to be Terrence A. Noonan, David L. Goldsmith, Eric S.
Kentor and Thomas R. Testman. The parties have agreed that a
member of Endocares pre-Merger board of directors will be
Chairman of the post-Merger board of directors. It is the
parties current intention that Terrence A. Noonan will be
the Chairman of the board of directors after completion of the
Merger.
Effective
Time of the Merger
The Merger Agreement requires the parties to consummate the
Merger after all of the conditions to the consummation of the
Merger contained in the Merger Agreement are satisfied or
waived. The Merger will become effective upon the issuance of a
certificate evidencing the Merger by the Companies Registrar of
the State of Israel.
52
While we anticipate that consummation of the Merger will occur
in the period from the late first quarter of 2009 to the end of
the second quarter of 2009, neither Endocare nor Galil can
predict the exact timing of the consummation of the Merger, if
at all.
Government
and Regulatory Matters
Endocare and Galil have each agreed to use their commercially
reasonable efforts to do all things necessary under applicable
laws to complete the Merger. These things include:
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obtaining consents of all third parties and governmental
authorities necessary or advisable to complete the
Merger; and
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contesting any legal action opposing or adverse to the Merger.
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In the United States, Endocare must comply with applicable
federal and state securities laws and, to the extent Endocare is
to remain listed on the Nasdaq Capital Market, Nasdaq rules and
regulations in connection with the issuance of shares of
Endocares common stock in the Merger and the Financing,
including the filing with the SEC and effectiveness of the
registration statement on
Form S-4
of which this proxy statement/prospectus is a part and obtaining
stockholder approval of the issuance of the shares of Endocare
common stock pursuant to the Merger Agreement and Stock Purchase
Agreement in accordance with Nasdaq Marketplace
Rule 4350(i)(1)(c)(ii).
Neither Endocare nor Galil is required to obtain approvals or
clearances from any antitrust regulatory authorities in the
United States or other countries to consummate the Merger.
However, the FTC has opened a preliminary investigation into
whether the proposed Merger violates Section 7 of the
Clayton Act, as amended, 15 U.S.C. § 18, or
Section 5 of the FTC Act, as amended, 15 U.S.C.
§ 48. The parties are cooperating fully with the
FTCs investigation and have provided the FTC with
information and materials on a voluntary basis.
Israeli
Governmental Approvals
Israeli Companies Law. Under the Israeli
Companies Law, Endocare and Galil can not complete the Merger
without making certain filings and notifications to the Israeli
Companies Registrar.
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Merger Proposal. Once the board of directors
of each merging company has approved the Merger, and within
three days from the sending of the notice to such companys
shareholders regarding the approval of the Merger, each merging
company is required to file with the Israeli Companies
Registrar, jointly with the other merging company, a
Merger Proposal setting forth specified details with
respect to the merger. Such Merger Proposals were jointly filed
with the Israeli Companies Registrar on December 15, 2008.
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Notice to Creditors. In addition, each merging
company is obliged to notify its creditors, if any, of the
proposed Merger. Pursuant to the Israeli Companies Law, a copy
of the Merger Proposal must be sent to the secured creditors of
each merging company, substantial creditors (as such
term is defined in the regulations promulgated under the Israeli
Companies Law), if any, must be informed individually of the
filing of the Merger Proposal with the Israeli Companies
Registrar indicating where it can be reviewed, and all creditors
must be informed of the Merger by publication in daily
newspapers, including a United States daily newspaper (to the
extent there are material creditors in the United States), and
by making the Merger Proposal available for review. Creditors
are then entitled to request copies of the merging
companies financial statements, while material creditors
are entitled to request any information that is directly
necessary to evaluate whether the merged company will be able to
meet its obligations. After sending these notices, the merging
companies will notify the Israeli Companies Registrar of the
sending of the notices to their creditors. Creditors are also
entitled to apply to the appropriate court to request a delay or
an order preventing the Merger. In addition, pursuant to the
Israeli Companies Law, in case a merging company employs more
than 50 employees it must provide a notice of the Merger to
the workers union or post a copy of the publication placed
in the newspapers in a prominent location in the workplace.
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Shareholder Approval Notice. The Merger must
be approved by the shareholders of each merging company. After
shareholder approval, the companies will then file a shareholder
approval notice with the Israeli Companies Registrar concerning
the decision of the shareholders.
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53
Assuming that the shareholders of each of the merging companies
approve the Merger Agreement and the Merger and that all of
these statutory procedures and requirements have been complied
with, upon filing of the shareholder approval notice, and so
long as 30 days have passed from the date of the special
meetings of each of the merging companies and at least at least
50 days from the date of the filing of the Merger Proposals
with the Israeli Companies Registrar has lapsed, the Companies
Registrar will declare the Merger effective and issue the
surviving company a certificate to that effect.
Office of the Chief Scientist. The Israeli
Research and Development Law imposes certain reporting
requirements with respect to certain changes in the ownership of
a grant recipient. The law requires the grant recipient and its
controlling shareholders and non-Israeli interested parties to
notify the OCS of any change in control of the recipient, or a
change in the holdings of the means of control of the recipient
that results in a non-Israeli becoming an interested party
directly in the recipient, and requires the new interested party
to undertake to the OCS to comply with the Research and
Development Law. The OCS is a part of Israels Ministry of
Industry, Trade and Labor and provides research and development
grants to high-tech companies, subject to an obligation to repay
the grants by means of royalties on the sale of products funded
by the grants. Until 2003, Galil received grants from the Office
of the Chief Scientist, including the Magnet Division, for the
financing of a portion of different development programs for its
cryoablation products. Therefore, Endocare and Galil are
required to notify the OCS of the proposed Merger. Galil sent a
notice to the OCS in that respect on December 4, 2008.
Endocare has agreed in writing to observe strictly all the
requirements of the Israel Research and Development Law and the
regulations, rules and procedures promulgated thereunder, as
applied to Galil and as directed by the Israeli Research
Committee, in particular those requirements relating to the
prohibitions on the transfer of know-how
and/or
production rights and, as a shareholder of Galil, to make all
reasonable efforts that Galil shall observe strictly all such
requirements. Galil further confirmed to the OCS that after the
completion of the Merger Galil will continue to exist as a
subsidiary of Endocare, and accordingly, shall continue to hold
its assets and carry out its business. On December 8, 2008
an approval of receipt of Galils notice to the OCS was
obtained.
Israeli Investment Center in the Israeli Ministry of Industry
and Commence. To the extent that a company has
received benefits from the Israeli Investment Center, its
consent will also be required to the companys acquisition
by a non-Israeli shareholder. The Investment Center, which is
also a part of Israels Ministry of Industry, Trade and
Labor, provides various benefits to Israeli companies including
grants to finance capital investments and tax benefits ranging
from reduced rates of company tax to a full tax holiday for a
fixed period, depending on a number of factors. Galil has also
received tax benefits from the Investment Center, and therefore
Endocare and Galil have agreed to seek the approval of the
Investment Center to the Merger. Galil filed an application with
the Investment Center in that respect on December 4, 2008.
On January 13, 2009 the Investment Center granted its
approval in principle for the Merger.
Israeli Securities Authority. Endocare
requires an exemption, pursuant to Section 15D of the
Israeli Securities Law, 1968, from the requirement to publish a
prospectus in respect of the assumption by Endocare of the Galil
share options granted to employees of Galil. On
December 11, 2008, the Israeli Securities Authority granted
this exemption. In order to comply with the terms of the
exemption, Endocare will be required to make copies of the
relevant share option plans and related SEC filings available to
Israeli employees of Galil, and, upon demand, to provide Hebrew
translations of these documents. One of the conditions to the
exemption is that the closing of the Merger occurs by
March 31, 2009. If the closing of the Merger does not occur
by such date, Endocare will have to apply again to the Israeli
Securities Authority in that respect.
Israeli Restrictive Practices Law. Under
Israels Restrictive Trade Practices Law 1988, a Merger
which meets certain conditions is subject to the approval of the
Director of Restrictive Trade Practices. However, because
Endocare does not conduct business in Israel, Endocare and Galil
believe that the Merger will be exempt from the requirement to
obtain the consent in connection with the Merger.
Endocare and Galil are not aware of any other regulatory
approvals or actions that are required to effect the Merger. If
any additional governmental approvals or actions are required,
we intend to try to obtain them. We cannot assure you, however,
that we will be able to obtain any required approvals or actions.
54
Appraisal
Rights
Israeli law does not afford Galils shareholders any
appraisal rights in connection with the Merger. Endocares
stockholders are also not entitled to appraisal rights in
connection with the Merger.
Material
United States Federal Income Tax Consequences of the
Merger
The following is a general discussion of the material United
States federal income tax consequences of the Merger to the
U.S. Holders (as defined below) of Galil ordinary shares,
and to Endocare, Orange Acquisitions Ltd. and Galil. This
discussion is based on the opinion of Gibson, Dunn &
Crutcher LLP, counsel to Endocare. A U.S. Holder is defined
as:
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a citizen or resident of the United States;
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a corporation created or organized in the United States or under
the laws of the United States or of any political subdivision
thereof;
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an estate whose income is includible in gross income for United
States federal income tax purposes regardless of its
source; or
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a trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have the authority to control all
substantial decisions of the trust.
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If a partnership (including for this purpose any entity treated
as a partnership for United States federal income tax purposes)
is a beneficial owner of Galil shares, the treatment of a
partner in the partnership will generally depend upon the status
of the partner and upon the activities of the partnership.
Partnerships and partners in such partnerships should consult
their tax advisors about the United States federal income tax
consequences of participating in the Merger.
The discussion is based upon current provisions of the Code,
existing regulations promulgated under the Code and current
administrative rulings and court decisions, all of which are
subject to change, possibly with retroactive effect. No attempt
has been made to comment on all United States federal income tax
consequences of the Merger that may be relevant to particular
holders, including holders that are subject to special tax
rules, for example, dealers in securities,
non-U.S. Holders,
banks, mutual funds, insurance companies, financial services
entities, tax-exempt entities, and holders who do not hold their
shares as capital assets, who acquired their shares through
stock option or stock purchase programs or otherwise as
compensation, who are subject to alternative minimum tax, or who
hold their shares as part of a hedge, straddle or other risk
reduction transaction and persons who hold, directly,
constructively or by attribution, 5% or more of either the total
voting power or total value of the capital stock of Endocare
immediately after the Merger, or 10% or more of the total voting
power of the capital stock of Endocare at any time.
U.S. Holders of Galil ordinary shares are advised to
consult their own tax advisors regarding the United States
federal income tax consequences of the Merger in light of their
personal circumstances and the consequences under applicable
state, local and foreign tax laws.
Endocare has received from its counsel, Gibson, Dunn &
Crutcher LLP, an opinion to the effect that the Merger will be
treated for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the
Code. In rendering its opinion, Gibson, Dunn &
Crutcher LLP relied upon representations made by Galil, Endocare
and Orange Acquisitions Ltd.
Assuming the Merger is treated as a reorganization within the
meaning of Section 368(a) of the Code, no gain or loss will
be recognized for United States federal income tax purposes by
Endocare, Orange Acquisitions Ltd. or Galil as a result of the
Merger. A U.S. Holder of Galil shares will not recognize
gain or loss on the exchange of Galil shares for Endocare common
stock pursuant to the Merger for United States federal income
tax purposes. The aggregate tax basis of the Endocare common
stock received by a U.S. Holder of Galil shares will be the
same as the aggregate tax basis of the shares surrendered
therefor. The holding period of the Endocare common stock will
include the holding period of the Galil shares surrendered
therefor, provided that the Galil shares are held as capital
assets at the time of the Merger.
55
Notwithstanding the foregoing, if Galil is or has been a Passive
Foreign Investment Company (PFIC) at any time since
1986, the exchange of Galil shares for Endocare common stock
pursuant to the Merger may constitute a taxable transaction for
United States federal income tax purposes. In general, under
Section 1297 of the Code, a foreign corporation may be a
PFIC if 75% or more of its gross income is passive or if at
least 50% of its assets produce or are held for the production
of passive income. Galil does not believe that it is or has been
a PFIC for any tax year to date. Even if Galil is or has been a
PFIC, certain exceptions under proposed Treasury regulations may
exempt the exchange of Galil shares for Endocare common stock
from taxation. U.S. Holders are urged to consult their tax
advisors regarding the specific tax consequences if Galil is or
was a PFIC.
Tax Implications of Holding Endocare Common
Stock. A U.S. Holder of Endocare common
stock will be required to include in gross income as dividend
income the amount of any distributions (including constructive
distributions) paid on the Endocare common stock on the date
such distribution is received to the extent such distributions
are paid out of Endocares current or accumulated earnings
and profits. Distributions in excess of such earnings and
profits will be applied against and will reduce the
U.S. Holders basis in the Endocare common stock and,
to the extent in excess of such basis, will be treated as gain
from the sale or exchange of the Endocare common stock. In
general, dividends paid on the Endocare common stock to a
corporate U.S. Holder will qualify for the
dividends-received deduction. The dividends-received deduction
is subject to certain holding period, taxable income and other
limitations.
Dividends received by a non-corporate U.S. Holder during
taxable years beginning on or before December 31, 2010 will
be taxed at a maximum rate of 15%, provided that the
U.S. Holder held the stock for more than 60 days
during the
121-day
period beginning 60 days before the ex-dividend date and
certain other requirements are met. Dividends received by
non-corporate U.S. Holders in taxable years beginning after
December 31, 2010 will be subject to tax at ordinary income
rates.
For United States federal income tax purposes, a
U.S. Holder will recognize taxable gain or loss on any
sale, exchange or other disposition of Endocare common stock in
an amount equal to the difference between the United States
dollar value of the amount realized on such sale, exchange or
other disposition and such U.S. Holders basis in such
shares. Any such gain or loss will be capital gain or loss and
will be long-tem capital gain or loss if the stock is held for
more than one year. The deductibility of capital losses is
subject to limitations. Any gain or loss generally will be
treated as United States source income or loss for United States
foreign tax credit purposes.
U.S. HOLDERS OF GALIL ORDINARY SHARES SHOULD CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM
FROM THE MERGER AND FROM HOLDING ENDOCARE COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE
TAX LAWS.
Material
Israeli Tax Consequences of the Merger
The following is a summary discussion of certain Israeli tax
considerations in connection with the consummation of the
Merger. The following summary is based upon the Israeli Income
Tax Ordinance [New Version] 1961, as amended and other laws and
regulations, all as in effect as of the date hereof. No
assurance can be given that future legislation, regulations or
interpretations will not significantly change the tax
considerations described below, and any such change may apply
retroactively. This summary does not discuss all aspects of
Israeli tax consequences which may apply to particular holders
of Galil ordinary shares in light of their particular
circumstances, such as investors subject to special tax rules or
other investors referred to below. Holders of Galil ordinary
shares should consult their own tax advisors as to the Israeli
tax consequences applicable to them of the Merger.
Sale of Galil Shares. In general, under the
Israeli Income Tax Ordinance [New Version], 1961 and the rules
and regulations promulgated thereunder (the Tax
Ordinance), the disposition of shares of an Israeli
company is generally deemed to be a sale of capital assets,
unless such shares are held for the purpose of trading. The Tax
Ordinance generally imposes a capital gains tax on the sale of
capital assets located in Israel, including shares in an Israeli
resident company, by both residents and non-residents of Israel,
unless a specific exemption is available or unless a double
taxation prevention treaty between Israel and the sellers
country of residence provides otherwise.
56
Under the Tax Ordinance, the tax rate applicable to capital
gains derived from the disposition of Galil shares in the Merger
is generally 20% for Israeli individuals, unless such
shareholder claims a deduction for financing expenses in
connection with such shares, in which case the gain will
generally be taxed at a rate of 25%. Additionally, if such
shareholder is considered a Significant Shareholder
at any time during the twelve-month period preceding such
disposition (i.e., such shareholder holds directly or
indirectly, including with others, at least 10% of any means of
control in Galil) the tax rate will be 25%. Companies are
subject to a 25% tax rate on capital gains derived from the
disposition of Galil shares. However the foregoing tax rates
will not apply to dealers in securities. In addition, for
shareholders who acquired their Galil shares prior to
January 1, 2003, the aforementioned tax rates will apply
only to a proportionate part of the gain, in accordance with the
holding periods of the Galil shares, before and after
January 1, 2003, on a linear basis. Accordingly, the
proportionate part of the gain corresponding to the holding
period of the Galil shares after January 1, 2003 and until
their disposition will be subject to the above tax rates, while
the proportionate part of the gain corresponding to the holding
period of the Galil shares prior to January 1, 2003 will be
subject to the applicable marginal tax rate (currently up to 47%
and expected to be reduced to up to 46% for the 2009 tax year)
for Galil shareholders who are individuals, or the corporate tax
rate (currently 27% and expected to be reduced to 26% for the
2009 tax year) for Galil shareholders which are companies.
As mentioned above, certain capital gains tax exemptions
provided under the Tax Ordinance or certain reduced tax rates on
capital gains tax provided under applicable double taxation
prevention treaties to which Israel is party may provide relief
for certain Galil shareholders from Israeli capital gains tax on
any gain derived by such shareholders on the disposition of
Galil shares in the Merger. Galil shareholders should consult
their tax advisors regarding the tax consequences of the Merger
to them and the applicability of any such tax exemption or tax
relief.
Israeli Withholding Tax. In some instances
where Galil shareholders may be liable for Israeli tax on the
disposition of their Galil shares, the payment of the Merger
consideration may be subject to the deduction of Israeli tax at
source.
Endocare and Galil have agreed that Galil will file with the
Israeli tax authority, or ITA, one or more applications for the
receipt of one or more tax rulings that (A) provide for a
full exemption from withholding requirements as a result of a
deferral of Israeli income tax pursuant to Section 104H of
the Tax Ordinance, or (B) to the extent that the exemption
mentioned above does not apply, that either: (x) exempts
Endocare from any obligation to withhold Israeli tax at source
from any consideration payable or otherwise deliverable pursuant
to the Merger Agreement, or clarifies that no such obligation
exists; or (y) clearly instructs Endocare how and when such
withholding at source is to be performed, and the rate or rates
of withholding to be applied. Notwithstanding the above, no
withholding or a reduced rate of withholding, as applicable,
under Israeli tax law will be made from any consideration
payable under the Merger Agreement to a Galil shareholder to the
extent that such Galil shareholder has provided Endocare, prior
to the time such payment is made, with an appropriate
unequivocal exemption from withholding of Israeli tax issued by
the ITA confirming that no withholding of Israeli tax is
required with respect to the particular Galil shareholder in
question.
In addition, Endocare and Galil have agreed that Galil will file
with the ITA one or more applications for the receipt of one or
more tax rulings, if applicable, that provide that payments out
of the indemnity escrow fund shall not be subject to Israeli tax
until actually received by the persons entitled thereto, subject
to the terms and periods set forth in such ruling.
Receipt of these tax rulings is a condition to close the Merger.
The parties are obligated under the Merger Agreement to
cooperate with one another in obtaining these tax rulings.
Shares Issued as Compensation for Employment or
Service. Shareholders who received or acquired
their Galil shares under one or more of Galils incentive
plans, or otherwise as compensation for employment or services
provided to Galil or any of its affiliates, may be subject to
different tax rates. Because individual circumstances may
differ, any such holders of Galil shares should consult their
own tax advisors as to the Israeli tax consequences applicable
to them.
Endocare and Galil have agreed that Galil will file with the ITA
one or more applications for the receipt of one or more tax
rulings that will confirm that the assumption of Galil share
options (whether vested or unvested) under
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the Merger Agreement will not result in a requirement for an
immediate Israeli tax payment and that the statutory trust
period under Section 102 of the Tax Ordinance for any Galil
share options that are assumed by Endocare will continue
uninterrupted from the original date of grant of such Galil
share options and will not recommence as a result of the the
Merger; which ruling may be subject to customary conditions
regularly associated with such a ruling. In the event that such
pre-ruling from the ITA is not obtained prior to the closing of
the Merger, the payment at the closing of the Merger of the
consideration to such holders of options shall be subject to
deduction of Israeli tax at the source, at the rate set under
applicable law, unless the ITA provides for an extension of time
with respect to the obligation to deduct or withhold Israeli tax
at source from such consideration in order to allow for the
receipt of this tax ruling after closing of the Merger. An
application in that respect was filed by Galil with the ITA on
December 17, 2008.
Anticipated
Accounting Treatment
Upon consummation of the Merger and the concurrent Financing and
attributing ownership to Galils shareholders of the Escrow
Shares, existing Endocare stockholders will own approximately
38.5% of Endocares outstanding shares of common stock and
the shareholders of Galil will own approximately 61.5% of
Endocares outstanding shares of common stock. As a result,
the Merger will be accounted for as a reverse acquisition and
equity recapitalization in accordance with U.S. generally
accepted accounting principles.
For accounting purposes, Galil is considered to be acquiring
Endocare in this transaction by issuing stock for the net assets
of Endocare. The combined entitys results of operations
prior to completion of the Merger will be those of Galil. The
assets and liabilities and results of operations of Endocare
will be consolidated into the results of operations of Galil as
of the effective time of the Merger. The net assets of Endocare,
including intangible assets and goodwill (if any) will be stated
at their fair value determined at the acquisition date based
upon a valuation to be completed at that time.
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THE
MERGER AGREEMENT
The following summary describes certain material provisions
of the Merger Agreement entered into by Endocare, Merger Sub and
Galil, a copy of which is attached as Annex A hereto and
incorporated herein by reference. This summary may not contain
all of the information about the Merger Agreement that is
important to Endocare stockholders or Galil shareholders, and
Endocare stockholders and Galil shareholders are encouraged to
read the Merger Agreement carefully and in its entirety. The
legal rights and obligations of the parties are governed by the
specific language of the Merger Agreement and not this
summary.
The
Merger
The Merger Agreement provides for the merger of Merger Sub with
and into Galil. As a result of the Merger, Merger Sub will cease
to exist and Galil will continue as the corporation surviving
the Merger (the Surviving Company). After the
Merger, the Surviving Company will be a wholly owned subsidiary
of Endocare and the former Galil shareholders will not have any
equity ownership interest in the Surviving Company.
Closing
and Effectiveness of the Merger
The closing of the Merger (the Closing) is expected
to take place on the third business day following the
satisfaction or, to the extent permitted under the Merger
Agreement and by applicable law, waiver of all conditions to the
obligations of the parties set forth in the Merger Agreement and
described below (other than such conditions as may, by their
terms, only be satisfied at the Closing or on the Closing Date,
subject to such satisfaction or waiver thereof) (see
Conditions to Completion of the Merger below), or on
such other date as Endocare and Galil mutually agree in writing.
The day on which the Closing takes place is referred to as the
Closing Date.
Merger Sub and Galil are required to deliver to the Registrar of
Companies of the State of Israel (the Israeli Companies
Registrar) a notice of the contemplated Merger and the
proposed Closing Date on which the Israeli Companies Registrar
is requested to issue a certificate evidencing the Merger in
accordance with the Israeli Companies Law (the Merger
Certificate) after notice that the Closing has occurred is
served to the Israeli Companies Registrar. The Merger will
become effective only upon issuance of the Merger Certificate by
the Israeli Companies Registrar (the Effective Time).
Merger
Consideration
At the Effective Time, each outstanding ordinary share of Galil
will be converted into the right to receive the number of shares
of Endocare common stock equal to the product of
(1) the sum of the number of shares of Endocare common
stock outstanding and the number of shares of Endocare common
stock subject to in-the-money options immediately prior to the
effective time of the Merger and (2) the exchange ratio of
0.923077, divided by the total number of Galil ordinary
shares outstanding and the number of ordinary shares of Galil
subject to in-the-money options immediately prior to the
Effective Time (the Merger Consideration). The exact
conversion ratio cannot be calculated until immediately prior to
the Effective Time, but it is expected that approximately
33.0 ordinary shares of Galil will be converted into one
share of Endocare common stock. All of the shares of Galil
preferred stock will be converted to ordinary shares immediately
prior to the Effective Time pursuant to the Galil Pre-Closing
Shareholders Agreement described below.
Fractional
Shares
No fractional shares of Endocares common stock will be
issued in connection with the Merger. The aggregate number of
shares which each holder of Galil shares is entitled to receive
in the Merger will be rounded down to the nearest whole share
and such shareholder will not be entitled to any rights with
respect to any fractional share or any cash in lieu thereof.
Galil
Share Options
At the Effective Time, unless otherwise agreed by Endocare and
any affected Galil share option holder, each outstanding option
to purchase Galil ordinary shares issued pursuant to the Galil
1997 Option Plan, the Galil
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2000 Share Option Plan and the Galil 2003 Share Option
Plan (whether vested or unvested) will be converted into an
option to purchase, on the same terms and conditions as such
Galil share option, a number of shares of Endocare common stock
equal to the number of shares of Endocare common stock (rounded
up to the nearest whole share) that the holder of such Galil
share option would have been entitled to receive in the Merger
had such holder exercised such Galil share option immediately
prior to the Effective Time, at an exercise price per share of
Endocare common stock (rounded down to the nearest whole cent)
equal to (x) the aggregate existing exercise price for
Galil shares purchasable pursuant to such Galil share option
divided by (y) the number of shares of Endocare common
stock for which Galil share option will become exerciseable.
Endocare is obligated under the Merger Agreement to take all
corporate action necessary to reserve for issuance a sufficient
number of shares of Endocare common stock for delivery upon
exercise of Galil share options assumed pursuant to the Merger
Agreement. As soon as practicable after the Effective Time,
Endocare has agreed that if no registration statement is in
effect covering the shares of Endocare common stock issuable
upon exercise of Galil share options under the Merger Agreement,
it will file a registration statement on
Form S-8
with respect to the shares of Endocare common stock issuable
upon exercise of such Galil share options to the extent
registrable on
Form S-8
and has further agreed to maintain the effectiveness of such
registration statement for so long as such Galil share options
remain outstanding.
At or prior to the Effective Time, Galil has agreed, to the
extent necessary, to cause to be effected, in a manner
reasonably satisfactory to Endocare, amendments to Galils
share incentive plans and any other documents governing Galil
share options to give effect to the provisions of the Merger
Agreement affecting such Galil share options.
Exchange
Fund
The Merger Agreement provides that, at the Effective Time,
Endocare will deposit with the exchange agent the shares of
Endocares common stock issuable to Galils
shareholders and any dividends or other distributions to which
holders of such stock certificates may be entitled. It is
currently contemplated that the exchange agent will be
Computershare, Endocares transfer agent.
Exchange
of Galil Stock Certificates for the Merger
Consideration
The Merger Agreement provides that, as soon as practicable after
the Effective Time, the exchange agent will mail to each record
holder of Galil ordinary shares immediately prior to the
Effective Time a letter of transmittal and instructions for
surrendering and exchanging the record holders Galil share
certificates. Upon surrender of a Galil share certificate for
exchange to the exchange agent, together with a duly signed
letter of transmittal, and such other documents as the exchange
agent may reasonably require, the holder of the Galil share
certificate will be entitled to receive the following:
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a certificate representing the number of shares of
Endocares common stock that such holder has the right to
receive pursuant to the provisions of the Merger
Agreement; and
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dividends or other distributions, if any, to which they are
entitled under the terms of the Merger Agreement.
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All Galil share certificates surrendered will be cancelled.
At the Effective Time, all holders of certificates representing
Galil shares that were outstanding immediately prior to the
Effective Time will cease to have any rights as shareholders of
Galil. In addition, no transfer of Galil shares after the
Effective Time will be registered on the share transfer books of
Galil.
If any Galil share certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
person claiming such certificate to be lost, stolen or destroyed
and, if required by Endocare or the exchange agent, the posting
by such person of a bond in such reasonable amount as Endocare
or the exchange agent may direct as indemnity against any claim
that may be made against it with respect to such certificate,
the exchange agent will issue in exchange for such lost, stolen
or destroyed certificate, and delivery of the other documents
required by the Merger Agreement, the shares of Endocares
common stock and any unpaid dividends and distributions on such
shares of Endocares common stock.
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Escrow
Deposits
At the Closing, Endocare will deposit with Deutsche Bank
National Trust Company, as escrow agent, a number of shares
of Endocare common stock equal to 7.5% of the total number of
shares of Endocare common stock comprising the aggregate Merger
Consideration rounded down to the nearest whole share (the
Indemnity Escrow Fund), for the purpose of
satisfying any indemnification obligations arising under the
Merger Agreement (see Survival; Indemnification
below).
Shareholder
Representative
Pursuant to the Merger Agreement, Galils shareholders must
maintain a representative at all times for purposes of taking
certain actions and giving certain consents on behalf of the
Galil shareholders, as specified in the Merger Agreement (the
Shareholder Representative). Pursuant to the Major
Shareholders Agreement, the shareholder parties appointed
Thomas, McNerney Representative, LLC, as the initial Shareholder
Representative, and immediately upon the approval of the Merger
Agreement by the requisite vote or written consent of
Galils shareholders, each other Galil shareholder will be
deemed to have consented to such appointment.
Representations
and Warranties
The Merger Agreement contains customary representations and
warranties of the parties. These include representations and
warranties of Galil with respect to, among other things:
organization and qualification; authority; capitalization;
equity interests; financial statements; absence of undisclosed
liabilities; absence of certain changes or events; compliance
with laws; permits; litigation; benefit plans; labor and
employment matters; title, sufficiency and condition of assets;
real property; intellectual property; tax matters; environmental
matters; material contracts; customers and suppliers;
warranties; accounts receivable; accounts payable; grants,
incentives and subsidies; affiliate interests and transactions;
health care regulatory compliance; insurance; and brokers. The
Merger Agreement also contains customary representations and
warranties of Endocare and Merger Sub, including among other
things: organization and qualification; authority; application
of anti-takeover protections; capitalization; SEC reports;
financial statements; absence of undisclosed liabilities;
absence of certain changes or events; litigation; compliance
with applicable law; intellectual property; health care
regulatory compliance; tax matters; material contracts;
customers and suppliers; affiliate interests and transactions;
and brokers fees. The representations and warranties of
Endocare and Merger Sub contained in the Merger Agreement expire
with and are terminated and extinguished upon, the Effective
Time. The representations and warranties of Galil contained in
the Merger Agreement survive for the escrow period.
The representations, warranties and covenants made by Endocare
and Merger Sub in the Merger Agreement are qualified by
information contained in a disclosure schedule delivered to
Galil in connection with the execution of the Merger Agreement,
or Endocares SEC reports filed prior to the date thereof.
The representations, warranties and covenants made by Galil in
the Merger Agreement are qualified by information contained in a
disclosure schedule delivered to Endocare and Merger Sub in
connection with the execution of the Merger Agreement. Endocare
stockholders and Galil shareholders are not third party
beneficiaries under the Merger Agreement and should not rely on
the representations, warranties and covenants or any
descriptions thereof as characterizations of the actual state of
facts or condition of Endocare or Galil or any of their
respective affiliates.
Covenants
Relating to the Conduct of Business of Endocare and
Galil
Covenants
Relating to the Conduct of Galils Business
Between November 10, 2008, the date of execution of the
Merger Agreement (the Execution Date), and the
Closing Date, unless Endocare otherwise consents in writing
(which consent may not be unreasonably withheld, conditioned or
delayed), Galil has agreed that its business and the business of
its subsidiaries will be conducted materially in the ordinary
course of business consistent with past practice; and Galil
will, and will cause each of its subsidiaries to, preserve
substantially intact the business organization, use commercially
reasonable efforts to preserve substantially intact its assets
and the assets of its subsidiaries, and to keep available the
services of its current officers and key employees and
consultants and to preserve its current relationships with
customers, suppliers and other persons with which Galil or any
of its subsidiaries has significant business relations. Galil
has
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also agreed not to undertake certain other actions during the
period between the Execution Date and the Closing Date, without
the prior written consent of Endocare (which consent may not be
unreasonably withheld, conditioned or delayed), including the
following:
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except for an amendment to the articles of association of Galil
in the form previously agreed to among Endocare and Galil, amend
or otherwise change its memorandum of association, articles of
association, certificate of incorporation or bylaws or
equivalent organizational documents;
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issue, sell, pledge, dispose of or otherwise subject to any
encumbrance (i) any shares of Galil or any of its
subsidiaries, or any options, warrants, convertible securities
or other rights to acquire any such shares, or any other
ownership interest in Galil or any of its subsidiaries, other
than the issuance of Galil ordinary shares upon
(A) exercise of Galil share options outstanding on the
Execution Date, pursuant to the terms thereof, and
(B) conversion of Galil preferred shares outstanding on the
date of the Merger Agreement, pursuant to the articles of
association of Galil, or (ii) any properties or assets of
Galil or any of its subsidiaries, other than sales or transfers
of inventory in the ordinary course of business consistent with
past practice;
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declare, set aside, make or pay any dividend or other
distribution, or make any other payment on or with respect to
any of its outstanding shares, except for dividends by any
direct or indirect wholly owned subsidiary of Galil to Galil;
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acquire any entity or division thereof or any material assets
not in the ordinary course of business consistent with past
practice, or enter into any joint venture, strategic alliance,
exclusive dealing, noncompetition or similar contract;
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adopt or recommend a plan of complete or partial liquidation,
dissolution, merger (except for the Merger), consolidation,
restructuring, recapitalization or other reorganization of Galil
or any of its subsidiaries, or otherwise alter Galils or a
subsidiarys corporate structure;
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incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise become
responsible for, the obligations of any entity, or make any
loans or advances, except (i) borrowings, guarantees,
endorsements or advances in the ordinary course of business
consistent with past practice, provided that any increase in an
existing credit line or other existing indebtedness greater than
$2,500,000 will be deemed not in the ordinary course of
business, and (ii) any additional financing in an amount up
to $3,000,000 (less any increase in any existing credit line or
other existing indebtedness on or after the Execution Date
pursuant to clause (i)), provided that (x) Galil will
consult with Endocare on the terms of any such financing, and
such financing will be subject to customary terms for such
financings, (y) except to the extent such terms are
contingent upon termination of the Merger Agreement, such
borrowed funds may not be convertible into or exchangeable for
any equity securities of Galil or its subsidiaries and will have
no prepayment penalties, and (z) any such additional
financing under this clause (ii) that is provided by
existing Galil shareholders or their affiliates will be repaid
out of the proceeds of the Financing;
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amend, waive, modify or consent to the termination of any
material contract, or any of its rights thereunder, or enter
into any contract that would be a material contract, except in
the ordinary course of business consistent with past practice;
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authorize, or make any commitment with respect to, any single
capital expenditure that is in excess of $100,000 or capital
expenditures that are, in the aggregate, in excess of $250,000
for Galil and its subsidiaries taken as a whole;
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enter into (i) any lease of real property or any renewals
thereof, or (ii) any lease of personal property involving a
term of more than one year or rental obligation exceeding
$100,000 per year in any single case or in excess of $250,000 in
the aggregate;
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increase the compensation payable or to become payable or the
benefits provided to its directors, officers, employees or
consultants, except (i) for normal merit and cost-of-living
increases consistent with past practice in salaries or wages of
employees of Galil or any of its subsidiaries who are not
directors or officers of Galil or any of its subsidiaries,
(ii) in accordance with the terms of the agreements with
such directors,
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officers, employees or consultants existing on the Execution
Date, or (iii) for any benefit package disclosed to
Endocare as of the Execution Date;
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grant any severance or termination payment (except for payments
in accordance with agreements existing on the Execution Date,
and statutory payments required by Israeli law) to, or pay, loan
or advance any amount to, any director, officer, employee or
consultant of Galil or any of its subsidiaries, or establish,
adopt, enter into or amend any employee benefit or incentive
plan (except where required by the terms of an existing employee
benefit plan or by applicable law) or enter into any other plan
for the benefit of the employees, directors or service providers
of Galil or its subsidiaries;
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make any change in any method of accounting or accounting
practice or policy, except as required by GAAP;
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pay, discharge or satisfy any claim or other liability, other
than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice, of liabilities
reflected or reserved against on Galils balance sheet or
subsequently incurred in the ordinary course of business
consistent with past practice;
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commence or settle any legal action, or cancel, compromise,
waive or release any right or claim other than in the ordinary
course of business consistent with past practice;
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permit the lapse of any material right relating to intellectual
property used in the business of Galil or any of its
subsidiaries;
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take any action, or intentionally fail to take any action, that
is reasonably likely to result in any representation or warranty
made by Galil in the Merger Agreement, the Escrow Agreement, the
voting agreements entered into in connection with the Merger
Agreement or the Major Shareholders Agreement (collectively, the
Ancillary Agreements) to be untrue or result in a
breach of any covenant made by Galil in the Merger Agreement or
any Ancillary Agreement, or that has or would reasonably be
expected to have a Material Adverse Effect (as such term is
defined below and in the Merger Agreement) on Galil, except, in
every case, as may be required by applicable law;
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except for approval of the Merger by Galils shareholders,
the approval of the amendment to Galils articles of
association as contemplated in the Merger Agreement (for which
Galil has received irrevocable proxies sufficient for such
approval), take any action requiring the approval of
Galils shareholders representing at least a majority of
the holders of Galil ordinary shares, Preferred
A-1 Shares
or Preferred
A-2 Shares; or
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announce an intention, enter into any formal or informal
agreement, or otherwise make a contract to do any of the
foregoing.
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Covenants
Relating to the Conduct of Endocares
Business
Between the Execution Date and the Closing Date, unless Galil
otherwise consents in writing (which consent may not be
unreasonably withheld, conditioned or delayed), Endocare has
agreed that its business and the business of its subsidiaries
will be conducted materially in the ordinary course of business
consistent with past practice; and Endocare will, and will cause
each of its subsidiaries to, preserve substantially intact the
business organization, use commercially reasonable efforts to
preserve substantially intact its assets and the assets of its
subsidiaries, and to keep available the services of its current
officers and key employees and consultants and to preserve its
current relationships with customers, suppliers and other
persons with which Endocare or any of its subsidiaries has
significant business relations. Endocare has also agreed not to
undertake certain other actions during the period between the
Execution Date and the Closing Date, without the prior written
consent of Galil (which consent may not be unreasonably
withheld, conditioned or delayed), including the following:
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amend its certificate of incorporation or bylaws, except that
Endocare may amend its certificate of incorporation to provide
for a reverse stock split of the Endocare common stock, provided
that Endocare consult with Galil on the terms of any such
amendment, which terms must be reasonably satisfactory to Galil;
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issue, sell, pledge, dispose of or otherwise subject to any
encumbrance (i) any shares of Endocare capital stock, or
any options, warrants, convertible securities or other rights to
acquire any such shares, or any other
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ownership interest in Endocare, other than the issuance of
Endocare common stock upon exercise of Endocare stock options
outstanding on the Execution Date, pursuant to the terms
thereof, or (ii) any properties or assets of Endocare,
other than sales or transfers of inventory in the ordinary
course of business consistent with past practice;
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acquire any entity or division thereof or any assets not in the
ordinary course of business consistent with past practice, or
enter into any joint venture, strategic alliance, exclusive
dealing, noncompetition or similar contract;
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adopt or recommend a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of Endocare, or
otherwise alter Endocares corporate structure;
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incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise become
responsible for, the obligations of any person or entity, or
make any loans or advances, except borrowings, guarantees,
endorsements or advances in the ordinary course of business
consistent with past practice, provided that any increase in an
existing credit line or other existing indebtedness greater than
$2,500,000 will be deemed not in the ordinary course of business;
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amend, waive, modify or consent to the termination of any
Endocare Material Contract (as such term is defined in the
Merger Agreement), or any of its rights thereunder, or enter
into any contract that would be a Endocare Material Contract (as
such term is defined in the Merger Agreement), except in the
ordinary course of business consistent with past practice;
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authorize, or make any commitment with respect to, any single
capital expenditure that is in excess of $100,000 or capital
expenditures that are, in the aggregate, in excess of $250,000;
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enter into (i) any lease of real property or any renewals
thereof, or (ii) any lease of personal property involving a
term of more than one year or rental obligation exceeding
$100,000 per year in any single case or in excess of $250,000 in
the aggregate;
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increase the compensation payable or to become payable or the
benefits provided to its directors, officers, employees or
consultants, except for normal merit and cost-of-living
increases consistent with past practice in salaries or wages of
employees of Endocare who are not directors or officers of
Endocare, or grant any severance or termination payment (except
in accordance with agreements of Endocare existing on the
Execution Date) to, or pay, loan or advance any amount to, any
director, officer, employee or consultant of Endocare, or
establish, adopt, enter into or amend any existing benefit plan
or enter into any other plan for the benefit of the employees,
directors or service providers of Endocare;
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make any change in any method of accounting or accounting
practice or policy, except as required by GAAP;
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pay, discharge or satisfy any claim or other liability, other
than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice, of liabilities
reflected or reserved against on Endocares balance sheet
or subsequently incurred in the ordinary course of business
consistent with past practice;
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commence or settle any legal action, or cancel, compromise,
waive or release any right or claim other than in the ordinary
course of business consistent with past practice;
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take any action, or intentionally fail to take any action, that
is reasonably likely to result in any representation or warranty
made by Endocare or Merger Sub in the Merger Agreement or any
Ancillary Agreement to be untrue or result in a breach of any
covenant made by Endocare or Merger Sub in the Merger Agreement
or any Ancillary Agreement, or that has or would reasonably be
expected to have a Material Adverse Effect (as such term is
defined below and in the Merger Agreement) on Endocare, except,
in every case, as may be required by applicable law;
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declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, or
make any other payment on or with respect to any of its capital
stock;
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take any action requiring the approval of Endocares
stockholders representing at least a majority of the shares of
Endocare common stock; or
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announce an intention, enter into any formal or informal
agreement, or otherwise make a contract to do any of the
foregoing.
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Form S-4
and Proxy Statement/Prospectus
Pursuant to the Merger Agreement, Endocare has agreed to use its
commercially reasonable efforts to cause this proxy/prospectus
to be mailed to the holders of Endocare common stock and Galil
has agreed to use commercially reasonable efforts to cause this
proxy statement/prospectus to be mailed to its shareholders, in
each case, as promptly as practicable after the
Form S-4
is declared effective under the Securities Act. If, at any time
prior to the Effective Time, any information relating to
Endocare or Galil, or any of their respective affiliates, or
their respective officers or directors, is discovered by
Endocare or Galil, as applicable, and such information should be
set forth in an amendment or supplement to the
Form S-4
or this proxy statement/prospectus so that such documents would
not include any misstatement of a material fact or omit to state
any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, the party discovering such information has agreed to
promptly notify the other party and, to the extent required by
law, an appropriate amendment or supplement describing such
information will be promptly filed with the SEC and disseminated
to Endocares stockholders and Galils shareholders.
Endocare
Stockholder Approval
Pursuant to the Merger Agreement, Endocare is obligated to take
all lawful action to call, give notice of, convene and hold a
meeting of its stockholders as promptly as practicable, but in
no event later than 40 days after the date the
Form S-4
is declared effective by the SEC, to consider and vote for the
approval pursuant to the Merger Agreement of the issuance of
shares of Endocare common stock in connection with the Merger
and the other Transactions. Subject to its rights under the
Merger Agreement to change its recommendation under certain
circumstances (see Exclusivity below), the board of
directors of Endocare has agreed to recommend such approval and
to take all lawful action, consistent with its fiduciary duties,
to solicit the approval of Endocares stockholders in favor
of the issuance of shares of Endocare common stock in the Merger
and the Financing.
Galil
Shareholder Approval
Galil has agreed to take, in accordance with applicable law and
its charter documents, all action necessary to convene a general
meeting of its shareholders and separate meetings of the holders
of each class or series of company shares as promptly as
practicable, but in no event later than 40 days after the
date the
Form S-4
is declared effective by the SEC, to consider and vote for the
approval of the Merger Agreement, the Merger and the
transactions contemplated thereby. The board of directors of
Galil has agreed to recommend such approval subject to the
notice requirements of the Israeli Companies Law and the rules
and regulations promulgated thereunder and under Galils
charter documents.
Covenants
Related to Compliance with Israeli Law
Merger
Proposal
Pursuant to the Merger Agreement, each of Galil and Merger Sub
is required to file with the Israeli Companies Registrar,
jointly with the other merging company, a Merger
Proposal setting forth specified details with respect to
the Merger. Each of Galil and Merger Sub have agreed to cause a
copy of its Merger Proposal to be delivered to its secured
creditors, if any, no later than three days after the date on
which such Merger Proposal is delivered to the Israeli Companies
Registrar and to promptly inform its respective non-secured
creditors, if any, of such Merger Proposal and its contents in
accordance with the Israeli Companies Law.
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Israeli
Tax Rulings
Under the Merger Agreement, Galil is obligated to cause its
Israeli counsel or Israeli consultants to prepare and file with
the Israeli tax authority one or more applications, or, in the
case of applications that have previously been filed, to
continue to use its best efforts to diligently pursue in good
faith the receipt from the Israeli tax authority of one or more
rulings:
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providing for a full exemption to Endocare, the exchange agent,
the Surviving Company and its or their agents from withholding
requirements as a result of a deferral of Israeli income tax; or
to the extent that such payers are not fully exempt from
withholding, that either:
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exempts Endocare, the exchange agent, the Surviving Company and
its or their agents from any obligation to withhold Israeli
taxes at source from any consideration payable or otherwise
deliverable pursuant to the Merger Agreement, or clarifies that
no such obligation exists, or
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clearly instructs Endocare, the exchange agent, the Surviving
Company and their agents how and when such withholding at source
is to be performed, and in particular, with respect to the
classes or categories of former holders of Galil shares from
which Israeli tax is to be withheld (if any), and the rate or
rates of withholding to be applied;
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are in form and substance reasonably satisfactory to Endocare
and Galil, confirming that the assumption of Galil options
(whether vested or unvested) will not result in a requirement
for an immediate Israeli tax payment and that the statutory
trust period under the Israeli Tax Ordinance for any Galil
options that are assumed by Endocare will continue uninterrupted
from the original date of grant of such option and will not
recommence as a result of the the Merger and the other
Transactions; and
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if applicable, provides that payments out of the Indemnity
Escrow Fund shall not be subject to Israeli tax until actually
received by the persons entitled such payments under the Merger
Agreement, subject to the terms and periods set forth in such
ruling.
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Endocare has agreed to reasonably cooperate with Galil and its
Israeli counsel, consultants, representatives and other advisors
with respect to the preparation and filing of such applications
and in the preparation of any written or oral submissions that
may be necessary, proper or advisable to obtain the Israeli tax
rulings described above.
Israeli
Securities Exemption
Pursuant to the Merger Agreement, Endocare has agreed to cause
its Israeli counsel to prepare and file with the Israeli
Securities Authority an application for an exemption from the
requirements of the Israeli Securities Law concerning the
publication of a prospectus in respect of the conversion of
Galil options into options to purchase Endocare common stock in
accordance with the provisions of the Merger Agreement. Galil
has agreed to cooperate with all reasonable requests of Endocare
in connection with the preparation and filing of such
application and in the preparation of any written or oral
submissions that may be necessary, proper or advisable to obtain
the Israeli securities exemption. On December 11, 2008, the
Israeli Securities Authority granted this exemption. In order to
comply with the terms of the exemption, Endocare will be
required to make copies of the relevant share option plans and
related SEC filings available to Israeli employees of Galil,
and, upon demand, to provide Hebrew translations of these
documents. One of the conditions to the exemption is that the
closing of the Merger occurs by March 31, 2009. If the
Closing of the Merger does not occur by such date, Endocare will
have to apply again to the Israeli Securities Authority for an
exemption.
Exclusivity;
Change of Recommendation
Except as described in this section, until the earlier of
(i) the termination of the Merger Agreement, and
(ii) the Effective Time, Endocare and Galil have each
agreed that they will not, nor will either of them authorize or
permit any of their subsidiaries or any of their respective
affiliates or representatives to directly or indirectly:
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solicit, initiate, encourage or take any other action designed
to facilitate any inquiries or the making of any proposal or
offer that constitutes, or could reasonably be expected to lead
to, any Acquisition Proposal (as defined below and in the Merger
Agreement), including without limitation (A) approving any
transaction under Section 203 of the Delaware General
Corporation Law or any similar Israeli laws, (B) approving
any
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person or entity becoming an interested stockholder
under Section 203 of the Delaware General Corporation Law
or any similar Israeli laws, and (C) amending or granting
any waiver or release under any standstill or similar agreement
with respect to any of Endocares capital stock or
Galils share capital, respectively; or
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enter into, continue or otherwise participate in any discussions
or negotiations regarding, furnish to any person or entity any
information with respect to, assist or participate in any effort
or attempt by any person or entity with respect to, or otherwise
cooperate in any way with, any Acquisition Proposal.
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Notwithstanding the foregoing, if at any time prior to approval
by Endocares stockholders of the issuance of shares of
Endocare common stock in the Merger, Endocare receives a written
Acquisition Proposal from any person or group (as
defined in Section 13(d) of the Exchange Act) that did not
result from the breach by Endocare of its obligations under the
Merger Agreement, (i) Endocare may contact such person or
group to clarify the terms and conditions thereof and
(ii) if the board of directors of Endocare, or any
committee thereof, determines in good faith, after consultation
with outside legal counsel and a nationally recognized financial
advisor, that such Acquisition Proposal constitutes or could
reasonably be expected to lead to a Superior Proposal (as such
term is defined below and in the Merger Agreement), then
Endocare and its representatives may, (A) furnish
information with respect to Endocare to the person or group
making such Acquisition Proposal and its representatives
pursuant to a customary confidentiality agreement, and
(B) participate in discussions or negotiations with such
person or group and its representatives regarding any Superior
Proposal.
Pursuant to the Merger Agreement and notwithstanding the
foregoing, neither the board of directors of Endocare, nor the
board of directors of Galil, nor any committee thereof is
permitted to:
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except in certain circumstances as described below, withdraw or
modify, or publicly (or in a manner designed to become public)
propose to withdraw or modify, in a manner adverse to the other
party, its approval or recommendation with respect to the Merger
and the other transactions contemplated by the Merger Agreement;
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cause or permit Endocare or Galil, as applicable, to enter into
any letter of intent, memorandum of understanding, agreement in
principle, acquisition agreement, merger agreement or similar
agreement constituting or relating to any Acquisition Proposal
(other than, with respect to Endocare, a confidentiality
agreement under the circumstances described above); or
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adopt, approve or recommend, or propose to adopt, approve or
recommend, any Acquisition Proposal.
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Notwithstanding the foregoing, pursuant to the Merger Agreement,
the board of directors of Endocare may withdraw or modify its
recommendation with respect to the Merger and the other
transactions contemplated by the Merger Agreement if the board
of directors determines in good faith after consultation with
outside counsel that its fiduciary obligations require it to do
so, but only at a time that is prior to approval of the Endocare
stockholders of the shares to be issued in the Merger and the
Financing and after two business days following receipt by Galil
of written notice advising it that the board of directors of
Endocare desires to withdraw or modify the recommendation and,
if such withdrawal is due to the existence of an Acquisition
Proposal, specifying the material terms and conditions of such
Acquisition Proposal and identifying the person or entity making
such Acquisition Proposal. However, Endocare has agreed that it
will not enter into any letter of intent, memorandum of
understanding, agreement in principle, acquisition agreement,
merger agreement or similar agreement constituting or relating
to any Acquisition Proposal (other than a confidentiality
agreement under the circumstances described above); or adopt,
approve or recommend, or propose to adopt, approve or recommend,
any Acquisition Proposal. Endocare and its board of directors
are, however, permitted to take and disclose to Endocares
stockholders a position contemplated by
Rule 14d-9
and 14e-2(a)
under the Exchange Act (or any similar communication to
stockholders in connection with the making or amendment of a
tender offer or exchange offer) and are further permitted to
make any other disclosure to stockholders required by law with
regard to an Acquisition Proposal, including by virtue of the
board of directors fiduciary duties.
Each party has agreed to immediately advise the other party
orally, with written confirmation to follow promptly (and in any
event within 24 hours), of any Acquisition Proposal or any
request for nonpublic information in connection with any
Acquisition Proposal, or of any inquiry with respect to, or that
could reasonably be expected to lead to, any Acquisition
Proposal, the material terms and conditions of any such
Acquisition Proposal or inquiry and the identity of the person
or entity making the Acquisition Proposal or inquiry. Endocare
has agreed not to
67
provide any information to or participate in discussions or
negotiations with a person or entity making a Superior Proposal
until after it has first notified Galil of such Acquisition
Proposal as required by the preceding sentence. Under the terms
of the Merger Agreement, Galil is not permitted to provide any
information to or participate in discussions or negotiations
with any such person or entity under any circumstances.
Contemporaneously with providing any information to a third
party in connection with any Superior Proposal or inquiry,
Endocare is required under the Merger Agreement to furnish a
copy of such information to Galil.
Each of Endocare and Galil have agreed to immediately cease all
discussions and negotiations regarding any proposal that
constitutes, or could reasonably be expected to lead to, an
Acquisition Proposal.
For purposes of this summary and pursuant to the terms of the
Merger Agreement, Acquisition Proposal means any
offer or proposal or related offers or proposals for, or any
indication of interest in, any of the following (other than the
Merger) by any person or entity or group (as defined
in Section 13(d) of the Exchange Act): (i) any direct
or indirect acquisition or purchase of (A) 5% or more of
Galils share capital or the share capital or capital stock
of any of its subsidiaries or (B) 15% or more of
Endocares capital stock, (ii) any acquisition,
license or purchase of assets (other than inventory to be sold
in the ordinary course of business consistent with past
practice) of Endocare, or Galil or any of its subsidiaries,
(iii) any merger, consolidation or other business
combination relating to Endocare, or Galil or any of its
subsidiaries or (iv) any other transaction that would
inhibit, or materially interfere with or delay the consummation
of the Transactions contemplated in the Merger Agreement and the
Ancillary Agreements.
For purposes of this summary and pursuant to the terms of the
Merger Agreement, Superior Proposal means, with
respect to Endocare, any unsolicited, bona fide written
Acquisition Proposal on terms that the board of directors of
Endocare determines in its good faith judgment to be
(A) materially more favorable to Endocares
stockholders than the Merger and the other Transactions, taking
into account all the terms and conditions of such proposal
(including any written counterproposal by Galil to amend the
terms of the Merger Agreement in response to such Acquisition
Proposal or otherwise) and after consultation with outside legal
counsel and a nationally recognized financial advisor, and
(B) reasonably capable of being completed on the terms
proposed, taking into account all financial, regulatory, legal
and other aspects of such proposal; provided, however, that no
Acquisition Proposal will be deemed to be a Superior Proposal if
any financing required to consummate the Acquisition Proposal is
not fully and irrevocably committed.
Director
and Officer Indemnification
Pursuant to the Merger Agreement, prior to the Effective Time,
Galil may purchase a tail policy under Galils
existing directors and officers insurance policy
which (i) has an effective term of seven years from the
Effective Time, (ii) covers those individuals who were
covered by Galils directors and officers
insurance policy in effect as of the Execution Date for actions
and omissions occurring on or prior to the Effective Time, and
(iii) contains terms and conditions that are no less
favorable, in the aggregate, to the insured than those of
Galils directors and officers insurance policy
in effect as of the Execution Date. For a period of seven years
from the Closing Date, Endocare has agreed to use its
commercially reasonable efforts to cause the Surviving Company
to maintain such tail policy, provided that no additional
amounts will be payable by the Surviving Company thereunder.
During the period commencing as of the Effective Time and ending
on the seventh anniversary of the Effective Time, to the fullest
extent permitted by applicable law, Endocare has agreed to cause
the Surviving Company to fulfill and honor in all respects the
obligations of Galil and its subsidiaries to the officers and
directors of Galil as of the Execution Date, any of its
subsidiaries and each other person who is or was a director or
officer of Galil or any of its subsidiaries at or at any time
prior to the Effective Time, pursuant to all rights to any
indemnification and exculpation from liabilities for acts or
omissions contained in Galils charter documents (as in
effect on the Execution Date) or available under applicable law.
68
Conditions
to the Completion of the Merger
General
Conditions to the Completion of the Merger
The respective obligations of Galil, Endocare and Merger Sub to
complete the Merger under the Merger Agreement are subject to
the satisfaction of the following conditions:
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No governmental authority is in the process of
(i) investigating or (ii) conducting proceedings
regarding the Merger Agreement, the Ancillary Agreements or the
transactions contemplated by the Merger Agreement which make it
reasonably possible, in Endocares
and/or
Galils reasonable determination, that as a result of such
investigation or proceedings, an order, including but not
limited to any injunction, will be issued, promulgated, enforced
or entered by a governmental authority that would enjoin,
materially restrain or condition, or make illegal or otherwise
prohibit the consummation of the Merger and the other
transactions.
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No governmental authority has enacted, issued, promulgated,
enforced or entered any law or order that is then in effect and
that enjoins, materially restrains or conditions, or makes
illegal or otherwise prohibits the consummation of the Merger
and the other transactions contemplated by the Merger Agreement
or the Ancillary Agreements.
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All the governmental authority and other third party consents
required by the Merger Agreement have been obtained or the
applicable waiting periods have expired or been terminated.
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At least 50 days have elapsed after the filing of the
Merger Proposals with the Israeli Companies Registrar and at
least 30 days have elapsed after receipt of approval of the
Merger by Galils shareholders and the approval of the
Merger by the sole shareholder of Merger Sub.
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No prospectus is, in Endocares reasonable judgment,
required to be filed in Israel for the issuance of shares of
Endocare common stock in connection with the Merger, the
Financing and the other transactions contemplated by the Merger
Agreement.
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The approval of the Merger by Galils shareholders and the
approval by Endocares stockholders of the issuance of
shares of Endocare common stock in the Merger and the Financing
have been obtained in accordance with applicable law and the
charter documents of Galil and Endocare respectively.
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The
Form S-4
has become effective under the Securities Act and no stop order
suspending the effectiveness of the
Form S-4
has been issued and no proceedings for that purpose have been
initiated or threatened by the SEC.
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The Merger Certificate has been issued by the Israeli Companies
Registrar.
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No action has been commenced or threatened by or before any
governmental authority that the board of directors of Endocare
or the board of directors of Galil determines in good faith,
after consultation with outside legal counsel, is reasonably
likely to (i) require divestiture or license of any
material assets of Endocare as a result of the transactions
contemplated by the Merger Agreement or the divestiture or
license of any material assets of the Surviving Company or any
of their respective subsidiaries, (ii) prohibit or impose
material limitations on Endocares ownership or operation
of all or a material portion of its or the Surviving
Companys business or assets (or those of any of their
subsidiaries) or (iii) impose material limitations on the
ability of Endocare or any of its subsidiaries, or render
Endocare or any of its subsidiaries unable effectively to
control the business, assets or operations of the Surviving
Company or its subsidiaries in any material respect.
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The Israeli tax ruling and the other Israeli approvals described
above must have been received.
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The Financing, in all material respects consistent with the
Stock Purchase Agreement, will close concurrent with the Closing
of the Merger.
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69
Conditions
to the Obligations of Galil to Consummate the
Merger
The obligations of Galil to consummate the transactions
contemplated by the Merger Agreement are subject to the
fulfillment, at or prior to the Closing, of each of the
following conditions, any of which may be waived in writing by
Galil in its sole discretion:
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Each of the representations and warranties of Endocare and
Merger Sub set forth in the Merger Agreement qualified as to
materiality or Material Adverse Effect must be true and correct,
and those not so qualified must each be true and correct in all
material respects, as of the Execution Date and as of the
Closing Date (without giving effect to any amendment or
supplement to the Endocare disclosure schedule after the
Execution Date, other than as permitted by the Merger
Agreement), except to the extent such representations and
warranties speak as of an earlier date, in which case such
representation or warranty must be true and correct as of such
earlier date;
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Endocare and Merger Sub have performed, in all material
respects, all obligations and agreements and complied with all
covenants and conditions required by the Merger Agreement or any
Ancillary Agreement to be performed or complied with by it prior
to or at the Closing;
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each of the Ancillary Agreements has been duly authorized,
executed and delivered by each of the other parties thereto
(other than Galil), and Galil has received an executed
counterpart of each of the Ancillary Agreements, signed by each
party thereto (other than Galil), including a counterpart of the
Escrow Agreement signed by the Escrow Agent;
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Galil has received an opinion of counsel to Endocare in the form
agreed upon by Endocare and Galil and attached as an exhibit to
the Merger Agreement;
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Galil has received an opinion from its tax counsel to the effect
that (i) the Merger qualifies as a reorganization under
Section 368(a)(2)(E) of the Code, and (ii) no material
gain or loss will be recognized by Endocare or Galil as a result
of the Merger;
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no change, event or development or prospective change, event or
development has occurred that, individually or in the aggregate,
has had or is reasonably likely to have a Material Adverse
Change (as such term is defined below and in the Merger
Agreement) on Endocare; and
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Galil has received copies of the letters of resignation from the
applicable directors of Endocare effective as of the Closing,
and the directors that are the current directors of Galil that
Endocare has agreed to appoint to the board of directors of
Endocare have been duly appointed to the board of directors of
Endocare effective as of the Closing.
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Conditions
to the Obligations of Endocare to Consummate the
Merger
The obligations of Endocare and Merger Sub to consummate the
transactions contemplated by the Merger Agreement are subject to
the fulfillment, at or prior to the Closing, of each of the
following conditions, any of which may be waived in writing by
Endocare in its sole discretion:
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Each of the representations and warranties of Galil set forth in
the Merger Agreement qualified as to materiality or Material
Adverse Effect (as such term is defined below and in the Merger
Agreement) must be true and correct, and those not so qualified
must each be true and correct in all material respects, as of
the Execution Date and as of the Closing Date (without giving
effect to any amendment or supplement to the Galil confidential
disclosure schedule after the Execution Date, other than as
permitted by the Merger Agreement), except to the extent such
representations and warranties speak as of an earlier date, in
which case such representation or warranty must be true and
correct as of such earlier date;
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Galil has performed, in all material respects, all obligations
and agreements and complied with all covenants and conditions
required by the Merger Agreement or any Ancillary Agreement to
be performed or complied with by it prior to or at the Closing;
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each of the Ancillary Agreements has been duly authorized,
executed and delivered by each of the other parties thereto,
other than Endocare and Merger Sub, and Endocare has received an
executed counterpart of
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each of the Ancillary Agreements, signed by each party thereto,
other than Endocare or Merger Sub, including a counterpart of
the Escrow Agreement signed by the Escrow Agent;
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Endocare has received an opinion of counsel to Galil in the form
agreed upon by Endocare and Galil and attached as an exhibit to
the Merger Agreement;
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Endocare has received an opinion from its tax counsel to the
effect that (i) the Merger qualifies as a reorganization
under Section 368(a)(2)(E) of the Code, and (ii) no
material gain or loss will be recognized by Endocare or Galil as
a result of the Merger;
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Endocare has received letters of resignation from the directors
of Galil and each of its subsidiaries; and
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no change, event or development or prospective change, event or
development has occurred that, individually or in the aggregate,
has had or is reasonably likely to have a Material Adverse
Change on Galil.
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Definitions
of Material Adverse Effect and Material
Adverse Change
For purposes of this summary and pursuant to the terms of the
Merger Agreement, Material Adverse Effect means with
respect to any person or entity, one or more events,
occurrences, conditions or circumstances (whether or not covered
by insurance) which, individually or in the aggregate, result in
a material adverse effect on or change in (i) the business,
operations, assets, liabilities, condition (financial or
otherwise), prospects, or results of operations of such person
or entity, taken as a whole with its subsidiaries, or
(ii) the ability of such person or entity (and, in the case
of Galil, including its shareholders) to timely (A) perform
his, her or its material obligations under the Merger Agreement
or any Ancillary Agreement, or (B) consummate the
transactions contemplated in the Merger Agreement and the
Ancillary Agreements.
For purposes of this summary and pursuant to the terms of the
Merger Agreement, Material Adverse Change means with
respect to any person or entity, any change, event, occurrence,
condition or circumstance (whether or not covered by insurance)
which, individually or in the aggregate, results in a Material
Adverse Effect, in each case other than to the extent caused by,
arising out of or attributable to any of the following:
(i) changes or proposed changes in law or accounting
standards or interpretations thereof applicable to such person
or entity, (ii) changes in global, national or regional
economic or political conditions (including acts of war (whether
or not declared), armed hostilities, sabotage, military actions
or the escalation thereof (whether underway on the Execution
Date or thereafter commenced), and terrorism) or in general
financial, credit, business, or securities market conditions,
including changes in interest rates or the availability of
credit financing; (iii) changes generally applicable in the
industries in which such person or entity operates,
(iv) any failure of such person or entity to meet internal
or analysts estimates, projections or forecasts of
revenues, earnings or other financial or business metrics (it
being understood that the cause of any such failure may be taken
into consideration when determining whether a Material Adverse
Change has occurred or would be reasonably likely to occur);
(v) a decline in the market price, or a change in the
trading volume, of the capital stock or share capital of such
person or entity (it being understood that the cause of any such
decline or change may be taken into consideration when
determining whether a Material Adverse Change has occurred or
would be reasonably likely to occur); provided, in the case of
clauses (i) and (ii), that such conditions or changes do
not have a materially disproportionate impact on such person or
entity and its subsidiaries, taken as a whole, relative to other
participants in the industries in which such person or entity
operates.
Survival;
Indemnification
Survival
of Representations and Warranties and Covenants
Pursuant to the Merger Agreement, the representations and
warranties of Galil made in the Merger Agreement survive for the
period beginning on the Closing Date through the due date
(without regard to any extensions) of Endocares required
filing with the SEC of its Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009. The
representations and warranties of Endocare made in the Merger
Agreement will not survive the Closing.
Pursuant to the terms of the Merger Agreement, the covenants and
agreements of the parties contained in the Merger Agreement will
survive the Closing indefinitely, except as expressly provided
otherwise in the Merger Agreement.
71
Indemnification
and Other Rights
Pursuant to the terms of the Merger Agreement, if the Closing
occurs, to the extent and solely out of the Indemnity Escrow
Fund, Endocare and its affiliates (including the Surviving
Company following the Closing), each of their respective
officers, directors, employees, stockholders, agents,
representatives, and each of their respective successors and
assigns (the Endocare Indemnified Parties) will be
indemnified and held harmless, reimbursed and made whole from
and against any losses or other liability (including reasonable
legal and expert fees and expenses incurred in investigation or
defense (including any appeal) of any of the same, or in
asserting, preserving or enforcing its rights hereunder)
actually incurred, accrued or claims suffered by any such
indemnified party (collectively Damages) to the
extent arising from or in connection with any of the following:
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any breach or inaccuracy of any representation or warranty of
Galil contained in the Merger Agreement or in any Ancillary
Agreement (without giving effect to any supplement to the Galil
disclosure schedule after the Execution Date);
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any breach of any covenant of Galil prior to the Closing
contained in the Merger Agreement; and
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any and all taxes of Galil and its subsidiaries with respect to
(x) taxable periods ending on or before the Closing Date or
(y) any taxable period that commences before and ends after
the Closing Date to the extent attributable to the period prior
to Closing as determined pursuant to the Merger Agreement, and
(B) reasonable costs and expenses incurred by the Surviving
Company in connection with compliance matters relating to taxes
for which Endocare is entitled to indemnification under the
Merger Agreement, including costs and expenses relating to
disputes with taxing authorities.
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Any payments made out of the Indemnity Escrow Fund pursuant to
the Merger Agreement will be treated for all purposes as an
adjustment to the Merger Consideration.
Other
Limitations
The Endocare Indemnified Parties may not recover any Damages
pursuant to the indemnification procedures of the Merger
Agreement, unless and until collectively they have incurred,
accrued or suffered Damages in excess of $250,000 in the
aggregate (the Basket Amount), after which, such
Endocare Indemnified Parties are entitled to recover all such
Damages, including Damages in the Basket Amount. Notwithstanding
the foregoing, the Endocare Indemnified Parties are entitled to
recover for, and the Basket Amount does not apply as a threshold
to, any and all claims or payments made with respect to any
Damages incurred for taxes as set forth above, or any Damages
incurred as a result of fraud by any Galil shareholder.
Value
Used for Indemnity
For purposes of determining the number of shares of Endocare
common stock payable to Endocare for any Damages arising from an
indemnification claim made by Endocare, the per share value of
Endocare common stock held in the Indemnity Escrow Fund will be
based on the then current price of shares of Endocare common
stock.
Sole
and Exclusive Remedy if the Closing Occurs
Should the Closing occur, the sole and exclusive remedies of
Endocare and Merger Sub with respect to claims under or
otherwise relating to the Merger Agreement, will be limited to
the indemnification rights set forth in the Merger Agreement.
Should the Closing occur, the sole and exclusive remedies of
Galils shareholders with respect to claims under or
otherwise relating to the Merger Agreement and any Ancillary
Agreements will be the remedies afforded to such shareholders by
the securities laws applicable to each such Galil shareholder by
virtue of their receipt of shares of Endocare common stock in
the Merger.
If the Closing does not occur, the sole and exclusive remedy of
the parties will be as set forth below in the section entitled
Termination Fees and Expenses, and the
indemnification provision described above will be inapplicable.
72
Termination
of the Merger Agreement
Termination
by Endocare or Galil
The Merger Agreement may be terminated at any time before the
Effective Time:
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by mutual written consent of Endocare and Galil;
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by either Endocare or Galil, subject to certain conditions, if
either:
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an order permanently restraining, enjoining or otherwise
prohibiting the Merger has been entered and becomes
nonappealable; or
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if the Merger is not completed by June 30, 2009 (the
Termination Date).
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Termination
by Endocare
Under the Merger Agreement, Endocare may terminate the Merger
Agreement if:
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any of the conditions to obligations of both parties or of
Endocare to consummate the Merger have become incapable of
fulfillment;
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there has been a material breach of any representation,
warranty, covenant or agreement of Galil contained in the Merger
Agreement that is not curable or, if curable, is not cured prior
to the earlier of (i) 30 days after written notice of
such breach is given by Endocare to Galil, and (ii) the
Termination Date;
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the board of directors of Galil has failed to give its
recommendation to the approval of the Merger and the other
transactions in connection with the meeting of Galils
shareholders to approve the Merger or has withdrawn or modified
its recommendation of the Merger and the other transactions
contemplated by the Merger Agreement;
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after the receipt by Galil of an Acquisition Proposal, Endocare
requests in writing that the board of directors of Galil
reconfirm its recommendation of the Merger and the other
transactions and the board of directors of Galil fails to do so
within five business days after its receipt of Endocares
request;
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the board of directors of Galil, or any committee thereof, has
approved or recommended to the Galil shareholders an Acquisition
Proposal;
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a tender offer or exchange offer for outstanding shares of Galil
is commenced (other than by Endocare or an affiliate of
Endocare), and the board of directors of Galil (or any committee
thereof) recommends that its shareholders tender their shares in
such tender or exchange offer or, within 10 business days after
the commencement of such tender offer or exchange offer, the
board of directors of Galil fails to recommend against
acceptance of such offer; provided, however, the board of
directors of Galil will be permitted to disclose any stop,
look and listen or similar communication of the type
contemplated by
Rule 14d-9(f)
under the Exchange Act and such a communication will not result
in a right of Endocare to terminate the Merger Agreement;
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Galil has breached its obligations with respect to exclusivity
or its obligation to hold the Company Shareholders
Meetings in accordance with the provisions of the Merger
Agreement in order to consider and vote for the approval of the
Merger Agreement, the Merger and the other transactions
contemplated by the Merger Agreement;
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In the event that Galil has not increased the unrestricted cash
balance of Galil and its subsidiaries, taken together, to
$1,000,000 or more within ten business days after written notice
of such failure is given by Galil to Endocare; or
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Ten days after the written notice described below is provided,
if on such tenth day, the condition to Closing of the Merger
that the Financing will occur concurrently with the Closing of
the Merger remains unsatisfied
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73
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because a purchaser under the Stock Purchase Agreement that is
an existing shareholder of Galil is in default and no other
purchasers have agreed to purchase the shares in the Financing
of the purchaser in default, and:
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all of the general conditions to the obligations of Endocare and
Galil to consummate the Merger and all of the conditions to
Endocares obligations to consummate the Merger (except for
such conditions as may, by their terms, only be satisfied at the
Closing or on the Closing Date and except the condition that the
closing of the Financing will occur concurrently with the
Closing of the Merger) have been satisfied or waived;
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the purchasers under the Stock Purchase Agreement that are
existing stockholders of Endocare are prepared to immediately
purchase their respective shares issuable in the Financing;
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Endocare provides written notice to Galil stating its belief
that the terms of the two foregoing clauses have been
satisfied, and
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one or more of the purchasers under the Stock Purchase Agreement
that are existing Galil shareholders has breached, expressed an
intention to breach, or has failed to affirm that it or they
will not breach, its or their obligations to purchase the shares
allocated to them under the Stock Purchase Agreement on the
Closing Date.
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Termination
by Galil
Galil may terminate the Merger Agreement if:
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any of the conditions to obligations of both parties or of Galil
to consummate the Merger have become incapable of fulfillment;
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there has been a material breach by Endocare or Merger Sub of
any representation, warranty, covenant or agreement of Endocare
or Merger Sub contained in the Merger Agreement that is not
curable or, if curable, is not cured prior to the earlier of
(i) 30 days after written notice of such breach is
given by Galil to Endocare and (ii) the Termination Date;
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the board of directors of Endocare has failed to give in the
proxy statement/prospectus its recommendation to the approval
pursuant to the Merger Agreement of the issuance of shares of
Endocare common stock in connection with the Merger and the
transactions contemplated by the Merger Agreement or has
withdrawn or modified such recommendation;
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after the receipt by Endocare of an Acquisition Proposal, Galil
requests in writing that the board of directors of Endocare
reconfirm its recommendation of the approval pursuant to the
Merger Agreement of the issuance of shares of Endocare common
stock in connection with the Merger and the transactions
contemplated by the Merger Agreement and the board of directors
of Endocare fails to do so within five business days after its
receipt of Galils request;
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the board of directors of Endocare, or any committee thereof,
has approved or recommended to Endocares stockholders an
Acquisition Proposal;
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a tender offer or exchange offer for outstanding shares of
Endocare common stock is commenced (other than by Galil or an
affiliate of Galil), and the board of directors of Endocare (or
any committee thereof) recommends that Endocares
stockholders tender their shares in such tender or exchange
offer or, within 10 business days after the commencement of
such tender offer or exchange offer, the board of directors of
Endocare fails to recommend against acceptance of such offer,
provided, however, that the board of directors of
Endocare will be permitted to disclose any stop, look and
listen or similar communication of the type contemplated
by
Rule 14d-9(f)
under the Exchange Act and such disclosure will not result in a
right of Galil to terminate under this provision;
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Endocare has breached its obligations with respect to
exclusivity or its obligation to call a meeting of its
stockholders in order to obtain the requisite stockholder
approval necessary to complete the Merger and the Financing;
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74
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In the event that Endocare has not increased the unrestricted
cash balance of Endocare and its subsidiaries, taken together,
to $1,000,000 or more within ten business days after written
notice of such failure is given by Endocare to Galil; or
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Ten days after the written notice described below is provided,
if on such tenth day, the condition to Closing of the Merger
that the Financing will occur concurrently with the Closing of
the Merger remains unsatisfied because a purchaser under the
Stock Purchase Agreement that is an existing stockholder of
Endocare is in default and no other purchasers have agreed to
purchase the shares in the Financing of the purchaser in
default, and:
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all of the general conditions to the obligations of Endocare and
Galil to consummate the Merger and all of the conditions to
Galils obligations to consummate the Merger (except for
such conditions as may, by their terms, only be satisfied at the
Closing or on the Closing Date and except the condition that the
closing of the Financing will occur concurrently with the
Closing of the Merger) have been satisfied or waived;
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the purchasers under the Stock Purchase Agreement that are
shareholders of Galil are prepared to immediately purchase their
respective shares issuable in the Financing;
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Galil provides written notice to Endocare stating its belief
that the terms of the two foregoing clauses have been
satisfied; and
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one or more of the purchasers under the Stock Purchase Agreement
that is an existing Endocare stockholder has breached, expressed
an intention to breach, or has failed to affirm that it or they
will not breach, its or their obligations to purchase the shares
allocated to them under the Stock Purchase Agreement on the
Closing Date.
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Termination
Fees and Expenses
Except as set forth below, all costs and expenses incurred in
connection with the Merger Agreement will be paid by the party
incurring the same.
The Merger Agreement provides for the payment of a termination
fee of $900,000 by each of Endocare and Galil (in such
circumstance, the defaulting party) to the other
party, in the event of:
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a willful breach of the defaulting party or a change of
recommendation by the board of directors of the defaulting party;
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a breach of the defaulting partys covenant to call the
meeting of such partys shareholders in order to obtain the
requisite shareholder approval necessary to complete the Merger
and Financing or a breach of the non-solicit covenants of the
defaulting party; or
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if a shareholder of the defaulting party defaults on its
obligation to purchase shares of Endocare common stock in the
Financing.
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In each case where a defaulting party is obligated to pay a
termination fee, such party is also obligated to reimburse the
other party for the other partys expenses related to the
transaction in an amount not to exceed $850,000. In addition, in
the event of a material breach not covered by the foregoing, in
connection with termination of the Merger Agreement, the
breaching party is required to reimburse the other party for its
expenses related to the transaction in an amount not to exceed
$850,000.
Effect of
Termination
If the Merger Agreement is terminated, all obligations of the
parties under the Merger Agreement will terminate, without any
liability on the part of any party to the Merger Agreement to
any person or entity in respect of the Merger Agreement or the
transactions contemplated by the Merger Agreement other than the
fees and expenses described above, if any. Furthermore, no party
will have any claim against another (and no person or entity
will have any rights against such party), whether under
contract, tort or otherwise, except that certain sections of the
Merger Agreement related to confidentiality and termination, the
Confidentiality Agreement and any Ancillary Agreement entered
into prior to termination of the Merger Agreement with respect
to any breaches occurring prior to any
75
termination of the Merger Agreement, will survive. None of the
parties may seek specific performance or monetary damages in
connection with termination except as set forth above.
Specific
Performance
Each party to the Merger Agreement is entitled to specific
performance of the terms of the Merger Agreement or other
equitable relief, in addition to any other remedy to which such
party is entitled at law or in equity. After termination of the
Merger Agreement the parties are only entitled to specific
performance and injunctive relief with respect to those
provisions that expressly survive termination, as described
above. In no event is Endocare or Galil entitled to require the
other to bring any action against any purchaser to the Financing
Agreement, in such capacity.
Amendment
The Merger Agreement may be amended, modified or supplemented by
the parties by action taken or authorized by their respective
boards of directors at any time prior to the Closing Date
(notwithstanding any approval by the stockholders of Endocare or
the shareholders of Galil). However, the parties have agreed
that after the approval of the Endocares stockholders and
Galils shareholders has been obtained, no amendment may be
made which pursuant to applicable law would require further
approval by such stockholders or shareholders without such
further approval.
The Merger Agreement is not intended to provide any other
factual information about Endocare or Galil. The
representations, warranties and covenants contained in the
Merger Agreement were made only for purposes of the Merger
Agreement and as of a specific date, were solely for the benefit
of the parties to the Merger Agreement, may be subject to
limitations agreed upon by the contracting parties, including
being qualified by disclosure schedules made for the purposes of
allocating contractual risk between the parties thereto instead
of establishing these matters as facts, and may be subject to
standards of materiality applicable to the contracting parties
that differ from those applicable to investors. Investors are
not third-party beneficiaries under the Merger Agreement and
should not rely on the representations, warranties and covenants
or any descriptions thereof as characterizations of the actual
state of facts or condition of Endocare, Galil or Orange
Acquisitions, Ltd. or any of their respective subsidiaries or
affiliates. Moreover, information concerning the subject matter
of the representations and warranties may change after the date
of the Merger Agreement, which subsequent information may or may
not be fully reflected in Endocares public disclosures.
76
AGREEMENTS
RELATED TO THE MERGER
Galil
Voting Agreements
Concurrent with and as a condition to Endocares entering
into the Merger Agreement, on November 10, 2008,
shareholders of Galil affiliated with Thomas
McNerney & Partners, The Vertical Group, Elron
Electronics Industries Ltd., Investor Growth Capital, Discount
Investment Corporation Ltd., Berman & Co. Trading and
Investment Ltd. and RDC-Rafael Development Corporation Ltd.
(together, the Shareholder Parties), entered into
voting agreements with Endocare (the Voting
Agreements), whereby the Shareholder Parties have agreed
to vote all shares of Galil currently beneficially owned by them
and all shares acquired by them prior to the date of termination
of the Voting Agreement in favor of the Merger Agreement, the
Merger and related transactions and against any alternative,
competing or inconsistent transaction. The Shareholder Parties
consist solely of executive officers and directors of Galil and
their respective affiliates, and holders of 5% or more of the
voting power of Galil. In connection with the Voting Agreements,
each Shareholder Party granted to Endocare an irrevocable proxy
to vote such Shareholder Partys Galil shares in accordance
with the terms of the Voting Agreements. The Voting Agreements
limit the ability of the Shareholder Parties to sell or
otherwise transfer the shares of Galil beneficially owned by
them. As of November 10, 2008, the Shareholder Parties
owned an aggregate of approximately 97.5% of Galils
outstanding shares. The Voting Agreements terminate upon the
earlier to occur of (i) the closing of the Merger, and
(ii) the termination of the Merger Agreement in accordance
with its terms.
Major
Shareholders Agreement
On November 10, 2008, as a condition to and concurrent with
the execution of the Merger Agreement, the Shareholder Parties
entered into an agreement with Endocare (the Major
Shareholders Agreement), pursuant to which each
Shareholder Party has made certain representations and
warranties to Endocare with respect to its Galil shares, entered
into a limited mutual general release with Endocare and agreed,
severally and not jointly, to indemnify Endocare with respect to
certain tax liabilities.
Stock
Purchase Agreement
Concurrent with the execution of the Merger Agreement, Endocare
and certain existing institutional accredited stockholders of
Endocare and Galil entered into a Stock Purchase Agreement,
relating to the sale of 16,250,000 shares of Endocare
common stock at a purchase price of $1.00 per share representing
approximately [ ]% of the outstanding shares of
Endocare common stock on [ ], 2009. The
offering proceeds to Endocare are expected to be approximately
$16,250,000. Pursuant to the Stock Purchase Agreement, the
closing of the Financing is subject to the concurrent closing of
the Merger and certain other conditions, including the accuracy
of Endocares and the purchasers representations and
warranties at closing, the sale of shares with a minimum
aggregate purchase price of $12,000,000 and that Endocares
common stock remains listed on the Nasdaq Capital Market or the
Over-The-Counter Bulletin Board. The purchasers have agreed to a
lock-up
period of six months from the closing of the Financing, subject
to earlier release under certain circumstances, as well as a
standstill (which shall expire on the first anniversary of
Endocares 2009 annual stockholders meeting and no later
than June 30, 2010) whereby no purchaser may own more
than 35% of the then outstanding shares of Endocare common
stock, subject to certain exceptions. In the event that a
purchaser breaches its obligation to purchase shares in the
Financing, Endocare has the ability to offer the shares
allocated to such breaching purchaser to other purchasers in the
Financing on a pro rata basis and to third parties to the extent
that such other purchasers do not purchase all of the defaulting
purchasers shares. Assuming all of the purchasers acquire
the shares for which they have subscribed and attributing
ownership to Galils shareholders of the Escrow Shares,
upon the closing of the Merger and the Financing, existing
Endocare stockholders will own approximately 38.5% of the
outstanding shares of Endocare common stock and the shareholders
of Galil will own approximately 61.5% of the outstanding shares
of Endocare common stock.
Registration
Rights Agreement
Pursuant to the Stock Purchase Agreement, upon consummation of
the Financing, the purchasers of the Endocare common stock in
the Financing will enter into a registration rights agreement,
pursuant to which
77
Endocare will agree to prepare and file with the SEC a
shelf registration statement covering the resale of
the shares of Endocare common stock issued pursuant the Stock
Purchase Agreement.
IDB
Entity Indemnification Agreement
On November 10, 2008, as a condition to and concurrent with
the execution of the Merger Agreement, Discount Investment
Corporation Ltd., Elron Electronic Industries Ltd. and
RDC-Rafael Development Corporation Ltd., each an Israeli
shareholder of Galil, agreed, severally and not jointly, and
each of them up to its respective pro rata ratio set forth under
the IDB Entity Indemnification Agreement, to indemnify Endocare
and the surviving company in an amount of up to $3,774,037 in
connection with a preference payment potentially payable to
certain other shareholders of Galil pursuant to that certain
Restructure, Consent and Waiver, entered into between Galil and
its then shareholders on December 31, 2003 (the
Indemnified Preference), plus any related
out-of-pocket legal fees and expenses incurred by Endocare or
the surviving company as a result of any action relating to the
Indemnified Preference.
Pre-Closing
Shareholders Agreement
On November 10, 2008, Galil and certain shareholders of
Galil entered into a Shareholders Agreement, which provides for
certain matters in connection with the consummation of the
Merger and the transactions contemplated thereby, including, the
conversion of all outstanding preferred shares into Ordinary
Shares immediately prior to the consummation of the Merger.
78
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements give effect to the proposed business combination of
Endocare and Galil to be effected via the Merger and the
$16.25 million concurrent Financing as if these
transactions occurred as of September 30, 2008 for purposes
of the pro forma condensed combined balance sheet, and as of
January 1, 2007 for the pro forma condensed combined
statements of operations for the year ended December 31,
2007 and the nine months ended September 30, 2008. For
accounting purposes Galil is considered to be acquiring Endocare
in the Merger inasmuch as the existing stockholders of Galil
will have a controlling interest in the combined company after
the Merger and Financing. Accordingly, the Merger will be
accounted for as a reverse acquisition and equity capitalization
in accordance with U.S. GAAP for accounting and financial
reporting purposes. Under this method of accounting, the
arrangement will be treated as the equivalent of Galil issuing
stock for the net assets of Endocare at their fair value on the
Merger date. The existing assets and liabilities of Galil will
be carried forward at historical costs. Operations prior to the
Merger will be those of Galil.
The transaction will be accounted for under the acquisition
method of accounting in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 141R, Business
Combinations (SFAS No. 141R) since it will be
consummated in 2009 after the effective date of this accounting
standard. In merger transactions in which the consideration
given is not in the form of cash (that is, in the form of
non-cash assets, liabilities incurred, or equity interests
issued), measurement of the purchase consideration is based on
the fair value of the consideration given or the fair value of
the asset (or net assets) acquired, whichever is more clearly
evident and, thus, more reliably measurable. Since Galil is a
private company, the purchase consideration received by Galil in
the form of Endocares equity securities is most reliably
measured based on their fair value. As such, the purchase price
will be measured based on the fair value of Endocares
equity securities outstanding at the consummation date and will
allocated to the acquired tangible and intangible assets and
assumed liabilities of Endocare based on their estimated fair
values at that date.
Under SFAS No. 141R, all the assets acquired and
liabilities assumed in a business combination are recognized at
their acquisition-date fair value while transaction costs and
restructuring costs associated with the business combination are
expensed as incurred. The excess of the purchase price over the
fair value of assets acquired and liabilities assumed, if any,
is allocated to goodwill. Where the fair value of the
consideration transferred for an acquirers interest is
less than its fair value (a bargain purchase), the accounting
acquiror will record a gain at the transaction date. In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date until
the completion or abandonment of the associated research and
development efforts. Acquired contingent liabilities will be
recorded at fair value at the acquisition date and subsequently
measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired
contingencies. Changes in deferred tax asset valuation
allowances and income tax uncertainties after the acquisition
date generally will affect income tax expense.
For purposes of these unaudited pro forma condensed combined
financial statements, Endocare and Galil have made preliminary
allocations of the estimated purchase price to the tangible and
intangible assets to be acquired and liabilities to be assumed
based on preliminary estimates of their fair value as of
September 30, 2008, as described in Note 2. A final
determination of these estimated fair values, which cannot be
made prior to the completion of the Merger, will be based on the
actual fair value of Endocares outstanding equity
securities and the net assets of Endocare that exist as of the
date of completion of the Merger. The actual amounts recorded as
of the completion of the Merger may differ materially from the
information presented in these unaudited pro forma condensed
combined financial statements as a result of:
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changes in Endocares share price;
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net cash used in the Endocare operations between the signing of
the Merger Agreement and the closing of the Merger;
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the timing of completion of the Merger; and
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other changes in the Endocare net assets that occur prior to
completion of the Merger, which could cause material differences
in the information presented below.
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79
The unaudited pro forma condensed combined financial statements
presented below are based on the historical financial statements
of Endocare and Galil, adjusted to give effect to the
acquisition of Endocare by Galil for accounting purposes and the
Financing. The unaudited pro forma adjustments are described in
the accompanying notes presented on the following pages. These
adjustments do not give effect to any synergies that may be
realized as a result of the Merger, nor do they give effect to
any nonrecurring/unusual restructuring charges that may be
incurred as a result of the integration of the two companies. As
provided in the Merger Agreement, the unaudited pro forma
condensed combined financial statements assume that, at the
effective time of the Merger, all of Galils preferred
stock will convert into ordinary shares, which will in turn
convert into Endocare common shares at the ratio of 32.956
to 1.
The unaudited pro forma condensed combined balance sheet as of
September 30, 2008 gives effect to the proposed Merger as
if it occurred on September 30, 2008 and combines the
historical balance sheets of Endocare and Galil as of
September 30, 2008. The Galil balance sheet information was
derived from its unaudited balance sheet as of
September 30, 2008 included herein. The Endocare balance
sheet information was derived from its unaudited condensed
balance sheet included in its Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008 and also
included herein.
The unaudited pro forma condensed combined statements of
operations for the nine months ended September 30, 2008 and
the year ended December 31, 2007 are presented as if the
Merger was consummated on January 1, 2007, and combines the
historical results of Endocare and Galil for the nine months
ended September 30, 2008 and the year ended
December 31, 2007. The historical results of Galil were
derived from its unaudited statement of operations for the nine
months ended September 30, 2008 and its audited statement
of operations for the year ended December 31, 2007 included
herein. The historical results of Endocare were derived from its
unaudited condensed statement of operations for the nine months
ended September 30, 2008 included in its Quarterly Report
on
Form 10-Q
for the quarterly period ended September 30, 2008, and its
audited statement of operations included in its Annual Report on
Form 10-K
for the year ended December 31, 2007 and also included
herein.
The unaudited pro forma condensed combined financial statements
have been prepared for illustrative purposes only and are not
necessarily indicative of the financial position or results of
operations in future periods or the results that actually would
have been realized had Endocare and Galil been a combined
company during the specified periods. The pro forma adjustments
are based on the preliminary information available at the time
of the preparation of this proxy statement/prospectus. The
unaudited pro forma condensed combined financial statements,
including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the
historical financial statements of Galil for the nine months
ended September 30, 2008 and for the year ended
December 31, 2007 included herein, and the historical
condensed financial statements of Endocare included in its
Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2008, and the
historical financial statements of Endocare included in its
Annual Report on
Form 10-K
for the year ended December 31, 2007, also included herein.
Following is a preliminary allocation of the total estimated
purchase price, to the acquired assets and assumed liabilities
of Endocare based on the estimated fair values as of
September 30, 2008 (in thousands).
80
Unaudited
Pro Forma Condensed Combined Balance Sheet
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September 30, 2008
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Galil
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Endocare
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Pro Forma
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Historical
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Historical
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Pro Forma
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Combined
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(In thousands)
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Assets
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Current assets:
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Cash, cash equivalents
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$
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3,482
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$
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5,346
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|
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$
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15,775
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(F)
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$
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24,603
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Accounts receivable, net
|
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4,418
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3,579
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7,997
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Inventories, net
|
|
|
4,801
|
|
|
|
3,108
|
|
|
|
4,023
|
(A)
|
|
|
11,932
|
|
Prepaid expenses & other current assets
|
|
|
772
|
|
|
|
597
|
|
|
|
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,473
|
|
|
|
12,630
|
|
|
|
19,798
|
|
|
|
45,901
|
|
Property and equipment, net
|
|
|
2,363
|
|
|
|
724
|
|
|
|
1,121
|
(A)
|
|
|
4,208
|
|
Intangible, net
|
|
|
9,433
|
|
|
|
2,701
|
|
|
|
8,400
|
(A)
|
|
|
20,534
|
|
Investments and other assets
|
|
|
782
|
|
|
|
993
|
|
|
|
|
|
|
|
1,775
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
715
|
(A)
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,051
|
|
|
$
|
17,048
|
|
|
$
|
30,034
|
|
|
$
|
73,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,717
|
|
|
$
|
4,042
|
|
|
$
|
|
|
|
$
|
5,759
|
|
Accrued compensation
|
|
|
1,786
|
|
|
|
2,111
|
|
|
|
|
|
|
|
3,897
|
|
Other accrued liabilities
|
|
|
7,043
|
|
|
|
2,931
|
|
|
|
3,579
|
(D)
|
|
|
13,553
|
|
Loan payable
|
|
|
|
|
|
|
880
|
|
|
|
|
|
|
|
880
|
|
Obligations under capital lease current portion
|
|
|
67
|
|
|
|
26
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,613
|
|
|
|
9,990
|
|
|
|
3,579
|
|
|
|
24,182
|
|
Deferred compensation
|
|
|
915
|
|
|
|
120
|
|
|
|
|
|
|
|
1,035
|
|
Obligations under capital lease less current portion
|
|
|
38
|
|
|
|
69
|
|
|
|
|
|
|
|
107
|
|
Other long-term liabilities
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
195
|
|
|
|
|
|
|
|
(195
|
)(C)
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
195
|
|
|
|
12
|
|
|
|
11
|
(C)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
(195
|
)(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
(F)
|
|
|
|
|
Additional
paid-in-capital
|
|
|
86,508
|
|
|
|
201,256
|
|
|
|
(201,256
|
)(B)
|
|
|
121,348
|
|
|
|
|
|
|
|
|
|
|
|
|
16,234
|
(F)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,702
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(475
|
)(F)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379
|
(C)
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Accumulated deficit
|
|
|
(73,153
|
)
|
|
|
(194,399
|
)
|
|
|
194,399
|
(B)
|
|
|
(74,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1,165
|
)(D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
13,766
|
|
|
|
6,869
|
|
|
|
26,455
|
|
|
|
47,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
26,051
|
|
|
$
|
17,048
|
|
|
$
|
30,034
|
|
|
$
|
73,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
Galil
|
|
|
Endocare
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Product sales
|
|
$
|
18,662
|
|
|
$
|
18,279
|
|
|
$
|
|
|
|
$
|
36,941
|
|
Service revenues
|
|
|
|
|
|
|
5,028
|
|
|
|
|
|
|
|
5,028
|
|
Other
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,662
|
|
|
|
23,672
|
|
|
|
|
|
|
|
42,334
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
5,808
|
|
|
|
7,127
|
|
|
|
599
|
(E)
|
|
|
13,534
|
|
Research and development
|
|
|
5,686
|
|
|
|
1,765
|
|
|
|
|
|
|
|
7,451
|
|
Selling and marketing
|
|
|
13,361
|
|
|
|
11,120
|
|
|
|
68
|
(E)
|
|
|
24,549
|
|
General and administrative
|
|
|
4,280
|
|
|
|
9,234
|
|
|
|
334
|
(E)
|
|
|
12,742
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,106
|
)(H)
|
|
|
|
|
Impairment of goodwill
|
|
|
16,758
|
|
|
|
|
|
|
|
|
|
|
|
16,758
|
|
Litigation settlement, net of related legal expenses
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
45,893
|
|
|
|
(28,496
|
)
|
|
|
(105
|
)
|
|
|
74,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,231
|
)
|
|
|
(4,824
|
)
|
|
|
105
|
|
|
|
(31,950
|
)
|
Interest income, net
|
|
|
(142
|
)
|
|
|
181
|
|
|
|
310
|
(G)
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,373
|
)
|
|
$
|
(4,643
|
)
|
|
$
|
415
|
|
|
$
|
(31,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted
|
|
$
|
(2.47
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
(0.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
11,100
|
|
|
|
11,854
|
|
|
|
|
|
|
|
39,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Galil
|
|
|
Endocare
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Product sales
|
|
$
|
25,622
|
|
|
$
|
22,730
|
|
|
$
|
|
|
|
$
|
48,352
|
|
Service revenues
|
|
|
|
|
|
|
6,418
|
|
|
|
|
|
|
|
6,418
|
|
Other
|
|
|
|
|
|
|
539
|
|
|
|
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,622
|
|
|
|
29,687
|
|
|
|
|
|
|
|
55,309
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
8,296
|
|
|
|
9,780
|
|
|
|
798
|
(E)
|
|
|
18,874
|
|
Research and development
|
|
|
5,245
|
|
|
|
2,555
|
|
|
|
|
|
|
|
7,800
|
|
Selling and marketing
|
|
|
18,414
|
|
|
|
14,855
|
|
|
|
90
|
(E)
|
|
|
33,359
|
|
General and administrative
|
|
|
3,557
|
|
|
|
12,506
|
|
|
|
446
|
(E)
|
|
|
16,509
|
|
Litigation settlement, net of related legal expenses
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
35,512
|
|
|
|
39,019
|
|
|
|
1,334
|
|
|
|
75,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,890
|
)
|
|
|
(9,332
|
)
|
|
|
(1,334
|
)
|
|
|
(20,556
|
)
|
Interest income, net
|
|
|
401
|
|
|
|
391
|
|
|
|
764
|
(G)
|
|
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,489
|
)
|
|
$
|
(8,941
|
)
|
|
$
|
(570
|
)
|
|
$
|
(19,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
11,107
|
|
|
|
11,122
|
|
|
|
|
|
|
|
38,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
NOTES TO
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION
On November 10, 2008, Endocare and Galil entered into the
Merger Agreement pursuant to which Orange Acquisitions Ltd., a
wholly owned subsidiary of Endocare, will merge with and into
Galil. Galil will become a wholly-owned subsidiary of Endocare
and Endocare will be the surviving corporation of the Merger.
Pursuant to the terms of the Merger Agreement, Endocare will
issue to the shareholders of Galil shares of Endocare common
stock and will assume all of the stock options of Galil
outstanding as of the Merger closing date, such that Galil
shareholders, attributing ownership to Galil shareholders of the
Escrow Shares, will own approximately 48% of the combined
company on a pro forma basis and Endocare stockholders and
option holders will own approximately 52% of the common stock
combined company on a pro forma basis. The Merger is intended to
qualify as a tax-free reorganization under the provisions of
Section 368(a) of the Internal Revenue Code. The Merger is
subject to customary closing conditions, including approval by
Endocare and Galil stockholders.
Concurrent with the Merger Agreement, Endocare and Galil entered
into the Stock Purchase Agreement whereby at the close of the
Merger, a combination of existing Galil and Endocare
shareholders will provide $16.25 million in financing to
the combined company. Upon the close of the Financing, Galil
shareholders, attributing ownership to Galil shareholders of the
Escrow Shares, will own approximately 61.5% of the common stock
of the combined company.
Because Galil shareholders, attributing ownership to Galil
shareholders of the Escrow Shares, will own approximately 61.5%
of the common stock of the combined company upon consummation of
the Merger and Financing, Galil is deemed to be the acquiring
company for accounting purposes and the transaction will be
accounted for as a reverse acquisition under the purchase method
of accounting for business combinations in accordance with
accounting principles generally accepted in the United States.
Accordingly, the assets and liabilities of Endocare will be
recorded as of the merger closing date at their estimated fair
values.
The unaudited pro forma condensed combined financial statements
assume that, immediately prior to the effective time of the
Merger, all of Galils preferred stock will convert into
ordinary shares which will in turn convert into Endocare common
shares at the ratio of 32.956 to 1 and subject to further
adjustment to account for the occurrence of certain events
discussed elsewhere in this proxy statement/prospectus.
These unaudited pro forma condensed combined financial
statements also assume that the Merger consideration will be
based on Endocares stock price of$1.50 at
September 30, 2008. The volatility in the Endocare stock
price and changes in other key assumptions could result in a
significant different these between the pro forma financial
statements and the final purchase accounting at the effective
date of the Merger. Subsequent to September 30, 2008,
Endocares stock price has declined to as low as $0.40 (on
December 31, 2008). As the accounting acquiree in a reverse
acquisition, Endocares stock price will impact the
purchase price consideration and may result in a bargain
purchase acquisition for which a gain will be recorded by Galil
at the time of the Merger.
On September 30, 2008, Endocare had 11.8 million
shares of common stock outstanding and a market capitalization
of $17.7 million. Endocares outstanding options,
warrants and other instruments exercisable or convertible into
common stock are valued at approximately $1.0 million, for
a total pro forma purchase consideration of $18.7 million.
The fair value of the net assets of Endocare at
September 30, 2008, including goodwill and internally
developed intangibles, is estimated at $18.0 million.
The estimated purchase price may change due to changes in the
fair value of the net assets of Endocare during the period from
September 30, 2008 to the Merger closing date and based on
the actual costs to complete the Merger.
Under the acquisition method of accounting, the total purchase
price is allocated to the acquired tangible and intangible
assets and assumed liabilities of Endocare based on their
estimated fair values as of the Merger closing date. The excess
of the purchase price over the fair value of assets acquired and
liabilities assumed, if any, is allocated to goodwill. The
excess of the fair value of assets acquired and liabilities
assumed, if any, is recorded as a gain at the time of the
transaction.
83
The allocation of the estimated purchase price is preliminary
because the proposed Merger has not yet been completed. The
purchase price allocation will remain preliminary until Endocare
management determines the fair values of assets acquired and
liabilities assumed. The final determination of the purchase
price allocation is anticipated to be completed as soon as
practicable after completion of the Merger and will be based on
the value of the Endocare share price at the close of the
Merger. The final amounts allocated to assets acquired and
liabilities assumed could differ significantly from the amounts
presented in the unaudited pro forma condensed combined
financial statements.
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Standards
(SFAS) No. 141 Revised (SFAS 141R), which
replaced SFAS 141, Business Combinations, for
periods beginning on or after December 15, 2008,
(January 1, 2009 for Endocare and Galil) but retains the
fundamental requirements in SFAS 141, that the acquisition
method of accounting be used for all business combinations and
for an acquirer to be identified for each business combination.
SFAS 141R revises the definition of the acquisition date as
the date the acquirer obtains control of the acquiree. This is
typically the closing date, and is used to measure the fair
value of the consideration paid. When the acquirer issues equity
instruments as full or partial payment for the acquiree, the
fair value of the acquirers equity instruments will be
measured at the acquisition date, rather than an earlier
measurement date (i.e. the merger announcement date) as
currently required under SFAS 141. Transaction costs are
excluded from the acquisition accounting. They are instead
accounted for under other generally accepted accounting
principles, which may mean the costs are expensed as incurred
(e.g., due diligence costs), or, to the extent applicable,
treated as a cost of issuing equity securities. Statement 141R
nullifies EITF
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination and requires costs associated with
restructuring or exit activities that do not meet the
recognition criteria in SFAS 146 (as amended),
Accounting for Costs Associated with Exit or Disposal
Activities as of the acquisition date to be subsequently
recognized as post-combination costs when those criteria are met.
SFAS 141R also retains the guidance in SFAS 141 for
identifying and recognizing intangible assets separately from
goodwill. However, SFAS 141Rs scope is broader than
that of SFAS 141, which was applied to only business
combinations in which control was obtained by transferring
consideration. Since the transaction is expected to close after
January 1, 2009, the application of SFAS 141R has been
considered in arriving at the unaudited pro forma results.
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4.
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Pro Forma
and Purchase Accounting Adjustments
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The unaudited pro forma condensed combined financial statements
include pro forma adjustments to give effect to certain
significant capital transactions occurring as a direct result of
the proposed Merger, the acquisition of Endocare by Galil for
accounting purposes and the effect of the concurrent Financing
with certain Galil and Endocare shareholders.
The pro forma adjustments are as follows:
(A) To reflect the estimated fair value of Endocares
tangible and intangible assets and resulting goodwill assuming
that the Merger is consummated at September 30, 2008.
(B) To reflect the elimination of the historical additional
paid-in capital and accumulated deficit of Endocare and to
restate additional paid-in capital on the acquisition date based
on the Merger consideration paid.
(C) To reflect the expected conversion of Galil preferred
stock into ordinary shares, which are in turn exchanged into
Endocare common stock. Immediately prior to the effective time
of the Merger, 81.7 million shares of Galil preferred stock
will be converted into approximately 280.2 million Galil
ordinary shares at a ratio determined in accordance with the
Galils Articles of Association, as amended.
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The exact conversion ratio in the Merger between Galil and
Endocare cannot be calculated until immediately prior to the
effective time of the Merger, but it is expected that Endocare
will issue one common share for every 33 ordinary shares held by
Galil shareholders for a total of 11.1 million shares of
Endocare common stock.
Immediately following the effective time of the Merger and
attributing ownership to Galil shareholders of the Escrow
Shares, Galil shareholders will own approximately 48%, and
Endocares existing stockholders will own approximately
52%, of Endocares common stock, without giving effect to
the shares issuable pursuant to the Financing. The Merger will
have no effect on the number of shares of common stock of
Endocare owned by existing Endocare stockholders.
(D) To reflect estimated additional costs to consummate the
Merger and to register the shares issued in the Merger that are
not yet reflected in the historical results of Endocare and
Galil at September 30, 2008. Merger costs include fees
payable for investment banking services, legal, accounting,
printing and other consulting services. Of the $3,579, $2,414
relates to Endocare and $1,165 for Galil. These costs are
expensed as incurred and the additional Galil costs of $1,165
are reflected as an increase in other accrued liabilities and
accumulated deficit.
(E) To reflect additional depreciation and amortization for
the write-up of assets to fair value. Intangibles (i.e.
trademarks, patents, international distributor network, and
developed technology) are amortized over useful lives ranging
from five to eleven years.
(F) To reflect the $16.25 million Financing to be
completed concurrent with the Merger. Net proceeds are estimated
at $15,775 after $475 in issuance costs, which is recorded as a
reduction of paid in capital.
(G) To reflect the interest income from cash proceeds
received in the $16.25 million Financing as if it occurred
on January 1, 2007 based on interest rate of approximately
2.6% to 4.8% which approximate historical returns.
(H) To eliminate Merger related expenses included in the
historical statements of operations that were directly related
to the acquisition.
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PROPOSALS TO
BE CONSIDERED AT THE ENDOCARE SPECIAL MEETING
Proposal 1:
Approval of the Issuance of Common Stock Pursuant to the
Merger Agreement.
General
At the special meeting, Endocares stockholders will be
asked to approve the issuance of shares of Endocare common stock
in the Merger pursuant to the Merger Agreement. Immediately
following the effective time of the Merger and attributing
ownership to Galils shareholders of the Escrow Shares, but
prior to taking into account the shares of Endocare common stock
issued in the Financing, Galils shareholders will own
approximately 48.0% of Endocares outstanding shares of
common stock, and Endocares existing stockholders will own
approximately 52.0% of Endocares outstanding shares of
common stock, subject to various assumptions and conditions
described in detail in this proxy statement/prospectus. Upon
consummation of the Merger and the Financing and attributing
ownership to Galils shareholders of the Escrow Shares,
Galils shareholders will own approximately 61.5% of
Endocares outstanding common stock, and Endocares
existing stockholders will own approximately 38.5% of
Endocares outstanding common stock. The terms of, reasons
for and other aspects of the Merger Agreement and the issuance
of shares of Endocare common stock in the Merger pursuant to the
Merger Agreement are described in detail in the other sections
of this proxy statement/prospectus.
Because Endocare common stock is listed on the Nasdaq Capital
Market, Endocare is subject to Nasdaq rules and regulations.
Nasdaq Marketplace Rule 4350(i)(1)(c)(ii) requires
Endocare, subject to certain exceptions, to obtain shareholder
approval prior to the issuance or sale of shares in any
transaction in connection with the acquisition of the stock or
assets of another company, if where, due to the present or
potential issuance of common stock, or securities convertible
into or exercisable for common stock, other than a public
offering for cash:
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the common stock has or will have upon issuance voting power
equal to or in excess of 20% of the voting power outstanding
before the issuance of stock or securities convertible into or
exercisable for common stock; or
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the number of shares of common stock to be issued is or will be
equal to or in excess of 20% of the number of shares or common
stock outstanding before the issuance of the stock or securities.
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The purpose of this Proposal No. 1 is to satisfy the
requirements of Nasdaq Marketplace Rule 4350(i)(1)(c)(ii)
by obtaining stockholder approval of the issuance of shares of
Endocare common stock in the Merger pursuant to the Merger
Agreement.
The Nasdaq rules also require a company to obtain stockholder
approval prior to an issuance of stock that will result in a
change of control of the company. The Nasdaq rules do not define
change of control. The issuance of the shares of
Endocare common stock in the Merger and the Financing will
result in the Endocare stockholders immediately prior to the
effective time of the Merger holding only 38.5% of the shares of
Endocare common stock then outstanding. Because of the diverse
holders of Galil shares, Endocare does not believe that such
issuance constitutes a change of control of Endocare, however,
to ensure that there is no violation of the Nasdaqs change
of control requirement, Endocare has included this disclosure
for your consideration. If this issuance is deemed to result in
a change of control under the Nasdaq rules, the approval of
Proposal 1 by Endocares stockholders will also
constitute approval of such change of control.
The full text of the Merger Agreement is attached to this proxy
statement/prospectus as Annex A.
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Required
Vote
The affirmative vote of the holders of a majority of the shares
of Endocares common stock present in person or represented
by proxy and voting on such matter at the special meeting is
required for approval of Proposal 1. Abstentions and broker
non-votes will not vote on the matter, and therefore will have
no effect on the outcome of the proposal.
The approval of both Proposals 1 and 2 is required for
completion of the Merger. In the event that either
Proposal 1 or 2 or both are not approved by the Endocare
stockholders at the special meeting, the Merger will not be
consummated.
Recommendation
of the Board of Directors
Endocares board of directors unanimously recommends that
Endocares stockholders vote FOR Proposal 1 to
approve the issuance of shares of Endocare common stock in
connection with the Merger.
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Proposal 2:
Approval of the Issuance of Common Stock Pursuant to the
Stock Purchase Agreement
General
At the special meeting, Endocares stockholders will be
asked to approve the issuance of up to 16,250,000 shares of
Endocare common stock pursuant to the Stock Purchase Agreement
and in connection with the Financing. Upon consummation of the
Merger and the Financing and attributing ownership to
Galils shareholders of the Escrow Shares, Galils
shareholders will own approximately 61.5%, and Endocares
existing stockholders will own approximately 38.5%, of
Endocares common stock. The terms of, reasons for and
other aspects of the Stock Purchase Agreement and the issuance
of up to 16,250,000 shares of Endocare common stock
pursuant to the Stock Purchase Agreement are described in detail
in other sections of this proxy statement/prospectus.
Nasdaq Marketplace Rule 4350(i)(1)(c)(ii) requires a
Nasdaq-listed company, subject to certain exceptions, to obtain
shareholder approval prior to the issuance or sale of shares in
any transaction in connection with the acquisition of the stock
or assets of another company, if where, due to the present or
potential issuance of common stock, or securities convertible
into or exercisable for common stock, other than a public
offering for cash:
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the common stock has or will have upon issuance voting power
equal to or in excess of 20% of the voting power outstanding
before the issuance of stock or securities convertible into or
exercisable for common stock; or
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the number of shares of common stock to be issued is or will be
equal to or in excess of 20% of the number of shares or common
stock outstanding before the issuance of the stock or securities.
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Because the issuance of shares in the Financing may be deemed
in connection with the acquisition of the stock or
assets of another company for purposes of Nasdaq Marketplace
Rule 4350(i)(1)(c)(ii), Endocare is soliciting stockholder
approval of the issuance of up to 16,250,000 shares of
Endocare common stock in the Financing.
The full text of the Stock Purchase Agreement is attached to
this proxy statement/prospectus as Annex B.
Required
Vote
The affirmative vote of the holders of a majority of the shares
of Endocares common stock present in person or represented
by proxy and voting on such matter at the special meeting is
required for approval of Proposal 2. Abstentions and broker
non-votes will not vote on the matter, and therefore will have
no effect on the outcome of the proposal.
The approval of both Proposals 1 and 2 is required for
completion of the Merger. In the event that either
Proposal 1 or 2 or both are not approved by the Endocare
stockholders at the special meeting, the Merger will not be
consummated.
Recommendation
of Board of Directors
Endocares board of directors unanimously recommends that
Endocares stockholders vote FOR Proposal 2 to
approve the issuance of up to 16,250,000 shares of Endocare
common stock in pursuant to the Stock Purchase Agreement and in
connection with the Financing.
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Proposal 3:
Approval of the Endocare, Inc. 2009 Stock Incentive Plan
As of December 31, 2008, an aggregate of
1,542,859 shares of common stock remained available under
Endocares existing equity plans for the grant of
stock-based incentives. In addition, as of such date, awards
covering 1,986,590 shares were outstanding under
Endocares existing equity plans. Endocares board of
directors believes that the number of shares currently available
are insufficient to allow the combined company to continue to
make substantial use of stock-based incentives to attract,
retain and motivate qualified employees, officers and
non-employee directors. In order to increase the aggregate
number of shares available for stock-based incentives,
Endocares board of directors approved, subject to
stockholder approval, the 2009 Stock Incentive Plan (the
2009 Plan) on January 21, 2009, to make
available 5,000,000 shares of Endocares common stock
for stock-based awards. Endocares board of directors is
submitting the 2009 Plan to the stockholders for their approval
at the special meeting.
The approval of both Proposals 1 and 2 is required for
completion of the Merger. In addition, unless the Merger is
completed, the Endocare, Inc. 2009 Stock Incentive Plan will not
be implemented by Endocare, whether or not approved by the
Endocare stockholders.
Why You
Should Vote for the 2009 Plan
Endocares board of directors recommends that
Endocares stockholders approve the 2009 Plan because it
believes Endocares ability after the Merger to grant an
appropriate number of equity-based awards continues to be
crucial in allowing Endocare to effectively compete for key
employee talent against other companies. It is in the long-term
interest of Endocare and its stockholders to strengthen the
ability to attract, motivate and retain employees, officers,
directors, consultants, agents, advisors and independent
contractors, and to provide additional incentive for those
persons through stock ownership and other incentives to improve
operations, increase profits and strengthen the mutuality of
interest between those persons and Endocares stockholders.
Promotion
of Good Corporate Governance Practices
Endocares board of directors believes the use of equity
incentive awards promotes best practices in corporate governance
by maximizing stockholder value. By providing participants in
the 2009 Plan with a stake in Endocares success, the
interests of the participants are aligned with those of
Endocares other stockholders. The 2009 Plan will provide
incentives to plan participants to operate Endocare in the most
efficient way possible.
Specific features of the 2009 Plan that are consistent with good
corporate governance practices include, but are not limited to:
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options may not be granted with exercise prices lower than the
fair market value of the underlying shares on the grant date;
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there can be no repricing of options or stock appreciation
rights issued under the 2009 Plan without stockholder approval,
either by canceling the award in exchange for another award,
option or stock appreciation right with an exercise price that
is less than the exercise price of the original award, or by
reducing the exercise price of the option or stock appreciation
right, other than in connection with a change in Endocares
capitalization;
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the ability to issue full-value awards (awards other than
options and stock appreciation rights) is limited by requiring
that these awards count one and a half times as much as options
and stock appreciation rights against the authorized number of
shares issuable under the 2009 Plan;
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the administrator of the 2009 Plan has discretion to pay to
holders of restricted stock and restricted stock units their
awards in cash or shares of common stock, according to the
current cash or capitalization needs of Endocare; and
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there can be no recycling of shares from exercised awards,
meaning shares of common stock subject to an award cannot be
made available for issuance if the shares were subject to a
stock-settled stock appreciation
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right and were not issued in the net settlement, were used to
pay the exercise price of an option, were delivered or withheld
to pay the withholding taxes related to an award, or were
repurchased on the open market with the proceeds of an option
award.
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Need
to Remain Competitive
Endocares board of directors believes the use of incentive
equity awards is an integral component of compensation for
Endocares employees. Employees consider equity awards an
important part of their total compensation, and they expect
these awards when they join Endocare. Consequently,
Endocares board of directors believes Endocare must
continue to award its employees with equity awards to maintain
its competitive position.
Section 162(m)
of the Code
Endocares board of directors believes that it is in the
best interests of Endocare and its stockholders to provide for
an incentive plan under which certain stock-based
and/or cash
compensation awards made to Endocares executive officers
can qualify for deductibility by Endocare for federal income tax
purposes. Accordingly, the 2009 Plan has been structured in a
manner such that awards under it can satisfy the requirements
for performance-based compensation within the
meaning of Section 162(m) of the Code
(Section 162(m)). In general, under
Section 162(m), in order for Endocare to be able to deduct
compensation in excess of $1 million paid in any one year
to Endocares Chief Executive Officer or any of
Endocares three other most highly compensated executive
officers (other than Endocares Chief Financial Officer),
such compensation must qualify as performance-based.
One of the requirements of performance-based
compensation for purposes of Section 162(m) is that the
material terms of the performance goals under which compensation
may be paid be disclosed to and approved by Endocares
stockholders. For purposes of Section 162(m), the material
terms include (i) the employees eligible to receive
compensation, (ii) a description of the business criteria
on which the performance goal is based and (iii) the
maximum amount of compensation that can be paid to an employee
under the performance goal. With respect to the various types of
awards under the 2009 Plan, each of these aspects is discussed
below, and stockholder approval of the 2009 Plan will be deemed
to constitute approval of each of these aspects of the 2009 Plan
for purposes of the approval requirements of Section 162(m).
Summary
of the Plan
The following is a description of the material features of the
2009 Plan. The description does not purport to be complete and
is qualified in its entirety by reference to the full text of
the 2009 Plan which is attached to this proxy
statement/prospectus as Annex C and incorporated herein by
reference. Stockholders are encouraged to read the text of the
2009 Plan in its entirety.
Purpose
The purpose of the 2009 Plan is to enable Endocare and its
subsidiaries after the Merger to attract, retain and motivate
their directors, officers, employees and service providers, and
to further align the interests of such persons with those of the
stockholders of Endocare by providing for or increasing the
proprietary interest of such persons in Endocare.
Eligible
Participants
Any person who is a current or prospective officer or employee
of Endocare or its subsidiaries, and any director of Endocare or
other service provider retained to provide consulting, advisory
or other services to Endocare or its subsidiaries, is eligible
to be considered for the grant of awards under the 2009 Plan. As
of [ ], 2009, approximately 120 employees
and 4 non-employee directors were eligible to participate in the
2009 Plan.
Available
Shares
The maximum number of shares of common stock of Endocare that
may be issued pursuant to awards granted under the 2009 Plan
will be 5,000,000 (subject to adjustments to prevent dilution),
plus any shares subject to outstanding awards under
Endocares 2004 Stock Incentive Plan, 1995 Stock Plan and
1995 Director Option Plan (collectively, the Prior
Plans) as of the effective time of the Merger, that on or
after such date cease for any reason to be subject to such
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awards (other than by reason of exercise or settlement of the
awards to the extent they are exercised for or settled in vested
and nonforfeitable shares). No shares reserved for issuance
under the Prior Plans will be transferred for issuance under the
2009 Plan. No awards will be made under the Prior Plans after
the effective time of the Merger. The aggregate number of shares
issued under the 2009 Plan will equal only the number of shares
actually issued upon exercise or settlement of an award and will
not include shares subject to awards that have been canceled,
expired or forfeited.
Tax
Code Limitations
The aggregate number of shares subject to awards granted under
the 2009 Plan during any calendar year to any one participant
shall not exceed 1,500,000 shares; provided, however, that
for the year in which a participant commences employment or
service with Endocare, this limit will be increased to
3,000,000 shares. The aggregate number of shares that may
be issued pursuant to the exercise of incentive stock options
granted under the 2009 Plan shall not exceed 5,000,000 (plus any
shares subject to outstanding awards under Prior Plans as of the
effective time of the Merger that on or after such date cease
for any reason to be subject to such awards (other than by
reason of exercise or settlement of the awards to the extent
they are exercised for or settled in vested and non-forfeitable
shares)), which number is subject to antidilution adjustment to
the extent that such adjustment will not affect the status of
any option intended to qualify as an incentive stock option
under Code Section 422. The maximum cash amount payable
pursuant to that portion of an incentive bonus granted in any
calendar year to any participant under the 2009 Plan that is
intended to satisfy the requirements for performance-based
compensation under Section 162(m) of the Code shall
not exceed $3,000,000.
Administration
The 2009 Plan will be administered by a committee of
Endocares board of directors consisting of two or more
directors, each of whom is (1) a non-employee
director within the meaning of
Rule 16b-3
promulgated under the Exchange Act and (2) is an
outside director within the meaning of the
regulations adopted under Code Section 162(m), provided
however, that with respect to any award that is not intended to
satisfy the conditions of
Rule 16b-3
under the Exchange Act or Code Section 162(m)(4)(c), the
committee may appoint one or more separate committees composed
of one or more directors of Endocare (who may but need not be
members of the Compensation Committee of Endocare) and may
delegate to any such subcommittees the authority to grant awards
under the 2009 Plan to eligible persons, to determine all terms
of such awards, and to administer the plan or any aspect of it.
Subject to the provisions of the 2009 Plan, the administrator
has the power to do all things necessary or desirable in
connection with the administration of the 2009 Plan.
Amendments
Endocares board of directors may amend, alter or
discontinue the 2009 Plan or any agreement or other document
evidencing an award made under the plan, but, except as provided
pursuant to the anti-dilution adjustment provisions of the plan,
no such amendment may be made without the approval of the
stockholders of Endocare if such amendment would require
stockholder approval by law or under the Nasdaq Capital Market
listing requirements, if applicable.
No amendment may impair the rights of any participant under an
award without their consent, provided that no consent is
required prior to any change of control of Endocare if the
amendment is advisable in order for Endocare or the 2009 Plan or
award to satisfy any law or regulation, or meet the requirements
of or avoid adverse financial accounting consequences under any
accounting standard.
Awards
The 2009 Plan authorizes the administrator to grant awards to
eligible participants in the form of incentive and nonqualified
stock options, stock appreciation rights, restricted stock and
restricted stock units, any of which may be performance-based,
and for incentive bonuses, which may be paid in cash or stock or
a combination thereof.
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Stock
Options
The administrator of the 2009 Plan may grant an option to
purchase common stock of Endocare, either from time to time in
the discretion of the administrator or automatically upon the
occurrence of specified events, such as the achievement of
performance goals, or the satisfaction of an event or condition.
Options may be incentive stock options that qualify under Code
Section 422 (Incentive Stock Options) or
nonstatutory stock options (Nonqualified Stock
Options).
The exercise price per share of common stock subject to an
option granted under the 2009 Plan must equal or exceed 100% of
the fair market value of such common stock on the date the
option is granted, except that:
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the exercise price of an option may be higher or lower in the
case of options granted to an employee of a company acquired by
Endocare in assumption and substitution of options held by such
employee at the time such company is acquired; and
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the exercise price of an incentive stock option granted to an
individual owning more than 10% of the combined voting power of
all classes of Endocare stock must equal or exceed 110% of the
fair market value of such common stock.
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In no event will the exercise price per share of common stock
subject to an option that is intended to qualify as
performance based compensation under Code
Section 162(m) be less than 100% of the fair market value
of such common stock on the date the option is granted. On
[ ], 2009, the fair market value of a share of
common stock of Endocare was $[ ].
Unless the administrator provides for a shorter period, the
maximum term of an option granted under the 2009 Plan, including
any Incentive Stock Options, will be 10 years from the date
of its grant, except that Incentive Stock Options granted to an
individual who, at the time the option is granted to such
individual, owns more than 10% of the combined voting power of
all classes of stock of Endocare will have a term no greater
than 5 years from the date of grant. Options granted under
the 2009 Plan will vest according to a schedule determined by
the administrator, provided however, that no option, other than
non-employee director options, may first become exercisable
within one year from the date of grant, other than upon the
death or disability of a participant or a change of control of
Endocare.
The administrator will determine the acceptable forms of payment
of the exercise price of an option, which may include:
(1) cash, (2) shares of capital stock of Endocare,
(3) an irrevocable commitment by a broker to pay over the
amount from a sale of shares issuable under an option,
(4) delivery of previously owned shares,
(5) withholding of shares or (6) any combination of
the above.
Incentive
Bonus
An incentive bonus award is an award which confers upon the
participant the opportunity to earn a future payment tied to the
level of achievement with respect to one or more performance
criteria established for a specified performance period. The
maximum amount payable pursuant to an incentive bonus award
granted under the 2009 Plan for any fiscal year to any
participant that is intended to satisfy the requirements for
performance based compensation under
Section 162(m) cannot exceed $3,000,000.
Restricted
Stock and Restricted Stock Units
Restricted stock is an award or issuance of shares of common
stock of Endocare, the grant, issuance, retention, vesting
and/or
transferability of which is subject, during specified periods of
time, to such conditions (including continued employment or
performance conditions) and terms as the administrator deems
appropriate. Restricted stock units are awards denominated in
units of shares of common stock of Endocare under which the
issuance of shares is subject to such conditions (including
continued employment or performance conditions) and terms as the
administrator deems appropriate. The administrator will
determine the extent to which awards of restricted stock and
restricted stock units may be settled in cash, shares of common
stock of Endocare, or a combination of the above. Participants
receiving restricted stock awards are entitled to the voting and
dividend rights of the shares of common stock underlying the
awards. Participants receiving restricted stock unit awards are
not entitled to the
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voting rights of the underlying shares of common stock, and are
entitled to the dividend rights only to the extent determined by
the administrator.
Stock
Appreciation Rights
A stock appreciation right is an award pursuant to which a
participant, for each right subject to the award, may be
entitled to receive the amount, if any, by which the fair market
value of a share of common stock of Endocare on the date of
exercise exceeds a measurement value, multiplied by the number
of shares of common stock with respect to which the award
relates. The measurement value of a stock appreciation right
must equal or exceed the fair market value of a share of common
stock of Endocare on the date of the grant. Stock appreciation
rights may be granted either in tandem with or as a component of
other awards granted under the 2009 Plan (Tandem
SARs) or as a stand-alone award (Stand-Alone
SARs). The grant, retention, vesting
and/or
transferability of the stock appreciation right is subject
during specified periods of time to such conditions and terms as
the administrator of the 2009 Plan deems appropriate. The stock
appreciation right may be paid in cash or shares of common stock
of Endocare or a combination of the two, in the discretion of
the administrator. Unless the administrator provides for a
shorter period, the maximum term of a stock appreciation right
granted under the 2009 Plan will be 10 years from the date
of grant.
Performance
Criteria
For purposes of the 2009 Plan, qualifying performance criteria
means the following criteria, individually, alternatively or in
any combination, applied to either Endocare as a whole or to a
business unit, subsidiary or one or more joint ventures, either
individually, alternatively or in any combination, and measured
either annually or cumulatively over a period of years, on an
absolute basis or relative to a pre-established target, to
previous years results or to a designated comparison
group, in each case as specified by the administrator in the
award:
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cash flow (before or after dividends)
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earnings per share (including earnings before any
one or more of interest, taxes, depreciation and amortization)
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stock price
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return on equity
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total stockholder return
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return on capital (including return on total capital
or return on invested capital)
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return on inventory, assets or net assets
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market capitalization
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economic value added
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debt leverage (debt to capital, debt to equity or
other leverage criteria)
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revenue
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income or net income
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operating income, or net operating income
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operating profit or net operating profit
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operating, gross or pretax margin
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return on operating revenue
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cash from operations
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operating ratio
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operating revenue
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market share
|
|
SG&A ratio
|
borrowing capacity and other liquidity criteria
|
|
inventory turnover, increase or reduction
|
|
income from joint ventures
|
interest coverage
|
|
shareholders equity or book value per share
|
|
overhead or other cost reduction
|
brand recognition/acceptance
|
|
product launch targets
|
|
customer service
|
customer or employee satisfaction
|
|
product development or release schedules or new
product innovation
|
|
the sales of assets or subsidiaries
|
To the extent consistent with Section 162(m) of the Code,
the administrator may appropriately adjust any evaluation of
performance under a qualifying performance criteria to
(i) eliminate the effects of charges for restructurings,
discontinued operations, extraordinary items and all items of
gain, loss or expense determined to be
93
extraordinary or unusual in nature or related to the disposal of
a segment of a business or related to a change in accounting
principle all as determined in accordance with standards
established by opinion No. 30 of the Accounting Principles
Board (APA Opinion No. 30) or other applicable or
successor accounting provisions, as well as the cumulative
effect of accounting changes, in each case as determined in
accordance with generally accepted accounting principles or
identified in Endocares financial statements or notes to
the financial statements,
and/or
(ii) exclude any of the following events that occurs during
a performance period: (A) asset write-downs,
(B) litigation, claims, judgments or settlements,
(C) the effect of changes in tax law or other such laws or
provisions affecting reported results, (D) accruals for
reorganization and restructuring programs and (E) accruals
of any amounts for payment under the 2009 Plan or any other
compensation arrangement maintained by Endocare.
Change
of Control of Endocare
The administrator has the discretion to provide, either at the
time an award is granted or thereafter, that a change of control
of Endocare will have such effect as specified by the
administrator, or no effect. Without limiting this discretion,
the 2009 Plan provides for automatic accelerated vesting and
termination (upon consummation of the transaction) of any awards
granted under the 2009 Plan that are not assumed, continued or
replaced in connection with the change of control. The 2009 Plan
further provides that if awards under the 2009 Plan are assumed,
continued or replaced in a change of control transaction, the
vesting of the assumed, continued or replaced award will be
accelerated in the event of a termination of the
participants employment without cause within one year of
the change of control transaction.
Deferral
The administrator has the discretion to provide that payment of
awards granted under the 2009 Plan may be deferred by the
recipient to the extent permitted under
Section 409A(a)(1)(B) of the Code.
Termination
The 2009 Plan will terminate on the tenth anniversary of its
approval by Endocares stockholders, unless Endocares
board of directors terminates it sooner.
Federal
Income Tax Treatment
The following is a brief description of the federal income tax
treatment that will generally apply to awards made under the
2009 Plan, based on federal income tax laws currently in effect.
The exact federal income tax treatment of awards will depend on
the specific nature of any such award and the individual tax
attributes of the award recipient. This summary is not intended
to be a complete analysis and discussion of the federal income
tax treatment of the 2009 Plan, and does not discuss gift or
estate taxes or the income tax laws of any municipality, state
or foreign country.
Incentive
Stock Options
Options granted under the 2009 Plan may qualify as Incentive
Stock Options within the meaning of Code Section 422. If an
optionee exercises an Incentive Stock Option in accordance with
its terms and does not dispose of the shares acquired within two
years from the date of the grant of the Incentive Stock Option
or within one year from the date of exercise (the Required
Holding Periods), an optionee generally will not recognize
ordinary income and Endocare will not be entitled to any
deduction, on either the grant or the exercise of the Incentive
Stock Option. An optionees basis in the shares acquired
upon exercise will be the amount paid upon exercise. Provided an
optionee holds the shares as a capital asset at the time of sale
or other disposition of the shares, an optionees gain or
loss, if any, recognized on the sale or other disposition will
be capital gain or loss. The amount of an optionees gain
or loss will be the difference between the amount realized on
the disposition of the shares and the optionees basis in
the shares. The gain or loss will be long-term capital gain or
loss if the shares are held for at least one year after exercise
of the option; otherwise, it will be short-term.
If, however, an optionee disposes of the acquired shares at any
time prior to the expiration of the Required Holding Periods,
then (subject to certain exceptions), the optionee will
recognize ordinary income at the time of
94
such disposition which will equal the excess, if any, of the
lesser of (1) the amount realized on such disposition or
(2) the fair market value of the shares on the date of
exercise, over the optionees basis in the shares. Endocare
generally will be entitled to a deduction in an amount equal to
the amount of ordinary income recognized by an optionee. Any
gain in excess of such ordinary income amount will be a
short-term or long-term capital gain, depending on the
optionees holding period. If an optionee disposes of such
shares for less than the optionees basis in the shares,
the difference between the amount realized and the
optionees basis will be short-term or long-term capital
loss, depending upon the holding period of the shares.
Nonqualified
Stock Options
In general, there are no tax consequences to the optionee or to
Endocare on the grant of a Nonqualified Stock Option. On
exercise, however, the optionee generally will recognize
ordinary income equal to the excess of the fair market value of
the shares as of the exercise date over the purchase price paid
for such shares, and Endocare will be entitled to a deduction
equal to the amount of ordinary income recognized by the
optionee. Provided the shares received under a Nonqualified
Stock Option are held as a capital asset, upon the subsequent
disposition of the shares the optionee will recognize capital
gain or loss in an amount equal to the difference between the
proceeds received upon disposition and his or her basis for the
shares. The basis will be equal to the sum of the price paid for
the shares and the amount of income realized upon exercise of
the option. Any capital gain or loss to the optionee will be
characterized as long-term or short-term, depending upon the
holding period of the shares.
Stock
Appreciation Rights
Generally, the recipient of a Stand-Alone SAR will not recognize
any taxable income at the time the Stand-Alone SAR is granted.
If the employee receives the appreciation inherent in the SARs
in cash, the cash will be taxable as ordinary compensation
income to the employee at the time that it is received. If the
employee receives the appreciation inherent in the Stand-Alone
SARs in stock, the employee will recognize ordinary compensation
income equal to the excess of the fair market value of the stock
on the day it is received over any amounts paid by the employee
for the stock.
With respect to Tandem SARs, if a holder elects to surrender the
underlying option in exchange for cash or stock equal to the
appreciation inherent in the underlying option, the tax
consequences to the employee will be the same as discussed above
relating to Stand-Alone SARs. If the employee elects to exercise
the underlying option, the holder will be taxed at the time of
exercise as if he or she had exercised a nonqualified stock
option (discussed above), i.e., the employee will recognize
ordinary income for federal tax purposes measured by the excess
of the then fair market value of the shares over the exercise
price.
In general, there will be no federal income tax deduction
allowed to Endocare upon the grant or termination of Stand-Alone
SARs or Tandem SARs. However, upon the exercise of either a
Stand-Alone SAR or a Tandem SAR, Endocare will be entitled to a
deduction for federal income tax purposes equal to the amount of
ordinary income that the employee is required to recognize as a
result of the exercise, provided that the deduction is not
otherwise disallowed under the Code.
Restricted
Stock and Restricted Stock Units
Upon grant of restricted stock or restricted stock units, a
participant generally will not have taxable income. Instead, he
or she will recognize ordinary income in the first taxable year
in which his or her interest in the shares underlying the award
becomes either (i) freely transferable or (ii) no
longer subject to substantial risk of forfeiture (e.g., vested).
However, a holder of a restricted stock award may elect to
recognize income at the time he or she receives the award in an
amount equal to the fair market value of the shares underlying
the award less any amount paid for the shares on the date the
award is granted. Endocare generally will be entitled to a
deduction at the same time and in the same amount as a
participant recognizes ordinary income.
95
Incentive
Bonus
Receipt of a cash incentive bonus will cause the participant to
recognize ordinary income with respect to such award at the
earliest time at which the participant has an unrestricted right
to receive the amount of the cash payment, and Endocare will be
entitled to a corresponding deduction.
Golden
Parachute Provisions
The terms of awards granted under the 2009 Plan may provide for
accelerated vesting or payment of an award in connection with a
change of control of Endocare. In that event and depending upon
the individual circumstances of the recipient, certain amounts
with respect to such awards may constitute excess
parachute payments under the golden parachute
provisions of the Code. Pursuant to these provisions, a
participant will be subject to a 20% excise tax on any
excess parachute payments and Endocare will be
denied any deduction with respect to such payment.
Section 162(m)
Section 162(m) imposes a $1 million limit on the
amount of compensation that may be deducted by Endocare in any
tax year with respect to Endocares named executive
officers, other than Endocares Chief Financial Officer,
including any compensation relating to an award granted under
the 2009 Plan.
Compensation that is considered to be performance-based will not
have to be taken into account for purposes of the
$1 million limitation, and accordingly, should be
deductible by Endocare without limitation under
Section 162(m). Options and other awards granted under the
2009 Plan may, at the administrators discretion, be
intended to be performance-based compensation that qualifies for
the exception from the $1 million limit.
Withholding
Taxes
Endocare will generally be required to withhold applicable taxes
with respect to any ordinary income recognized by a participant
in connection with awards made under the 2009 Plan. Whether or
not such withholding is required, Endocare will make such
information reports to the Internal Revenue Service as may be
required with respect to any income (whether or not that of an
employee) attributable to transactions involving awards.
Other
Information
On December 31, 2008, (i) 1,355,483 shares were
covered by stock options granted under Endocares existing
stock incentive plans, at exercise prices ranging from $1.33 to
$63.69 per share, with a weighted average exercise price of
$12.36 and expiration dates ranging from January 6, 2009 to
October 2, 2018; (ii) 386,763 shares were subject
to unvested awards of restricted stock granted under the
existing stock incentive plans, (iii) 244,344 shares were
subject to unearned performance shares granted under the
existing stock incentive plans; (iv) 702,548 shares
remained available to support additional awards under
Endocares 2004 Stock Incentive Plan;
(v) 606,292 shares remained available to support
additional awards under Endocares Employee Deferred Stock
Unit Program; and (vi) 234,019 available to support additional
awards under Endocares Non-Employee Director Deferred
Stock Unit Plan.
Information about stock option and performance share awards
granted in 2008 to the Chief Executive Officer, Chief Financial
Officer and the three other most highly compensated executive
officers can be found in the table under the heading
Outstanding Equity Awards at 2008 Fiscal
Year-End on page 177 of this proxy statement/prospectus.
Participation in the 2009 Plan is in the discretion of the
administrator. Accordingly, future participation by executive
officers, other employees and directors under the 2009 Plan is
not determinable. In addition, the benefits under the 2009 Plan
that would have been received by or allocated to such persons
for the last completed fiscal year had it been in effect cannot
be determined.
The 2009 Plan is not exclusive and does not limit the authority
of Endocares board of directors or the administrator to
adopt such other incentive arrangements as they may deem
desirable.
96
Additionally, upon consummation of the Merger, it is expected
that approximately 764,918 shares of Endocare common stock
will be issuable pursuant to the Galil options assumed in the
Merger, and 129 Galil employees will be eligible to participate
in the 2009 Plan.
Due in large part to market and general economic circumstances
external to Endocares business, Endocares stock
price has fallen over the past two years, which has caused a
significant number of its outstanding stock option awards to be
out-of-the-money (meaning the exercise price of the option is
greater than the market price of a share of Endocares
common stock). The Compensation Committee of Endocare believes,
as a result of these options being out-of-the-money, the options
fail to provide the appropriate long-term incentive for
performance and retention of Endocares employee optionees.
The Endocare Compensation Committee has therefore considered the
possibility of seeking stockholder approval of a one-time
exchange of certain options that would allow Endocare to cancel
out-of-the-money stock options currently held by some of its
employees (including potentially employees joining Endocare as a
result of the Merger) in exchange for the issuance of new stock
options or restricted stock units. If the Compensation Committee
determines that it is in Endocares best interest to
proceed with such an exchange, shares available under the 2009
Plan may be used for such purpose, however, Endocare does not
intend to proceed with such an exchange without stockholder
approval.
Equity
Compensation Plan Information
The following table provides information as of December 31,
2008 with respect to the shares of our common stock that may be
issued under our existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to
|
|
|
Exercise Price of
|
|
|
Equity Compensation
|
|
|
|
be Issued Upon Exercise
|
|
|
Outstanding
|
|
|
Plans (Excluding
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
and Rights
|
|
|
Column A)
|
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
1,693,959
|
(1)
|
|
$
|
11.56
|
(3)
|
|
|
702,548
|
(5)
|
Equity Compensation Plans not Approved by Security Holders
|
|
|
291,010
|
(2)
|
|
$
|
34.50
|
(4)
|
|
|
840,311
|
(6)
|
Total
|
|
|
1,984,969
|
|
|
$
|
12.35
|
(3)(4)
|
|
|
1,542,859
|
|
|
|
|
(1) |
|
Consists of 425,583 shares to be issued upon the exercise
of options outstanding under the 1995 Stock Plan,
21,668 shares to be issued upon the exercise of options
outstanding under the 1995 Director Option Plan,
859,945 shares to be issued upon the exercise of options
outstanding under the 2004 Stock Incentive Plan and
386,763 shares to be issued upon the vesting of RSUs
outstanding under the 2004 Stock Incentive Plan. |
|
(2) |
|
Consists of 46,666 shares to be issued upon the exercise of
options outstanding under the 2002 Supplemental Stock Plan, an
aggregate of 78,363 DSUs held by employees under our Employee
DSU Program and an aggregate of 165,981 DSUs held by
non-employee directors under our Non-Employee Director DSU
Program. |
|
(3) |
|
The RSUs referred to above in footnote (1) are disregarded
for purposes of calculating the weighted average exercise price
because the RSUs do not have any exercise price. |
|
(4) |
|
The DSUs referred to above in footnote (2) are disregarded
for purposes of calculating the weighted average exercise price
because the DSUs do not have any exercise price. |
|
(5) |
|
Consists of shares available for future issuance under the 2004
Stock Incentive Plan. The number of shares of common stock
available for issuance under the 2004 Stock Incentive Plan
automatically increases on the first trading day of each
calendar year by an amount equal to 3% of the total number of
shares of common stock outstanding on the last trading day of
the immediately preceding calendar year, but in no event will
any such annual increase exceed 333,333 shares of common
stock. |
|
(6) |
|
Consists of 606,292 shares available for future issuance
under the Employee DSU Program and 234,019 shares available
for future issuance under the Non-Employee Director DSU Program. |
The above table does not include information for equity
compensation plans assumed by us in connection with mergers and
acquisitions of the companies which originally established those
plans. As of December 31, 2008, a
97
total of 1,621 shares of our common stock were issuable
upon exercise of outstanding options under those assumed plans.
The weighted average exercise price of those outstanding options
is $21.75 per share. No additional options may be granted under
those assumed plans.
Required
Vote
The affirmative vote of the holders of a majority of the shares
of Endocares common stock present in person or represented
by proxy and voting on such matter at the special meeting is
required for approval of Proposal 3. Abstentions and broker
non-votes will not vote on the matter, and therefore will have
no effect on the outcome of the proposal.
Recommendation
of Board of Directors
Endocares board of directors unanimously recommends that
Endocares stockholders vote FOR Proposal 3 to
approve the Endocare, Inc. 2009 Stock Incentive Plan.
98
Proposal 4:
Approval of Amendment to Endocares Restated Certificate
of Incorporation
General
At the special meeting, Endocares stockholders will be
asked to approve an amendment to Endocares Restated
Certificate of Incorporation, as amended (the
Amendment), in order to increase the total number of
shares of capital stock that Endocare is authorized to issue
from 51,000,000 shares to 76,000,000 shares by
increasing the total number of authorized shares of common stock
from 50,000,000 shares to 75,000,000 shares.
The approval of both Proposals 1 and 2 is required for
completion of the Merger. In addition, unless the Merger is
completed, the Amendment will not be filed with the Delaware
Secretary of State and the number of shares of capital stock
that Endocare is authorized to issue will not be increased,
whether or not approved by Endocares stockholders.
On January 21, 2009, Endocares board of directors
approved the Amendment in the form attached hereto as
Appendix D, subject to stockholder approval, and directed
that the Amendment be submitted to a vote of Endocares
stockholders. Endocares board of directors has determined
that the Amendment is in the best interest of Endocare and its
stockholders and recommends approval by Endocares
stockholders. Pursuant to the Delaware General Corporation Law,
Endocare is required to obtain stockholder approval to adopt the
Amendment.
If the Amendment is approved by Endocares stockholders,
the Amendment will become effective upon the filing with the
Delaware Secretary of State, which filing is expected to occur
promptly after the effective time of the Merger.
Endocares Restated Certificate of Incorporation, as
amended, currently authorizes the issuance of up to
50,000,000 shares of common stock. As of the record date
for the special meeting of Endocares stockholders, there
were [ ] shares of common stock issued and
outstanding, [ ] shares reserved for issuance
pursuant to the terms of Endocares equity incentive plans
and [ ] shares reserved for issuance pursuant
to the terms of Endocares outstanding warrants, leaving
[ ] shares of common stock available for future
issuances.
Endocare expects to issue an additional 11,092,330 shares
of common stock in the Merger, including the Escrow Shares,
reserve an additional [ ] shares of common
stock for issuance pursuant to Galil options assumed in the
Merger, issue an additional 16,250,000 shares of common
stock in the Financing and reserve an additional 1,192,106 for
issuance pursuant to the terms of Endocares outstanding
warrants, as a result of the antidilution adjustment under the
warrants resulting from the Financing. Assuming the issuance and
reservation for issuance of these shares in the Merger and the
Financing, the number of shares of common stock that will be
available for future issuance will be [ ].
Endocares board of directors believes that increasing the
number of shares of common stock that Endocare is authorized to
issue from 50,000,000 shares to 75,000,000 shares will
provide Endocare with additional flexibility to issue common
stock when advantageous market conditions present themselves.
Endocare currently has no specific plans or understandings with
respect to the issuance of any other common stock except as
described in this proxy statement/prospectus.
The additional shares of common stock being authorized by the
Amendment might be issued at times and under circumstances as to
have a dilutive effect on earnings per share or the percentage
ownership interest of the present holders of our common stock,
none of whom have preemptive rights under our Restated
Certificate of Incorporation, as amended, to subscribe for
additional securities that we may issue.
The provisions of the Amendment discussed above summarize
certain provisions of the Amendment and are qualified in their
entirety by reference to the text of the Amendment, which is
attached hereto as Appendix D. Before making a voting
decision on this Proposal 4, stockholders are urged to read
the entire text of the Amendment.
99
Required
Vote
The affirmative vote of the holders of a majority of the
outstanding shares of Endocare common stock as of the record
date is required to approve the proposed Amendment to
Endocares Restated Certificate of Incorporation, as
amended. As a result, abstentions and, if applicable, broker
non-votes will be treated as votes against the proposal.
Recommendation
of Board of Directors
Endocares board of directors unanimously recommends that
Endocares stockholders vote FOR Proposal 4 to
approve the amendment to Endocares Restated Certificate of
Incorporation, as amended, to increase the total number of
shares of capital stock that Endocare is authorized to issue
from 51,000,000 shares to 76,000,000 shares by
increasing the total number of authorized shares of common stock
from 50,000,000 shares to 75,000,000 shares.
100
Proposal 5:
Approval of Possible Adjournment of the Special Meeting
General
If Endocare fails to receive a sufficient number of votes to
approve Proposals 1 through 4, Endocare may propose to adjourn
the special meeting, if a quorum is present, for a period of not
more than 30 days for the purpose of soliciting additional
proxies to approve Proposals 1 through 4. Endocare
currently does not intend to propose adjournment at the special
meeting if there are sufficient votes to approve
Proposals 1 through 4.
Required
Vote
The affirmative vote of the holders of a majority of the shares
of Endocares common stock present in person or represented
by proxy and voting on such matter at the special meeting is
required for approval of Proposal 5. The persons named in
the enclosed proxy form will have the discretion, unless
otherwise noted on any proxy form, to vote to adjourn or
postpone the special meeting, subject to applicable law. No
proxy that is voted against Proposals 1 or 2 will be voted
in favor of any adjournment or postponement of the special
meeting.
Recommendation
of the Board of Directors
Endocares board of directors unanimously recommends that
Endocares stockholders vote FOR Proposal 5 to
approve a possible adjournment of the special meeting.
101
INFORMATION
ABOUT THE COMPANIES
Endocare,
Inc.
Overview
Endocare is specialty medical device company focused on
improving patients lives through the development,
manufacturing and distribution of health care products for
cryoablation. Our strategy in the prostate and renal cancer
markets is to further develop and increase the acceptance of our
technology in the interventional radiology and oncology markets
for treatment of liver and lung tumors as well as palliative
intervention (treatment of pain associated with metastases),
while achieving penetration across additional markets with our
proprietary cryoablation technology. The term
cryoablation refers to the creation inside the body
of extremely low freezing temperatures which causes the
destruction of cells within tissue and tumors, for therapeutic
purposes. The term cryoablation technology refers to
technology relating to the use of ice in surgical procedures,
including cryoablation procedures.
Today, our FDA-cleared Cryocare Surgical System is used in the
urological market for treatment of prostate and renal cancer.
Because of our initial concentration on prostate and renal
cancer, the majority of our sales and marketing resources are
directed toward the promotion of our technology to urologists.
We also employ a dedicated sales team focused on the
interventional radiology market in which our products are used
to treat renal, liver and lung cancer and for palliative
intervention. In addition to selling our cryoablation systems
and disposable products to hospitals and mobile service
companies, we also contract directly with hospitals for the use
of our Cryocare Surgical System and disposable products on a
fee-for-service basis for a small portion of our business.
We were incorporated under the laws of the State of Delaware in
May 1994. We maintain our principal executive offices at 201
Technology Drive, Irvine, California 92618, and our telephone
number at that address is
(949) 450-5400.
Information regarding our financial condition and results of
operations can be found in a separate section of this proxy
statement/prospectus, beginning on page 127. We previously owned
Timm Medical Technologies, Inc., a company focused on erectile
dysfunction products. We sold Timm Medical to UK-based Plethora
Solutions Holdings plc on February 10, 2006.
Advent of
Cryoablation
Throughout the past two decades, the medical community has moved
increasingly toward minimally invasive treatments for destroying
cancerous tumors. This shift has been prompted by a variety of
medical innovations including (1) major advancements in our
ability to image or see inside the body using
visualization technologies; (2) ablative technologies such
as cryoablation, which can be performed from outside the body
percutaneously, and (3) more precise methods for
diagnosing, characterizing and targeting tumors inside the body.
Endocare is a pioneer of modern cryoablation, a minimally
invasive procedure that freezes tissue to destroy tumor cells.
Cryoablation was first developed in the 1960s and focused on the
prostate cancer market. The early cryoablation technology, which
used cold probes, or cryoprobes, was explored as a
method to kill prostate tissue but was limited by imprecise
targeting techniques and the inability to control the amount of
tissue frozen during the procedure.
In more recent years, progress in ultrasound imaging and the
advent of the Endocare Cryocare Surgical System and later
Cryocare
CStm
Surgical System prompted the further evolution of cryoablation.
Ultrasound allows a physician to guide the cryoprobes to the
targeted tissue where the freezing system can be activated and
the growth of ice around the diseased tissue can be more
precisely controlled and monitored.
Existing
Markets for Cryoablation
Endocare initially focused on developing treatments for prostate
cancer. Incidence of prostate cancer has grown since 1980 and
that disease is now the second most common cause of
cancer-related deaths among men in the United States. The
American Cancer Society in 2008 estimated there would be
approximately 186,000 new cases of prostate cancer diagnosed and
approximately 28,000 deaths associated with the disease in the
United States during 2008. Prostate cancer incidence and
mortality increase with age. Prostate cancer is found most often
in men who are
102
over the age of 50. According to the American Cancer Society,
about 64 percent of men diagnosed with prostate cancer are
age 65 or older. Incidence rates are higher in African
American men. In addition to age and race, other risk factors
are linked to prostate cancer, such as genetics, diet and
exposure to environmental toxins.
Recently, we have added a new focus: the growing renal, or
kidney, cancer market. The American Cancer Society estimates
that approximately 54,000 people are diagnosed with renal
cancer each year. Recent data, including five-year outcomes
presented by The Cleveland Clinic for laparoscopic renal
cryoablation and a Mayo Clinic study presented at the
Radiological Society of North America conference in November
2007, have demonstrated the effectiveness of cryoablation in the
destruction of renal tumors leading to increased cancer-free
rates for patients when performed as a percutaneous procedure
(without making an incision). Based on a recommendation from the
American Medical Association, Medicare in 2007 created a
clinical reimbursement code for percutaneous renal cryoablation.
Other treatments that make up our competition in the prostate
and renal cancer markets generally include surgery, radiation
(both external beam and seed, or brachytherapy) and other
ablative treatments. Cryoablation is a minimally invasive
procedure the urologists can perform independently. For
radiation therapies, urologists must refer a patient for
treatment to a radiation oncologist. Cryoablation offers the
urologist both the opportunity to maintain continuity of patient
care and to generate additional revenue, while providing
clinical results on par with or superior to other treatment
modalities.
Potential
Future Markets
Endocare hopes to place a renewed emphasis on four other cancer
markets within our currently FDA-cleared indications for use:
liver metastases, lung, a broad market called palliative
intervention, which includes tumors that have metastasized to
such areas of the body as the bones, and an expansion of the
prostate cancer market called focal or partial gland treatment.
According to American Cancer Society estimates, in the United
States approximately 215,000 people a year will be
diagnosed with lung cancer and approximately 21,000 will be
diagnosed with liver cancer.
The bone cancer market, which is estimated to be
100,000 patients annually, is considered an important
opportunity because of recent studies led by physicians at The
Mayo Clinic. Initial results indicate that cryoablation could
play a significant role in the treatment of these patients
because it first destroys these metastasized tumors, but in so
doing it also relieves the often debilitating and excruciating
pain caused by the cancer. Based on the positive results of an
initial study at The Mayo Clinic in the use of cryoablation as a
treatment to relieve bone pain, the National Cancer Institute of
the National Institutes of Health is supporting a multi-center
study comparing the pain-reducing palliative effects of
cryoablation and radiation therapy for patients who are
experiencing focal pain from cancer that has metastasized to
their bones. The prospective, randomized study, called
Cryoablation And Radiation Effectiveness (CARE) for Bone Pain is
evaluating the efficacy of percutaneous cryoablation compared to
external beam radiation therapy as measured by pain relief,
quality of life, analgesic use and complication rates.
We are working with some of the nations leading urologists
and interventional radiologists in advancing a technique called
focal or partial prostate gland treatment. Focal cryoablation is
a prostate cancer treatment in which the ablation is confined to
the known tumor location, thereby sparing surrounding tissue and
avoiding side effects such as impotence or incontinence in the
majority of patients. Much like the evolution that took place
30 years ago in the treatment of breast cancer in women,
mens health professionals are asking themselves if it is
necessary to remove or destroy the entire prostate when the
disease may be confined to only a portion of that gland. New
diagnostic methods and the precision of ablative technologies
such as our Cryocare
CStm Surgical
System have convinced leading physicians that focal cryoablation
should become an important option for many men facing prostate
cancer.
Endocare
Cryoablation Technology Development
We have sought to develop our technology over time to increase
the safety and efficacy of our products. In 1996, we developed
our first generation eight-probe argon-based cryoablation
system. Argon allows for room temperature gas to safely pass
through the cryoprobe to create a consistent highly sculpted
ablation zone. In 1997,
103
we incorporated temperature-monitoring software to allow for
continual feedback from the thermocouple tips. In 1998, we
launched our CryoGuide intraoperative planning software, which
allowed physicians better planning and targeting technology for
use during a procedure. In 2000, we launched our 2.4 mm
DirectAccess CryoProbe and CryoGrid which we believe shortened
the time necessary to perform a procedure and added to the
safety and ease of the procedure. In 2002, we developed and
launched AutoFreeze, our innovative software technology that
provides computer-controlled automated freeze/thaw cycles. In
2003, we launched our second generation Cryocare Surgical
System, which we refer to as Cryocare CS, which
integrated all the past and latest technology, including an
on-board, integrated ultrasound device, into one complete system.
At the Annual Meeting of the American Urological Association in
May 2006, we introduced the first variable cryoablation probe,
referred to as the V-Probe. The V-Probe provides physicians the
ability to sculpt different sized ablation zones to
encompass tumors and tissue based on individual patient anatomy
and needs. As previously announced, we currently are in the
planning and design stage for the development of a
nitrogen-based cryoablation system, which we refer to as the
Cryocare CN2 System. Once development is complete,
we expect to market the Cryocare CN2 System primarily to our
interventional radiology and oncology customers and to customers
in international markets where argon gas is not widely available.
Our
System Solution: Cryocare CS
We believe Cryocare CS is the most sophisticated prostate
cryoablation system currently available and combines the latest
technology to enhance the speed and effectiveness of the
procedure. Exclusive features of the Cryocare CS include an
on-board training module, integrated color Doppler ultrasound
designed specifically for the needs of prostate cryoablation,
CryoGuide our patented intraoperative planning module, and
AutoFreeze our patented treatment software that provides
computer-controlled automated freeze/thaw cycles based upon
target endpoint temperatures and continual feedback from the
thermocouple tips.
The argon gas-based Cryocare CS accommodates up to eight
independently operated cryoprobes and six thermocouples to allow
physicians to monitor temperatures of tissue adjacent to the
prostate in real-time. Our proprietary suite of cryoprobes is
engineered to consistently produce sculpted ice conforming to
the unique anatomy of the prostate. Our vacuum-insulated
DirectAccess CryoProbes help deliver lethal ice in a
controllable and repeatable fashion. Our CryoGrid, which is
similar to a brachytherapy grid, is affixed to the ultrasound
stepper and aids the physician with placement of the cryoprobes
so that ice formation and lethal temperatures occur where
necessary to destroy cancerous tissue but do not affect areas
where tissue damage could cause harm.
Key
Clinical Advantages of Our Cryocare CS System
Cryocare CS provides the following potential clinical advantages
relative to other principal treatment options for prostate
cancer.
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High quality of life following treatment. Our minimally
invasive procedure typically offers patients a short recovery
period for prostate cancer therapy and may result in a lower
incidence of certain side effects, including incontinence.
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Treatment of patients who have failed radiation
therapy. Cryoablation is an effective option that can be
used to treat patients who have a recurrence following radiation
therapy with potentially fewer side effects than radical
surgery.
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Treatment can be performed more than once. Regardless of
what therapy is chosen, there is always a chance that the cancer
will recur. Unlike radiation therapy or surgery, cryoablation
can be repeated without increased morbidity.
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Focal or partial gland treatment. Focal cryoablation is
a prostate cancer treatment in which the ablation is confined to
the known tumor location, thereby sparing surrounding tissue.
|
104
Marketing
and Strategy
Cryoablation
Products
Endocares objective in urology is to establish
cryoablation as a primary treatment option for prostate and
renal cancers. Our earlier commercial efforts were focused on
direct-sales to hospitals and distributor sales of systems to
third party service providers who would provide systems and
technicians to hospitals where cryoablation procedures were
performed.
In 2003, we redirected our urology strategy away from attempting
to drive acceptance of cryoablation through sales of capital
equipment into the urology market. Our primary objective for the
urology portion of our business is now to grow market share,
measured in terms of procedures and revenues, by establishing
cryoablation as a primary treatment option for prostate and
renal cancers. In 2004, 2005 and 2006, we derived a significant
percentage of our revenues from recurring sales of disposable
products used with the Cryocare Surgical System.
A cryoablation procedure requires the necessary sterile
disposable products that are usually provided in the form of a
kit. In addition to the cryoablation disposable products
component, there is a service component. This service component
consists of transportation and provision of equipment used in
the procedure, plus the services of a technician to assist the
urologist with use and monitoring of this equipment. In addition
to the use of a Cryocare Surgical System, an ultrasound device
is needed for visual monitoring of the prostate and ice
formation, unless our Cryocare CS is used, since the Cryocare CS
includes an on-board, integrated ultrasound unit. Tanks of argon
and helium gas are needed for freezing and warming during the
procedure. Frequently, this equipment is not stored on site but
is mobilized and brought into the hospital for procedures by an
independent third party who performs the service component of
the procedure.
For urology procedures we typically sell the cryoablation
disposable products to hospitals either as part of a procedure
fee or separately, that is, without the service component. We
also continue to sell our Cryocare Surgical Systems both to
hospitals and service providers. For interventional radiology we
will often place a system with a new customer under our
placement program and sell cryoprobes directly to the hospitals
or enter into an agreement to provide cryoablation services to
the hospital, which includes providing the equipment,
technicians and cryoablation disposable products necessary to
perform the procedures. These agreements generally include the
services of a third party provider contracted by us or the
hospital to provide these services.
An important challenge we face in the prostate cancer market is
to educate physicians and then to overcome any initial
reluctance on the part of urologists so that they are able to
incorporate cryoablation as a primary treatment option. Many
times a physicians initial reluctance may be based on her
or his experiences or perception of the clinical failures
experienced during earlier efforts to introduce the technology
by other companies. See above under Advent of
Cryoablation. In addition, we compete with other therapies
that have proven effective in treating prostate cancer. Over
30 years of clinical data exist documenting the safety and
efficacy of radical prostatectomy for prostate cancer. There are
20 years of clinical data supporting use of various forms
of radiation treatment options such as brachytherapy and beam
radiation treatments, which we estimate are used to treat over
one third of all prostate cancer cases each year in the United
States.
We believe cryoablation has clinical advantages for many
patients over both the current most popular forms of treatment.
While there are long-term clinical data available on radical
prostatectomy, this treatment approach, typical of surgery in
general, is characterized by a long recovery period combined
with a relatively high incidence of side effects, including
impotence and urinary incontinence. The appeal of radiation as a
treatment alternative, particularly to patients, is that it is
less invasive than surgery. Like radiation, cryoablation is less
invasive and therefore has potentially fewer side effects than
radical prostatectomy. Unlike radiation treatments, however,
cryoablation treatments can be repeated on the same patient. In
fact, our initial clinical successes in prostate cancer
treatment were in treating patients who had failed radiation
therapy. We also believe that cryoablation has significant
economic benefits for payers. These benefits include shorter
hospital stays for recovery and shorter procedure time as
compared to radical prostatectomy, long term hormone treatment
or radiation therapies, resulting in reduced expense to the
payer.
105
Key elements in our strategy for overcoming the challenges we
face in establishing cryoablation as a primary treatment option
for prostate cancer are:
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Increasing awareness in the urological community regarding the
clinical benefits of cryoablation through our presence at major
technical meetings and trade shows, publication of numerous
scientific papers and articles on cryoablation and formation of
a scientific advisory board to provide guidance and counsel to
us regarding clinical matters and physician education;
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Conducting post-market clinical studies to further demonstrate
the safety and efficacy of cryoablation as a primary treatment
of prostate cancer;
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Conducting post-market clinical studies to further demonstrate
the safety and efficacy of cryoablation as a salvage treatment
for prostate cancer patients who have failed radiation
treatments;
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Conducting post-market clinical studies to further demonstrate
the safety and efficacy of cryoablation as a treatment for renal
tumors, which is another important component of the urology
market for cryoablation;
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Creating a significant number of new practicing cryosurgeons
each year through our physician education program;
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Endeavoring to ensure that reimbursement for cryoablation by
Medicare and other payers is appropriate given the costs and
benefits of the treatment;
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Driving patient awareness through our direct-to-consumer
marketing programs; and
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Marketing our products to physicians and hospitals through our
direct sales force.
|
Because of our initial concentration on prostate cancer, the
majority of our sales and marketing resources are directed
towards the promotion of cryoablation technology to urologists
for the treatment of prostate and renal cancers. However, we are
also expanding the reach of our technology across a number of
other markets, including ablation of tumors in the lung and
liver, as well as for palliative intervention (treatment of pain
associated with metastases). Procedures for treatment of these
cancers are typically performed percutaneously, using CT
scanning technology, and are provided by interventional
radiologists. In order to better understand and address the
distinct needs of this new market, we have formed a dedicated
sales team to work in developing these opportunities for
application of our cryoablation technology.
Key elements in our strategy to establish new markets for
cryoablation treatment of tumors, specifically in the
interventional radiology and radiation oncology markets, are:
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Conducting key clinical studies to demonstrate the safety and
efficacy of cryoablation as a primary treatment for lung and
liver tumors as well as for palliative intervention (treatment
of pain associated with metastases), and
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Formation of a dedicated sales group focused on the
opportunities for cryoablation treatment approaches in these new
markets.
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Products
We currently market the following products:
Prostate
and Renal Cancer:
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Cryocare Surgical System A cryoablation
system with eight cryoprobe capability.
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Cryocare CS System A Cryocare Surgical System
with onboard ultrasound.
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CryoGuide A computerized cryoprobe placement,
simulation and guidance system for cryoablation.
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Cryoprobes Disposable probes used with the Cryocare
Surgical System.
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FasTrac Percutaneous access device that
allows one-step insertion of cryoprobes.
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Urethral Warming Catheter Disposable catheter
used in prostate cryoablation procedures.
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106
Additional
Cryoablation Markets:
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Cryocare Surgical System A cryoablation
system with eight cryoprobe capability specially configured for
interventional radiology and oncology.
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Raw
Materials
We rely on third party suppliers to provide certain critical
components for all of our product lines. In certain cases, the
suppliers are our sole source of supply for these components.
Our policy is to enter into long-term supply agreements that
require suppliers to maintain adequate inventory levels and
which contain other terms and conditions designed to protect us
against unforeseen interruptions in their production. We
endeavor to maintain adequate stock levels at our own locations
to ensure an uninterrupted source of supply. We typically seek
to establish secondary sources of supply or other manufacturing
alternatives. Nevertheless, despite these efforts, it is
possible that we may experience an interruption in supply of one
or more of our critical components resulting in backorders to
our customers. However, we believe that we could locate
alternative sources of supply upon such terms and within such a
timeframe as would not result in a material adverse effect on
our business.
Patents
and Intellectual Property
As of December 31, 2008, we have rights to 51 issued United
States patents relating to cryoablation technology. Included
within these 51 issued United States patents are 7 patents in
which we have licensed-in rights. The remainder of the patents
are assigned to us. Most of these patents relate to our
cryoprobe technology for creating the freeze zone and precisely
controlling the shape of the freeze zone produced by the
cryoprobes. Additionally, certain patents relate to our computer
guided system for assisting surgeons in properly placing
cryoprobes in a patient, a computer-controlled cryoablation
apparatus and method, a cryoablation integrated control and
monitoring system and urethral warming technology. We also have
rights to 14 pending United States patent applications relative
to cryoablation technology. Additionally, we have rights to 57
foreign patents and pending foreign patent applications in this
technology area. The earliest of our patents do not expire until
2011. Most of the earliest patents in our core technology area
do not expire until about 2016.
Our policy is to secure and protect intellectual property rights
relating to our technology through patenting inventions and
licensing others when necessary. While we believe that the
protection of patents and licenses is important to our business,
we also rely on trade secrets, know-how and continuing
technological innovation to maintain our competitive position.
Given our technology and patent portfolio, we do not consider
the operation of our business to be materially dependent upon
any one patent, group of patents or single technological
innovation.
Our policy is to sell our products under trademarks and to
secure trademark protection in the United States and elsewhere
where we deem such protection important.
No assurance can be given that our processes or products will
not infringe patents or other intellectual property rights of
others or, if they are held to infringe, that any license
required would be made available under any such patents or
intellectual property rights, on terms acceptable to us or at
all. In the past, we have received correspondence alleging
infringement of intellectual property 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 we could be prevented from practicing the subject
matter claimed or could be required to obtain licenses from the
owners of any such intellectual property rights to avoid
infringement.
We seek to preserve the confidentiality of our technology by
entering into confidentiality agreements with our employees,
consultants, customers and key vendors and by other means. No
assurance can be given, however, that these measures will
prevent the unauthorized disclosure or use of such technology.
Research
Strategy
Our research goal is to develop innovative cryoablation
technology that dramatically improves patient outcomes. Our
primary focus is on developing devices for the treatment of
prostate, kidney, lung and liver tumors and for palliative
intervention. To that end, we endeavor to develop innovations
that improve the safety and efficacy of our Cryocare Surgical
System, as well as to explore new applications for use of our
technology platform in the body.
107
We spent approximately $2.3 million, $2.8 million and
$2.6 million for the years ended 2005, 2006 and 2007,
respectively, on research and development activities from
continuing operations, and $1.8 million for the
nine month ended September 30, 2008.
Sales
We sell our products primarily to hospitals and third party
service providers and have both domestic and international
customers. One of our customers, Advanced Medical Partners,
Inc., a subsidiary of HealthTronics, Inc., accounted for
42.1 percent of our total revenues in 2007, and
36.9 percent of our total revenues for the nine month ended
September 30, 2008. The following products and services
account for 15 percent or more of total revenues from
continuing operations for each of the years ended
December 31, 2005, 2006 and 2007, and the nine months
ended September 30, 2008:
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Nine Months
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Year Ended
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Ended
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December 31,
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September 30,
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2005
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2006
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2007
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2008
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Cryoablation and urological products:
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Cryocare Surgical Systems
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*
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*
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*
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*
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|
Cryoprobes, disposables and procedures
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|
94
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%
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|
94
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%
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|
93
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%
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94
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%
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Cardiac products (CryoCath)
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*
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*
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*
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*
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* |
|
These products account for less than 15 percent of total
revenues. |
We currently sell our cryoablation products domestically through
our direct sales force, which as of December 31, 2008
consisted of 40 people, consisting of 34 sales
representatives and sales managers and 6 cryoablation field
technicians. Our strategy is to continue to introduce the
clinical benefits of cryoablation to new physicians as well as
educating physicians already performing cryoablation so that
they are able to increasingly incorporate cryoablation into
their practice. We also intend to create patient demand by
providing education regarding the benefits of cryoablation
therapy versus alternative treatment options and by using
national advertising and other programs targeted directly at
prostate cancer patients.
Internationally, our cryoablation products are sold primarily
through independent distributors. Our international sales from
continuing operations represented approximately
6.9 percent, 5.8 percent, 7.2 percent and
7.8 percent of our total revenue for each of the years
ended 2005, 2006 and 2007, and the nine months ended
September 30, 2008, respectively.
We derived our revenues from continuing operations from the
following geographic regions for each of the years ended
December 31, 2005, 2006 and 2007, and the nine months ended
September 30, 2008, based on shipping destination:
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Nine Months
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Ended
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|
Year Ended December 31,
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September 30,
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2005
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2006
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2007
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2008
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|
(In thousands)
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|
United States
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|
$
|
26,322
|
|
|
$
|
26,379
|
|
|
$
|
27,548
|
|
|
$
|
21,825
|
|
International:
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|
|
|
|
|
|
|
|
|
|
|
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|
Canada
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1,015
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|
|
|
796
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|
|
|
892
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|
|
|
722
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|
China
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|
|
567
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|
|
|
451
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|
|
|
690
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|
|
|
607
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|
Other
|
|
|
370
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|
|
|
364
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|
|
|
557
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|
|
|
518
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|
Total international
|
|
|
1,952
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|
|
|
1,611
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|
|
|
2,139
|
|
|
|
1,847
|
|
Total revenues
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|
$
|
28,274
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|
|
$
|
27,990
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|
|
$
|
29,687
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|
|
$
|
23,672
|
|
108
Reimbursement
We sell our Cryocare Surgical System and related disposable
products to hospitals and third party service companies that
provide services to hospitals. While patients occasionally pay
for cryoablation procedures directly, most patients depend upon
third-party payers to pay for their procedures, including
Medicare, Medicaid, Tricare and other federal health care
programs, as well as private insurers.
Accordingly, our revenue is dependent upon third-party
reimbursement, particularly Medicare, since the majority of
patients receiving prostate cryoablation treatments using our
products are Medicare beneficiaries. The mix of public/private
payers for other cryoablation procedures varies by type of
procedure.
Medicare reimbursement for cryoablation procedures using our
products as a primary treatment alternative for localized
prostate cancer began in July 1999. Effective July 2001,
Medicare coverage was approved for secondary cryoablation
treatment of prostate cancer patients who have failed radiation
therapy.
When Medicare-reimbursed services are provided on an inpatient
basis, the hospital is reimbursed under the Medicare prospective
payment system, based on the applicable diagnosis related group.
A single payment covers all facility services.
Outpatient reimbursement for cryoablation procedures for
Medicare beneficiaries is in accordance with the Hospital
Outpatient Prospective Payment System, or HOPPS. Under HOPPS,
the hospital is paid on a per procedure basis, based on the
ambulatory payment classification for the procedure. The payment
to the hospital includes the per procedure share of the cost for
any depreciable equipment, such as our Cryocare Surgical System,
and the provision of disposable devices, such as our temperature
probes and cryoprobes.
Clinical studies are in process and planned for percutaneous
cryoablation of cancerous tissue in the kidney, lung and liver
and palliative intervention for pain associated with metastases.
After studies are complete coverage decisions and unique
reimbursement codes will be sought from Medicare and private
payers. As of January 1, 2008, a clinical CPT Category I
code has been established for percutaneous renal cryoablation.
Clearance to market a new device or technology by the FDA does
not guarantee payment by Medicare or other payers. Future
devices and technology that we develop would have to be approved
for coverage by Medicare after we obtain FDA approval or
clearance. The Medicare approval process is lengthy and there is
no assurance that Medicare approval would be granted. Each
private insurer makes its own determination whether to cover a
device or procedure and sets its own reimbursement rate.
Backlog
As of September 30, 2008, we had no backlog for our
products. Our policy is to carry enough inventory to be able to
ship most orders within a few days of receipt of order.
Historically, most of our orders have been for shipment within
30 days of the placement of the order. Therefore, we rely
on orders placed during a given period for sales during that
period.
Manufacturing
We manufacture our Cryocare Surgical System and related
disposables at our facilities in Irvine, California. We have
been issued a Device Manufacturing License by the California
Department of Health Services. Our license is renewable in
April, 2009. Manufacturers of medical devices are required to
manufacture devices in compliance with various federal, state
and foreign requirements including compliance with FDAs
Quality System Regulation. Our manufacturing facility is subject
to periodic inspections
and/or
audits by the State of California, FDA and other parties. Our
facility has been inspected, most recently in 2008 by the
California Department of Health Services. There are no
outstanding non-conformities from the inspection.
Our manufacturing facility has been subjected to Quality System
Regulation compliance inspections by the FDA most recently in
June 2004. The inspection has been closed by the FDA. We most
recently received ISO 13485:2003, CE Marking and Canadian
CMDCAS certifications, indicating substantial compliance with
European standards for a robust Quality Management System,
quality assurance and manufacturing process control.
109
Government
Regulation
Governmental regulation in the United States and other countries
is a significant factor affecting the research and development,
manufacture and marketing of medical devices, including our
products. In the United States, the FDA has broad authority
under the FD&C Act to regulate the development,
distribution, manufacture, marketing and sale of medical
devices. Foreign sales of medical devices are subject to foreign
governmental regulation and restrictions that vary from country
to country.
Medical devices intended for human use in the United States are
classified into one of three categories, depending upon the
degree of regulatory control to which they will be subject. Such
devices are classified by regulation into either Class I
(general controls), Class II (special controls) or
Class III pre-market approval (PMA), depending upon the
level of regulatory control required to provide reasonable
assurance of the safety and effectiveness of the device.
Most Class I devices are exempt from pre-market
notification (510(k)) or PMA. However Class I devices are
subject to general controls, including compliance
with FDA manufacturing requirements (Quality System Regulation
(QSR), sometimes referred to as current good manufacturing
practices or cGMPs), adverse event reporting, labeling and other
requirements. Class II devices are subject to general
controls, special standards and ordinarily to the pre-market
notification requirements under Section 510(k) of the
FD&C Act. For a 510(k) to be cleared by the FDA, the
manufacturer must demonstrate to the FDA that a device is
substantially equivalent to another legally marketed device that
was either cleared through the 510(k) process or on the market
prior to 1976. It generally takes four to twelve months from the
date of submission to obtain 510(k) clearance although it may
take longer. Class III is the most stringent regulatory
category for devices. Class III devices are those for which
insufficient information exists to assure safety and
effectiveness solely through general or special controls.
Class III devices are usually those that support or sustain
human life, are of substantial importance in preventing
impairment of human health, or which present a potential,
unreasonable risk of illness or injury. Class III devices
also include devices that are not substantially equivalent to
other legally marketed devices. To obtain approval to market a
Class III device, a manufacturer must obtain FDA approval
of a PMA application. The PMA process requires more data,
including ordinarily data from clinical studies testing the
device in humans, takes longer and is typically a significantly
more complex and expensive process than the 510(k) procedure.
Clinical studies of devices in humans are also subject to
regulation by the FDA. Testing must be conducted in compliance
with the investigational device exemption (IDE) regulations.
Our Cryocare Surgical Systems have been cleared for marketing
through the 510(k) process.
We can provide no assurance that we will be able to obtain or
maintain clearances or approvals for clinical testing or for
manufacturing and sales of our existing products for all
applications in all targeted markets, or that we will be able to
obtain or maintain clearances or approvals needed to introduce
new products and technologies. After a device is placed on the
market, numerous regulatory requirements apply. These include,
but are not limited to:
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quality system regulation, which requires manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures during the manufacturing process;
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labeling regulations, which require specific information on
product labels and in labeling, prohibit certain information,
prohibit the promotion of products for unapproved or
off-label uses and impose other restrictions on
labeling; and
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medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if it were to recur.
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Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include, but
is not limited to, any of the following sanctions:
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fines, injunctions, and civil penalties;
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recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusing our request for 510(k) clearance or premarket approval
of new products;
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withdrawing 510(k) clearance or premarket approvals that are
already granted; and
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criminal prosecution.
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Medical device laws are also in effect in many of the countries
outside of the United States in which we do business. These laws
range from comprehensive device approval and quality system
requirements for some or all of our medical device products to
simple requests for product data or certifications. The number
and scope of these requirements are increasing. In June 1998,
the European Union Medical Device Directive became effective,
and all medical devices must meet the Medical Device Directive
standards and receive CE mark certification. CE mark
certification involves a comprehensive Quality System program,
and submission of data on a product to the Notified Body in
Europe.
We have obtained the CE mark certification for distribution of
our Cryocare Surgical System in Europe and approval for
distribution in Australia, Canada, New Zealand, China, Taiwan,
Korea and Mexico.
Health
Care Regulatory Issues
The health care industry is highly regulated and the regulatory
environment in which we operate may change significantly in the
future. In general, regulation of health care-related companies
is increasing. Endocare anticipates that Congress and state
legislatures will continue to review and assess alternative
health care delivery and payment systems. We cannot predict what
impact the adoption of any federal or state health care reform
measures may have on our business.
We regularly monitor developments in statutes and regulations
relating to our business. We may be required to modify our
agreements, operations, marketing and expansion strategies from
time to time in response to changes in the statutory and
regulatory environment. We plan to structure all of our
agreements, operations, marketing and strategies in accordance
with applicable law, although we can provide no assurance that
our arrangements will not be challenged successfully or that
required changes may not have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
We believe that the following discussion summarizes all of the
material health care regulatory requirements to which we
currently are subject. Complying with these regulatory
requirements may involve expense to us, delay in our operations
and/or
restructuring of our business relationships. Violations could
potentially result in the imposition of civil
and/or
criminal penalties.
Anti-Kickback
Laws
The federal health care program anti-kickback law
prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or in
order to induce, (i) the referral of a person for services,
(ii) the furnishing or arranging for the furnishing of
items or services, or (iii) the purchase, lease or order or
arranging or recommending purchasing, leasing or ordering any
item or service, in each case, reimbursable under any federal
health care program. Because our products are reimbursable under
Medicare, Medicaid and other federal health care programs, the
anti-kickback law applies. Many states have similar
anti-kickback or anti-referral laws, and in many cases these
laws apply to all patients, not just federal health care program
beneficiaries. Noncompliance with, or violation of, the federal
anti-kickback law can result in exclusion from federal health
care programs and civil and criminal penalties. Similar
penalties are provided for violation of state anti-kickback
laws. Several federal courts have held that the anti-kickback
law is violated if just one purpose of payment is to induce the
referral of patients. To the extent that we are deemed to be
subject to these federal or similar state laws, we believe that
our activities and contemplated activities comply in all
material respects with such statutes and regulations.
Regulations to the federal anti-kickback law specify payment
practices that will not be subject to prosecution under the
anti-kickback law. These are known as the
safe-harbors. Failure to comply fully within a
safe-harbor does not mean the practice is per se illegal, and
many common arrangements in the health care industry do not fit
within a safe harbor, yet are not violations of the
anti-kickback law. Rather, if a practice does not fit within a
safe
111
harbor, no guarantee can be given that the practice will
be exempt from prosecution; it will be viewed under the totality
of the facts and circumstances.
Many of our relationships with customers, such as volume and
other discounts, fit within a safe harbor. However, our service
agreements with physician-owned entities (which constitute less
than twenty percent (20%) of our urology business) do not fit
completely within a safe harbor. For example, the safe harbor
for equipment leases and the safe harbor for personal services
both require that the aggregate amount of the rental or service
payment be fixed in advance for the term of the arrangement,
which must be at least one year. However, where the need for
medical procedures is not known in advance, it is sometimes more
appropriate to arrange for payment on a per procedure (also
known as per-click) basis, rather than determining a
years total compensation in advance. For the reasons
described below, certain of our arrangements with
physician-owned entities currently provide for payment on a per
procedure basis.
In the case of cryoablation, hospitals often do not want to
invest in the required capital equipment. Rather, hospitals
enter into arrangements with specialty mobile service providers
or equipment manufacturers to obtain the use of the necessary
equipment and disposable products (such as cryoprobes), as well
as technical support services, where applicable, on a per
procedure basis. In the case of cryoablation equipment and
disposables, some physicians have formed or invested in mobile
service providers that provide cryoablation equipment,
disposables and services directly to hospitals. In such cases,
our relationship to the physician-owned entities is only as a
seller of our products, where discounts are provided in
accordance with the discount safe harbor. However, in some
cases, we contract directly with hospitals to provide the
necessary equipment/disposables and technical support. These
contracts generally provide for the hospital to pay for the
equipment/disposables and support package on a per procedure
basis. Since we are primarily in the business of selling our
equipment and disposable products, not providing services, when
we contract to provide equipment to hospitals we typically
subcontract with a mobile service provider or other equipment
owner to furnish the equipment as our subcontractor. A
significant number of these businesses are owned entirely or in
part by urologists who purchase the equipment in order to make
cryoablation available in their communities. Since the hospitals
pay us on a per procedure basis, we in turn pay our
subcontractors on a per procedure basis pursuant to service
agreements. These service agreements do not meet a safe harbor
since, as noted above, the safe harbors for equipment leases and
service arrangements require that the aggregate payment for the
term of the arrangement must be set in advance. Although the
service agreements do not meet a safe harbor, our service
agreements with physician-owned entities include a number of
safeguards intended to address anti-kickback law concerns.
As noted above in the section entitled Risks Related to
Endocare and the Combined Company and the Industry in Which They
Will Operate as well as in the following section,
arrangements with physician-owned entities that involve
per-click leases will have to be restructured by
October 1, 2009. We are pursuing restructuring options and
expect that the restructured arrangements will continue to
comply in all material respects with the federal anti-kickback
law and similar state laws.
Patient
Referral Laws
The Stark Law prohibits a physician from referring a Medicare
patient for designated health services, or DHS, to
an entity with which the physician has a direct or indirect
financial relationship, whether in the nature of an ownership
interest or a compensation arrangement, subject only to limited
exceptions. The Stark Law also prohibits the recipient of a
prohibited referral from billing for the DHS provided pursuant
thereto. DHS include inpatient and outpatient hospital services.
Physicians who have an ownership or compensation relationship
with the entities (such as mobile vendors) that furnish our
equipment to hospitals, and the hospitals that obtain equipment
and services directly or indirectly from such entities, are
considered to have an indirect compensation
arrangement, and therefore that relationship must meet a
Stark Law exception in order for the physicians to make DHS
referrals to the hospital.
As noted above in the section entitled Risks Related to
Endocare and the Combined Company and the Industry in Which They
Will Operate, CMS recently issued a final rule that
includes amendments to the regulations that implement the Stark
Law. Certain elements of the final rule that will be effective
October 1, 2009 likely will require restructuring of our
contracts with physician-owned entities that provide equipment
and services in
112
connection with our arrangements to furnish equipment, products
and services to hospitals. The rule narrows the exception that,
before October 1, 2009, was available for
per-click lease arrangements in which a
physician-owned entity is the lessor and receives a per-click
payment, either directly or indirectly, from a DHS provider such
as a hospital for space or equipment used by the hospital in the
provision of services to patients, including patients who were
referred by the lessor to the lessee. Such per click
leases will no longer be eligible for a Stark Law exception. The
arrangements where we hold the hospital contract and subcontract
with a physician-owned entity constitute less than 20% of our
urology business, and we are actively pursuing various
restructuring options. At this time, we are unable to predict
whether, and to what the extent, such restructuring will affect
our business or future business arrangements, but there is no
guarantee that it will not have an adverse effect on our
business.
In addition, for the same reasons as noted above, by
October 1, 2009, physician-owned entities that purchase our
equipment and disposables and then furnish the equipment,
disposables, and technical support services to hospitals on a
per click basis will be required to restructure
their per click contracts with the hospital or
potentially divest the physician-owners. Although there is a
reasonable position at this time that these entities can avoid
divesture of their physician-owners, these entities will likely
have to be restructured to address the Stark Law rule change
effective October 1, 2009. A significant percentage of the
urology cases using our equipment in hospitals involves the
aforementioned per-click arrangement. We understand
that these entities are also actively pursuing potential
restructuring options. We expect that our arrangements and those
of our customers involved in furnishing our products will be
fully compliant with the new regulatory requirements before the
October 1, 2009 deadline. Although too early to assess, it
is possible that such restructuring will have an adverse effect
on our business. Interventional radiology services outside of
the urology business that involve use of our products generally
do not involve physician-owned businesses, and therefore will
not be affected by the new rule.
Many states also have patient referrals laws, some of which are
more restrictive than the Stark Law and regulate referrals by
all licensed healthcare practitioners for any health care
services to an entity with which the licensee has a financial
relationship unless an exception applies. Such laws in
particular states may prohibit us from entering into
relationships with physicians and physician-owned entities,
which may limit business development.
HIPAA
and Other Privacy Laws
As of April 14, 2003, the privacy regulations developed
under the Health Insurance Portability and Accountability Act of
1996, referred to as HIPAA, took effect. The privacy
regulations place limitations on a covered
entitys use and disclosure of identifiable patient
information, including research data. While Endocare is not a
covered entity under HIPAA, Endocares
relationships with covered entities, such as hospitals and
physicians, sometimes implicate HIPAA. Accordingly, Endocare has
adopted policies and procedures regarding confidentiality and
each employee who comes into contact with Protected Health
Information (PHI or patient data) is trained in the proper
handling of such information. Endocare has also established
procedures to determine when Endocare is required to sign a
business associate agreement with a covered entity
in connection with receipt of PHI and when such measures are not
required.
We believe that we have implemented appropriate measures to
ensure that our relationships with covered entities are
appropriate and consistent with HIPAA. However, there are many
uncertainties remaining about how HIPAA applies to medical
device companies, and no assurance can be given that HIPAA will
not be interpreted in a manner that will hamper our ability to
conduct medical research and receive medical information for
other purposes as well.
Other
United States Regulatory Requirements
In addition to the regulatory framework for product approvals,
we are and may be subject to regulation under federal and state
laws, including requirements regarding advertising and
promotion, occupational health and safety, laboratory practices
and the use, handling and disposing of toxic or hazardous
substances. We may also be subject to other present and future
local, state, federal and foreign regulations.
Seasonality
We believe that holidays, major medical conventions and
vacations taken by physicians, patients and patient families may
have a seasonal impact on our sales of cryoablation products
because cryoablation procedures can be
113
scheduled in advance. For example, for the past several years,
we have noted that the three months ended September 30 each year
result in revenues that are lower than during the three months
ended June 30 each year.
Competition
The cryotherapy products manufactured and distributed by
Endocare and Galil compete vigorously with other treatment
modalities. Endocare and Galil believe that their primary
competition consists of other, better-established modalities of
treatment for prostate cancer, including surgery, which is
considered the gold standard, and radiation
therapies that presently dominate the market. Significant
competitors in the area of prostate cancer and other tumor
ablation (renal, liver, lung, palliative intervention, and, in
the case of Galil, womens health) include companies that
offer one or more of the following products: surgical devices
(such as robotic surgery equipment); intensity-modulated
radiation therapy (IMRT), image-guided radiation therapy (IGRT),
brachytherapy seeds and other forms of radiation therapy; and
other ablation products such as microwave and radiofrequency
ablation (RFA) products. Additional devices in development, such
as high intensity focused ultrasound (HIFU), may be competitive
devices in the future. Many of the existing and potential
competitors of Endocare and Galil have significantly greater
financial and human resources than they do.
Employees
As of December 31, 2008, we had a total of
120 employees. Of these employees, 8 are engaged directly
in research and development activities, 7 in regulatory
affairs/quality assurance, 28 in manufacturing, 52 in sales,
marketing, clinical support and customer service and 25 in
general and administrative positions. We have never experienced
a work stoppage, none of our employees are represented by a
labor organization, and we consider our employee relations to be
good.
Properties
Our executive offices, as well as our principal manufacturing
and research facilities, are located in a 28,000 square
foot facility in Irvine, California. The lease for this facility
expires in 2010, with an option to extend the lease for an
additional five years. We believe that our property and
equipment are generally well maintained, in good operating
condition and are sufficient to meet our current needs.
Legal
Proceedings
Endocare is a party to lawsuits in the normal course of its
business. Litigation and governmental investigation can be
expensive and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. Significant judgments or settlements in connection
with legal proceedings may have a material adverse effect on our
business, financial condition, results of operations and cash
flows. Other than as described below, we are not a party to any
legal proceedings that we believe to be material.
Governmental
Legal Proceedings
The FTC has opened a preliminary investigation into whether the
proposed Merger with Galil violates Section 7 of the
Clayton Act, as amended, 15 U.S.C. § 18, or
Section 5 of the FTC Act, as amended, 15 U.S.C.
§ 48. The parties are cooperating fully with the
FTCs investigation and have provided the FTC with
information and materials on a voluntary basis.
Orange
Acquisitions Ltd.
Orange Acquisitions Ltd. is a wholly owned subsidiary of
Endocare. It was incorporated under the laws of the State of
Israel solely for use in the Merger and has never conducted any
business other than in connection with the Merger.
114
Galil
Medical Ltd.
Overview
Galil has been a leader in the development of cryotherapy
systems and disposables for minimally invasive ablation of
benign and malignant tissues. Galils cryotherapy
technology platform utilizes the smallest, most minimally
invasive needles available in the market, helping to potentially
reduce trauma to external and internal tissue and structures.
Galils capabilities include real-time monitoring of
internal tissue temperatures by providing four independent
temperature readings per needle by using Galils 17 gauge
Multi-point Thermal Sensors
(MTStm).
MRI-compatible cryoablation needles and Thermal Sensors,
single-gas cryoablation procedures using the
i-Thawtm
technology, and advanced pre-planning software capabilities
(IceVuetm)
are also unique to Galil. For a general description of
cryoablation and cryoablation technology and a discussion of the
historical development of cryoablation technology, see the
sections entitled Endocare, Inc.
Overview and Endocare, Inc. Advent of
Cryoablation beginning on page 102 of this proxy
statement/prospectus.
Galils strategy is to strengthen cryotherapys
presence in the prostate cancer and renal cancer markets, while
further developing and increasing the acceptance of Galils
technology in the treatment of bone, lung and liver tumors.
Galils product pipeline includes developing cryoablation
products for the treatment of uterine fibroids, a CE approved
treatment which is currently in the phase of pivotal clinical
studies in the United States, and cryoablation of breast benign
tumors (fibroadenoma), an FDA and CE approved procedure.
Galils current physician specialty focus is urology and
interventional radiology. In the future, Galil anticipates that
it will also work with other physician specialties such as
gynecologists, surgical oncologists, breast surgeons and
pulmonologists as Galil increases the disease state treatments
in which Galils technology is utilized.
In recent years, progress in different forms of imaging and the
advent of Galils cryoablation systems and ultra-thin
needles prompted the evolution of cryoablation. Improved imaging
allows a physician to guide the cryoablation needles to the
targeted tissue where the freezing system can be activated and
the growth of ice around the diseased tissue can be more
precisely controlled and monitored. The modern freezing agent or
cryogen used is argon, which is a highly controllable and
predictable medical gas.
Galils unique cryotherapy technology platform is based on
a family of proprietary 17 gauge (1.47mm) needles with different
ice-ball dimensions and shapes. Ice-ball sizes can also be
controlled by software during the procedure. Galils
ultra-thin needles are associated with less patient discomfort
and lower morbidity. Additionally, the needles excellent
echogenicity results in dramatically improved control of needle
insertion and placement under ultrasound, CT and MRI, allowing
physicians to ablate a clearly-defined area, create precise
margins and avoid damaging adjacent healthy tissue.
Galil was incorporated under the laws of the State of Israel in
December 1996. Galil maintains its executive offices at 1 Tavor
Building, Yokneam Industrial Park, 20692 Israel, and the
telephone number at that address is +972-(0)4-909-3200.
Information regarding Galils financial condition and
results of operations can be found in a separate section of this
proxy statement/prospectus, beginning on page 152. Galil owns
three subsidiaries: Galil Medical Inc., with offices at 410
Plymouth Road, Suite 130, Plymouth Meeting, PA 19462 USA
(telephone number
(484) 530-4000);
Galil Medical UK Ltd., with offices at the Office Building,
Suite 21, Gatwick Road, Manor Royal, Crawley, West Sussex
RH10 9RZ, United Kingdom (telephone number +44 (0)1-293-459848);
and Galil Italy Srl, with offices at Via Valentino Mazzola, 18,
Rome 00142, Italy.
Potential
Future Markets
Galil initially focused on the prostate cancer market and, since
2007, has expanded its focus to the growing renal cancer market.
For a general discussion of these existing markets for
cryoablation and competitive treatments to cryoablation in these
markets, see the section entitled Endocare,
Inc. Existing Markets for Cryoablation
beginning on page 102 of this proxy statement/prospectus.
Galil believes that its cryo technology is potentially
appropriate to treat other soft tissue tumors within its current
FDA-cleared indications for use. Some of these disease states
include: breast fibroadenomas and liver metastasis. Other
applications (disease states) are covered by a general
indication as cleared by the FDA.
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Examples of these disease states include lung cancer (primary
and metastatic), palliative intervention (including bone
metastasis), and primary liver cancer. Finally, Galil also
believes its technology may be appropriate for the treatment of
uterine fibroids.
According to recently published statistical
data1:
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In the United States approximately 21,000 patients will be
diagnosed with liver cancer and 200,000 patients with liver
metastases originating from other primary cancer sites.
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About 400,000 cases of cancer metastases in the bone are
diagnosed annually, often involving debilitating and
excruciating pain. Initial results indicate that cryoablation
could play a significant role in the treatment of these patients
by palliating their pain and potentially achieving a local
curative effect.
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Approximately 800,000 women in the United States and 500,000 in
Europe are diagnosed with breast fibroadenoma each year. Many of
these women can potentially benefit from the optimal aesthetic
results associated with cryoablation using Galils
ultra-thin needles.
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As well, approximately 200,000 hysterectomies are performed in
the United States each year due to uterine fibroids. A large
percentage of patients could potentially be safely and
effectively treated with laparoscopic or transvaginal
cryoablation.
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With respect to the treatment of prostate cancer, Galil believes
that the use of cryo technology might be effective as a focal or
partial gland treatment in earlier stages of prostate cancer.
Mens health professionals and patients alike are seeking
new treatments that may not require the removal or destruction
of the entire prostate when the cancer only affects a portion of
the gland. Such a treatment currently being studied is focal or
partial prostate gland treatment. Focal ablation is a general
term that describes the relatively new concept of using energy
to target the specific areas of the prostate where cancer tumors
are located. Today, identifying prostate tumor locations in a
specific patient is largely dependent on biopsy results.
Biopsies have the known risk of false negative results. In the
future, it is hoped that improvements in imaging will allow
physicians to specifically see the tumors in the
prostate, thereby reducing the risk of false negative diagnoses.
Galil, working with some of the nations leading
urologists, has designed, but not yet begun to enroll patients
in, a controlled clinical study in order to better understand
the clinical efficacy of focal cryoablation using currently
available biopsy techniques. With the introduction of new
diagnostic methods and more precise ablative technologies, focal
cryoablation could become an important option for prostate
cancer patients.
Funding will be required for Galil to invest in the research and
development work and clinical studies that are necessary to
pursue all of the additional indications above.
1 American
Cancer Society Cancer Facts and Figures 2008; Womens
Health: Fibroid Market Heats Up, Medtech Insight, January
2005; U.S. National Cancer Institute
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Galils
Cryoablation Technology Development
Galils technology evolution is manifested through four
generations of cryoablation systems, each presenting with more
robust hardware design, and increasingly sophisticated software
capabilities. Along with Galils systems, Galil has
introduced numerous new products into the market, including
several generations of cryoablation probes and needles,
culminating in Galils breakthrough family of 17 gauge
(1.47 mm) cryoablation needles and thermal sensors. The
evolution of these platforms, along with additional unique
capabilities that evolved with time, is depicted in the
following table:
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First Generation
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2nd
Generation
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3rd
Generation
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4th
Generation
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Launch Year
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1998
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1998-2000
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2001-2005
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Since 2006
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Cryoablation System
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CryoHittm
helium/argon
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CryoHittm
MRI
SeedNet®
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SeedNet®
Gold
SeedNet®
Gold MRI
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Presice®
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Cryoablation Probes/Needles Diameter
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3.4 mm
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2.4 mm
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1.47 mm
(IceRod®
IceSeedtm,
and MRI-compatible
IceRod®)
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1.47 mm
i-Thawtm
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Unique Capabilities
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MRI compatible needles (3.4, 2.4 mm)
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1.47 mm Thermal Sensors and MRI-compatible sensors
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Multi-point Thermal Sensors
(MTStm)
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Argon only mode
(i-thawtm)
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Galils
System Solutions
Presice®
Galils flagship system, the
Presice®
System, was launched during 2006. Primarily positioned for
urology applications, the system includes a number of
proprietary and unique features:
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Supports up to 25 needles, 3
MTStm
and 5 Thermal Sensors (TS)
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Planning and simulation software
(IceVuetm)
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A 17 touch-screen, mounted on an articulated arm, with
virtual keyboard capabilities allowing for
one-person operation
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MTStm,
which allows for better control of ablation procedures by
monitoring 4 different temperature points on one needle.
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i-Thawtm
needle technology for one-gas (argon) cryoablation, simplifying
procedure logistics and costs
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High-end maneuverability capabilities enabled through the recent
development of a new set of cart, wheels and handle
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Designated urethral warmer
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Integrated thermal printer
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Extensive procedure reporting capabilities
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Each of these technological innovations brings unprecedented
clinical value to the physician, and drives improved patient
outcome and greater potential for wide adoption of cryotherapy
as a preferred treatment. With the recent developments
pertaining to the systems hardware and new software
version, we believe that the
Presice®
is currently the most robust and reliable system available in
the market.
SeedNet®
Gold and
SeedNet®
Gold MRI
Galils
SeedNettm
Gold system is designed to operate in hospitals and ambulatory
service centers (ASC). This system lends itself to image-guided
cryoablation under ultrasound and CT guidance, and can be
configured to
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operate in MRI environment, allowing for precise control and
monitoring of needle insertion and placement and iceball
formation. Galils
SeedNettm
Gold MRI is the only cryoablation solution available in
the market today for MR-guided cryoablation, owing to
Galils unique MRI-compatible cryoablation needles and
Thermal Sensors.
Isistm
Galils mini system, the
Isistm,
is currently under development and is a scaled-down model of the
fourth-generation cryo
Presice®
platform. Galils mini system is designed to meet the space
limitations and low operating costs of a physicians
office, uniquely designed to serve the treatment of breast
fibroadenoma and potentially the treatment of uterine fibroids.
The system can be manufactured with a single small argon-only
gas canister that provides the gas for the freeze-thaw using
Galils
i-Thawtm
technology, or as a standard argon helium
cryoablation system. In addition, the user-friendly system
allows for operation and control by a single user through a
compact remote-control device.
Galils
Family of 17 Gauge Cryoablation Needles
Galil offers patented 17 gauge (1.47 mm) straight and
90-degree
disposable cryoablation needles for truly minimally-invasive
cryoablation procedures. Galils
90-degree
needles are specifically designed for CT-guided procedures in
which a patient is being moved in and out of the scanner for
real time image capture and review. A variety of cryoablation
needle types, standard configurations and software control
enables sculpting of a precise freeze zone for patient-specific
treatment. Galils 17 gauge needles possess several unique
advantages:
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Ultra thin cryoablation needles, allowing for minimal external
tissue trauma, bleeding, and minimal damage to internal healthy
tissue and structures
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The only MRI-compatible cryoablation needles available in the
market today
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I-Thawtm
needles, the only cryoablation needles allowing for single-gas
(argon) cryoablation procedures
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Excellent echogenicity, resulting in optimal visualization under
ultrasound, CT, and MRI
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A sharp trocar-like tip, eliminating the need for an incision
before needle insertion
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Availability of standard brachytherapy template for needle
insertion in prostate procedures, compatible only with
Galils ultra-thin needles
|
Key
Clinical Advantages of Galils Cryoablation
Solution
Potential clinical advantages of Galils cryoablation
systems and its 17 gauge cryoablation needles include:
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Less patient discomfort. Galils
minimally invasive procedures may result in lower incidence of
certain negative side effects and a higher quality of life
following treatment.
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|
Alternative options. Patients for whom
radiation therapy has failed have few options. Cryoablation,
however, offers an alternative option that has the potential to
help these patients effectively and possibly avoid radical
surgery.
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|
Repeat treatments possible. Unlike other
cancer treatments such as radiation or surgery, cryoablation
therapy can be repeated without increased morbidity should a
patients cancer recur.
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|
Focused treatment. Focal or partial gland
treatment allows the ablation to be confined to specific areas
affected by the tumor and consequently spares unaffected
surrounding tissue.
|
Marketing
and Strategy
One of Galils main marketing objectives is to establish
cryosurgery as a primary treatment option for prostate and renal
cancers. The cryoablation procedure consists of various
components: sterile disposable products provided by Galil in
procedure kits; cryoablation system equipment and an ultrasound
device; tanks of argon and helium used for freezing and warming
during the procedure and service technicians to assist
urologists with the use and monitoring of the equipment until
proficiency is achieved.
118
Galils primary objective for the urology portion of its
business is to grow its market share of the total treatments for
prostate and kidney cancers. Galil measures market share in
terms of procedures and revenues for prostate and renal cancers.
Therefore, Galil derives a significant percentage of its
revenues from recurring sales of disposable products used with
its cryoablation system.
A smaller, but rapidly growing piece of Galils business is
renal tumor procedures performed by interventional radiologists.
The sales and marketing strategy for these customers is similar
to our urology customers. One of Galils primary objectives
in this line of business is to increase the awareness of the
effectiveness of cryotherapy within interventional radiology as
compared to the current treatment modalities utilized by
interventional radiologists.
United
States
In the United States, Galil utilizes two unique models to
deliver disposable products and equipment the direct
sales/placement of the system at the site of care or the use of
third party mobile providers. Under the mobile provider model
the equipment is not stored on site but is mobilized and brought
into the hospital for procedures by an independent third party
who performs the service component of the procedure. In this
model, the independent third party often times purchases the
disposable procedure kit and resells it to the hospital (this
model accounts for 60% of Galils business). The direct
sales/placement model is defined as the equipment residing at
the facility, typically under an equipment use fee. Under this
model, the hospital purchases the disposable procedure product
directly from Galil. The sale of a system to a hospital
represents a very small percentage of Galils total
revenues in the United States. The independent mobile providers
purchase (or lease) the cryoablation systems from Galil.
Europe
Galil generates revenues in Europe from sales of disposable
cryoablation needles, thermal sensors, and accessories. Galil
sells and places its systems, with most of the systems placed
upon a customers commitment to a predefined minimum number
of annual procedures. Galil executes through a direct sales
model in some European countries, while in others Galil sells
through local distributors and agents.
While the majority of sales in Europe originate from the
prostate cancer and kidney cancer market, Galils
image-guided cryoablation business in Europe is rapidly
developing, with more and more interventional radiologists
adopting cryoablation as a feasible modality of treatment in
cancer sites such as kidney and
liver.2
Asia
In Asia, Galil sells both systems and disposables, executing
sales through local distributors. As one of the distributors is
an MRI manufacturer, bundling strategies are often leveraged to
enhance the sales of cryoablation systems.
There is a relatively high penetration rate of interventional
radiology in the Asian markets. In the Asian markets, Galil
primarily sells to interventional radiologists whereas in the
United States and Europe, Galil primarily sells to urologists.
As a result, our cryoablation business in interventional
radiology in the Asian markets is relatively predominant to the
United States and Europe, and accounts for a significant portion
of revenues, specifically as it relates to the treatment of
renal and liver cancers.
Patient
and Physician Marketing
Marketing to prostate cancer patients will be an important part
of Galils sales and marketing strategies in the future.
Typically, a patient with prostate cancer diagnosis is
encouraged by his physician to actively participate in the
creation of the treatment path for his prostate cancer. Galil
will be investing in market research to better
2 As
noted in physicians interviews conducted as a part of
Galils internal market research and participation in
industry conferences, such as CIRSE (European interventional
radiology meeting, which took place in September 2008).
119
understand how men with prostate cancer (and their partners)
educate themselves on the various prostate cancer treatment
options that are available.
Galil would like to see urologists incorporate cryoablation as
part of their routine prostate cancer treatment options. To do
this, Galil must work to educate and inform urologists about the
cryoablation procedure. A physician may initially be hesitant
about newer procedures because of various factors which may
include failed clinical trials or complications related to such
procedures experienced in the past by other companies who sought
to introduce the treatment. See Endocare, Inc.
Advent of Cryoablation beginning on page 102 of this proxy
statement/prospectus. Additionally, there are other, more
established therapies that have proven effective and successful
in treating prostate cancer over the years, so urologists may
depend on these treatments rather than seek out newer
alternatives. However, the American Urological Association
recently published Best Practice Guidelines for
prostate cryoablation which confirms cryosurgery is an
appropriate treatment option for prostate cancer:
For PRIMARY PROSTATE CANCER:
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|
|
|
|
Primary cryosurgery is an appropriate treatment option for men
with clinically organ-confined, non-metastatic prostate cancer
(T1 T3)
|
|
|
|
Regardless of grade
|
And for SALVAGE PROSTATE CANCER:
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|
|
|
Salvage cryosurgery is a suitable option for men who have failed
radiation therapy
|
|
|
|
Most effective in men with organ-confined disease,
PSA<10ng/dl and no metastases confirmed by a positive biopsy
|
In addition, prostate cryoablation provides a number of benefits
over alternative treatments, including the following:
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|
|
|
|
Typically done as an outpatient procedure; choice of general or
regional anesthesia
|
|
|
|
10 year data available demonstrating prostate cryoablation
is comparable to surgery and radiation disease free survival
rates.3
|
|
|
|
A faster recovery than surgery and lower risk of potential side
effects and complications such as incontinence
|
|
|
|
radiation free procedure no radiation or radioactive
substances are left in the body
|
|
|
|
No major surgery, which means the patient returns to normal
activities in a few days
|
|
|
|
Provides an excellent treatment option when previous treatments
have failed
|
There are 20 years of clinical data supporting use of
various forms of radiation treatment options such as
brachytherapy and beam radiation treatments, which Galil
estimates are used to treat over one third of all prostate
cancer cases each year in the United States. Thus, there are
many challenges in establishing cryoablation as a primary option
for treating prostate cancers. Galil actively seeks to overcome
these challenges by remaining committed to physician and patient
education, training and awareness, product development and
improvement, participation in clinical studies and continued
marketing efforts.
In addition to the promotion of cryoablation technology to
urologists for the treatment of prostate and renal cancers,
Galil has begun to extend its sales and marketing resources to a
focus on the image-guided treatment of renal tumors through
interventional radiologists who utilize CT or MRI scanning
technology.
3 Ten-Year
Biochemical Disease Control for Patients with Prostate Cancer
Treated with Cryosurgery as Primary Therapy. by Jeffrey K.
Cohen, Ralph J. Miller Jr., Sharmila Ahmed, Meredith J. Lotz,
and John Baust, Urology 71:
515-518,
2008.
120
Based on the five-year outcomes by the Cleveland Clinic for
laparoscopic renal cryoablation versus radio frequency ablation
(RFA) and the Mayo Clinic study regarding a percutaneous
cryoablation procedure for renal cancers, cryoablation is
quickly becoming the treatment of choice for renal cancers less
than 4 cm in diameter. In 2007, based on a recommendation from
the American Medical Association, Medicare created a clinical
reimbursement code for percutaneous renal cryoablation.
Galil will also be seeking to apply its technology to a number
of other markets, including image-guided ablation of tumors in
other cancer sites, cryoablation of benign breast tumors
(fibroadenoma), as well as palliative intervention (treatment of
pain associated with metastases).
Another important target market for Galils cryoablation
technology is the uterine fibroid market, in which Galil offers
a new procedure utilizing cryoablation. The procedure is
approved for marketing in Europe. Galil is currently preparing
for the launch of a pivotal clinical study in the United States,
after which Galil expects to receive FDA clearance for the
marketing of this treatment in the United States. Galil will
also need to pursue reimbursement in the United States for the
procedure. Galil anticipates minimal sales and marketing effort
on its part in support of this procedure in Europe until Galil
has significantly more clinical experience, both in the United
States and Europe.
Products
Galil currently markets the following products:
Cryoablation
Systems
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|
Presice®
System Galils flagship cryoablation
system, supporting up to 25 cryoablation needles, 3 MTS and 5 TS
capability, real-time ultrasound monitoring, single-gas
capabilities, and pre-planning software.
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|
SeedNet®
Gold System - A cryoablation system supporting up to 25
cryoablation needles and 5 TS, positioned for the urology and
interventional radiology / interventional oncology
markets.
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|
SeedNet®
Gold MRI System - A cryoablation system with up to 25
cryoablation needles, especially designed to facilitate
MR-guided cryoablation procedures, using Galils
MRI-compatible cryoablation needles and thermal sensors.
Especially positioned for the interventional
radiology / interventional oncology market.
|
Disposable
Cryoablation Needles and Thermal Sensors
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|
|
17 Gauge Cryoablation Needles - Disposable ultra-thin
needles designed for use with Galils systems. Needles are
provided in straight
and/or
90-degree
design. The
IceRod®and
IceSeedtm
needles are also available in
i-Thawtm
(single gas) design.
|
Galils family of 17 gauge cryoablation needles currently
includes the following needle types:
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|
Straight
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90°
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|
Presice
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|
IceSeed
|
|
IceSeed
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|
IceSphere
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|
IceSphere
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|
|
IceRod
|
|
IceRod
|
|
|
IceRod-i-Thaw
|
|
|
|
|
IceBulb
|
|
|
SeedNet
|
|
IceSeed
|
|
IceSeed
|
|
|
IceSphere
|
|
IceSphere
|
|
|
IceRod
|
|
IceRod
|
|
|
IceBulb
|
|
|
MRI SeedNet
|
|
IceSeed MRI
|
|
IceSeed MRI
|
|
|
IceRod MRI
|
|
IceRod MRI
|
121
|
|
|
|
|
17 Gauge Thermal Sensors Galil offers 17
gauge TS providing real-time temperature reading near the
needles tip, MTS providing four independent temperature
readings along each needle:
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|
|
|
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|
|
Straight
|
|
90°
|
|
Presice
|
|
TS
|
|
TS
|
|
|
MTS
|
|
|
SeedNet
|
|
TS
|
|
TS
|
MRI SeedNet
|
|
TS MRI
|
|
TS MRI
|
Accessories
|
|
|
|
|
Urethral Warmer A reusable electronic device
which provides circulation of warm saline to heat the urethral
tissue in prostate cryoablation procedures. The system is
comprised of a fluid warmer and a roller pump.
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|
Urethral Warming Catheter Set The set
includes three disposable components: a urethral catheter, a
warmer cassette, and warmer tubing. The set is used in prostate
cryoablation procedures.
|
|
|
|
Prostate Template Similar to a brachytherapy
template, the template eases insertion of needles and aids in
proper configuration of needles.
|
|
|
|
Needle Testing Device (NTD) - Used to perform the
required Integrity and Functionality Test for each needle. The
NTD is comprised of a needle holder, a clear plastic container,
clamp and screw. It can be attached to any sterile surface
or IV pole.
|
Raw
Materials
Third party suppliers provide various components for all of
Galils products. In some cases, these suppliers may be the
only source for these necessary components. To avoid inadequate
inventory, Galil often enters into long term supply contracts
with the third party suppliers pursuant to which the suppliers
are required to maintain certain levels of inventory available
to Galil. Such contracts protect Galil from interruptions in
production. In addition, Galil tries to keep its own inventory
at an adequate level and seeks secondary sources of supply and
other manufacturing alternatives to avoid full dependence on
third party suppliers. Despite such efforts, Galil may
experience interruptions in production of one or more components
which would result in customer backorders. Galil does not
believe, however, that this would result in a material adverse
effect on its business because acceptable alternative sources of
supply could most likely be located within an adequate timeframe.
Patents
and Intellectual Property
Galil has a large intellectual property portfolio covering
cryosurgery core technology, devices and treatment methods. As
of September 30, 2008, Galil owns 33 patents worldwide and
66 applications at various stages. Included within these issued
patents are 4 patents which were transferred to Galil by Rafael
Advanced Defense Systems Ltd. at Galils inception. The
earliest of these patents does not expire until 2014 while most
patents in core technology areas do not expire until 2016.
Key Galil patents include the
following: low-diameter needles (less than 2mm)
which inflict less overall trauma, internal and external thermo
sensors, cryosurgery control means, three-dimensional imaging
and planning and procedure methods.
Because of the size and scope of Galils patent portfolio,
Galil does not believe its business to be materially dependent
upon any one or any group of these patents or any single
technological innovation. Galil relies on trade secrets,
know-how and continuing development to support its competitive
position.
Galil secures its intellectual property rights relating to its
cryosurgery technology through patenting, trademarking and
licensing certain inventions when appropriate. Galil, however,
can give no assurance that its products will not infringe on the
patents or intellectual property rights of other parties or that
any necessary licenses would be available to Galil on acceptable
terms and conditions. Galil has, at times, received notice from
third parties of
122
alleged intellectual property infringement. Galil cannot
equivocally state that these third party claims would not be
deemed valid and enforceable. If such claims were deemed valid,
Galil could potentially be prohibited from using the subject
patented matter, or Galil could be required to obtain licenses
from the owners of the intellectual property rights so as to
avoid infringement.
Galil enters into confidentiality agreements with certain of its
employees, consultants, customers and vendors to preserve the
confidentiality of its products and technologies. Galil cannot,
however, assure that these practices will prevent unauthorized
disclosure or use of such products or technologies.
Research
Strategy
Galil is committed to new product development to maintain its
position in the cryotherapy market. Galil intends to continue to
invest and focus its ongoing research and development efforts on
the improvement of the delivery and effectiveness of its product
platform, solutions both for its existing and targeted
applications as well as for additional applications beyond the
prostate and renal cancer markets.
Galil spent approximately $5.2 million, $1.4 million
and $1 million for the years ended 2007, 2006 and 2005,
respectively on research and development activities and
$5.7 million for the nine months ended September 30,
2008.
Sales
Galil sells its products in the United States primarily to
hospitals, ASCs and third party service providers. In
international markets (Europe and Asia), Galil also sells
through distributors. The following products and services
account for 15 percent or more of total revenues for each
of the years ended December 31, 2006 and 2007, and the nine
months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended
|
|
Year Ended
|
|
Ended
|
|
|
December 31,
|
|
December 31,
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
Cryoablation Surgical Systems
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Cryoablation disposables
|
|
|
71
|
%
|
|
|
87
|
%
|
|
|
92
|
%
|
Services
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
These products account for less than 15 percent of total
revenues. |
On July 1, 2003, Galil completed the merger of its urology
cryotherapy business and the urology brachytherapy business of
Amersham plc. (acquired on April 8, 2004 by General
Electric Company (GE)). Upon the merger, a new
company, Oncura Inc. (Oncura), was incorporated
under the laws of Delaware, with Galil holding an aggregate
ownership interest of 25%. Oncura aimed to provide minimally
invasive treatment options for prostate cancer using
brachytherapy and cryotherapy technologies. Galil and Amersham
each entered, separately, into supply and research and
development service agreements with Oncura based on a cost plus
pricing, according to the terms and conditions stipulated in the
relevant agreements. Following the establishment of Oncura,
Galils revenues for fiscal years 2005 and 2006 derived
mainly from urology sales to Oncura and from services provided
to Oncura.
On December 8, 2006 Galil entered into two agreements
whereby: (1) Galil sold to GE its holdings in Oncura (25%)
for consideration of $20.0 million and (2) Galil
acquired the cryo assets from Oncura for consideration of
$46.0 million, thereby effectively increasing its indirect
holding in the cryo business from 25% to a direct holding of
100%. In total, with the closing of these two transactions,
Galil transferred its 25% interest in the brachy business (held
through its 25% holding in Oncura) and obtained full ownership
of the cryo business in consideration of $20 million paid
in cash and $6 million paid by surrendering its accounts
receivables and loan balances due from Oncura.
By concluding the acquisition, Galil obtained the entire
cryoablation urology business, including all the related
customers, inventories, property, equipment and licenses to use
the technology.
Following the establishment of Oncura in July 2003, and until
December 8, 2006, Galil sold its cryoablation urology
products to Oncura based on a certain supply agreement. During
that period, Galil continued to sell its non-urology products
primarily to the Asian market. Revenues from sales to Oncura
were $5.1 million for 2006.
123
Galil currently sells cryoablation products in the United States
through its direct sales force, which consisted of
34 people as of September 30, 2008, including 28 sales
representatives, 3 sales managers and 3 field technicians. Galil
continues to position its products as alternatives within the
urology market as well as to expand into the womens health
and interventional radiology markets. In all its products
offerings, Galils strategy is to target the gate
keeper physician who manages the disease being treated
(e.g., the urologist for prostate cancer, the gynecologist for
uterine fibroid, etc.). Galil believes that this strategy will
lead to increased adoption of cryotherapy. With cryotherapy, the
gate keeper physician is able to offer patients a
safe and effective treatment option that the gate
keeper physician can administer himself without having to
refer the patient to a different specialist for treatment,
thereby maintaining continuity of care to the patient.
Internationally, Galils cryoablation products are sold
through its direct sales force and independent distributors.
Galils international sales represented approximately 26%
percent and 28% percent of total revenue for the year ended 2007
and for the nine months ended September 30, 2008,
respectively.
Galil derived its revenues from the following geographic regions
for the year ended December 31, 2007 and for the nine
months ended September 30, 2008, based on shipping
destination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
18,955
|
|
|
$
|
13,439
|
|
International:
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
1,396
|
|
|
|
1,045
|
|
China
|
|
|
1,232
|
|
|
|
1,005
|
|
Other
|
|
|
4,039
|
|
|
|
3,173
|
|
Total international
|
|
|
6,667
|
|
|
|
5,223
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
25,622
|
|
|
$
|
18,662
|
|
|
|
|
|
|
|
|
|
|
Reimbursement
Cryotherapy reimbursement, in general terms, involves the
payment to healthcare providers when cryoablation devices are
used to provide a cryotherapy treatment which has been cleared
by the required regulatory agency(ies). In the United States,
reimbursement of procedures and products by Medicare and third
party payers typically follows the regulatory approvals
necessary to market and sell the products.
Galil sells cryotherapy systems, disposable devices and products
to hospitals, ASCs and third party companies that also provide
services to the hospitals and ASCs. Providers of cryotherapy
services typically depend upon Medicare, Medicaid, Tricare and
other federal health care programs as well as private
third-party commercial payers to pay for the cryotherapy
procedures. Patient age is usually a significant criterion as to
whether they rely upon Medicare or some form of commercial
insurance. As Galils current revenue base is heavily
weighted to prostate cancer patients, who are typically older
patients, Galils near-term revenue projections are very
dependent upon continued reimbursement under Medicare. Patients
may also elect to pay for the procedure and services in the
absence of health care coverage which is referred to as
self pay plans. Each plan establishes its own
coverage and payment policies which result in a range of
payments and coverage decisions. The mix of government
payer/private payers for cryoablation procedures varies by the
specific type of cryotherapy procedure.
Coding, coverage and payment are the three key elements crucial
to obtaining reimbursement and market acceptance of a product.
Adoption of cryotherapy requires the health care providers to be
reimbursed as competitively as possible and also to have a wide
range of clinical applications for which reimbursement of each
application is accessible and adequate.
Accordingly, Galils revenue projections are subject to a
number of factors including reimbursement rates. Galil has a
clear strategy to build upon the existing coding and
reimbursement for cryotherapy and increase its market
penetration by targeting an expanded range of regulatory
clearances and approvals for its products in key markets. Galil
continually identifies possible existing reimbursement code(s)
and when appropriate, works with the
124
specialty society groups to apply for new specific reimbursement
codes that will facilitate reimbursement by health care payers
both private and public for future cryotherapy applications.
Prostate cryoablation, renal cryoablation and liver cryoablation
already have established CPT Category I coding specific to each
type of procedure. Additionally, the procedures are described by
International Statistical Classification of Diseases (ICD-9)
Procedure Codes. Medicare has established a National Coverage
Decision for prostate cryoablation, and Local Coverage Decisions
exist for many of the Medicare jurisdictions for both renal and
liver cryoablation. Many third party commercial payers have
established coverage policies and provider fee schedules for the
aforementioned cryoablation procedures.
When Medicare-reimbursed services are provided on an inpatient
hospital basis, the hospital is reimbursed under the Medicare
Inpatient Prospective Payment System (IPPS), based on the
applicable Diagnosis Related Group (DRG). The payment to the
hospital covers both the cryoablation equipment/products and the
facility services.
Outpatient reimbursement for cryoablation procedures for
Medicare beneficiaries is in accordance with the Hospital
Outpatient Prospective Payment System (HOPPS) and the ASC
payment system. Under HOPPS, the hospital is paid on a per
procedure basis, based on the Ambulatory Payment Classification
(APC) for the procedure. The payment to the hospital
and/or the
ASC includes the per procedure share of the cost for any
depreciable equipment, and the provision of disposable
cryoablation devices. In addition to the facility fees,
physician providers are also reimbursed a separate professional
fee.
Clearance to market a new device or technology by the FDA does
not guarantee payment by Medicare or other private payers.
Although cryotherapy products are sold in accordance with
existing regulatory approvals, clinical trials are necessary,
particularly in the United States, to support both the current
and future clinical indications. Future devices and technology
that Galil develops would have to be approved for coverage by
Medicare after obtaining the necessary FDA clearances. The
insurance coverage approval process is lengthy and there is no
assurance that Medicare or commercial payer approvals would be
granted. Each individual private insurer makes its own
determination whether to provide coverage for a device or
procedure and sets its own reimbursement rate. Driving adoption
of cryoablation devices by successfully implementing
Galils reimbursement strategy is vital to success in this
market. Galil intends to continue to commit considerable
resources to achieving this goal.
Backlog
As of September 30, 2008, Galil had no backlog for its
products. Galils policy is to carry enough inventory to be
able to ship most orders within a few days of receipt of order.
Historically, most of Galils orders have been shipped
within 30 days of the placement of the order. Therefore,
Galil relies on orders placed during a given period for sales
during that period.
Manufacturing
Galil manufactures its cryo surgical systems and related
disposables at its facilities in Yokneam, Israel. Galils
current manufacturing facility is subjected to yearly external
audits by a European notified body, AMTAC. The facility is
audited for compliance with ISO 13485:2003, ISO 9001:2000, the
European medical directives (CE marking) and the Canadian CMDCAS
certification. The most recent audit was held in May 2008 and
closed by AMTAC. The facility Quality System Regulation
compliance was inspected by the FDA in November 2007. This audit
has been closed by the FDA. We have complied with ISO 9001 since
1998, and ISO 13485:2003, CE Medical Device Directive and
Canadian regulation since 2004, demonstrating a long term robust
Quality Management System, quality assurance, design control and
manufacturing process control.
Government
Regulation
Galil is subject to regulation under United States federal and
state law, as well as various international regulatory agencies
in countries around the world in which it does business. These
regulatory requirements may change and Galil has no ability to
predict the changes or to forecast the risk or impact of these
potential changes. However, Galil actively monitors and adheres
to all regulations applicable to its business in these countries.
For a general discussion of governmental regulation in the
United States and other countries affecting the research and
development, manufacture and marketing of medical devices,
including Galils products, see the
125
sections entitled Endocare, Inc. Government
Regulation and Endocare, Inc. Health
Care Regulatory Issues beginning on page 110 of this proxy
statement/prospectus. The discussion below supplements the
information provided in such sections to the extent applicable
to Galil.
In the United States, Galils CryoHit, SeedNet and Presice
Surgical Systems and accessories have been cleared for marketing
through the 510(k) process as Class II devices. In Europe,
Galils systems have been cleared (CE marked) for marketing
as class IIb devices.
In addition to Galils FDA clearance and CE mark, Galil has
obtained certification for distribution of its CryoHit, SeedNet
and Presice Surgical Systems in Israel, Canada, Australia, New
Zealand, China and Hong Kong and South Korea, with regulatory
approval for marketing in Taiwan underway.
Seasonality
Galil believes that there is a seasonal impact on its sales of
cryoablation products. Because cryoablation procedures can be
scheduled in advance rather than on an as-needed basis, sales in
certain months may be lower due to holidays, medical conventions
or physician/patient vacations.
Competition
For a general description of the competitive environment in
which Galil operates, please see the above description under
Information About the Companies Endocare,
Inc. Competition.
Galil faces intense competition from other medical device
companies active in the areas of prostate cancer and other tumor
ablation (e.g., renal, womens health and interventional
radiology and oncology). These companies offer surgical devices,
brachytherapy, cryoablation and radio frequency ablation
products. These companies often have significantly larger
financial and human resources at their disposal than Galil does.
Additional devices currently in development may also become
competitive in the future.
Galil believes that currently Endocare, Sanarus and American
Medical Systems offer cryoablation products that do compete, or
could compete, with Galils cryoablation products. Other
companies currently have access to cryoablation technologies
similar to Galils and will likely become competitors in
the future if Galil demonstrates success in any of its markets.
Galil believes the principal competitive factors in the
cryoablation product market include:
|
|
|
|
|
The safety and efficacy of treatment alternatives;
|
|
|
|
Acceptance of a procedure by physicians and patients;
|
|
|
|
Technology leadership and superiority;
|
|
|
|
Availability of government or private insurance
reimbursement; and
|
|
|
|
Speed to market.
|
Employees
As of December 30, 2008, Galil had a total of
129 employees (including 14 employees under notice period).
Of these employees, 18 are engaged directly in research and
development activities, 5 in regulatory affairs/quality
assurance, 28 in manufacturing, 57 in sales, marketing, clinical
support and customer service and 21 in general and
administrative positions. In December 2008, Galil reduced its
United States sales force by 13 employees, aiming to reduce
its operating losses. Galil has never experienced a work
stoppage. Galil considers its employee relations to be strong.
Legal
Proceedings
Galil may be a party to lawsuits in the normal course of its
business. Litigation and governmental investigation can be
expensive and disruptive to normal business operations.
Moreover, the results of complex legal proceedings are difficult
to predict. Currently, Galil is not a party to any legal
proceedings that it believes to be material.
126
ENDOCARES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the sections of the proxy statement/prospectus entitled
Information about the Companies Endocare
Inc. beginning on page 102, and Risk Factors
beginning on page 12, as well as our consolidated financial
statements and related notes contained elsewhere in this proxy
statement/prospectus. This discussion contains forward-looking
statements based on our current expectations. There are various
factors many beyond our control that
could cause our actual results or the occurrence or timing of
expected events to differ materially from those anticipated in
these forward-looking statements. Some of these factors are
described below and other factors are described elsewhere in
this proxy statement/prospectus, including above under
Risks Factors beginning on page 12. In addition,
there are factors not described in this proxy
statement/prospectus that could cause our actual results or the
occurrence or timing of expected events to differ materially
from those anticipated in these forward-looking statements. All
forward-looking statements included in this proxy
statement/prospectus are based on information available to us as
of the date hereof, and, except as required by law, we assume no
obligation to update any such forward-looking statements.
Overview
We are an innovative medical device company focused on the
development of minimally invasive technologies for tissue and
tumor ablation through cryoablation, which is the use of lethal
ice to destroy tissue, such as tumors, for therapeutic purposes.
We develop and manufacture devices for the treatment of prostate
and renal cancers and we believe that our proprietary
technologies have broad applications across a number of markets,
including the ablation of tumors in the lung and liver and
palliative intervention (treatment of pain associated with
metastases).
Today, our FDA-cleared Cryocare Surgical System occupies a
growing position in the urological market for treatment of
prostate and renal cancers. Because of our initial concentration
on prostate and renal cancers, the majority of our sales and
marketing resources are directed toward the promotion of our
technology to urologists. We also employ a dedicated sales team
focused on the interventional radiology market in which our
products are used to treat renal, liver and lung cancer and for
palliative intervention. In addition to selling our cryoablation
disposable products to hospitals and mobile service companies,
we contract directly with hospitals for the use of our Cryocare
Surgical System and disposable products on a fee-for-service
basis. We intend to continue to identify and develop new markets
for our cryoablation products and technologies, particularly in
the area of tumor ablation.
Recent
Events
On November 10, 2008, Endocare and Galil entered into the
Merger Agreement, pursuant to which Merger Sub, a wholly owned
subsidiary of Endocare, will merge with and into Galil, with
Galil continuing after the Merger as the surviving company and a
wholly owned subsidiary of Endocare.
At the effective time of the Merger, it is expected that
11,092,330 shares of Endocare common stock will be issued
in the Merger. The exact conversion ratio cannot be calculated
until immediately prior to the effective time of the Merger, but
it is expected that approximately 33.0 ordinary shares of Galil
will be converted into one share of Endocare common stock.
Immediately following the effective time of the Merger and
attributing ownership to Galils shareholders of the Escrow
Shares, Galils shareholders will own approximately 48.0%,
and Endocares stockholders will own approximately 52.0%,
of Endocares common stock, without giving effect to the
shares issuable pursuant to the concurrent Financing described
below. The Merger will have no effect on the number of shares of
common stock of Endocare owned by existing Endocare stockholders.
Concurrent with the execution of the Merger Agreement, Endocare
and certain existing institutional accredited stockholders of
Endocare and Galil entered into the Stock Purchase Agreement,
relating to the private placement by Endocare of
16,250,000 shares of Endocare common stock at a purchase
price of $1.00 per share. The offering proceeds to Endocare from
the Financing are expected to be $16,250,000. The closing of the
Financing is subject to the concurrent closing of the Merger and
certain other conditions, including the sale of shares with a
minimum aggregate purchase price of $12,000,000 and that
Endocares common stock remains listed on the Nasdaq
Capital Market or the
Over-The-Counter
Bulletin Board. Upon consummation of the Merger and the
Financing, and
127
attributing ownership to Galils shareholders of the Escrow
Shares, Endocare stockholders will own approximately 38.5% of
Endocares outstanding common stock and the former
shareholders of Galil will own approximately 61.5% of
Endocares outstanding common stock.
Consummation of the Merger is subject to certain closing
conditions, including, among other things, approval by Endocare
stockholders and those of Galil and continued listing of
Endocare common stock on the NASDAQ Global Market. As a
condition to the parties entering into the Merger Agreement,
certain of Galil stockholders who in the aggregate own
approximately 97.5% of Galil stock on an as if converted to
common stock basis, have entered into voting agreements whereby
they have agreed to vote in favor of the transactions
contemplated by the Merger Agreement subject to the terms of the
voting agreements.
The Merger Agreement contains certain termination rights for
both Endocare and Galil, and further provides that, upon
termination of the Merger Agreement under specified
circumstances, either party may be required to pay the other
party a termination fee of $900,000 and, in some circumstances,
reimburse the other party for expenses incurred in connection
with the Merger, up to a maximum of $850,000.
Strategy
and Key Metrics
Our strategy is to achieve a dominant position in the prostate
and renal cancer markets, and further develop and increase the
acceptance of our technology in the interventional radiology and
oncology markets for treatment of liver and lung cancers and
palliative intervention (treatment of pain associated with
metastases). At the same time, we seek to achieve penetration
across additional markets with our proprietary cryoablation
technology.
The factors driving interest in and utilization of cryoablation
include increased awareness and acceptance of cryoablation by
industry thought leaders, continued publication of clinical data
on the effectiveness of cryoablation, increased awareness among
patients of cryoablation and its preferred outcomes as compared
to other modalities, the efforts of our sales force and our
continued expenditure of funds on patient education and advocacy.
Our primary objective is to grow market share, which we have
historically measured in terms of the estimated number of
domestic cryoablation procedures performed with our Cryocare
Surgical System, which we calculate using two primary
components. The first component is the actual number of
cryoablation cases for which we perform the service element on
behalf of the healthcare facility and provide the required
disposable products. In the second, we compute a procedure case
equivalent based on direct sales of our cryoablation disposable
products (without the service element) by using the expected
disposable product usage for each procedure for those sales. In
2005, we began gradually shifting our revenue model from
providing the service component of our cryoablation procedure
(revenues from cryoablation procedure fees) to focusing on
selling our cryoablation disposable products without
responsibility for the service element of the procedure
(revenues from sales of cryoablation disposable products),
thereby reducing the incremental revenues associated with our
business in favor of a more straightforward disposable sales
model. We did so recognizing that this strategic business model
change would result in a flattened revenue curve until the
change was complete since the average revenue per case where we
only sell the disposables is less than that for a case where we
also provide the service component. Because of that, we
continued to communicate the estimated number of procedures
performed each quarter so that the users of our financial
information could monitor market adoption and progress within
our markets.
Today, the transition is largely complete and the remaining
transition should be relatively small in future periods.
Therefore, we believe that revenue growth will once again become
one of our most important business metrics going forward.
Because our customers are now directly purchasing and carrying
inventories of our disposables and because of the resulting
variability of probe use across patients and applications,
making precise determinations about how many procedures are
performed is increasingly difficult. As a consequence, we have
decided that, beginning with our operating results for the three
months ended December 31, 2007, we will report the number
of cryoprobes sold during the period.
128
The following tables summarize for the periods presented the
total estimated domestic cryoablation procedures our customers
performed or which are represented by the procedure case
equivalent we computed from sales of our cryoablation disposable
products. We also summarize the number of probes sold for each
period. We are providing this summary to allow users of the
financial information greater clarity regarding the transition
from the former metric (procedure growth) we reported to the new
metric (revenue growth measured by the number of probes sold) we
will report going forward.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Estimated domestic cryoablation procedures
|
|
|
2,263
|
|
|
|
2,353
|
|
|
|
7,122
|
|
|
|
7,104
|
|
Number of cryoprobes sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight probes
|
|
|
8,660
|
|
|
|
9,957
|
|
|
|
28,017
|
|
|
|
29,852
|
|
Right-angle probes
|
|
|
2,084
|
|
|
|
1,564
|
|
|
|
6,058
|
|
|
|
4,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,744
|
|
|
|
11,521
|
|
|
|
34,075
|
|
|
|
34,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Estimated domestic cryoablation procedures
|
|
|
6,407
|
|
|
|
7,802
|
|
|
|
9,373
|
|
Number of cryoprobes sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight probes
|
|
|
29,943
|
|
|
|
33,598
|
|
|
|
38,909
|
|
Right-angle probes
|
|
|
2,803
|
|
|
|
4,590
|
|
|
|
6,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,746
|
|
|
|
38,188
|
|
|
|
45,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of cryoprobes sold represents the domestic sales of
cryoprobes during the periods presented. Straight probes are
typically, although not always, used in prostate procedures and
right-angle probes are typically used in procedures other than
prostate procedures.
We recently conducted a thorough review of our year-to-date 2008
performance, including the number and types of cases performed
by each of our physician customers. This review suggested that
urology prostate cancer cases were impacted primarily by the
emergence of robotic prostatectomy and intensity-modulated
radiation therapy (IMRT). In the financial results press release
that we issued on August 6, 2008, we announced a number of
initiatives to help us regain the growth that we have
demonstrated in the past. The initiatives include programs
intended to impact the number of new physicians trained,
increase revenues from our existing customers and communicate
directly and more broadly with patients to educate them about
the significant benefits of cryoablation. The programs include
additional new urology sales personnel, significantly enhanced
patient outreach and advertising and programs that assist our
existing physician customers in reaching more patients through
community-based marketing. An important element of these
programs is an increased emphasis on focal cryoablation, since
we believe that this is an area where we have a potentially
substantial competitive advantage.
129
Results
of Operations
Three
and Nine Months Ended September 30, 2008 and
2007
Revenues and costs of revenues related to the following products
and services for the three and nine months ended
September 30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
5,676
|
|
|
$
|
5,312
|
|
|
$
|
17,186
|
|
|
$
|
15,932
|
|
Cryocare Surgical Systems
|
|
|
195
|
|
|
|
385
|
|
|
|
1,093
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,871
|
|
|
|
5,697
|
|
|
|
18,279
|
|
|
|
17,315
|
|
Cryoablation procedure fees
|
|
|
1,592
|
|
|
|
1,541
|
|
|
|
5,028
|
|
|
|
5,029
|
|
Cardiac royalties
|
|
|
146
|
|
|
|
86
|
|
|
|
383
|
|
|
|
278
|
|
Other
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
(18
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,599
|
|
|
$
|
7,326
|
|
|
$
|
23,672
|
|
|
$
|
22,773
|
|
Costs of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
2,180
|
|
|
$
|
2,057
|
|
|
$
|
6,765
|
|
|
$
|
6,803
|
|
Cryocare Surgical Systems
|
|
|
95
|
|
|
|
114
|
|
|
|
362
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,275
|
|
|
$
|
2,171
|
|
|
$
|
7,127
|
|
|
$
|
7,506
|
|
We recognize revenues from sales of Cryocare Surgical Systems
and disposable cryoprobes when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and
determinable and collectability is reasonably assured.
Per-procedure fees are recorded when the service has been
rendered.
Costs of revenues for cryoablation disposable products and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees incorporate
similar inventory when sold and we do not separately track the
cost of disposable products sold directly to customers and those
consumed in cryoablation procedures.
Costs of revenues consist of fixed and variable costs incurred
in the manufacture of our products in addition to depreciation
of Cryocare Surgical Systems placed in the field with customers
under our placement program or with our sales and service
personnel. We incur an additional cost of revenues in the form
of a fee for equipment usage and other services when a procedure
is performed on a system owned by an unrelated third-party
service provider. The fee paid to the third-party service
provider is charged to costs of revenues when the procedure is
performed and billed.
Research and development expenses include expenses associated
with the design and development of new products as well as
enhancements to existing products. We expense research and
development costs when incurred. Our research and development
efforts are occasionally subject to significant non-recurring
expenses and fees that can cause some variability in our
quarterly research and development expenses.
Selling and marketing expenses primarily consist of salaries,
commissions and related benefits and overhead costs for
employees and activities in the areas of selling, marketing and
customer service. Expenses associated with advertising, trade
shows, promotional and physician training costs related to
marketing our products are also classified as selling and
marketing expenses.
General and administrative expenses primarily consist of
salaries and related benefits and overhead costs for employees
and activities in the areas of legal affairs, finance,
information technology, human resources and administration. Fees
for attorneys, independent auditors and certain other outside
consultants are also included where their services are related
to general and administrative activities. This category also
includes reserves for bad
130
debt and litigation losses less amounts recoverable under our
insurance policies. Litigation reserves and insurance recoveries
are recorded when such amounts are probable and can be
reasonably estimated. In the 2008 period, general and
administrative expenses also include certain costs related to
potential strategic opportunities.
We account for equity awards to employees and non-employee
directors under Statement of Financial Accounting Standards
No. 123 (revised 2004), Share Based Payment
(SFAS No. 123R). As of September 30, 2008,
there was $1.1 million of total unrecognized compensation
costs related to unvested stock options. That cost is expected
to be amortized on a straight-line basis over a weighted average
service period of 0.9 years less any stock options
forfeited prior to vesting. Unrecognized compensation for
restricted stock units was $1.7 million as of
September 30, 2008 (assuming that all service and
performance conditions will be met) and will be recognized over
a weighted average period of 1.2 years. Compensation costs
related to restricted stock units is recorded over the service
period (2007 through 2009) if it is probable the
performance conditions (profitability and sales goals) will be
satisfied. Stock-based compensation expense recorded in the
three months ended September 30, 2008 and 2007 was a
reduction (negative expense) of $0.6 million and expense of
$1.4 million, respectively. Stock-based compensation
expense recorded in the nine months ended September 30,
2008 and 2007 was $0.8 million and $2.9 million,
respectively. The expense for the 2008 three and nine month
periods are net of a cumulative adjustment to reverse
$1.3 million in previously recorded expense due to a change
in vesting probability and forfeitures from terminations.
Three
Months Ended September 30, 2008 Compared to Three Months
Ended September 30, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
5,676
|
|
|
$
|
5,312
|
|
|
$
|
364
|
|
|
|
6.9
|
%
|
Cryocare Surgical Systems
|
|
|
195
|
|
|
|
385
|
|
|
|
(190
|
)
|
|
|
(49.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,871
|
|
|
|
5,697
|
|
|
|
174
|
|
|
|
3.1
|
%
|
Cryoablation procedure fees
|
|
|
1,592
|
|
|
|
1,541
|
|
|
|
51
|
|
|
|
3.3
|
%
|
Cardiac royalties
|
|
|
146
|
|
|
|
86
|
|
|
|
60
|
|
|
|
69.8
|
%
|
Other
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
(12
|
)
|
|
|
(600.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,599
|
|
|
$
|
7,326
|
|
|
$
|
273
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of cryoprobes sold during the three months ended
September 30, 2008 decreased by approximately
6.7 percent to 10,744 compared to 11,521 probes sold during
this same period in 2007. The reduction in revenue was offset by
higher average sales price of probes sold and used in
procedures, which increased 12.4 percent during the three
months ended September 30, 2008 compared to this same
period in 2007. This is largely caused by annual price increases
implemented in the second quarter as well as migration to higher
priced probes. Sales of straight probes, which are typically,
although not always, used in prostate cancer procedures
decreased 13.0 percent and right-angle probes, which are
typically used in procedures other than prostate cancer
procedures, increased 33.2 percent.
Revenues from sales of Cryocare Surgical Systems decreased as a
result of fewer sales of such systems in domestic markets.
Cardiac royalty revenues increased for the three months ended
September 30, 2008 over the same period in 2007 due to
increased sales by the licensee.
131
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of revenues
|
|
$
|
2,275
|
|
|
$
|
2,171
|
|
|
$
|
104
|
|
Percent of revenues
|
|
|
29.9
|
%
|
|
|
29.6
|
%
|
|
|
|
|
The cost of revenues increase was primarily due to a
$0.1 million adjustment to the reserve for slow moving and
obsolete inventory.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
Gross profit
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
5,088
|
|
|
$
|
4,796
|
|
|
$
|
292
|
|
Cryocare Surgical Systems
|
|
|
100
|
|
|
|
271
|
|
|
|
(171
|
)
|
Cardiac royalties and other
|
|
|
136
|
|
|
|
88
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,324
|
|
|
$
|
5,155
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Percentage
|
|
|
|
September 30,
|
|
|
Point
|
|
Gross margin
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Percent of revenues)
|
|
|
Cryoablation disposable products and procedure fees
|
|
|
67.0
|
%
|
|
|
65.5
|
%
|
|
|
1.5
|
%
|
Cryocare Surgical Systems
|
|
|
1.3
|
%
|
|
|
3.7
|
%
|
|
|
(2.4
|
)%
|
Cardiac royalties
|
|
|
1.8
|
%
|
|
|
1.2
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.1
|
%
|
|
|
70.4
|
%
|
|
|
(0.3
|
)%
|
The increase in gross margin (gross profit as a percentage of
revenues) of disposable products and procedure fees was related
to continued reductions in manufacturing costs for our
cryoablation products. This was offset somewhat by a
$0.1 million adjustment to our inventory reserve for slow
moving and obsolete inventory. The decrease in gross margin of
Cryocare Surgical Systems was related to the sale of a reduced
cost system during the three months ended September 30,
2007. The increase in cardiac royalties was related to increased
sales by the licensee.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development expenses
|
|
$
|
626
|
|
|
$
|
699
|
|
|
$
|
(73
|
)
|
|
|
(10.4
|
)%
|
Percent of total revenues
|
|
|
8.2
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
The decrease in research and development expenses was primarily
related to the reduction in stock-based compensation expense.
Expenses related to clinical studies for the three months ended
September 30, 2008 have remained consistent with the same
period last year. In both 2007 and 2008, we have focused a
significant portion of our research dollars on those areas in
which cryoablation research is required to substantiate
reimbursement codes and coverage.
132
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Selling and marketing expenses
|
|
$
|
3,423
|
|
|
$
|
3,500
|
|
|
$
|
(77
|
)
|
|
|
(2.2
|
)%
|
Percent of total revenues
|
|
|
45.0
|
%
|
|
|
47.8
|
%
|
|
|
|
|
|
|
|
|
The decrease in selling and marketing expenses was due to the
reduction in stock-based compensation expense of
$0.3 million and incentive compensation expense of
$0.2 million offset by increases in online and promotional
expense of $0.2 million, salaries of $0.1 million as
well as $0.1 million in travel related expenses. Included
in selling and marketing expenses for the three months ended
September 30, 2008 and 2007 was a negative expense of
$41,000 and an expense of $0.3 million, respectively, for
stock-based compensation related to stock options, deferred
stock units and restricted stock units. The 2008 expense is net
of a cumulative adjustment to reverse expenses related to
performance awards that are not expected to vest.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative expenses
|
|
$
|
2,951
|
|
|
$
|
2,881
|
|
|
$
|
70
|
|
|
|
2.4
|
%
|
Percent of total revenues
|
|
|
38.8
|
%
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily due to higher legal and accounting fees of
$1.6 million offset by a reduction of $1.5 million in
stock-based compensation expense. Of the $1.6 million
increase in legal fees, $0.7 million was related to the
legal proceedings of our former CEO and former CFO while the
remaining increase of $0.9 million related to legal
expenses incurred in relation to potential strategic
opportunities, including in connection with the Merger. These
expenditures were recorded as general and administrative
expenses as incurred because the Merger is not expected to occur
until 2009, and these costs will be required to be expensed
under Statement of Financial Accounting Standards (SFAS)
No. 141(R), Business Combinations. Effective August
2008, we are no longer required to advance the legal fees of our
former CEO and former CFO. In addition, the provision for bad
debts in the 2008 period was $0.4 million higher than the
third quarter of 2007 due to a favorable revaluation adjustment
in the 2007 period of a note receivable we received in
connection with our 2006 sale of Timm Medical, our former
subsidiary. This increase was offset by a decrease of
$0.4 million in incentive compensation primarily as a
result of the resignation of our CEO in September 2008. Total
stock-based compensation expense included in general and
administrative expenses related to stock options, deferred stock
units and restricted stock units for each of the three months
ended September 30, 2008 and September 30, 2007 was a
negative expense of $0.5 million and expense of
$1.0 million, respectively. The reduction in stock-based
compensation was primarily due to a cumulative adjustment to
reverse $1.3 million in expenses related to equity awards
that are no longer expected to vest.
Gain on
Recovery of Note Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Gain on recovery of note receivable
|
|
$
|
(750
|
)
|
|
$
|
|
|
|
$
|
(750
|
)
|
|
|
100
|
%
|
Percent of total revenues
|
|
|
(9.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
133
The three months ended September 30, 2008 included
$0.8 million for the receipt of payment in full
satisfaction of a note receivable from SRS Medical related to
the sale of a product line in October 2003. Due to uncertainty
of collection, the note was fully reserved at the time of sale
in 2003.
Litigation
Settlement, Net of Related Legal Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Litigation settlement, net
|
|
$
|
|
|
|
$
|
(677
|
)
|
|
$
|
677
|
|
|
|
100
|
%
|
Percent of total revenues
|
|
|
|
|
|
|
(9.2
|
)%
|
|
|
|
|
|
|
|
|
The three months ended September 30, 2007 included
$0.7 million for litigation settlement, net of related
legal expenses. This amount relates to our settlement received
from KPMG LLP relating to the audit and review of our historical
financial statements.
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income, net
|
|
$
|
5
|
|
|
$
|
264
|
|
|
$
|
(259
|
)
|
|
|
(98.1
|
)%
|
Percent of total revenues
|
|
|
0.0
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
Interest income, net in the 2008 and 2007 periods includes
interest income earned from the investment of our cash balances,
as well as interest expense related to our line of credit.
Interest income decreased in 2008 due to higher cash balances in
the third quarter of 2007 resulting from our May 2007 private
placement. Additionally, the collection of our note receivable
from SRS Medical resulted in no interest income recorded on the
note during the three months ended September 30, 2008.
Because the note was fully satisfied, we will receive no future
interest payments on such note.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(921
|
)
|
|
$
|
(984
|
)
|
|
$
|
63
|
|
|
|
6.4
|
%
|
Percent of total revenues
|
|
|
(12.1
|
)%
|
|
|
(13.4
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the three months ended September 30, 2008 was
$0.08 per basic and diluted share on 12.0 million weighted
average shares outstanding, compared to a net loss of $0.08 per
basic and diluted share on 11.6 million weighted average
shares outstanding during the same period in 2007.
134
Nine
Months Ended September 30, 2008 Compared to Nine Months
Ended September 30, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
17,186
|
|
|
$
|
15,932
|
|
|
$
|
1,254
|
|
|
|
7.9
|
%
|
Cryocare Surgical Systems
|
|
|
1,093
|
|
|
|
1,383
|
|
|
|
(290
|
)
|
|
|
(21.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,279
|
|
|
|
17,315
|
|
|
|
964
|
|
|
|
5.6
|
%
|
Cryoablation procedure fees
|
|
|
5,028
|
|
|
|
5,029
|
|
|
|
(1
|
)
|
|
|
0.0
|
%
|
Cardiac royalties
|
|
|
383
|
|
|
|
278
|
|
|
|
105
|
|
|
|
37.8
|
%
|
Other
|
|
|
(18
|
)
|
|
|
151
|
|
|
|
(169
|
)
|
|
|
(111.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,672
|
|
|
$
|
22,773
|
|
|
$
|
899
|
|
|
|
3.9
|
%
|
The number of cryoprobes sold during the nine months ended
September 30, 2008 decreased by approximately
1.2 percent to 34,075 compared to 34,489 probes sold during
this same period in 2007. The reduction in revenue was offset by
higher average sales price of probes sold and used in
procedures, which increased 7.2 percent during the nine
months ended September 30, 2008 compared to this same
period in 2007. This is largely caused by annual price increases
implemented in the second quarter as well as migration to higher
priced probes. Sales of straight probes, which are typically,
although not always, used in prostate cancer procedures
decreased 6.2 percent and right-angle probes, which are
typically used in procedures other than prostate cancer
procedures, increased 30.6 percent.
Revenues from sales of Cryocare Surgical Systems decreased as a
result of fewer sales of such systems primarily in domestic
markets. Cardiac royalty revenues increased for the nine months
ended September 30, 2008 over the same period in 2007 due
to increased sales by the licensee. Other revenues decreased due
to a one-time non-refundable payment received under a term sheet
with a potential collaboration partner in 2007. The term sheet
was subsequently terminated without the parties reaching a
definitive agreement.
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of revenues
|
|
$
|
7,127
|
|
|
$
|
7,506
|
|
|
$
|
(379
|
)
|
Percent of revenues
|
|
|
30.1
|
%
|
|
|
33.0
|
%
|
|
|
|
|
Costs of revenues declined due to decreases in materials, labor
and overhead costs of approximately $0.7 million offset by
an increase in the provision for excess and obsolete inventory
of $0.3 million. In addition, this decrease was
attributable to a slight change in the mix of our revenues from
those where we are responsible for providing cryoablation
services to solely selling cryoablation disposable products.
This mix shift led to a decrease in the number of cases for
which we paid fees to third-party service providers.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
15,449
|
|
|
$
|
14,158
|
|
|
$
|
1,291
|
|
Cryocare Surgical Systems
|
|
|
731
|
|
|
|
680
|
|
|
|
51
|
|
Cardiac royalties and other
|
|
|
365
|
|
|
|
429
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,545
|
|
|
$
|
15,267
|
|
|
$
|
1,278
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Point Change
|
|
|
|
(Percent of revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
|
65.3
|
%
|
|
|
62.2
|
%
|
|
|
3.1
|
%
|
Cryocare Surgical Systems
|
|
|
3.1
|
%
|
|
|
3.0
|
%
|
|
|
0.1
|
%
|
Cardiac royalties
|
|
|
1.5
|
%
|
|
|
1.9
|
%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69.9
|
%
|
|
|
67.1
|
%
|
|
|
2.8
|
%
|
The positive trend in gross margins (gross profit as a
percentage of revenues) was partially related to our continual
shift from procedures where we bear responsibility for the
service element of the procedure to those where we solely sell
our cryoablation disposable products. Sales of cryoablation
disposable products yield a higher gross margin than procedures
performed by third party subcontractors. We also have continued
to reduce manufacturing costs for our cryoablation disposable
products and surgical systems, while increasing efficiencies in
production. Gross margins were negatively affected during the
nine months ended September 30, 2007 by transactions where
we allowed certain customers to upgrade to our Cryocare CS
System from a previous generation of our Cryocare Surgical
System with nominal additional payment, resulting in a net loss
of $0.2 million.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development expenses
|
|
$
|
1,765
|
|
|
$
|
1,935
|
|
|
$
|
(170
|
)
|
|
|
(8.8
|
)%
|
Percent of total revenues
|
|
|
7.5
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
The decrease in research and development expenses was primarily
attributable to a concerted effort to maintain operating
expenses at minimum levels and yet support our growth goals to
the greatest extent as well as a reduction in the stock-based
compensation expense of $0.1 million. Expenses related to
clinical studies for the nine months ended September 30,
2008 have remained consistent with the same period last year. In
both 2008 and 2007, we have focused a significant portion of our
research dollars on those areas in which cryoablation research
is required to substantiate reimbursement codes and coverage.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Selling and marketing expenses
|
|
$
|
11,120
|
|
|
$
|
11,362
|
|
|
$
|
(242
|
)
|
|
|
(2.1
|
)%
|
Percent of total revenues
|
|
|
47.0
|
%
|
|
|
49.9
|
%
|
|
|
|
|
|
|
|
|
The decrease in selling and marketing expenses primarily related
to reductions in incentive compensation of $0.5 million,
reductions in the training expenses for new physicians of
$0.2 million and a reduction in stock-based compensation
expense of $0.1 million. The total decrease of
$0.8 million was offset by $0.3 million increase in
promotional expenses and a $0.2 million increase in
consultant expenses related to further development and
enhancement of the Cryo On-Line Database (COLD) registry, a
database of cryoablation patients and treatment outcomes.
Included in selling and marketing expenses for the nine months
ended September 30, 2008 and 2007 was $0.4 million and
$0.5 million in non-cash stock-based compensation expenses
related to stock options, deferred stock units and restricted
stock units.
136
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative expenses
|
|
$
|
9,234
|
|
|
$
|
9,556
|
|
|
$
|
(322
|
)
|
|
|
(3.4
|
)%
|
Percent of total revenues
|
|
|
39.0
|
%
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
The decrease in general and administrative expenses is primarily
due to reductions in stock-based compensation of
$1.6 million and incentive compensation of
$0.8 million. In addition, expenses recorded for fees to
our board of directors decreased by $0.3 million as a
result of our decreasing stock price and accounting fees
decreased by $0.2 million. Offsetting those decreasing
expenses was an increase in legal expenses of $1.8 million
in the 2008 period as well as an increase in the provision for
bad debts of $0.4 million in the current year period due to
a favorable revaluation adjustment in 2007 period of a note
receivable we received in connection with our 2006 sale of Timm
Medical. In addition, sales and use tax expenses increased
$0.4 million as a result of the settlement of liabilities
related to previous years that were received from various states
in 2007 and did not recur in the 2008 period.
Of the $2.9 million in legal expenses net of insurance
recoveries, $1.8 million related to the legal proceedings
of our former CEO and former CFO, and $0.9 million related
to legal expenses incurred in relation to potential strategic
opportunities. These expenditures were recorded as general and
administrative expenses as incurred since any potential
transaction is not expected to occur until 2009, and these costs
will be required to be expensed under Statement of Financial
Accounting Standards (SFAS) No. 141(R), Business
Combinations. As of March 31, 2008, we have exhausted
all remaining insurance coverage for indemnification matters
relating to our former executives. In August and October 2008,
our indemnification agreements with our former CFO and former
CEO, respectively, were terminated. As a result of the
termination agreements, we are no longer obligated to pay any
future legal expenses relating to the legal proceedings of our
former CEO and former CFO.
Total stock-based compensation expense included in general and
administrative expenses related to stock options, deferred stock
units and restricted stock units for the nine months ended
September 30, 2008 and September 30, 2007 was
$0.4 million and $2.3 million, respectively. The
reduction in stock-based compensation was primarily due to a
cumulative adjustment to reverse $1.3 million in expenses
related to equity awards that are no longer expected to vest.
Gain on
Recovery of Note Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Gain on recovery of note receivable
|
|
$
|
(750
|
)
|
|
$
|
|
|
|
$
|
(750
|
)
|
|
|
100
|
%
|
Percent of total revenues
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
The nine months ended September 30, 2008 included
$0.8 million for the receipt of a payment in full
satisfaction of a note receivable from SRS Medical related to
the sale of a product line in October 2003. Due to uncertainty
of collection, the note was fully reserved at the time of sale
in 2003.
Litigation
Settlement, Net of Related Legal Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Litigation settlement, net
|
|
$
|
|
|
|
$
|
(677
|
)
|
|
$
|
677
|
|
|
|
100
|
%
|
Percent of total revenues
|
|
|
|
|
|
|
(3.0
|
)%
|
|
|
|
|
|
|
|
|
137
The nine months ended September 30, 2007 included
$0.7 million for litigation settlement, net of related
legal expenses. This amount relates to our settlement received
from KPMG LLP relating to the audit and review of our historical
financial statements.
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income, net
|
|
$
|
181
|
|
|
$
|
402
|
|
|
$
|
(221
|
)
|
|
|
(55.0
|
)%
|
Percent of total revenues
|
|
|
0.8
|
%
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
Interest income, net in the 2008 and 2007 periods included
interest income earned from the investment of our cash balances,
as well as interest expense related to our line of credit.
Interest expense paid on our line of credit decreased due to
reduced borrowings for the nine months ended September 30,
2008 compared to the same period in 2007. Interest income also
decreased due to higher cash balances in 2007 resulting from our
May 2007 private placement.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(4,643
|
)
|
|
$
|
(6,507
|
)
|
|
$
|
1,864
|
|
|
|
28.6
|
%
|
Percent of total revenues
|
|
|
(19.6
|
)%
|
|
|
(28.6
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended September 30, 2008 was
$0.39 per basic and diluted share on 11.9 million weighted
average shares outstanding, compared to a net loss of $0.59 per
basic and diluted share on 10.9 million weighted average
shares outstanding during the same period in 2007.
Years
Ended December 31, 2007, 2006 and 2005
Revenues and cost of revenues from continuing operations related
to the following products and services for the three-year period
ended December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
6,790
|
|
|
$
|
13,948
|
|
|
$
|
21,157
|
|
Cryocare Surgical Systems
|
|
|
743
|
|
|
|
1,096
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,533
|
|
|
|
15,044
|
|
|
|
22,730
|
|
Cryoablation procedure fees
|
|
|
19,780
|
|
|
|
12,298
|
|
|
|
6,418
|
|
Cardiac royalties
|
|
|
889
|
|
|
|
604
|
|
|
|
386
|
|
Other
|
|
|
72
|
|
|
|
44
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,274
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
15,278
|
|
|
$
|
11,541
|
|
|
$
|
9,006
|
|
Cryocare Surgical Systems
|
|
|
460
|
|
|
|
802
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,738
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
Costs of revenues for cryoablation disposable products and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees incorporate
similar inventory when sold and we do not separately track the
cost of disposable products sold directly to customers and those
consumed in cryoablation procedures. Procedure fees relate to
services which are provided to medical facilities upon request
to facilitate the overall delivery of our technology into the
marketplace.
We recognize revenues from sales of Cryocare Surgical Systems
and disposable cryoprobes when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and
determinable, and collectability is reasonably assured. Revenues
are deferred when we have continuing obligations until those
obligations are fulfilled. When we contract with medical
facilities for the use of the Cryocare Surgical Systems and
provide the service element in addition to the disposables
required in cryoablation treatments, we charge a per-procedure
fee. Cryoablation services generally consist of rental and
transport of a Cryocare Surgical System as well as the services
of a technician to assist the physician with the setup and
monitoring of the equipment.
Costs of revenues consist of fixed and variable costs incurred
in the manufacture of our products in addition to depreciation
of Cryocare Surgical Systems placed in the field with customers
under our placement program or with our sales and service
personnel. We incur additional cost of revenues in the form of a
fee for equipment usage and other services when a procedure is
performed on a system owned by an unrelated third-party service
provider. The fee paid to the third-party service provider is
charged to costs of revenues when the procedure is performed and
billed.
Research and development expenses include expenses associated
with the design and development of new products as well as
enhancements to existing products. We expense research and
development costs when incurred. Our research and development
efforts are occasionally subject to significant non-recurring
expenses and fees that can cause some variability in our
quarterly research and development expenses.
Selling and marketing expenses primarily consist of salaries,
commissions and related benefits and overhead costs for
employees and activities in the areas of selling, marketing and
customer service. Expenses associated with advertising, trade
shows, promotional and training costs related to marketing our
products are also classified as selling and marketing expenses.
General and administrative expenses primarily consist of
salaries and related benefits and overhead costs for employees
and activities in the areas of legal affairs, finance,
information technology, human resources and administration. Fees
for attorneys, independent auditors and certain other outside
consultants are also included where their services are related
to general and administrative activities. This category also
includes reserves for bad debt, and litigation losses less
amounts recoverable under our insurance policies. Litigation
reserves and insurance recoveries are recorded when such amounts
are probable and can be reasonably estimated.
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share Based Payment (SFAS No. 123R) using the
modified-prospective transition method. Under that transition
method, compensation cost is recognized for (a) all
share-based payments granted prior to, but not yet vested as of
January 1, 2006 based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS 123 Accounting for Stock-Based
Compensation and (b) all share-based payments
granted, modified or settled subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Results for prior periods have
not been restated. Total stock-based compensation expense was
$2.8 million and $3.9 million for 2006 and 2007,
respectively. As a result of adopting SFAS No. 123R,
our net loss for 2006 and 2007 is $2.6 million and
$2.5 million greater, respectively, than if we had
continued to account for stock-based compensation under
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, As of December 31, 2007,
there was $1.7 million of total unrecognized compensation
costs related to unvested stock options. That cost is expected
to be amortized on a straight-line basis over a weighted average
service period of 0.9 years less any stock options
forfeited prior to vesting. Unrecognized compensation for
deferred and restricted stock units was $2.1 million at
December 31, 2007 (assuming that all service and
performance milestones will be met) and will be recognized over
a weighted average period of 1.9 years.
139
Costs, expenses, gains and losses from continuing operations for
the three-year period ended December 31, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of revenues
|
|
$
|
15,738
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
Research and development
|
|
|
2,283
|
|
|
|
2,781
|
|
|
|
2,555
|
|
Selling and marketing
|
|
|
13,001
|
|
|
|
15,195
|
|
|
|
14,855
|
|
General and administrative
|
|
|
13,858
|
|
|
|
13,107
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment and other charges
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Gain on legal settlement
|
|
|
|
|
|
|
|
|
|
|
(677
|
)
|
Total costs and expenses
|
|
$
|
44,906
|
|
|
$
|
43,426
|
|
|
$
|
39,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
$
|
308
|
|
|
$
|
452
|
|
|
$
|
391
|
|
Interest expense related to common stock warrants
|
|
$
|
657
|
|
|
$
|
3,716
|
|
|
$
|
|
|
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
21,157
|
|
|
$
|
13,948
|
|
|
$
|
7,209
|
|
|
|
51.7
|
%
|
Cryocare Surgical Systems
|
|
|
1,573
|
|
|
|
1,096
|
|
|
|
477
|
|
|
|
43.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,730
|
|
|
|
15,044
|
|
|
|
7,686
|
|
|
|
51.1
|
%
|
Cryoablation procedure fees
|
|
|
6,418
|
|
|
|
12,298
|
|
|
|
(5,880
|
)
|
|
|
(47.8
|
)%
|
Cardiac royalties
|
|
|
386
|
|
|
|
604
|
|
|
|
(218
|
)
|
|
|
(36.1
|
)%
|
Other
|
|
|
153
|
|
|
|
44
|
|
|
|
109
|
|
|
|
247.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,687
|
|
|
$
|
27,990
|
|
|
$
|
1,697
|
|
|
|
6.1
|
%
|
Although our total number of estimated domestic procedures
increased approximately 20 percent to 9,373 for the year
ended December 31, 2007 from 7,802 for the year ended
December 31, 2006, the growth in revenues is not reflective
of this increase because of the change in revenue mix from
procedure fees to direct sale of disposable products without the
service component. Generally, we earn less revenue per case for
sales of cryoablation disposable products than for procedure
fees; however the related gross margin as a percent of revenues
for sales of cryoablation disposable products is greater. Of the
total estimated procedures performed during the year ended
December 31, 2007, 14 percent were those for which we
provided cryoablation services and 86 percent were from the
sale of cryoablation disposable products. This compares to
32 percent for cryoablation services and 68 percent
for sales of cryoablation disposable products during the year
ended December 31, 2006.
Also contributing to growth in sales of cryoablation products
was an increase in sales to a market served by interventional
radiologists, who are physicians who treat tumors in the kidney,
lung and liver and perform palliative intervention. Direct sales
of disposable products and interventional radiology procedures
generally have a lower average selling price than procedures
performed by urologists on prostate and renal treatments
although costs of revenues are also lower.
The decrease in royalty revenues for the year ended
December 31, 2007 is related to a decrease in the
contractual rate of royalties that we are paid from
5.0 percent in 2006 to 3.0 percent in 2007.
Revenues from sales of Cryocare Surgical Systems increased as a
result of a greater number of systems sold.
140
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of Revenues
|
|
$
|
9,780
|
|
|
$
|
12,343
|
|
|
$
|
(2,563
|
)
|
Percent of revenues
|
|
|
32.9
|
%
|
|
|
44.1
|
%
|
|
|
|
|
The decrease in cost of revenues resulted primarily from the
change in the mix of our revenues from those where we are
responsible for providing cryoablation procedure services to
solely selling cryoablation disposable products. This mix shift
led to a decrease in the number of cases for which we paid fees
to third party service providers. Fees to service providers were
$2.5 million in 2007 and $4.7 million in 2006. In
addition, costs of revenues declined due to decreases in
materials, labor and overhead costs. During the years ended
December 31, 2007 and 2006, substantially all of our
cryoablation procedures for which we were responsible for the
service element were performed by third party service providers
at an additional cost to us.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Gross profit
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
18,569
|
|
|
$
|
14,705
|
|
|
$
|
3,864
|
|
Cryocare Surgical Systems
|
|
|
799
|
|
|
|
294
|
|
|
|
505
|
|
Cardiac royalties and other
|
|
|
539
|
|
|
|
648
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,907
|
|
|
$
|
15,647
|
|
|
$
|
4,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Gross margin
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Percent of revenues)
|
|
|
Cryoablation disposable products and procedure fees
|
|
|
62.6
|
%
|
|
|
52.5
|
%
|
|
|
10.1
|
%
|
Cryocare Surgical Systems
|
|
|
2.7
|
%
|
|
|
1.1
|
%
|
|
|
1.6
|
%
|
Cardiac royalties and other
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.1
|
%
|
|
|
55.9
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The positive trend in gross margins (gross profit as a
percentage of revenues) was primarily related to our shift from
procedures where we bear responsibility for the service element
of the procedure to those where we solely sell our cryoablation
disposable products. Sales of cryoablation disposable products
yield a higher gross margin than procedures performed by third
party subcontractors. We also have continued to reduce
manufacturing costs for our cryoablation disposable products,
while increasing efficiencies in production.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development expenses
|
|
$
|
2,555
|
|
|
$
|
2,781
|
|
|
$
|
(226
|
)
|
|
|
(8.1
|
)%
|
Percent of total revenues
|
|
|
8.6
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
This decrease in research and development expenses is primarily
attributable to a $0.2 million reduction in educational
grants and clinical studies expenses. In 2007, we focused our
research dollars on those areas in which cryoablation research
is required to substantiate reimbursement codes and coverage. In
addition, these expenses are
141
generally recognized in conjunction with milestones inherent in
the studies and are not always predictable in amount and timing.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Selling and marketing expenses
|
|
$
|
14,855
|
|
|
$
|
15,195
|
|
|
$
|
(340
|
)
|
|
|
(2.2
|
)%
|
Percent of total revenues
|
|
|
50.0
|
%
|
|
|
54.3
|
%
|
|
|
|
|
|
|
|
|
The decrease in selling and marketing expenses is due mainly to
reductions in travel and entertainment costs, consulting costs,
depreciation and amortization, and advertising, trade shows and
related expenses totaling $1.4 million for the year ended
December 31, 2007. These reductions were offset by
increases in compensation and related costs in the amount of
$1.1 million. Included in selling and marketing expenses
for the year ended December 31, 2007 and 2006 were
$0.7 million and $0.6 million, respectively, in
non-cash stock-based compensation expense related to stock
options, deferred stock units and restricted stock units.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative expenses
|
|
$
|
12,506
|
|
|
$
|
13,107
|
|
|
$
|
(601
|
)
|
|
|
(4.6
|
)%
|
Percent of total revenues
|
|
|
42.1
|
%
|
|
|
46.8
|
%
|
|
|
|
|
|
|
|
|
As a result of our concerted effort to reduce costs, our audit,
accounting, insurance, professional and consulting fees
decreased by over $1.3 million for the year ended
December 31, 2007 as compared to the same period in 2006.
In 2006, we wrote off a $0.3 million note receivable from a
related party that was deemed uncollectible, which was a one
time event. In addition, we reduced the carrying value of the
$1.4 million note receivable from Plethora relating to the
sale of Timm Medical to $1.1 million in the fourth quarter
of 2006 in anticipation of the acceptance of a discount in
exchange for early repayment. No agreement was ultimately
reached and we reinstated the note receivable to its face value
in the third quarter of 2007. The note was collected in February
2008 upon scheduled maturity.
These decreases were partially offset by increased legal fees of
$0.2 million generated by law firms representing our former
officers and former directors in connection with ongoing SEC and
DOJ investigations and legal proceedings. Also, in 2007, we
recorded a $0.1 million benefit for payroll tax liabilities
that were no longer statutorily due, compared to a similar
benefit in the amount of $0.9 million in 2006. Included in
general and administrative expenses for the year ended
December 31, 2007 and December 31, 2006 were
$3.0 million and $2.0 million, respectively, of
non-cash stock-based compensation expense related to stock
options, deferred stock units and restricted stock units.
Gain on
Legal Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Gain on legal settlement
|
|
$
|
(677
|
)
|
|
$
|
|
|
|
$
|
(677
|
)
|
|
|
100.0
|
%
|
Percent of total revenues
|
|
|
(2.2
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
In the third quarter of 2007, we recorded a gain of
$0.7 million for litigation settlement, net of related
legal expenses. This amount relates to the settlement with KPMG
LLP, our former independent auditor, for claims of professional
negligence and breach of contract in the amount of
$1.0 million for damages and $0.2 million for
142
recovery of audit fees paid. We were required to pay one-third
of the settlement amount and one-third of the returned fees to
our outside litigation counsel.
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income, net
|
|
$
|
391
|
|
|
$
|
452
|
|
|
$
|
(61
|
)
|
|
|
(13.5
|
)%
|
Percent or total revenues
|
|
|
1.3
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Interest income, net in the 2007 and 2006 periods includes
interest income on a note receivable from the 2003 sale of our
urinary incontinence product line and income earned on the
investment of our cash balances. The 2007 amount also includes
$0.1 million in interest income on the note receivable from
Plethora related to the 2006 sale of Timm Medical. We suspended
interest accrual on the note in 2006 and resumed accrual in
2007. The note and related interest receivable was collected in
February 2008. The increase in interest income in 2007 was
offset by $0.1 million of interest expense on our credit
line.
Interest
Expense Related to Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest expense related to common stock warrants
|
|
$
|
|
|
|
$
|
(3,716
|
)
|
|
$
|
3,716
|
|
|
|
(100
|
)%
|
Percent or total revenues
|
|
|
|
|
|
|
(13.3
|
)%
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the negative interest
expense on common stock warrants resulted from a decrease in the
fair value of common stock warrants related to our March 2005
private placement. As a result of a provision for liquidated
damages under a related registration rights agreement, these
warrants were accounted for as derivatives through
December 31, 2006 and were carried at fair value with
changes in fair value recorded through interest expense.
Effective January 1, 2007, we adopted FASB Staff Position
(FSP) EITF
No. 00-19-02,
Accounting for Registration Payment Arrangements, which
no longer requires the warrants to be recorded as a liability
and no interest expense was recorded for these warrants during
the year ended December 31, 2007. See Note 6
Private Placement of Common Stock and
Warrants in the notes to our consolidated financial
statements for the year ended December 31, 2007 for further
discussion.
Loss from
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Loss from continuing operations
|
|
$
|
(8,941
|
)
|
|
$
|
(11,076
|
)
|
|
$
|
(2,135
|
)
|
|
|
(19.3
|
)%
|
Percent or total revenues
|
|
|
(30.1
|
)%
|
|
|
(39.6
|
)%
|
|
|
|
|
|
|
|
|
Loss from continuing operations for the year ended
December 31, 2007 was $0.80 per basic and diluted share on
11.1 million weighted average shares outstanding compared
to a loss from continuing operations of $1.10 per basic and
diluted share on 10.1 million weighted average shares
outstanding for 2006. Losses decreased in 2007 due to a
$4.3 million increase in gross profit over 2006, lower
spending across all major expense categories and a
$0.7 million gain on a litigation settlement. This was
partially offset by non-cash expenses including
$3.9 million of stock-based compensation expense in 2007,
compared to $2.8 million in 2006, and a negative interest
expense of $3.7 million in 2006 from the change in the fair
value of common stock warrants which did not occur in 2007.
143
Income
from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
311
|
|
|
$
|
(311
|
)
|
|
|
(100.0
|
)%
|
Percent of total revenues
|
|
|
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Income from discontinued operations for the year ended
December 31, 2006 represents the operating results of Timm
Medical through the date of its sale on February 10, 2006.
Income for the 2006 period was $0.03 per basic and diluted share
on 10.1 million weighted average shares outstanding. The
2006 income included a $0.5 million gain on the sale of
Timm Medical and a tax provision of $0.2 million.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(8,941
|
)
|
|
$
|
(10,765
|
)
|
|
$
|
(1,824
|
)
|
|
|
(16.9
|
)%
|
Percent of total revenues
|
|
|
(30.1
|
)%
|
|
|
(38.5
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2007 was $0.80 per
basic and diluted share on 11.1 million weighted average
shares outstanding, compared to a net loss of $1.07 per basic
and diluted share on 10.1 million weighted average shares
outstanding during the same period in 2006.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
13,948
|
|
|
$
|
6,790
|
|
|
$
|
7,158
|
|
|
|
105.4
|
%
|
Cryocare Surgical Systems
|
|
|
1,096
|
|
|
|
743
|
|
|
|
353
|
|
|
|
47.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,044
|
|
|
|
7,533
|
|
|
|
7,511
|
|
|
|
99.7
|
%
|
Cryoablation procedure fees
|
|
|
12,298
|
|
|
|
19,780
|
|
|
|
(7,482
|
)
|
|
|
(37.8
|
)%
|
Cardiac royalties
|
|
|
604
|
|
|
|
889
|
|
|
|
(285
|
)
|
|
|
(32.1
|
)%
|
Other
|
|
|
44
|
|
|
|
72
|
|
|
|
(28
|
)
|
|
|
(38.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,990
|
|
|
$
|
28,274
|
|
|
$
|
(284
|
)
|
|
|
(1.0
|
)%
|
The revenue decrease from the year ended December 31, 2005 to
2006 resulted from a rapid shift in mix from procedures for
which we are responsible for providing the service element to
those for which we solely sell our cryoablation disposable
products. Total procedures increased 22 percent to 7,802
for the year ended December 31, 2006 from 6,407 in the
comparable period of 2005, while the related revenues decreased
by 1.2 percent. Of the total procedures performed during
the year ended December 31, 2006, 32 percent were
those for which we provided cryoablation services and
68 percent were from the sale of cryoablation disposable
products. This compares to 63 percent for cryoablation
services and 37 percent for sales of cryoablation
disposable products during the year ended December 31,
2005. While our total procedures increased significantly, the
lower average sales price from selling direct disposable
products as compared to our average service price from providing
the service element had the effect of slightly decreasing our
revenues year over year. However, direct product sales also have
lower cost of revenues and produce much higher gross margins as
discussed above. The shift in our revenue mix was faster than
expected but in line with our overall strategy to shift our
business to become a more traditional medical device
manufacturer.
144
Cardiac royalty revenue decreased mainly because the contractual
rate CryoCath was obligated to pay us as percentage of related
revenues decreased from 9.0 percent to 5.0 percent in
2006. Revenue from the sale of Cryocare Surgical Systems
increased for the year ended December 31, 2006 from the
comparable period in 2005 to $1.1 million from
$0.7 million primarily due to increased sales of our
systems internationally.
Cost of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of Revenues
|
|
$
|
12,343
|
|
|
$
|
15,738
|
|
|
$
|
(3,395
|
)
|
Percent of revenues
|
|
|
44.1
|
%
|
|
|
55.7
|
%
|
|
|
|
|
The decrease in cost of revenues was driven mainly by the rapid
shift in revenue mix resulting in a decrease in the number of
cryoablation procedures for which we bear responsibility for
providing the service element of the procedure as opposed to
solely selling our cryoablation disposable products. This mix
shift led to a decrease in fees we paid to third party service
providers. Costs for materials, labor and overhead per
cryoablation case also decreased as we achieve manufacturing
efficiencies and improve product design. Fees to service
providers were $8.0 million in 2005 and $4.7 million
in 2006. This decrease was offset slightly by a
$0.3 million increase in cost related to Cryocare Surgical
Systems.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Gross profit
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
14,705
|
|
|
$
|
11,292
|
|
|
$
|
3,413
|
|
Cryocare Surgical Systems
|
|
|
294
|
|
|
|
283
|
|
|
|
11
|
|
Cardiac royalties and other
|
|
|
648
|
|
|
|
961
|
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,647
|
|
|
$
|
12,536
|
|
|
$
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Gross margin
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
(Percent of revenues)
|
|
|
Cryoablation disposable products and procedure fees
|
|
|
52.5
|
%
|
|
|
39.9
|
%
|
|
|
12.6
|
%
|
Cryocare Surgical Systems
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
Cardiac royalties and other
|
|
|
2.3
|
%
|
|
|
3.4
|
%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.9
|
%
|
|
|
44.3
|
%
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The positive trend in our gross margin (gross profit as a
percentage of revenues) relates primarily to the shift in our
business model to a much larger percentage of total procedures
from the sale of our cryoablation disposable products as opposed
to procedures where we are responsible for providing the service
element of the procedure, which generates a lower gross margin
as a percent of revenues. Also contributing to the increase in
gross margin were continued reductions in manufacturing costs
for our cryoablation disposable products. Gross margins were
negatively affected during the year ended December 31, 2006
by transactions where we allowed certain customers to upgrade to
our Cryocare CS System from a previous generation of our
Cryocare Surgical System with nominal additional payment,
resulting in a net loss of $0.5 million.
145
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development expenses
|
|
$
|
2,781
|
|
|
$
|
2,283
|
|
|
$
|
498
|
|
|
|
21.8
|
%
|
Percent of total revenues
|
|
|
9.9
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was primarily
attributable to increased compensation costs of
$0.1 million and costs associated with several new
development projects we have undertaken to reduce the
manufacturing costs of Cryocare disposables and broaden the
application of cryoablation outside of our current markets in
urology and interventional radiology. Included in research and
development expenses for the year ended December 31, 2006
is $0.1 million in non-cash stock-based compensation
expense.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Selling and marketing expenses
|
|
$
|
15,195
|
|
|
$
|
13,001
|
|
|
$
|
2,194
|
|
|
|
16.9
|
%
|
Percent of total revenues
|
|
|
54.3
|
%
|
|
|
46.0
|
%
|
|
|
|
|
|
|
|
|
Driving the increases in selling and marketing expenses were
proctor fees and related cost increases of $0.4 million,
increased travel costs of $0.2 million, non-cash
stock-based compensation expenses related to stock options and
deferred stock units in the amount of $0.6 million and
increased compensation related expenses in our sales
organization of $0.8 million.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative expenses
|
|
$
|
13,107
|
|
|
$
|
13,858
|
|
|
$
|
(751
|
)
|
|
|
(5.4
|
)%
|
Percent of total revenues
|
|
|
46.8
|
%
|
|
|
49.0
|
%
|
|
|
|
|
|
|
|
|
General and administrative expenses decreased in several areas
including legal and accounting costs of $1.7 million as a
result of establishing in house legal counsel and marked efforts
to reduce accounting and consulting fees, specifically those
related to compliance with section 404 of the
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). We had
$0.5 million in reductions in insurance premiums due to
concerted efforts to reduce premiums without compromising
coverage. During the second quarter of 2006 the statute of
limitations expired on $0.9 million of potential payroll
tax liability pertaining to employee loans forgiven and stock
option exercises that occurred in 2002 and prior, compared to
$0.2 million of similar reductions in 2005. In 2005 we paid
$0.6 million in liquidated damages related to our March
2005 private placement financing, which did not recur in 2006.
These reductions were partially offset by $2.2 million in
additional compensation expense including $2.0 million of
non-cash stock-based compensation expenses related to stock
options and deferred stock units. Additionally in the fourth
quarter of 2006, we reserved a total of $0.7 million on
notes receivable. Of this amount $0.4 million relates to a
reserve recorded on a note with a related party. The
$0.3 million remaining amount is related to a possible
arrangement with the purchaser of Timm Medical which we may
offer a payment discount in exchange for acceleration of payment
of the remaining balance of the purchase note.
146
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income, net
|
|
$
|
452
|
|
|
$
|
308
|
|
|
$
|
144
|
|
|
|
46.8
|
%
|
Percent of total revenues
|
|
|
1.6
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Interest income increased due to interest income on a note
receivable for the 2003 sale of our urinary incontinence product
line and interest income earned from the investment of our cash
balances.
Interest
Expense Related to Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest expense related to common stock warrants
|
|
$
|
(3,716
|
)
|
|
$
|
(657
|
)
|
|
$
|
(3,059
|
)
|
|
|
(465.6
|
)%
|
Percent of total revenues
|
|
|
(13.3
|
)%
|
|
|
(2.3
|
)%
|
|
|
|
|
|
|
|
|
The negative interest expense for the years ended
December 31, 2006 and 2005 was due to the decreases in the
fair value of common stock warrants issued in connection with
our private placement in March 2005.
Loss from
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Loss from continuing operations
|
|
$
|
(11,076
|
)
|
|
$
|
(14,838
|
)
|
|
$
|
(3,762
|
)
|
|
|
(25.4
|
)%
|
Percent of total revenues
|
|
|
(39.6
|
)%
|
|
|
(52.5
|
)%
|
|
|
|
|
|
|
|
|
Loss from continuing operations for the year ended
December 31, 2006 was $1.10 per basic and diluted share on
10.1 million weighted average shares outstanding compared
to a loss from continuing operations of $1.54 per basic and
diluted share on 9.7 million weighted average shares
outstanding for the same period in 2005. Included in the loss
from continuing operations during the year ended
December 31, 2006 is an aggregate of $2.8 million of
non-cash stock-based compensation expense related to stock
options and deferred stock units, a reduction in accrued payroll
taxes of $0.9 million which were no longer statutorily due
and the reduction in interest expense of $3.7 million from
the change in the fair value of common stock warrants.
Income
from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Income from discontinued operations
|
|
$
|
311
|
|
|
$
|
1,159
|
|
|
$
|
(848
|
)
|
|
|
(73.1
|
)%
|
Percent of total revenues
|
|
|
1.1
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
Income from discontinued operations for the year ended
December 31, 2006 represents the operating results of Timm
Medical through the date of its sale on February 10, 2006.
Income for the 2006 period was $0.03 per basic and diluted share
on 10.1 million weighted average shares outstanding. The
2006 income included $0.5 million gain on sale of Timm
Medical and a tax provision of $0.2 million. Income from
discontinued operations for the year ended December 31,
2005 was $0.12 per basic and diluted share on 9.7 million
weighted average shares outstanding. The 2005 period includes
income of $0.6 million as a result of the elimination of
the estimated costs to sell, which was previously reported as a
component of a 2004 impairment charge when Timm Medical was
initially marketed for sale.
147
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(10,765
|
)
|
|
$
|
(13,679
|
)
|
|
$
|
(2,914
|
)
|
|
|
(21.3
|
)%
|
Percent of total revenues
|
|
|
(38.5
|
)%
|
|
|
(48.4
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2006 was
$10.8 million or $1.07 per basic and diluted share on
10.1 million weighted average shares outstanding, compared
to a net loss of $13.7 million, or $1.42 per basic and
diluted share on 9.7 million weighted average shares
outstanding for the same period in 2005.
Liquidity
and Capital Resources
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of September 30,
2008, we had cash and cash equivalents of $5.3 million. We
do not expect to reach cash flow positive operations or an
annual basis in 2009, and, both as a standalone company and as a
combined company after the Merger, we expect to continue to
generate losses from operations for the foreseeable future.
We face large cash expenditures in the future related to past
due state and local taxes, primarily sales and use tax
obligations, which we estimate to be approximately
$2.1 million. The amount was fully accrued as of
September 30, 2008. We are in the process of negotiating
resolutions of the past due state and local tax obligations with
the applicable tax authorities. However, there is no assurance
that these obligations will be reduced as a result of the
negotiations or that we will be allowed to pay the amounts due
over an extended period of time.
During the three months ended September 30, 2008, we
incurred $0.9 million in relation to potential strategic
transactions, including the Merger. These expenditures were
recorded as general and administrative expenses as incurred
since the Merger is not expected to occur until 2009, and these
costs will be required to be expensed under Statement of
Financial Accounting Standards (SFAS) No. 141(R), Business
Combinations. Consummation of the Merger, including post-closing
integration costs, or, if the Merger is not consummated, any
continued exploration of other strategic alternatives, is
expected to continue to require a significant use of cash.
We face large cash expenditures in the future related to the
costs associated with negotiating and consummating the Merger
and the Financing. In addition, we anticipate significant cash
expenditures in connection with post-closing integration.
We have historically financed our operations and growth through
borrowings and equity financings. In the short term, we expect
to use existing cash reserves and working capital through the
sale of our products, and if the Merger and Financing are
consummated, the proceeds of the Financing, to finance our
projected operating and cash flow needs, along with continued
expense management efforts. The gross proceeds to Endocare of
the Financing are expected to be approximately
$16.3 million. The closing of the Financing is subject to
the concurrent closing of the Merger and certain other
conditions including the sale of shares with a minimum aggregate
purchase price of $12,000,000. However, our cash needs are not
entirely predictable, and additional cash may be required,
including from our bank credit facility. The future availability
of funds from our bank credit facility is subject to many
conditions, including the subjective acceleration clause and
other provisions that are predicated on events not within our
control. The funds we can borrow are based on eligible trade
receivables and inventory as defined. The credit facility
includes a subjective acceleration clause and a requirement to
maintain a lock box with the lender, the proceeds from which
will be applied to reduce the outstanding borrowings upon our
default or if other conditions are met.
On December 15, 2008, we borrowed an additional $800,000
under our credit facility, bringing the total amount currently
outstanding under the credit facility to $1.9 million. As
of November 30, 2008, there was $2.9 million available
for additional borrowing under the credit facility, of which
$800,000 was borrowed on December 15, 2008 as noted above.
The credit facility is currently scheduled to expire on
February 26, 2009. We are currently in discussions with the
lender to extend the credit facility.
148
In addition, our credit facility contains a minimum tangible net
worth covenant measured on a monthly basis. We were not in
compliance with this covenant as of December 31, 2008. We
are currently in the process of seeking a waiver from the bank
with respect to this noncompliance. We believe that a waiver
will be granted. However, if the waiver is not granted, the bank
could accelerate the outstanding indebtedness under the credit
facility and terminate the credit facility.
We cannot guarantee the availability of these capital resources
or that they will be sufficient to fund our ongoing operations
to the point where our operations will generate positive cash
flows on a consistent basis. In light of the investments
required to fund our operations and growth initiatives, we will
continue to assess the adequacy of our capital resources and may
need to use existing and new sources of capital to finance the
growth of the business. If the Merger and Financing are not
consummated, Endocare, as a standalone company, expects that it
will need to raise additional capital during 2009 to fund its
ongoing operations. Should such financing be unavailable or
prohibitively expensive when we require it, the consequences
would have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Critical
Accounting Policies
The foregoing discussion and analysis of our financial condition
and results of operations are based on our consolidated
financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The
preparation of the financial statements requires management to
make estimates and assumptions in applying certain critical
accounting policies. Certain accounting estimates are
particularly sensitive because of their significance to our
consolidated financial statements and because of the possibility
that future events affecting the estimates could differ
significantly from current expectations. Factors that could
possibly cause actual amounts to differ from current estimates
relate to various risks and uncertainties inherent in our
business, including those set forth under Risk
Factors in this proxy statement/prospectus.
Endocares management believes that the following are some
of the more critical judgment areas in the application of
accounting policies that affect our financial statements.
Revenue Recognition. We follow the provisions
of Staff Accounting Bulletin 104, Revenue
Recognition in Financial Statements
(SAB 104) and Emerging Issues Task Force (EITF)
Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
for revenue recognition. Under SAB 104, four conditions
must be met before revenue can be recognized: (i) there is
persuasive evidence that an arrangement exists,
(ii) delivery has occurred or service has been rendered,
(iii) the price is fixed or determinable and
(iv) collection is reasonably assured.
We reduce our revenues for customer concessions, and defer
revenue recognition for minimum procedure guarantees, contingent
payment arrangements and when we have continuing performance
obligations until a future date when the contingencies are
resolved and obligations met.
Where we own the equipment used in the procedure, we bill the
medical facility and retain the entire procedure fee. In many
instances, however, the equipment is owned by a third-party who
contracts with us to perform the service component of the
procedure. Third-party service providers are at times entities
owned or controlled by urologists who perform cryoablation
procedures. In the latter case, we still invoice the medical
facility but we pay a fee to the third-party service provider.
The procedure fee is recorded as revenue in the period when the
procedure is performed and, where applicable, the fee paid to a
third-party service provider is included in cost of revenues for
the same period.
From time to time we provide loaner equipment to customers as
part of a strategy aimed at promoting broader acceptance of our
technology and driving sales of disposable products faster than
would be possible if we restricted use of the device only to
customers willing to make a significant capital investment to
purchase a Cryocare Surgical System. In these situations, we
either loan a mobile Cryocare Surgical System to a hospital or
consign a stationary Cryocare Surgical System with the hospital
under our placement program and charge a fee for each procedure
in which the equipment is used. Cost of revenues includes
depreciation on the Cryocare Surgical Systems we own over an
estimated useful life of three years. We have also reduced the
selling price of our Cryocare Surgical System to at or near cost
to promote sales of our cryoablation disposable products.
149
Under certain circumstances, we will upgrade our older model
Cryocare Surgical Systems for our new model with select
customers. The terms of the upgrade can include the trade-in of
an older system for a refurbished system at no additional cost
to the customer, or a trade-in of an older system plus cash for
a refurbished or new Cryocare Surgical System. These upgrades
are not part of a bundled arrangement conditioned upon past or
future purchases of our products. They are offered at our
election as a means to introduce our latest technology to the
market place. The older systems received in the trade are then
redeployed for interventional radiology procedures or sold in
secondary markets. When these upgrades take place, we invoice
the customer for the upgraded Cryocare Surgical System and
expense the cost of the system upon shipment. If we determine
that there will be a loss on the trade, we may record the loss
at the time the commitment is made. We recognize revenue to the
extent of the cash consideration upon shipment. We do not assign
a value to the older trade-in system since they generally have
exceeded our estimated useful life of three years.
We routinely assess the financial strength of our customers and,
as a consequence, believe that our accounts receivable credit
risk exposure is limited. Accounts receivable are carried at
original invoice amount less all discounts and allowances, and
less an estimate for doubtful accounts and sales returns based
on a periodic review of outstanding receivables. Allowances are
provided for known and anticipated credit losses as determined
by management in the course of regularly evaluating individual
customer receivables. This evaluation takes into consideration a
customers financial condition and credit history as well
as current economic conditions. Accounts receivable are written
off when deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded when received.
Impairment of Long-Lived Assets. We have a
significant amount of property, equipment and amortizable
intangible assets primarily consisting of purchased patents and
acquired technology. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, we review our
long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset or asset group may not be
recoverable. Recoverability of long-lived and amortizable
intangible assets to be held and used is measured by a
comparison of the carrying amount of an asset to the
undiscounted future net operating cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the
amount by which the carrying value of the assets exceeds their
fair value.
Legal and Other Loss Contingencies. In the
normal course of business, we are subject to contingencies, such
as legal proceedings and claims arising out of our business that
cover a wide range of matters, including tax matters, product
liability and workers compensation. In accordance with
SFAS No. 5, Accounting for Contingencies, we
record accruals for such contingencies when it is probable that
a liability will be incurred and the amount of loss can be
reasonably estimated. A significant amount of management
estimation is required in determining when, or if, an accrual
should be recorded for a contingent matter and the amount of
such accrual, if any. Due to the uncertainty of determining the
likelihood of a future event occurring and the potential
financial statement impact of such an event, it is possible that
upon further development or resolution of a contingent matter, a
charge could be recorded in a future period that would be
material to our consolidated results of operations, financial
position or cash flows.
Other Investments. We review our equity
investments for impairment based on our determination of whether
a decline in the market value of the investment below our
carrying value is other than temporary. In making this
determination, we consider Accounting Principles Board Opinion
(APB) No. 18, The Equity Method of Accounting of
Investments in Common Stock, and
EITF 00-31,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, which set forth factors
to be evaluated in determining whether a loss in value should be
recognized. Factors include the investees operational
performance, indicators of continued viability, financing
status, liquidity prospects and cash flow forecasts. We also
consider our ability to hold the investment until we recover our
cost, the market price and market price fluctuations of the
investees publicly traded shares and the ability of the
investee to sustain an earnings capacity which would justify the
carrying amount of the investment. In addition, we assess if
these equity investees constitute variable interest entities and
are required to be consolidated under FASB Interpretation
No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, an interpretation of ARB
No. 51.
150
Income Taxes. In the preparation of our
consolidated financial statements, we are required to estimate
income taxes in each of the jurisdictions in which we operate,
including estimating both actual current tax exposure and
assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. Assessment
of actual current tax exposure includes assessing tax
strategies, the status of tax audits and open audit periods with
the taxing authorities. To the extent that we have deferred tax
assets, we must assess the likelihood that our deferred tax
assets will be recovered from taxable temporary differences, tax
strategies or future taxable income and to the extent that we
believe that recovery is not likely, we must establish a
valuation allowance. As of December 31, 2007 we have
established a valuation allowance of $5.6 million against
our deferred tax assets. In the future, we may adjust our
estimates of the amount of valuation allowance needed and such
adjustment would impact our provision for income taxes in the
period of such change. Effective January 1, 2007, we
adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of
SFAS No. 109 (FIN 48). FIN 48 prescribes
a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements.
Stock based Compensation. As a normal
practice, we compensate employees and non-employee directors
through stock-based compensation. Effective January 1,
2006, we account for our stock-based compensation under the
provisions of SFAS No. 123R, Share-Based Payments.
SFAS No. 123R eliminates the use of the intrinsic
value method of accounting under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and requires companies to recognize in
the financial statements the cost of employee services received
in exchange for awards of equity instruments based on the grant
date fair value of those awards that are expected to vest. The
estimation of stock-based compensation requires the use of
complex option pricing models and application of judgment in
selecting the appropriate valuation assumptions, as such
volatility, forfeiture rates and expected term. We value our
stock-based compensation using the Black-Scholes option pricing
model and the single option award approach, in accordance with
the requirements of SFAS No. 123R and Staff Accounting
Bulletin (SAB) No. 107, Share-Based Payment. We
reduce our compensation expense for estimated forfeitures based
on historical forfeiture behavior, excluding unusual events or
behavior that is not indicative of future expectations. In
addition, certain equity awards vest based on performance
conditions, such as sales and profitability goals. Compensation
expense is recorded only if it is probable that the award will
vest. Assessing whether the milestones will be met and the
implicit service period requires significant judgment. We
re-assess the appropriateness of the milestone and valuation
assumptions, including our calculated forfeiture rate, on a
quarterly basis or when events or changes in circumstances
warrant a re-evaluation. In addition, we monitor equity
instruments with non-standard provisions, such as
performance-based vesting conditions, accelerated vesting based
on achievement of performance milestones and features that
require instruments to be accounted for as liabilities.
Inflation
The impact of inflation on our business has not been significant
to date.
151
GALILS
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
the sections of the proxy statement/prospectus entitled
Information about the Companies Galil Medical
Ltd. beginning on page 115, and Risk Factors
beginning on page 12, as well as Galils consolidated
financial statements and related notes contained elsewhere in
this proxy statement/prospectus. This discussion contains
forward-looking statements based on Galils current
expectations. There are various factors many beyond
Galils control that could cause Galils
actual results or the occurrence or timing of expected events to
differ materially from those anticipated in these
forward-looking statements. Some of these factors are described
below and other factors are described elsewhere in this proxy
statement/prospectus, including above under Risks
Factors beginning on page 12. In addition, there are
factors not described in this proxy statement/prospectus that
could cause Galils actual results or the occurrence or
timing of expected events to differ materially from those
anticipated in these forward-looking statements. All
forward-looking statements included in this proxy
statement/prospectus are based on information available to Galil
as of the date hereof, and , except as required by law , Galil
assumes no obligation to update any such forward-looking
statements.
Strategy
and Key Metrics
Galils strategy is to achieve a market leading position in
the prostate and renal cancer markets, and further develop and
increase the acceptance of Galils technology in the
treatment of other diseases. At the same time, Galil seeks to
achieve penetration across additional markets such as uterine
fibroids with Galils proprietary cryoablation technology.
The factors driving interest in and utilization of cryoablation
include increased awareness and acceptance of cryoablation by
industry thought leaders, continued publication of clinical data
on the effectiveness of cryoablation, increased awareness among
patients of cryoablation and its preferred outcomes as compared
to other modalities, the efforts of Galils sales force,
Galils continued expenditure of funds on patient education
and advocacy and access to Galils technology via adequate
reimbursement.
Galils primary objective is to grow market share, which it
measures in terms of the estimated number of cryoablation
procedures performed with Galils cryoablation systems
based on the number of procedures kits sold. Galils sales
to the U.S. market and to the European market are comprised
mostly of procedures kits and other disposables, while
Galils sales to the Asian market are comprised mostly of
cryoablation systems.
For the periods presented, the following tables summarize the
total estimated cryoablation procedures Galils customers
performed in the United States and Europe, which is represented
by the number of Galils cryoablation disposable procedures
kits sold during those periods. The tables do not include
information relating to the Asian market, as Galils sales
in this market are primarily systems sales.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Number of procedures kits sold
|
|
|
4,760
|
|
|
|
4,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of procedures kits sold
|
|
|
6,083
|
|
|
|
4,819
|
|
|
|
5,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
Results
of Operations
Nine
Months Ended September 30, 2008 and 2007
Revenues and costs of revenues related to the following products
for the nine months ended September 30, 2008 and 2007 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unaudited
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
17,032
|
|
|
$
|
16,409
|
|
Cryoablation Surgical Systems
|
|
|
1,059
|
|
|
|
2,290
|
|
Other
|
|
|
571
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,662
|
|
|
$
|
19,272
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
5,117
|
|
|
$
|
5,060
|
|
Cryoablation Surgical Systems
|
|
|
215
|
|
|
|
541
|
|
Other
|
|
|
476
|
|
|
|
448
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,808
|
|
|
$
|
6,049
|
|
Galil recognizes revenues from sales of cryoablation surgical
systems and cryoablation disposable products when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and collectability is reasonably
assured. Other sales mainly include procedure service fees
related to services performed in the United States by third
party providers in connection with Galils procedures. Such
procedure service fees are recorded when the service has been
rendered.
Costs of revenues consist of fixed and variable costs incurred
in the manufacture of Galils products, such as: materials
and subcontractors, payroll, warehouse, shipment and facilities.
In addition, costs of revenues included depreciation of
cryoablation systems placed in the field with customers under
Galils placement program, amortization expenses for
certain technology (acquired from Oncura) and fees paid to the
third-party service providers, which are charged to costs of
revenues when the procedure is performed.
Galil derives its revenues from the following three geographic
regions: the United States, Europe and Asia. Revenues for the
nine months ended September 30, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unaudited
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
13,439
|
|
|
$
|
14,587
|
|
Europe
|
|
|
3,908
|
|
|
|
3,069
|
|
Asia
|
|
|
1,315
|
|
|
|
1,616
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,662
|
|
|
$
|
19,272
|
|
|
|
|
|
|
|
|
|
|
Research and development costs include expenses associated with
the design and development of new products as well as
enhancements to existing products. It also includes expenses
relating to clinical research and clinical studies as well as
expenses relating to development and maintenance of Galils
patents and intellectual property. Galil expenses research and
development costs when incurred. Galils research and
development efforts are occasionally subject to significant
non-recurring expenses and fees that can cause some variability
in Galils quarterly research and development costs.
Selling and marketing expenses primarily consist of salaries,
commissions and related benefits and overhead costs for
employees and activities in the areas of selling, marketing and
customer service. Expenses associated with advertising, trade
shows, promotional and physician training costs related to
marketing Galils products are also
153
classified as selling and marketing expenses. It also includes
overhead, support and administration costs relating to
Galils U.S. and European back-offices.
General and administrative expenses primarily consist of
salaries and related benefits and overhead costs for employees
and activities in the areas of legal affairs, finance,
information technology, human resources and administration. Fees
for attorneys, independent auditors and certain other outside
consultants are also included under general and administrative
expenses. This category also includes reserves for bad debt and
litigation losses less amounts recoverable under Galils
insurance policies.
Galil accounts for equity awards to employees and non-employee
directors and service providers under Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based
Payment (SFAS No. 123R) and EITF 96-18. As of
September 30, 2008, there was $3.2 million of total
unrecognized compensation costs related to unvested stock
options. That cost is expected to be amortized on a
straight-line basis over a weighted average service period of
years. Share-based compensation expenses recorded in the nine
months ended September 30, 2008 and 2007 were
$0.7 million and $0.5 million, respectively.
Nine
Months Ended September 30, 2008 Compared to Nine Months
Ended September 30, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
17,032
|
|
|
$
|
16,409
|
|
|
$
|
623
|
|
|
|
3.8
|
%
|
Cryoablation Surgical Systems
|
|
|
1,059
|
|
|
|
2,290
|
|
|
|
(1,231
|
)
|
|
|
(53.8
|
)%
|
Other
|
|
|
571
|
|
|
|
573
|
|
|
|
(2
|
)
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,662
|
|
|
$
|
19,272
|
|
|
$
|
(610
|
)
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of procedures kits sold in the United States and
Europe during the nine months ended September 30, 2008
increased by approximately 5.1% to 4,760 compared to 4,528
procedures kits sold during this same period in 2007.
Revenues from sales of cryoablation surgical systems decreased
as a result of fewer sales of such systems due to general market
conditions which made it difficult for Galils customers to
obtain credit for capital investments.
Revenues
by geographical region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
13,439
|
|
|
$
|
14,587
|
|
|
$
|
(1,148
|
)
|
|
|
(7.9
|
)%
|
Europe
|
|
|
3,908
|
|
|
|
3,069
|
|
|
|
839
|
|
|
|
27.3
|
%
|
Asia
|
|
|
1,315
|
|
|
|
1,616
|
|
|
|
(301
|
)
|
|
|
(18.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,662
|
|
|
$
|
19,272
|
|
|
$
|
(610
|
)
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales in the United States for the nine months ended
September 30, 2008, decreased 7.9% over the same period in
2007 and sales to Asia decreased 18.6% primarily due to fewer
sales of systems as a result of the general market conditions.
Revenues in Europe increased 27.3% following Galils
efforts to penetrate the European market.
154
Costs
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Costs of revenues
|
|
$
|
5,808
|
|
|
$
|
6,049
|
|
|
$
|
(241
|
)
|
Percent of revenues
|
|
|
31.1
|
%
|
|
|
31.4
|
%
|
|
|
|
|
Costs of revenues declined due to lower revenues. Costs of
revenues as a percentage of revenues remained stable.
Gross
Profit and Gross Margin
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
11,915
|
|
|
$
|
11,349
|
|
|
$
|
566
|
|
Cryoablation Surgical Systems
|
|
|
844
|
|
|
|
1,749
|
|
|
|
(905
|
)
|
Other
|
|
|
95
|
|
|
|
125
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,854
|
|
|
$
|
13,223
|
|
|
$
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Percentage Point
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
(Percent of total revenues)
|
|
|
Cryoablation disposable products
|
|
|
63.8
|
%
|
|
|
58.9
|
%
|
|
|
4.9
|
%
|
Cryoablation Surgical Systems
|
|
|
4.5
|
%
|
|
|
9.1
|
%
|
|
|
(4.6
|
)%
|
Other
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.8
|
%
|
|
|
68.6
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin remained stable for the nine months ended
September 30, 2008 as compared to the same period in 2007.
Research
and Development Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development costs
|
|
$
|
5,686
|
|
|
$
|
3,526
|
|
|
$
|
2,160
|
|
|
|
61.3
|
%
|
Percent of total revenues
|
|
|
30.5
|
%
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development costs for the nine
months ended September 30, 2008 was primarily related to
enhancement of Galils research and development activities
resulting in additional salaries expense of $0.9 million
due to an increased headcount and additional subcontractor
expenses of $0.2 million. Galil also enhanced its clinical
activities resulting in an additional salaries expense of
$0.7 million and additional clinical research and medical
advisory expenses of $0.4 million.
155
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Selling and marketing expenses
|
|
$
|
13,361
|
|
|
$
|
13,453
|
|
|
$
|
(92
|
)
|
|
|
(0.7
|
)%
|
Percent of total revenues
|
|
|
71.6
|
%
|
|
|
69.8
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing expenses for the nine months ended
September 30, 2008 increased by $1.5 million as
compared to the same period for 2007 mainly due to expansion of
Galils U.S. sales force at the end of 2007, following the
expected increase in procedural volume utilizing Galils
cryoablation procedures. This increase was offset by a decrease
of $0.6 million in expenses relating to shipments of
Galils products from Israel to Europe, which were reduced
commencing September 2007 when Galil established its warehouse
in Europe. In addition, for the nine months ended
September 30, 2008, Galil recorded $0.3 million of
income following reversal of the shipment expenses accrual, as
Galil collected part of the costs from its customers. During the
nine months ended September 30, 2008, two senior managers
in Galils U.S. operations terminated their employment,
which resulted in a reduction of $0.9 million in salaries
expenses (including notice period accrual reversal of
$0.3 million). Marketing expenses increased by
$0.2 million primarily due to increased salaries related to
enhancement of Galils strategic marketing capabilities.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative expenses
|
|
$
|
4,280
|
|
|
$
|
2,474
|
|
|
$
|
1,806
|
|
|
|
73.0
|
%
|
Percent of total revenues
|
|
|
22.9
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses for the nine
months ended September 30, 2008 as compared to the same
period for 2007 was primarily related to $0.5 million
professional service expenses in respect of the expected Merger,
$0.7 million higher salaries expenses relating mainly to an
increase of the notice period provision and to recruitment
costs, and $0.2 million higher share-based compensation. In
addition, Galil accrued $0.2 million during the nine months
ended September 30, 2008 for doubtful debts relating to
specific debts in Europe.
Impairment
of Goodwill Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Impairment of goodwill expenses
|
|
$
|
16,758
|
|
|
$
|
|
|
|
$
|
16,758
|
|
|
|
100.0
|
%
|
Percent of total revenues
|
|
|
89.8
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
Galils management used the income approach in order to
determine Galils total fair value. After comparing the
fair value with the carrying amounts of its total assets and
liabilities, it was concluded that the carrying value of
Galils net assets exceeded the estimated fair value.
Accordingly Galils management has continued to the next
step as provided by SFAS No. 142 and calculated the implied
fair value of goodwill by deducting the fair value of all
tangible and intangible net assets (including unrecognized
intangible assets). Galils management used operational
projections, discounted cash flow analysis and third
partys valuations in performing the analysis. As a result
of this analysis, Galils management determined that
goodwill impairment had occurred and recognized a non-cash
impairment charge of $16,758 during the quarter ended
September 30, 2008.
156
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income (expenses), net
|
|
$
|
(142
|
)
|
|
$
|
275
|
|
|
$
|
(417
|
)
|
|
|
(151.6
|
)%
|
Percent of total revenues
|
|
|
0.7
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Interest income (expenses), net for the nine months ended
September 30, 2008 and 2007 periods includes mainly
interest income earned from the investment of Galils cash
balances. Such interest income decreased by $0.4 million in
2008 due to higher cash balances in the first through third
quarters of 2007 resulting from Galils December 2006
private placement. Interest expense of $0.23 million was
recorded for the nine months ended September 2008 to adjust the
FIN 48 tax accrual compared to $0.16 million for the
same period in 2007.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(27,373
|
)
|
|
$
|
(5,955
|
)
|
|
$
|
21,418
|
|
|
|
(359.7
|
)%
|
Percent of total revenues
|
|
|
(146.7
|
)%
|
|
|
(30.9
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended September 30, 2008 was
$27.4 million, including $16.8 million relating to
impairment of goodwill, compared to $6.0 million net loss
for the same period in 2007. The increase in net loss is
primarily related to the goodwill impairment and to an increase
in operating expenses.
Years
Ended December 31, 2007, 2006 and 2005
Revenues and cost of revenues from continuing operations related
to the following products and services for each of the years
ended December 31, 2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
22,074
|
|
|
$
|
6,026
|
|
|
$
|
5,217
|
|
Cryoablation Surgical Systems
|
|
|
2,807
|
|
|
|
902
|
|
|
|
1,102
|
|
Services
|
|
|
|
|
|
|
1,583
|
|
|
|
1,933
|
|
Other
|
|
|
741
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,622
|
|
|
$
|
8,521
|
|
|
$
|
8,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
6,927
|
|
|
$
|
3,113
|
|
|
$
|
3,511
|
|
Cryoablation Surgical Systems
|
|
|
734
|
|
|
|
584
|
|
|
|
911
|
|
Services
|
|
|
|
|
|
|
1,341
|
|
|
|
1,598
|
|
Other
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,296
|
|
|
$
|
5,038
|
|
|
$
|
6,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Galil recognizes revenues from sales of cryoablation surgical
systems and cryoablation disposable products when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and
157
collectability is reasonably assured. Other sales in fiscal year
2007 mainly include procedure fees related to services performed
in the United States by third party providers in connection with
Galils procedures. Such procedure service fees are
recorded when the service has been rendered. Revenues for fiscal
years 2005 and 2006 include income resulting from services
rendered to Oncura.
In order to estimate the growth rate of Galils
cryoablation market from 2005 to 2007, Galil has calculated the
unaudited pro-forma revenues for fiscal years 2005 and 2006,
under the assumption that the acquisition of Oncuras cryo
business occurred at the beginning of fiscal years 2005 and
2006, respectively. The pro-forma revenues for fiscal years 2005
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation products sales
|
|
$
|
25,622
|
|
|
$
|
19,963
|
|
|
$
|
17,629
|
|
Costs of revenues consist of fixed and variable costs incurred
in the manufacture of Galils products such as: materials
and subcontractors, payroll, warehouse, shipment and facilities.
In addition costs of revenues included depreciation of
cryoablation systems placed in the field with customers under
Galils placement program and fees paid to the third-party
service providers, which are charged to costs of revenues when
the procedure is performed. For fiscal years 2005 and 2006 (up
to December 2006), costs of revenues included the costs
associated with the performance of services provided to Oncura
relating to Galils urology products. Commencing
December 8, 2006 costs of revenues included amortization
expenses for certain technology (acquired from Oncura) in the
amount of $0.9 million per year.
For fiscal year 2007, research and development costs included
expenses associated with the design and development of new
products as well as enhancements to existing products. It also
includes expenses relating to clinical research and clinical
studies as well as expenses relating to development and
maintenance of Galils patents and intellectual property.
For fiscal years 2005 and 2006 (up to December
2006), research and development costs related primarily to
expenses associated with the design and development of new
non-urology products. Galil expenses research and development
costs when incurred. Galils research and development
efforts are occasionally subject to significant non-recurring
expenses and fees that can cause some variability in its
quarterly research and development expenses.
For fiscal year 2007, selling and marketing expenses primarily
consisted of salaries, commissions and related benefits and
overhead costs for employees and activities in the areas of
selling, marketing and customer service. Expenses associated
with advertising, trade shows, promotional and physician
training costs related to marketing Galils products are
also classified as selling and marketing expenses. It also
includes overhead, support and administration costs relating to
Galils U.S. and European back-offices. During fiscal years
2005 and 2006 (up to December 2006) Galil sold its urology
products to Oncura and therefore its selling and marketing
expenses were limited only to its activities in non-urology
applications, mainly in the Asian markets.
General and administrative expenses primarily consisted of
salaries and related benefits and overhead costs for employees
and activities in the areas of legal affairs, finance,
information technology, human resources and administration. Fees
for attorneys, independent auditors and certain other outside
consultants are also included under general and administrative
expenses. This category also includes reserves for bad debt and
litigation losses less amounts recoverable under Galils
insurance policies.
Galil accounts for equity awards to employees and non-employee
directors and service providers under Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based
Payment (SFAS No. 123R) and EITF 96-18. As of
December 31, 2007, there was $1.1 million of total
unrecognized compensation costs related to unvested stock
options. That cost is expected to be amortized on a
straight-line basis over a weighted average service period of
years. Stock-based compensation expense recorded in the years
ended December 31, 2007, 2006 and 2005 were
$0.7 million, $0.3 million and $0.1 million,
respectively.
158
Costs and expenses for each of the years ended December 31,
2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of revenues
|
|
$
|
8,296
|
|
|
$
|
5,038
|
|
|
$
|
6,020
|
|
Research and development
|
|
|
5,245
|
|
|
|
1,444
|
|
|
|
1,088
|
|
Selling and marketing
|
|
|
18,414
|
|
|
|
1,368
|
|
|
|
218
|
|
General and administrative
|
|
|
3,557
|
|
|
|
2,617
|
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
35,512
|
|
|
$
|
10,467
|
|
|
$
|
8,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses (income), net
|
|
$
|
(401
|
)
|
|
$
|
(140
|
)
|
|
$
|
178
|
|
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
22,074
|
|
|
$
|
6,026
|
|
|
$
|
16,048
|
|
|
|
266.3
|
%
|
Cryoablation Surgical Systems
|
|
|
2,807
|
|
|
|
902
|
|
|
|
1,905
|
|
|
|
211.2
|
%
|
Services
|
|
|
|
|
|
|
1,583
|
|
|
|
(1,583
|
)
|
|
|
(100.0
|
)%
|
Other
|
|
|
741
|
|
|
|
10
|
|
|
|
731
|
|
|
|
73.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,622
|
|
|
$
|
8,521
|
|
|
$
|
17,101
|
|
|
|
200.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007 revenues from
disposable products and cryoablation surgical systems sales
increased due to the acquisition of the cryo urology business
from Oncura in December 2006. Through December 8, 2006
Galils revenues derived mainly from the sales to Oncura
($5.1 million) based on the supply agreement between Galil
and Oncura and from services provided to Oncura
($1.6 million) based on the service agreement between the
parties. Following the acquisition of Oncuras cryo assets,
Galil obtained the full urology based cryo business, and its
revenues for fiscal year 2007 derived from sales to the end-user
customers, and the recognition of the full end-user sales prices
in Galils revenues. In order to estimate the growth rate
of Galils cryoablation market from fiscal years 2006 to
2007, Galil has calculated the unaudited pro-forma revenues for
fiscal year 2006, under the assumption that the acquisition of
Oncuras cryo business occurred at the beginning of 2006.
The pro-forma calculation indicated a growth rate of 28% from
$20.0 million in unaudited pro-forma revenues in fiscal
2006 to $25.6 million in revenues in fiscal 2007.
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
(Dollars in thousands)
|
|
Cost of revenues
|
|
$
|
8,296
|
|
|
$
|
5,038
|
|
|
$
|
3,258
|
|
Percent of revenues
|
|
|
32.3
|
%
|
|
|
59.1
|
%
|
|
|
|
|
The increase in cost of revenues resulted primarily from the
increase in revenues. The percentage of revenues had decreased
following the acquisition of the Oncuras cryo business and
the recognition of the full end-user prices under Galils
revenues.
159
Gross
Profit and Gross Margin
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable product
|
|
$
|
15,147
|
|
|
$
|
2,913
|
|
|
$
|
12,234
|
|
Cryoablation Surgical Systems
|
|
|
2,073
|
|
|
|
318
|
|
|
|
1,755
|
|
Services
|
|
|
|
|
|
|
242
|
|
|
|
(242
|
)
|
Other
|
|
|
106
|
|
|
|
10
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,326
|
|
|
$
|
3,483
|
|
|
$
|
13,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Percentage
|
|
|
|
December 31,
|
|
|
Point
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Percentage of total revenues)
|
|
|
Cryoablation disposable product
|
|
|
59.1
|
%
|
|
|
34.2
|
%
|
|
|
24.9
|
%
|
Cryoablation Surgical Systems
|
|
|
8.1
|
%
|
|
|
3.7
|
%
|
|
|
4.4
|
%
|
Services
|
|
|
0.0
|
%
|
|
|
2.8
|
%
|
|
|
(2.8
|
)%
|
Other
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.6
|
%
|
|
|
40.9
|
%
|
|
|
26.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The positive trend in gross margins (gross profit as a
percentage of revenues) was primarily related to the shift from
sales to Oncura to sales to end-user customers, which yielded a
higher gross margin due to the recognition of the full end-user
prices under Galils revenues. Galil also implemented
several enhancements in its manufacturing facilities to increase
efficiency.
Research
and Development Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Research and development costs
|
|
$
|
5,245
|
|
|
$
|
1,444
|
|
|
$
|
3,801
|
|
|
|
263.2
|
%
|
Percent of total revenues
|
|
|
20.5
|
%
|
|
|
16.9
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development costs was primarily
related to the inclusion of $1.3 million of Galils
research and development costs under costs of revenues during
fiscal 2006, as those costs were related to the services Galil
provided to Oncura. In addition, following the acquisition of
Oncuras cryo business in December 2006, Galil extended its
clinical activities in the United States and Europe, resulting
in additional expenses of $2.3 million, relating mainly to
salaries, travel, clinical research and medical advisory board
fees.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Selling and marketing expenses
|
|
$
|
18,414
|
|
|
$
|
1,368
|
|
|
$
|
17,046
|
|
|
|
1,246
|
%
|
Percent of total revenues
|
|
|
71.9
|
%
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was primarily
related to the acquisition of Oncuras cryo business in
December 2006, following which Galil obtained full
responsibility for the urology sales and marketing
160
activities worldwide, previously conducted by Oncura. In
addition, during fiscal 2007, Galil significantly extended the
sales and marketing activities and its infrastructure in Europe,
under its plan to penetrate the European market, which had not
been an area of focus for Oncura.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
General and administrative expenses
|
|
$
|
3,557
|
|
|
$
|
2,617
|
|
|
$
|
940
|
|
|
|
35.9
|
%
|
Percent of total revenues
|
|
|
13.9
|
%
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily related to higher salaries and travel expenses of
$1.2 million due to enhancement of administration, finance
and human resources headcount, expenses of $0.3 million
relating to CEO search, and additional share-based compensation
expenses of $0.1 million. The increase was partly offset
with $0.7 million one-time expenses relating to the
acquisition of Oncuras cryo business, which were included
in Galils fiscal 2006 general and administrative expenses.
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest income, net
|
|
$
|
401
|
|
|
$
|
140
|
|
|
$
|
261
|
|
|
|
186.4
|
%
|
Percent of total revenues
|
|
|
1.6
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Interest income, net in fiscal 2007 increased due to higher
interest income of $0.5 million earned from the investment
of Galils cash balances, resulting from a December 2006
private placement. The increase was partly offset with
$0.3 million reduction in interest income relating to a
loan and receivables balances of Oncura, which were repaid on
December 2006 and with interest expenses of $0.2 million
relating to adjustment of FIN-48 tax accrual. Interest income
net in fiscal 2006 included interest expenses of
$0.2 million relating to a shareholders loan and
amortization expenses of $0.1 million relating to the
discount of that loan. The loan was converted to equity in
December 2006. Galil accounted for the warrants issued in fiscal
2004 under the provisions of Accounting Principles Board Opinion
No. 14 Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.
Loss
Related to Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Loss related to Oncuras acquisition and direct expenses
|
|
$
|
|
|
|
$
|
(2,288
|
)
|
|
$
|
2,288
|
|
|
|
(100.0
|
)%
|
Percent of total revenues
|
|
|
0.0
|
%
|
|
|
(26.8
|
)%
|
|
|
|
|
|
|
|
|
Galil adopted SFAS 153 Exchange of Nonmonetary
Assets and SFAS 141 Business Combination,
under which the acquisition of Oncuras cryo business with
the sale of Galils 25% equity holdings in Oncura in
December 2006 did not involve an exchange of similar productive
assets but rather a transaction using the purchase method of
accounting. Therefore, Galil effectively kept its original 25%
interest in the cryoablation business at its carrying value
amount of the cryoablation business, as reflected in
Galils financial statements through the investment in
Oncura, and revalued the remaining 75% cryoablation business
purchased from Oncura. As a result of the above, Galil recorded
a loss of $1.7 million. In addition Galil recorded direct
expenses relating to the above transactions of $0.5 million.
161
Loss
before Equity Losses of Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Loss before equity losses of affiliates
|
|
$
|
(9,489
|
)
|
|
$
|
(4,094
|
)
|
|
$
|
(5,395
|
)
|
|
|
131.8
|
%
|
Percent of total revenues
|
|
|
(37.0
|
)%
|
|
|
(48.0
|
)%
|
|
|
|
|
|
|
|
|
Loss before equity losses of affiliates for the year ended
December 31, 2007 was $9.5 million compared to a loss
of $4.1 million for the same period in 2006. Losses
increased in 2007 due to higher spending of $21.8 million
across all major operating expense categories. This was
partially offset with a $13.8 million increase in gross
profit over 2006 and a $0.3 million increase in net
interest income.
Equity
Losses of Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Equity losses of affiliates
|
|
$
|
|
|
|
$
|
(8,885
|
)
|
|
$
|
8,885
|
|
|
|
100.0
|
%
|
Percent of total revenues
|
|
|
0.0
|
%
|
|
|
(104.3
|
)%
|
|
|
|
|
|
|
|
|
Equity losses of affiliates include Galils 25%
proportionate share in Oncuras loss for fiscal year 2006,
which amounted to $2.8 million. In addition Galil reviewed
its investment in Oncura for impairment, and in light of
Oncuras results of operations and several other
indicators, recorded during fiscal 2006 an impairment of its
investment in Oncura of $6.1 million due to an other than
temporary decline in the value of the investment.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Net loss
|
|
$
|
(9,489
|
)
|
|
$
|
(12,979
|
)
|
|
$
|
3,490
|
|
|
|
(26.9
|
)%
|
Percent of total revenues
|
|
|
(37.0
|
)%
|
|
|
(152.3
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2007 was
$9.5 million compared to net loss of $13.0 million for
the same period in 2006. The reduction in the net loss of
$3.5 million resulted from the higher loss before equity
losses of affiliates of $5.4 million, which was offset with
lower expenses relating to equity losses of affiliates of
$8.9 million.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
6,026
|
|
|
$
|
5,217
|
|
|
$
|
809
|
|
|
|
15.5
|
%
|
Cryoablation Surgical Systems
|
|
|
902
|
|
|
|
1,102
|
|
|
|
(200
|
)
|
|
|
(18.1
|
)%
|
Services
|
|
|
1,583
|
|
|
|
1,933
|
|
|
|
(350
|
)
|
|
|
(18.1
|
)%
|
Other
|
|
|
10
|
|
|
|
9
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,521
|
|
|
$
|
8,261
|
|
|
$
|
260
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
Revenues from disposable products increased due to higher sales
to non-urology applications and due to the acquisition of
Oncuras cryo business in December 2006, following which
for the month of December 2006 revenues included sales to the
end-user customers with recognition of the full end-user sales
prices.
Cost
of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
|
(Dollars in thousands)
|
|
Cost of revenues
|
|
$
|
5,038
|
|
|
$
|
6,020
|
|
|
$
|
(982
|
)
|
Percent of revenues
|
|
|
59.1
|
%
|
|
|
72.9
|
%
|
|
|
|
|
The decrease in cost of revenues resulted primarily from a
decrease of $0.3 million in costs relating to services
rendered to Oncura and a decrease of $0.3 million in
royalty expenses paid to the Israeli Chief Scientist Office.
Gross
Profit and Gross Margin
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable product
|
|
$
|
2,913
|
|
|
$
|
1,706
|
|
|
$
|
1,207
|
|
Cryoablation surgical systems
|
|
|
318
|
|
|
|
191
|
|
|
|
127
|
|
Services
|
|
|
242
|
|
|
|
335
|
|
|
|
(93
|
)
|
Other
|
|
|
10
|
|
|
|
9
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,483
|
|
|
$
|
2,241
|
|
|
$
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Percentage
|
|
|
|
December 31,
|
|
|
Point
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(Percentage of total revenues)
|
|
|
Cryoablation disposable product
|
|
|
34.2
|
%
|
|
|
20.7
|
%
|
|
|
13.5
|
%
|
Cryoablation surgical systems
|
|
|
3.7
|
%
|
|
|
2.3
|
%
|
|
|
1.4
|
%
|
Services
|
|
|
2.8
|
%
|
|
|
4.1
|
%
|
|
|
(1.3
|
)%
|
Other
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.9
|
%
|
|
|
27.1
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The positive trend in gross margin (gross profit as a percentage
of revenues) was primarily related to a decrease in
royalties expenses paid to the Israeli Chief Scientist
Office and to the acquisition of Oncuras cryo business in
December 2006, following which for the month of December 2006
revenues included sales to the end-users customers with
recognition of the full end-user sales prices.
Research
and Development Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Research and development costs
|
|
$
|
1,444
|
|
|
$
|
1,088
|
|
|
$
|
356
|
|
|
|
32.7
|
%
|
Percent of total revenues
|
|
|
16.9
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
163
The increase in research and development costs was primarily
related to higher salaries expenses mainly due to the
development of womens health applications.
Selling
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Selling and marketing expenses
|
|
$
|
1,368
|
|
|
$
|
218
|
|
|
$
|
1,150
|
|
|
|
527.5
|
%
|
Percent of total revenues
|
|
|
16.0
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was primarily
related to the acquisition of Oncuras cryo business in
December 2006. Following this acquisition Galil obtained full
responsibility for the urology sales and marketing activities
worldwide, previously conducted by Oncura, which resulted in
expenses of $0.7 million for the month of December 2006.
Galil also recorded acquisition expenses of $0.2 million
relating mainly to retention bonuses paid to its sales
employees. In addition, during fiscal 2006, Galil enhanced its
business development activities in the womens health
applications and its sales efforts in other non-urology
applications, which resulted in higher selling and marketing
expenses of $0.3 million compared to the previous year.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
General and administrative expenses
|
|
$
|
2,617
|
|
|
$
|
1,466
|
|
|
$
|
1,151
|
|
|
|
78.5
|
%
|
Percent of total revenues
|
|
|
30.7
|
%
|
|
|
17.7
|
%
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily related to higher salaries and travel expenses of
$0.2 million and additional stock based compensation
expenses of $0.2 million. In addition, in 2006 Galil
recorded $0.7 million in expenses relating to the
acquisition of Oncuras cryo business.
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest income (expenses), net
|
|
$
|
140
|
|
|
$
|
(178
|
)
|
|
|
318
|
|
|
|
178.6
|
%
|
Percent of total revenues
|
|
|
1.6
|
%
|
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
Interest income, net in 2006 increased due to higher interest
income of $0.3 million earned from the investment of
Galils cash balances and from loan and receivables
balances of Oncura, which were repaid in December 2006. In
addition interest expenses relating to a shareholders loan
and the related warrants amortization expenses decreased by
$0.1 million. Galil accounted for the warrants issued in
2004 under the provisions of Accounting Principles Board Opinion
No. 14 Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.
Loss
Related to Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Loss related to Oncuras acquisition and direct expenses
|
|
$
|
(2,288
|
)
|
|
$
|
|
|
|
$
|
(2,288
|
)
|
|
|
(100.0
|
)%
|
Percent of total revenues
|
|
|
(26.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Galil adopted SFAS 153 Exchange of Nonmonetary
Assets and SFAS 141 Business Combination,
under which the acquisition of Oncuras cryo business with
the sale of Galils 25% holdings in Oncura in December
2006,
164
did not involve an exchange of similar productive assets but
rather a transaction using the purchase method of accounting.
Therefore, Galil effectively kept its original 25% interest in
the cryoablation business at its carrying value amount of the
cryoablation business, as reflected in Galils financial
statements through the investment in Oncura, and revalued the
remaining 75% cryoablation business purchased from Oncura. As a
result of the above, Galil recorded a loss of $1.7 million.
In addition Galil recorded direct expenses relating to the above
transactions of $0.5 million.
Loss
before Equity Losses of Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Loss before equity losses of affiliates
|
|
$
|
(4,094
|
)
|
|
$
|
(684
|
)
|
|
$
|
(3,410
|
)
|
|
|
498.5
|
%
|
Percent of total revenues
|
|
|
(48.1
|
)%
|
|
|
(8.3
|
)%
|
|
|
|
|
|
|
|
|
Loss before equity losses of affiliates for the year ended
December 31, 2006 was $4.1 million compared to
$0.7 million for the same period in 2005. Losses increased
primarily due to a $2.3 million loss related to the
acquisition of Oncuras cryo business and due to higher
spending of $2.7 million across all major operating expense
categories. This was partially offset with a $1.3 million
increase in gross profit over 2005 and the $0.3 million
increase in interest income, net.
Equity
Losses of Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Equity losses of affiliates
|
|
$
|
(8,885
|
)
|
|
$
|
(7,030
|
)
|
|
$
|
(1,855
|
)
|
|
|
26.4
|
%
|
Percent of total revenues
|
|
|
(104.3
|
)%
|
|
|
(85.1
|
)%
|
|
|
|
|
|
|
|
|
Equity losses of affiliates include Galils 25%
proportionate share in Oncuras losses for fiscal years
2006 and 2005, which amounted to $2.8 million and
$2.0 million, respectively. In addition, Galil reviewed its
investment in Oncura for impairment, and in light of
Oncuras results of operations and several other
indicators, recorded during fiscal years 2006 and 2005
impairment of its investment of $6.1 million and
$5.0 million respectively, due to an other than temporary
decline in the value of the investment.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Net loss
|
|
$
|
(12,979
|
)
|
|
$
|
(7,714
|
)
|
|
$
|
(5,265
|
)
|
|
|
68.3
|
%
|
Percent of total revenues
|
|
|
(152.3
|
)%
|
|
|
(93.4
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2006 was
$13.0 million compared to $7.7 million for the
previous year. Losses increased primarily due to a
$2.3 million loss related to the acquisition of
Oncuras cryo business, higher spending of
$2.7 million across all major operating expense categories
and higher expenses related to affiliates losses of
$1.9 million. This was partially offset with a
$1.3 million increase in gross profit over 2005 and a
$0.3 million increase in interest income, net.
Liquidity
and Capital Resources
Since inception, Galil has incurred losses from operations and
has reported negative cash flows. As of September 30, 2008,
Galil had an accumulated deficit of $73.2 million and cash
and cash equivalents of $3.5 million. Galil does not expect
to reach cash flow positive operations for fiscal years 2008 and
2009, and, as a standalone company, it expects to continue to
generate losses from operations for the foreseeable future.
165
On November 10, 2008, Galil signed the Merger Agreement
with Endocare. In the Merger, a wholly-owned subsidiary of
Endocare, Orange Acquisitions Ltd., will merge with and into
Galil. After the Merger, Galil will continue as the surviving
company and will be a wholly owned subsidiary of Endocare. Each
outstanding share of Galil will be cancelled at the effective
time of the Merger, and in exchange therefore, Endocare will
issue shares of Endocare common stock. Following the Merger,
Galil shareholders will no longer have any interest in Galil,
but will have an equity stake in Endocare, the new parent
company of Galils operations. Immediately after the
Merger, but prior to the Financing, existing Endocare
stockholders are expected to own approximately 52.0% of the
outstanding shares of Endocare common stock and the former Galil
shareholders are expected to own approximately 48.0% of the
outstanding shares of Endocare common stock. Upon consummation
of the Merger and Financing and attributing ownership to
Galils shareholders of the Escrow Shares, existing
Endocare stockholders will own approximately 38.5% of the
outstanding common stock of Endocare and Galil shareholders will
own approximately 61.5% of the outstanding common stock of
Endocare. During the nine months ended September 30, 2008,
Galil incurred expenses of $0.5 million in relation to the
pending Merger. These expenditures were recorded as general and
administrative expenses as incurred, since the Merger is not
expected to close until the first half of 2009, and these costs
are required to be expensed under Statement of Financial
Accounting Standards (SFAS) No. 141(R), Business
Combinations. Consummation of the Merger, including post-closing
integration costs, or, if the Merger is not consummated, any
continued exploration of other strategic alternatives, is
expected to continue to require a significant use of cash.
Galil has historically financed its operations and growth
through equity financings. As discussed in Note 11 to the
consolidated financial statements, on December 8, 2006
Galil issued 74,962,166
Series A-1
Preferred Shares to three groups of private U.S. investors for a
total consideration of $40.0 million. In addition, a loan
of $3.6 million granted to Galil in April 2004 was
converted into 6,746,596
Series A-2
Preferred Shares, based on per share price of $0.5336. The funds
were used for the acquisition of the urology business from
Oncura ($20.0 million) and to finance Galils
operations and growth following the acquisition of the cryo
business from Oncura.
To continue financing Galils cash operations until the
closing of the Merger, Galil signed in January 2009, a
Sale of Accounts agreement with Rexford Funding LLC.
Galil can borrow up to $3.0 million based on eligible US
trade receivables as defined in the agreement. In addition,
Galil has an understanding with several of its current
shareholders, pursuant to which the shareholders have agreed to
extend to Galil a bridge loan of $2.0 million. The loan is
expected to be funded to Galil in two installments, one
installment of $1.4 million during January of 2009, and a
second installment of $0.6 million in February of 2009. The loan
will bear interest of 18% per annum. If the Merger and the
Financing occur, the loan amounts will be repaid out of the
proceeds of the Financing. If the Merger Agreement is
terminated, the bridge loan will become convertible at a
discounted conversion rate of 75% of any share price agreed
under future equity financing round of at least
$5.0 million.
Galil cannot guarantee the availability of these capital
resources or that they will be sufficient to fund its ongoing
operations until the closing of the Merger. If the Merger and
Financing are not consummated, Galil, as a standalone company,
expects that it will need to raise additional capital during
2009 to fund its ongoing operations to the point where
Galils operations will generate positive cash flows on a
consistent basis. Should such financing be unavailable or
prohibitively expensive when Galil requires it, the consequences
would have a material adverse effect on Galils business,
financial condition, results of operations and cash flows.
Critical
Accounting Policies
The foregoing discussion and analysis of Galils financial
condition and results of operations are based on Galils
consolidated financial statements, which have been prepared in
accordance with US generally accepted accounting principles. The
preparation of the financial statements requires management to
make estimates and assumptions in applying certain critical
accounting policies. Certain accounting estimates are
particularly sensitive because of their significance to
Galils consolidated financial statements and because of
the possibility that future events affecting the estimates could
differ significantly from current expectations. Factors that
could possibly cause actual amounts to differ from current
estimates relate to various risks and uncertainties inherent in
Galils business, including those set forth under
Risk Factors in this proxy statement/prospectus.
Galils management believes that the following are some of
the more critical judgment areas in the application of
accounting policies that affect Galils financial
statements.
166
Revenue
recognition
Revenues from systems and disposable kits sales are recognized
in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition
(SAB No. 104), when persuasive evidence of
an agreement exists, delivery of the product has occurred, the
fee is fixed or determinable and collectability is probable.
Generally, Galil does not have any significant obligations after
delivery and does not grant a right of return to its customers.
Galil routinely assesses the financial position of its customers
to determine its exposure to credit risk. Accounts receivable
are carried at the original invoice amount, less a provision for
doubtful accounts, based on a periodic review of outstanding
receivables. Allowances are provided for known and anticipated
credit losses, as determined by management in the course of
regularly evaluating customer receivables. This evaluation takes
into consideration a customers financial position and
credit history, as well as current economic conditions. Accounts
receivable are written off when deemed uncollectible.
Inventories
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from
slow-moving items or technological obsolescence. Cost is
determined as follows:
Raw materials, parts and supplies using the
first-in,
first-out method
Finished products and work in progress with respect
to raw materials using the
first-in,
first-out method and with respect to labor and
manufacturing expenses on the basis of actual
expenses.
Investment
in an Affiliate
In Galils financial statements, an affiliate is a company
held to the extent of 20% or more (which is not a subsidiary),
or a company less than 20% held, where Galil can exercise
significant influence over operating and financial policies of
the affiliate. The investment in an affiliate was accounted for
in accordance with the equity method of accounting. Profits on
intercompany sales, not realized outside the group have been
eliminated. The excess of the purchase price over the fair value
of net tangible assets acquired has been attributed to goodwill
and other intangible assets.
The investment in the affiliate was accounted for under the
equity method of accounting in accordance with APB No. 18,
The Equity Method of Accounting for Investments in Common
Stock (APB 18).
Galils investment in the affiliate was reviewed for
impairment by management whenever events or changes in
circumstances indicated that the carrying amount of the
investment may not be recoverable and when indications of
goodwill or intangible assets impairments were indicated.
Impairment
of Long-Lived Assets
Galils long-lived assets are reviewed for impairment in
accordance with SFAS No. 144 whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected to be
generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs.
Intangible
Assets
Intangible assets acquired in a business combination are
recorded at fair value at the date of acquisition. Following
initial recognition, intangible assets are carried at cost less
any accumulated amortization and any accumulated impairment
losses. The useful lives of intangible assets are assessed to be
either finite or indefinite. Intangible assets with finite lives
are amortized over their useful economic life using a method of
amortization that reflects the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used
up and
167
are assessed for impairment whenever there is an indication that
the intangible asset may be impaired. The amortization period
and the amortization method for an intangible asset with a
finite useful life is reviewed at least at each financial
year-end. The amortization expense on intangible assets with
finite lives is recognized in the statement of operations.
Galils intangible assets consist of patent technology and
customer relationships. Both assets are amortized over an
estimated useful life which benefits are expected to be
received. As of December 31, 2006 and 2007, no impairment
losses have been identified.
Galil assessed whether there had been an impairment of its
intangible assets in accordance with SFAS No. 144 as
of September 30, 2008. Impairment is considered to exist if
total estimated future cash flows on an undiscounted basis are
less than the carrying value of the asset. Based upon this
analysis Galil concluded that impairment of the intangible
assets is not required as of September 30, 2008.
Goodwill
Goodwill reflects the excess of the purchase price of business
acquired over the fair value of net assets acquired. Goodwill is
not amortized but instead is tested for any impairment at least,
annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
An annual impairment test is performed by Galil in the fourth
quarter of each year.
In accordance with SFAS No. 142, due to certain
indicators as more fully described in Note 1d to the
consolidated financial statements, Galil performed an interim
assessment of goodwill impairment as of September 30, 2008.
As a result of this analysis, Galil determined that goodwill
impairment had occurred and recognized a non-cash impairment
charge of $16.768 million during the quarter ended
September 30, 2008. The impairment is primarily a result of
a reduction in the estimated future cash flows attributable to
the cryoablation urology business.
Income
taxes
Galil and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards
(SFAS) 109, Accounting for Income Taxes.
This Statement prescribes the use of the liability method
whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Galil provides a valuation
allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 utilizes a
two-step
approach for evaluating tax positions. Recognition (step one)
occurs when an enterprise concludes that a tax position, based
solely on its technical merits, is
more-likely-than-not
to be sustained upon examination. Measurement (step two) is
only addressed if step one has been satisfied (i.e., the
position is more-likely-than-not to be sustained) otherwise a
full liability in respect of a tax position not meeting the
more-than-likely-than-not
criteria is recognized. Under step two, the tax benefit is
measured as the largest amount of benefit, determined on a
cumulative probability basis that is
more-likely-than-not
to be realized upon ultimate settlement.
FIN 48 applies to all tax positions related to income taxes
subject to FAS 109. This includes tax positions considered
to be routine as well as those with a high degree of
uncertainty. FIN 48 has expanded disclosure requirements,
which include a tabular roll forward of the beginning and ending
aggregate unrecognized tax benefits as well as specific detail
related to tax uncertainties for which it is reasonably possible
the amount of unrecognized tax benefit will significantly
increase or decrease within twelve months.
Galil adopted the provisions of FIN 48 as of
January 1, 2007. As a result of the implementation of
FIN 48, Galil recognized $2.95 million increase in
liability for unrecognized tax positions which was accounted
with a corresponding increase to the January 1, 2007
balance of accumulated deficit. As of January 1, 2007,
liabilities for unrecognized tax positions in accordance with
FIN 48 amounted to $2.95 million.
168
Interest associated with uncertain tax position is classified as
financial expenses in the financial statements. Galils
policy for interest related to income tax exposures was not
impacted as a result of the adoption of the recognition and
measurement provisions of FIN 48.
Accounting
for stock-based compensation
Effective January 1, 2006 (the effective date),
Galil adopted SFAS No. 123(R), Share-Base
Payment, which is a revision of FASB Statement
No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which required
the measurement and recognition of compensation expenses based
on estimated fair value for all share based payment awards made
to employees and directors. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107)
relating to SFAS 123(R).
Galil adopted SFAS 123(R) using the modified-prospective
method. According to the modified-prospective method,
compensation cost is recognized beginning with the effective
date (a) based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R) for all
share-based payments granted after the effective date and
(b) based on the grant date fair value estimated in
accordance with the provisions of SFAS 123 Accounting
For Stock-Based Compensation (SFAS 123)
for all awards granted to employees prior to the effective date
that remain unvested on the effective date. Results of prior
periods have not been restated, in accordance with the modified
prospective transition method.
Previously, Galil adopted the fair-value-based method of
accounting based on the provisions of SFAS 123 for
share-based payments effective January 1, 2003 using the
prospective methods described in SFAS 148, Accounting
for Stock-Based Compensation Transition and
Disclosure.
The difference between the expense related to stock-based
employee compensation included in the determination of net
income for 2006, and the expense which would have been
recognized if the fair value method had been applied to all
awards granted after the original effective date of
SFAS 123 is immaterial.
Galil recognizes compensation expenses for the value of its
awards based on the straight line method over the requisite
service period of each of the awards.
Galil applies
EITF 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, with respect to options issued to
non-employees.
Inflation
The impact of inflation on Galils business has not been
significant to date.
Exchange
Rate Fluctuations
Galils operating expenses are materially impacted by the
fluctuations of the US dollar currency compared to the New
Israeli Shekel, because a significant portion of payroll,
manufacturing and facilities expenses are paid in New Israeli
Shekels.
In addition, the revenues and selling and marketing expenses are
impacted by the fluctuations of the Euro and the British pound
currencies as compared to the U.S. dollar, because part of
these revenues and expenses are collected and paid in Euros and
British pounds.
169
ENDOCARES
MANAGEMENT
Directors
Current
Directors
Information is set forth below concerning the current members of
Endocares board of directors.
|
|
|
|
|
|
|
Name
|
|
Age(1)
|
|
Position with Endocare
|
|
John R. Daniels, M.D.
|
|
|
70
|
|
|
Director
|
David L. Goldsmith
|
|
|
60
|
|
|
Director
|
Eric S. Kentor
|
|
|
49
|
|
|
Director
|
Terrence A. Noonan
|
|
|
71
|
|
|
Chairman, Interim Chief Executive Officer & Interim
President
|
Thomas R. Testman(2)
|
|
|
72
|
|
|
Director
|
|
|
|
(1) |
|
All ages are as of December 31, 2008. |
|
(2) |
|
Our board of directors has determined that Mr. Testman is
an audit committee financial expert, as defined in
SEC
Regulation S-K
Item 407. |
John R. Daniels, M.D. has served as a director
since January 2004. Dr. Daniels is former chief executive
officer and chairman at a number of medical technology
companies, as well as an accomplished clinician and past
faculty member of the Stanford University School of Medicine.
From 1990 to the present, Dr. Daniels has served as an
associate professor of medicine in the Division of Oncology at
the University of Southern California School of Medicine.
Dr. Daniels is the founder or co-founder of five
start-up
companies, including: Collagen Corporation, which was acquired
by Inamed, a publicly-traded healthcare company; Target
Therapeutics, today a division of Boston Scientific Corporation,
a publicly-traded medical device company; and Balance
Pharmaceuticals, a company founded in 1992 to develop and market
a drug to moderate hormone levels in pre-menopausal women.
Dr. Daniels is currently a director and Chairman of Balance
Pharmaceuticals. From 1997 until 2002, Dr. Daniels was
Chairman of Cohesion Technologies, a publicly-traded spin-off
from Collagen Corporation, which developed sealing technologies
for surgery. In 2003 Cohesion Technologies was acquired by
Angiotech Pharmaceuticals, a publicly-traded company that
develops drug-coated medical devices and drug-loaded surgical
implants. Dr. Daniels holds a B.A. from Stanford University
and an M.D. from the Stanford University School of Medicine.
David L. Goldsmith has served as a director since June
2005. A private investor and business consultant since 2004,
Mr. Goldsmith previously served as Managing Director of RS
Investment Management, an investment management firm, from 1999
to 2003. From 1981 to 1999, Mr. Goldsmith held a variety of
investment management and research positions at Robertson
Stephens and Company. From 1978 to 1981, Mr. Goldsmith
worked with BA Investment Management, eventually becoming
Associate Director of Research. He is also on the board of
directors of a number of privately-held companies.
Mr. Goldsmith is a chartered financial analyst, and holds a
B.A. from Occidental College and an M.B.A. from Columbia
University Graduate School of Business.
Eric S. Kentor has served as a director since February
2005 and currently serves as Chairman of the Compensation
Committee. From 2002 to the present, he has been an independent
business consultant, primarily to health care technology
companies. From 1995 to 2001, he was Senior Vice President,
General Counsel and Corporate Secretary of MiniMed, Inc., a
company engaged in the design, development, manufacture and
marketing of advanced systems for the treatment of diabetes.
Mr. Kentor also served as an original and permanent member
of MiniMeds Executive Management Committee. From 1994 to
1995, Mr. Kentor served as Vice President and Executive
Counsel of Health Net Health Plans. From 1987 to 1994,
Mr. Kentor practiced with the law firm McDermott,
Will & Emery, where he was elected partner.
Mr. Kentor holds a B.A. from the University of California,
Los Angeles and a J.D. from UCLA School of Law.
Terrence A. Noonan has served as a director of Endocare
since September 2003 and as Interim Chief Executive Officer and
Interim President of Endocare since October 2008. From 1991
to 1999, Mr. Noonan was President and Chief Operating
Officer of Furon Company, a New York Stock Exchange-listed
manufacturer of industrial and medical polymer components.
Mr. Noonan served as an Executive Vice President of Furon
from 1989 to 1991 and as a
170
Vice President of Furon from 1987 to 1989. Prior to joining
Furon in 1987, Mr. Noonan served as a Group Vice President
of Eaton Corporation, a diversified global manufacturer of
transportation and electrical products. From 1999 to the
present, Mr. Noonan has been serving as a board member to
several companies. Mr. Noonan received a B.S. from Miami
University and an E.M.B.A. from Case Western Reserve
University.
Thomas R. Testman has served as a director since April
2003 and currently serves as Chairman of the Audit Committee.
Mr. Testman is a former Managing Partner of
Ernst & Young LLP where, during his tenure from 1962
to 1992, he served as Managing Partner of both Health Care
Services and Management Consulting Services for the West Coast
and National Practices. He also served as an area Managing
Partner for the audit and tax practices. From 1993 to the
present, Mr. Testman has been serving as a board member to
both public and private companies. Mr. Testman recently
served as a director and member of the Audit Committee of Amylin
Pharmaceuticals, Inc. From 1996 to 2004, Mr. Testman served
as a director of Specialty Laboratories, Inc., including serving
as Chairman and as a member of the Audit Committee. He also
serves or has served on the board of several privately-held
companies, including serving as Chairman of Covenant Care, Inc.
and Pacific Health Corporation. Mr. Testman previously was
a director and Chairman of the Audit Committee of MiniMed Inc.
Mr. Testman has also served on numerous professional, civic
and charitable organization boards, including the Finance
Council of the American Hospital Association and the Advisory
Council of the California Hospital Commission. He has an M.B.A.
from Trinity University and is a certified public accountant
(retired).
Directors
After the Merger
Information is set forth below concerning the proposed members
of Endocares board of directors after the Merger.
|
|
|
|
|
|
|
Name
|
|
Age(1)
|
|
Position with Endocare
|
|
Doron Birger
|
|
|
57
|
|
|
Director
|
Martin J. Emerson
|
|
|
45
|
|
|
Director
|
Richard B. Emmitt
|
|
|
63
|
|
|
Director
|
David L. Goldsmith
|
|
|
60
|
|
|
Director
|
Eric S. Kentor
|
|
|
49
|
|
|
Director
|
Terrence A. Noonan
|
|
|
71
|
|
|
Director
|
Daniel A. Pelak
|
|
|
58
|
|
|
Director
|
Thomas R. Testman(2)
|
|
|
72
|
|
|
Director
|
James E. Thomas
|
|
|
48
|
|
|
Director
|
|
|
|
(1) |
|
All ages are as of December 31, 2008. |
|
(2) |
|
Our current board of directors has determined that
Mr. Testman is an audit committee financial
expert, as defined in SEC
Regulation S-K
Item 407. |
Doron Birger will be appointed to Endocares board
of directors in connection with the consummation of the Merger.
Mr. Birger has served as President and Chief Executive
Officer at Elron Electronic Industries Ltd., a member of
the IDB Holding group and a leading Israel-based technology
holding company since August 2002, President since September
2001, Chief Financial Officer from 1994 to May 2002 and
Corporate Secretary from 1994 to September 2001. Mr. Birger
is Chairman of ChipX (Israel), Ltd., as well as a director
of Given Imaging Ltd., Galil, Medingo Ltd., RDC,
Teledata Networks Ltd., Wavion Ltd. and
NuLens Ltd. Mr. Birger brought to Elron a 15 year
track record as Vice President-Finance and Chief Financial
Officer in a variety of private companies, including North Hills
Electronics Ltd., Fibronics Ltd., Middle-East Pipes and Bateman
Engineering Ltd. Mr. Birger is a director of the National
Science & Technology Museum in Haifa, a director in
the Israel Association of Electronics & Software
Industries, a member of Young Entrepreneurs, a non-profit
organization, and a member of DVI, the Dental Volunteers for
Israel. Mr. Birger holds a B.A. and an M.A. degree in
economics from the Hebrew University, Jerusalem.
Martin J. Emerson will be President and Chief Executive
Officer of Endocare after the Merger and a member of
Endocares board of directors. Mr. Emerson has served
as the Chief Executive Officer of Galil since March of 2008.
Mr. Emerson has over 20 years experience in the
medical device industry, most recently as President and
171
Chief Executive Officer of American Medical Systems (AMS), a
company focused on developing, manufacturing and marketing
medical devices that restore male and female pelvic health, from
January 2005 to January 2008. During his tenure at
AMS, he held other executive roles including President and Chief
Operating Officer from March 2004 to December 2004,
Executive Vice President and Chief Operating Officer from
July 2003 to February 2004. Executive Vice President
of Global Sales and Marketing from January 2003 to
June 2003 and Vice President and General Manager of
International, from June 2000 to December 2002. Prior
to joining AMS, in 2000, he held senior roles in the overseas
operations for several American-based companies including Baxter
International and Boston Scientific. Mr. Emerson serves on
the Board of Wright Medical and Incisive Surgical.
Richard B. Emmitt will be appointed to Endocares
board of directors in connection with the consummation of the
Merger. Mr. Emmitt has over thirty years of health care
industry investment experience including venture capital,
investment research, and investment banking. Mr. Emmitt has
been a Managing Director of The Vertical Group, an investment
management and venture capital firm focused on the medical
device industry, since 1989. Prior to joining The Vertical
Group, as an investment analyst with Cyrus J. Lawrence and F.
Eberstadt, Mr. Emmitt was recognized as one of the leading
experts on the health care industry by Institutional Investor
Magazine. He currently serves on the Boards of Directors of
American Medical Systems, Inc., BioSet, ENTrigue Surgical, ev3
Inc, Galil, Incumed, Tepha and Tornier. Mr. Emmitt
previously served on the Boards of Directors of OsteoBiologics
Inc., SciMed Life Systems, Xomed Surgical Products and Wright
Medical. Mr. Emmitt received a B.A. in Economics from
Bucknell University and an M.B.A. from The Rutgers School of
Business.
Daniel A. Pelak will be appointed to Endocares
board of directors in connection with the consummation of the
Merger. Mr. Pelak currently works for Welsh, Carson,
Anderson & Stowe, which he joined in
December 2008 and focuses on investments in the healthcare
industry. He has over twenty years of experience as a senior
executive in the medical technology industry, compiling a
successful track record in growing young companies and corporate
operating divisions. From August 2005 until joining Welsh,
Carson, Anderson & Stowe, Mr. Pelak served as Chief
Executive Officer at InnerPulse, a privately held, early-stage
cardiac medical device company with a cutting-edge alternative
to traditional cardiac rhythm management devices. Before joining
InnerPulse, from August 2002 until August 2005, he was the
Chief Executive Officer of Closure Medical Corporation, a
publicly traded global leader in the development and manufacture
of biomaterial-based medical adhesives, until its acquisition by
Johnson & Johnson in 2005. He began his industry
career at Medtronic, Inc., where he spent more than two decades.
His executive assignments there included Vice President of
U.S. Marketing, and later in his career, the worldwide
responsibility for three different operating divisions as the
Vice President and General Manager. Mr. Pelak presently serves
on the Boards of Directors of AGA Medical Corporation and
Affinergy, Inc. Mr. Pelak is a graduate of Penn State
University with a B.S. in Biology.
James E. Thomas will be appointed to Endocares
board of directors in connection with the consummation of the
Merger. Mr. Thomas co-founded Thomas, McNerney &
Partners, a health care venture capital firm, in 2001 and has
served as partner of such firm since its founding. Prior to
co-founding Thomas, McNerney & Partners, Mr. Thomas
worked at Warburg Pincus LLC, a private equity firm, from 1989
to 2000, heading its medical technology private equity practice
where he had responsibility for investments in biotechnology,
pharmaceutical, medical device and diagnostic companies. He is
currently a board member of Clarus Therapeutics, Inc., Galil and
Solstice Neurosciences, Inc. Prior to joining Warburg Pincus
LLC, Mr. Thomas was a Vice President at Goldman Sachs
International in London, England. Mr. Thomas also serves as
a Member of the Board of Directors at the Second Stage Theatre
in New York City. Mr. Thomas graduated magna cum laude with
a B.S. in Economics from the Wharton School at the University of
Pennsylvania and received an M.Sc. in Economics from the London
School of Economics.
For information regarding Messrs. Goldsmith, Kentor, Noonan
and Testman, see above under Directors-Current
Directors. The parties have agreed that a member of
Endocares pre-Merger board of directors will be Chairman
of the post-Merger board of directors. It is the parties
current intention that Terrence A. Noonan will be the Chairman
of the board of directors after completion of the Merger.
172
Executive
Officers
Current
Executive Officers
Endocares executive officers as of December 31, 2008
are as follows:
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|
|
|
|
|
Name
|
|
Age(1)
|
|
Position with Endocare
|
|
Terrence A. Noonan
|
|
|
71
|
|
|
Interim Chief Executive Officer and Interim President
|
Michael R. Rodriguez
|
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41
|
|
|
Senior Vice President, Finance and Chief Financial Officer
|
Clint B. Davis
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36
|
|
|
Senior Vice President, Legal Affairs, General Counsel and
Secretary
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|
(1) |
|
All ages are as of December 31, 2008. |
Terrence A. Noonan has served as our Interim Chief
Executive Officer and Interim President since October 2,
2008. For additional information regarding Mr. Noonan, see
above under Directors.
Michael R. Rodriguez has served as our Senior Vice
President, Finance and Chief Financial Officer since August
2004. From January 2004 until August 2004, Mr. Rodriguez
served as a consultant to Endocare, providing assistance on a
variety of financial and operational projects and compliance
with Section 404 of the Sarbanes-Oxley Act. Prior to
joining us as a consultant, Mr. Rodriguez served as
Executive Vice President and Chief Financial Officer of
Directfit, Inc., a provider of information technology staffing
services, from June 2000 to November 2003. From September 1997
to June 2000, Mr. Rodriguez held a variety of positions,
including Senior Vice President and Chief Financial Officer,
with Tickets.com, Inc., a publicly-traded Internet-based
provider of entertainment ticketing services and software. From
June 1995 to September 1997, Mr. Rodriguez was Corporate
Controller and Director of Finance at EDiX Corporation, a
medical informatics company. Mr. Rodriguez began his career
at Arthur Andersen LLP and was with that firm from 1989 to 1993.
Mr. Rodriguez holds a B.S. in accounting from the
University of Southern California and an M.B.A. from Stanford
University. Mr. Rodriguez is a certified public accountant.
Clint B. Davis joined us in January 2006 as Senior Vice
President, Legal Affairs, General Counsel and Secretary. From
August 2000 to January 2006, Mr. Davis was a corporate
attorney with the San Diego office of Morrison &
Foerster LLP. While at Morrison & Foerster,
Mr. Davis served as outside counsel to Endocare since
January 2003 and represented a number of other life sciences and
technology companies in a wide variety of business transactions,
contractual arrangements and corporate governance matters. Prior
to his employment with Morrison & Foerster,
Mr. Davis was a corporate attorney with law firms in Boston
and Los Angeles. Mr. Davis holds a B.A. from Rice
University and a J.D. from Harvard Law School.
Executive
Officers After the Merger
Endocares executive officers after the Merger are expected
to be as follows:
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|
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Name
|
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Age(1)
|
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Position with Endocare
|
|
Martin J. Emerson
|
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45
|
|
|
Chief Executive Officer and President
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Michael R. Rodriguez
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41
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Senior Vice President, Finance and Chief Financial Officer
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Clint B. Davis
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36
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|
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Senior Vice President, Legal Affairs, General Counsel and
Secretary
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|
|
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(1) |
|
All ages are as of December 31, 2008. |
For information regarding Mr. Emerson, see above under
Directors-Directors
After the Merger. For information regarding
Messrs. Rodriguez and Davis, see above under
Executive Officers-Current Executive Officers.
Related
Party Transactions
We have no related party transactions to report.
173
We have adopted written related party transaction policies and
procedures. Under these policies and procedures, our Audit
Committee reviews the material facts of each interested
transaction that requires the Audit Committees
approval and either approves or disapproves of the entry into
the interested transaction.
Our policies and procedures define an interested
transaction as any transaction, arrangement or
relationship or series of similar transactions, arrangements or
relationships in which:
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the aggregate amount involved will or may be expected to exceed
$100,000 in any calendar year;
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Endocare or a subsidiary is a participant; and
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|
any related party (including an executive officer, director or
nominee for election as a director of Endocare, a greater than
five percent beneficial owner of Endocare or an immediate family
member of any of the foregoing) has or will have a direct or
indirect interest, other than solely as a result of being a
director or less than 10 percent beneficial owner of
another entity.
|
In determining whether to approve or ratify an interested
transaction our Audit Committee is required to take into
account, among other factors as it deems appropriate, whether
the interested transaction is on terms no less favorable than
terms generally available to an unaffiliated third party under
the same or similar circumstances and the extent of the related
partys interest in the transaction.
Under our policies and procedures, no director is permitted to
participate in any deliberation or approval of an interested
transaction for which he or she is a related party, except that
the director shall provide all material information concerning
the interested transaction to the Audit Committee and may
address questions from the Audit Committee.
Several types of interested transactions are considered
pre-approved under our policies and procedures,
including transactions that the SEC has determined are not
disclosable as related party transactions under Item 404(a)
of
Regulation S-K
(such as executive and director compensation).
Compensation
Committee Interlocks, Insider Participation and
Independence
None of the members of the current Compensation Committee of
Endocare (Dr. Daniels and Messrs. Kentor and
Goldsmith) or the proposed Compensation Committee of Endocare
after the Merger (Messrs. Emmitt, Thomas and Kentor):
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has ever been an officer or employee of Endocare;
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is or was a participant in a related party
transaction for purposes of Item 404 of
Regulation S-K
from January 1, 2007 to the present; or
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|
is an executive officer of another entity, at which one of our
executive officers serves on the board of directors.
|
There are no Compensation Committee interlocks between Endocare
and other entities involving Endocares current or proposed
executive officers and directors. The current board of directors
has determined that all members of the Compensation Committee
are independent, as defined in the NASDAQ listing
standards.
174
ENDOCARES
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
2008
SUMMARY COMPENSATION TABLE
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Non-Equity
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Incentive
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Name and
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Salary
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Bonus
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Stock
|
|
|
Option
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Plan
|
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All Other
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|
|
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Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(1)
|
|
|
Awards ($)
|
|
|
Awards ($)
|
|
|
Compensation ($)
|
|
|
Compensation ($)
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Total ($)
|
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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Terrence A. Noonan,
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2008
|
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$
|
61,538
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None
|
|
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None
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|
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$
|
25,233
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(3)
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|
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None
|
|
|
$
|
100
|
(4)
|
|
$
|
86,871
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|
Interim CEO & President(2)
|
|
|
2007
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
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|
|
|
None
|
|
Michael R. Rodriguez,
|
|
|
2008
|
|
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$
|
230,196
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|
|
|
None
|
|
|
$
|
12,500
|
(5)
|
|
$
|
92,193
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(6)
|
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$
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36,831
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(11)
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$
|
13,494
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(12)
|
|
$
|
385,214
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|
SVP, Finance & CFO
|
|
|
2007
|
|
|
$
|
223,445
|
|
|
|
None
|
|
|
$
|
90,875
|
(8)
|
|
$
|
121,450
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(9)
|
|
$
|
110,830
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(13)
|
|
$
|
11,535
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(12)
|
|
$
|
558,135
|
|
Clint B. Davis,
|
|
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2008
|
|
|
$
|
244,843
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|
|
|
None
|
|
|
$
|
12,500
|
(5)
|
|
$
|
151,194
|
(6)
|
|
$
|
39,175
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(14)
|
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$
|
10,798
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(15)
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$
|
458,510
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|
SVP, Legal Affairs & General Counsel
|
|
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2007
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|
|
$
|
238,000
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|
|
|
None
|
|
|
$
|
88,160
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(8)
|
|
$
|
117,733
|
(9)
|
|
$
|
118,048
|
(16)
|
|
$
|
9,071
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(15)
|
|
$
|
571,012
|
|
Craig T. Davenport,
|
|
|
2008
|
|
|
$
|
358,744
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
95,851
|
(6)
|
|
|
None
|
|
|
$
|
8,729
|
(7)
|
|
$
|
463,324
|
|
Former CEO & President(2)
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|
|
2007
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|
|
$
|
390,000
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|
|
|
None
|
|
|
$
|
476,923
|
(8)
|
|
$
|
1,204,707
|
(9)
|
|
$
|
411,060
|
(10)
|
|
$
|
11,979
|
(7)
|
|
$
|
2,494,669
|
|
|
|
|
(1) |
|
Amounts earned under our 2008 Management Incentive Compensation
Program (MICP) and our 2007 MICP are reported under column (g),
Non-Equity Incentive Plan Compensation. |
|
(2) |
|
Mr. Noonan was appointed as our Interim Chief Executive
Officer and Interim President on October 2, 2008, following
Mr. Davenports resignation as our Chief Executive
Officer, President and Chairman on September 30, 2008. The
information in this table for Mr. Noonan relates to
compensation he received in his capacity as Interim Chief
Executive Officer and Interim President. For information
regarding Mr. Noonans compensation as a non-employee
director prior to his appointment as Interim Chief Executive
Officer and Interim President see the 2008 Director
Compensation table below. |
|
(3) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare for 2008 with respect to the stock
options granted to Mr. Noonan on October 2, 2008. For
a description of the assumptions made in the SFAS No. 123R
valuation, see Notes 3 and 8 to the financial statements
for the year ended December 31, 2007. |
|
(4) |
|
Represents the value of our contributions on behalf of
Mr. Noonan under our accidental death and disability,
long-term disability and group term life insurance plans. |
|
(5) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare for 2008 with respect to the RSUs held by
the respective executive officer. For a description of the
assumptions made in the SFAS No. 123R valuation, see
Notes 3 and 8 to the financial statements for the year
ended December 31, 2007. |
|
(6) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare for 2008 as a result of option awards
held by the applicable executive officer, disregarding estimated
forfeitures. For a description of the assumptions made in the
SFAS No. 123R valuation, see Notes 3 and 8 to the
financial statements for the year ended December 31, 2007. |
|
(7) |
|
Represents the value of our contributions on behalf of
Mr. Davenport under our medical, dental, accidental death
and disability, long-term disability and group term life
insurance plans. |
|
(8) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare for 2007 with respect to (i) the
RSUs granted to the respective executive officer on
February 23, 2007 ($443,773 for Mr. Davenport, $86,400
for Mr. Rodriguez and $69,120 for Mr. Davis) and
(ii) the 20% premium percentage applicable to
the DSU awards made to the applicable executive officer under
the Employee DSU Program as a result of the executive
officers election to receive all or a portion of his
target incentive payment under the 2007 MICP in the form of DSUs
instead of cash ($33,150 for Mr. Davenport, $4,475 for
Mr. Rodriguez and $19,040 for Mr. Davis). For a
description of the assumptions made in the
SFAS No. 123R valuation, see Notes 3 and 8 to the
financial statements for the year ended December 31, 2007. |
|
(9) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare in 2007 as a result of option awards held
by the applicable executive officer, disregarding estimated
forfeitures. For a description of the assumptions made in the
SFAS No. 123R valuation, see Notes 3 and 8 to the
financial statements for the year ended December 31, 2007. |
|
(10) |
|
Includes $245,310 in cash incentive compensation earned during
2007 under our 2007 MICP. Also includes $165,750 representing
the aggregate expense under SFAS No. 123R recognized
by Endocare for 2007 as a |
175
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|
result of Mr. Davenports election to receive 50% of
his target incentive payment under our 2007 MICP in the form of
DSUs under our Employee DSU Program. The 20% premium
percentage applicable to the DSUs is included in this
table under column (e), Stock Awards. For a description of the
assumptions made in the SFAS No. 123R valuation, see
Notes 3 and 8 to the financial statements for the year
ended December 31, 2007. |
|
(11) |
|
Consists of cash incentive compensation earned during 2008 under
our 2008 MICP, assuming an aggregate achievement percentage of
40%, which is our current estimate of the achievement percentage
for 2008. The achievement percentage will not be finalized until
the audit of our 2008 financial statements is completed and our
Compensation Committee has approved the final achievement
percentage. |
|
(12) |
|
Represents the value of our contributions on behalf of
Mr. Rodriguez under our medical, dental, accidental death
and disability, long-term disability and group term life
insurance plans. |
|
(13) |
|
Includes $88,453 in cash incentive compensation earned during
2007 under our 2007 MICP. Also includes $22,377 representing the
aggregate expense under SFAS No. 123R recognized by
Endocare for 2007 as a result of Mr. Rodriguezs
election to receive 25% of his target incentive payment under
our 2007 MICP in the form of DSUs under our Employee DSU
Program. The 20% premium percentage applicable to
the DSUs is included in this table under column (e), Stock
Awards. For a description of the assumptions made in the
SFAS No. 123R valuation, see Notes 3 and 8 to the
financial statements for the year ended December 31, 2007. |
|
(14) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare for 2008 as a result of
Mr. Davis election to receive 100% of his target
incentive payment under our 2008 MICP in the form of DSUs under
our Employee DSU Program. For a description of the assumptions
made in the SFAS No. 123R valuation, see Notes 3
and 8 to the financial statements for the year ended
December 31, 2007. |
|
(15) |
|
Amount consists of (i) $10,798 for 2008 and $6,210 for
2007, representing the value of our contributions on behalf of
Mr. Davis under our medical, dental, accidental death and
disability, long-term disability and group term life insurance
plans, and (ii) $2,861 for 2007 in accrued paid time off
that we permitted Mr. Davis to cash out and donate to the
families of current or former employees in need, consistent with
our policy of permitting employees to cash out and donate
accrued paid time off in certain circumstances. |
|
(16) |
|
Includes $22,848 in cash incentive compensation earned during
2007 under our 2007 MICP. Also includes $95,200 representing the
aggregate expense under SFAS No. 123R recognized by
Endocare for 2007 as a result of Mr. Davis election
to receive 100% of his target incentive payment under our 2007
MICP in the form of DSUs under our Employee DSU Program. The 20%
premium percentage applicable to the DSUs is
included in this table under column (e), Stock Awards. For a
description of the assumptions made in the
SFAS No. 123R valuation, see Notes 3 and 8 to the
financial statements for the year ended December 31, 2007. |
Explanatory
Information Relating to 2008 Summary Compensation
Table
Please note the following points in connection with the
information in the 2008 Summary Compensation Table:
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|
All stock options held by Mr. Davenport on
September 30, 2008, when he resigned from his positions
with Endocare, expired three months after his resignation
without being exercised. All restricted stock units (RSUs) held
by Mr. Davenport on September 30, 2008 were forfeited
as a result of his resignation.
|
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|
As compensation for Mr. Noonans service as Interim
Chief Executive Officer and Interim President, Endocare agreed
to pay Mr. Noonan a retainer of $25,000 per month. In
addition, Mr. Noonan was granted 50,000 stock options on
October 2, 2008, with an exercise price equal to the
closing price of our common stock on that date. These options
vest in equal monthly installments over the first five months of
Mr. Noonans service, with vesting accelerated upon
Endocares hiring of a new Chief Executive Officer.
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|
Endocare entered into employment agreements with
Messrs. Rodriguez and Davis in connection with the
commencement of their employment in August 2004 and January
2006, respectively. Pursuant to these agreements, each of
Messrs. Rodriguez and Davis is entitled to a certain amount
of base salary. This amount was determined based on our
assessment of the executive officers skill set and
experience and the market value of that skill set and
experience, based on competitive market data, at the time that
Endocare entered into the respective employment agreement. Each
year, Endocare considers whether to adjust the base
|
176
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salaries of senior management, including the executive officers,
in order to reward individual performance, keep pace with cost
of living increases and respond to competitive considerations.
|
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|
The employment agreements between Messrs. Rodriguez and
Davis also provide for certain compensation in the case of
termination or a change in control of Endocare, as described
below under Potential Payments Upon Termination or Change
in Control. For these purposes the Merger and the
Financing do not result in a change in control of Endocare.
|
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|
On October 8, 2008, our Compensation Committee approved the
following compensation items relative to Messrs. Rodriguez
and Davis: each of Messrs. Rodriguez and Davis was granted
$25,000 worth of RSUs, based on the October 8, 2008 closing
price of our common stock. These RSUs vest on April 1, 2009
if the recipient continues to be employed on that date; and each
of Messrs. Rodriguez and Davis was granted a cash retention
amount equal to four months of his base salary, based on his
base salary in effect on October 8, 2008. This cash
retention amount will be paid on the first pay date after
April 1, 2009 if and only if the recipient continues to be
employed on April 1, 2009.
|
OUTSTANDING
EQUITY AWARDS AT 2008 FISCAL YEAR-END
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Option Awards
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Stock Awards
|
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Equity
|
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Incentive
|
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Equity
|
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Plan
|
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Incentive
|
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Awards:
|
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Plan
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Market
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
or Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
of Unearned
|
|
|
Unearned
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Shares,
|
|
|
Shares,
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
Units or
|
|
|
Units or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
Other
|
|
|
Other
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Rights
|
|
|
Rights That
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
That Have
|
|
|
Have
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Not Vested
|
|
|
Not Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
Terrence A. Noonan(1)
|
|
|
6,667
|
|
|
|
|
|
|
$
|
12.45
|
|
|
|
9/30/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence A. Noonan(2)
|
|
|
6,667
|
|
|
|
|
|
|
$
|
7.08
|
|
|
|
1/10/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence A. Noonan(3)
|
|
|
6,667
|
|
|
|
|
|
|
$
|
9.12
|
|
|
|
1/10/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence A. Noonan(4)
|
|
|
6,667
|
|
|
|
|
|
|
$
|
4.95
|
|
|
|
1/10/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence A. Noonan(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,060
|
|
|
$
|
824
|
|
|
|
|
|
|
|
|
|
Terrence A. Noonan(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,142
|
|
|
$
|
2,857
|
|
|
|
|
|
|
|
|
|
Terrence A. Noonan(7)
|
|
|
20,000
|
|
|
|
30,000
|
|
|
$
|
1.33
|
|
|
|
10/2/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael R. Rodriguez(8)
|
|
|
91,667
|
|
|
|
|
|
|
$
|
6.45
|
|
|
|
8/18/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael R. Rodriguez(9)
|
|
|
11,805
|
|
|
|
4,862
|
|
|
$
|
9.93
|
|
|
|
2/23/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael R. Rodriguez(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
$
|
20,000
|
|
Michael R. Rodriguez(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,248
|
|
|
$
|
7,299
|
|
|
|
|
|
|
|
|
|
Clint B. Davis(12)
|
|
|
60,763
|
|
|
|
22,570
|
|
|
$
|
9.90
|
|
|
|
1/17/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clint B. Davis(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
$
|
16,000
|
|
Clint B. Davis(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,991
|
|
|
$
|
5,596
|
|
Clint B. Davis (11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,248
|
|
|
$
|
7,299
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
All market values in the table above are based on the closing
price of our common stock on December 31, 2008, which was
$0.40. |
|
|
|
(1) |
|
These stock options vested as to 50% of the shares on
September 30, 2004 and as to the remaining shares on
September 30, 2005. These stock options were granted to
Mr. Noonan in connection with his original appointment as a
non-employee director. |
|
(2) |
|
These stock options vested as to 100% of the shares on
January 10, 2006. These stock options were granted to
Mr. Noonan while he was serving as a non-employee director. |
177
|
|
|
(3) |
|
These stock options vested as to 100% of the shares on
January 10, 2007. These stock options were granted to
Mr. Noonan while he was serving as a non-employee director. |
|
(4) |
|
These stock options vested as to 100% of the shares on
January 10, 2008. These stock options were granted to
Mr. Noonan while he was serving as a non-employee director. |
|
(5) |
|
These stock awards consist of RSUs that vested on
January 10, 2009. These RSUs were granted to
Mr. Noonan while he was serving as a non-employee director. |
|
(6) |
|
These stock awards consist of RSUs that will vest on
May 15, 2009. These RSUs were granted to Mr. Noonan
while he was serving as a non-employee director. |
|
(7) |
|
These stock options vest in five equal monthly installments on
November 2, 2008, December 2, 2008, January 2,
2009, February 2, 2009 and March 2, 2009, with vesting
accelerated if Endocare appoints a new Chief Executive Officer
before March 2, 2009 and Mr. Noonan remains employed
by Endocare until such appointment. These RSU were granted to
Mr. Noonan in connection with his appointment as Interim
Chief Executive Officer and Interim President on October 2,
2008. |
|
(8) |
|
These stock options vested as to 25% of the shares on
August 18, 2005 and vested ratably on a monthly basis
thereafter based on continued employment through August 18,
2008. |
|
(9) |
|
These stock options vested as to 25% of the shares on
February 23, 2007 and vest ratably on a monthly basis
thereafter based on continued employment through
February 23, 2010. |
|
(10) |
|
These stock awards consist of RSUs that vest only if Endocare
achieves specific profitability goals over the
2007-2009
period. |
|
(11) |
|
These stock awards consist of RSUs that vest on April 1,
2009 subject to continued employment through that date. |
|
(12) |
|
These stock options vested as to 25% of the shares on
January 17, 2007 and vest ratably on a monthly basis
thereafter based on continued employment through
January 17, 2010. |
|
(13) |
|
These stock awards consist of RSUs that vest only if Endocare
achieves specific profitability goals over the
2007-2009
period. |
|
(14) |
|
These stock awards consist of DSUs elected in lieu of cash under
the Employee DSU Program and 2008 MICP. Based on estimated
performance under the 2008 MICP it is expected that 40% of these
DSUs will become vested in the first quarter of 2009. |
Potential
Payments Upon Termination or Change in Control
The following section provides information regarding the
severance and vesting acceleration provisions applicable to
Messrs. Rodriguez and Davis under their employment
agreements and the terms of their equity compensation awards.
Given the interim nature of his appointment as an executive
officer, Mr. Noonan does not have an employment agreement
and is not entitled to receive any severance or change in
control payments.
Single-trigger vesting acceleration means that
vesting acceleration is triggered automatically by the
occurrence of a change in control of Endocare (such as a merger
or acquisition involving a change in control).
Double-trigger vesting acceleration means that
vesting acceleration is triggered only if the employees
employment terminates in certain circumstances in connection
with or following a change in control of Endocare.
The default provision under Endocares 1995 Stock Plan was
single-trigger vesting acceleration. In adopting a
new equity compensation plan for Endocare in 2004,
double-trigger vesting acceleration was selected as
the default provision for the 2004 Stock Incentive Plan.
Therefore, unless specifically provided otherwise in the
relevant stock option agreements, stock options granted under
the 1995 Stock Plan have single-trigger vesting
acceleration and stock options granted under the 2004 Stock
incentive Plan have double-trigger vesting
acceleration. The 2004 Stock Incentive Plans
double-trigger provision applies if the
employees employment is terminated without cause within
12 months after the change in control. For these purposes,
the definition of cause is the same definition as is
contained in the respective employees employment
agreement, if the employee has an employment agreement.
Otherwise the definition is based on the employees:
(i) performance of any act or failure to perform any act in
bad faith and to the detriment of Endocare or a related entity;
(ii) dishonesty, intentional
178
misconduct or material breach of any agreement with Endocare or
a related entity; or (iii) commission of a crime involving
dishonesty, breach of trust, or physical or emotional harm to
any person.
The Merger and the Financing do not result in a change in
control for purposes of the 1995 Stock Plan or the 2004 Stock
Incentive Plan.
In addition to the information in this section, please see the
section above entitled Interests of Endocares
Directors and Executive Officers in the Merger for a
description of the effect of the Merger on deferred stock units
held by Endocares executive officers and directors,
including those held by Messrs. Noonan, Rodriguez and Davis.
Termination
and
Change-in-Control
Provisions Applicable to Mr. Rodriguez
Under his employment agreement, if Endocare terminates
Mr. Rodriguezs employment other than for cause (as
defined in the agreement) or if Mr. Rodriguez terminates
his employment for good reason (as defined in the agreement),
then, during the
12-month
period immediately following the date of
Mr. Rodriguezs termination, Endocare will continue to
pay to Mr. Rodriguez his base salary and make available to
Mr. Rodriguez the benefits made generally available by
Endocare to its employees.
Under his employment agreement, Mr. Rodriguezs right
to receive these post-termination benefits is contingent on his
signing a general release of claims against Endocare and his
compliance with his ongoing obligations to Endocare, including:
|
|
|
|
|
Mr. Rodriguez is required to perform any and all acts
requested by Endocare to ensure the orderly and efficient
transition of his duties;
|
|
|
|
for a period of two years after the date of the termination of
his employment, Mr. Rodriguez is prohibited (for himself or
for any third party) from diverting or attempting to divert from
Endocare any business, employee, consultant, customer, vendor or
service provider, through solicitation or otherwise, or
otherwise interfering with Endocares business or
Endocares relationships with its employees, consultants,
customers, vendors and service providers; and
|
|
|
|
Mr. Rodriguez is required to comply with his obligations
under any other agreements with Endocare, including his
agreement relating to protection of Endocares confidential
information.
|
Upon the commencement of his employment, Mr. Rodriguez
received options to purchase an aggregate of 91,667 shares
of our common stock. These options were granted under
Endocares 1995 Stock Plan. As described above, the default
provision under the 1995 Stock Plan is
single-trigger vesting acceleration. The option
agreement governing this option grant incorporates the
single-trigger default provision under the 1995
Stock Plan.
On February 23, 2006, Mr. Rodriguez was granted an
additional option to purchase 16,667 shares of our common
stock. This option was granted under Endocares 2004 Stock
Incentive Plan. This option is subject to
single-trigger vesting acceleration.
On February 23, 2007, Mr. Rodriguez was granted 50,000
RSUs. The RSUs were granted under Endocares 2004 Stock
Incentive Plan and use the standard double-trigger
vesting acceleration under the 2004 Stock Incentive Plan.
On October 8, 2008, Mr. Rodriguez was granted 18,248
RSUs. The RSUs were granted under Endocares 2004 Stock
Incentive Plan and use the standard double-trigger
vesting acceleration under the 2004 Stock Incentive Plan.
The table below reflects the estimated amounts of payments and
other benefits Mr. Rodriguez would be entitled to receive
upon termination or change in control in each situation assuming
that the event occurred on December 31, 2008 and based on
our closing stock price as of that date of $0.40 per share.
Actual payments made under Mr. Rodriguezs employment
agreement at any future date would likely vary, depending in
part on the market price of our common stock. The table does not
reflect any compensation adjustments or awards made in 2009.
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and Benefits
|
|
|
|
|
|
|
Upon Termination by
|
|
|
|
|
|
|
Endocare Without
|
|
|
|
Payments and
|
|
|
Cause or by the
|
|
|
|
Benefits for
|
|
|
Employee with Good
|
|
Change in Control
|
|
Change in Control
|
|
|
Reason (Other Than
|
|
Payments and
|
|
Followed
|
|
|
in Connection with
|
|
Benefits
|
|
by Termination
|
|
|
Change in Control)
|
|
(Single-Trigger)(1)
|
|
(Double-Trigger)(1)
|
|
Severance
|
|
$
|
230,476
|
(2)
|
|
|
None
|
|
|
$
|
230,476
|
(2)
|
Bonus
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Early vesting of stock options
|
|
|
None
|
|
|
|
None
|
(3)
|
|
|
None
|
(3)
|
Early vesting of RSUs
|
|
|
None
|
|
|
|
None
|
|
|
$
|
27,299
|
(4)
|
Benefits
|
|
$
|
13,000
|
(5)
|
|
|
None
|
|
|
$
|
13,000
|
(5)
|
Totals
|
|
$
|
243,476
|
|
|
|
None
|
|
|
$
|
270,775
|
|
|
|
|
(1) |
|
See above for a description of the single-trigger
and double-trigger provisions to which
Mr. Rodriguez is subject. |
|
(2) |
|
The severance is paid in the form of salary continuation during
the 12 months following termination. |
|
(3) |
|
On December 31, 2008, the closing price of Endocares
common stock ($0.40) was lower than the exercise price of any of
Mr. Rodriguezs stock options. |
|
(4) |
|
Amount reflects the 68,248 RSUs held by Mr. Rodriguez,
multiplied by $0.40, which was the closing price of
Endocares common stock on December 31, 2007. |
|
(5) |
|
Estimated costs of continuing to provide Mr. Rodriguez with
the benefits generally made available to our employees for one
year. |
Termination
and
Change-in-Control
Provisions Applicable to Mr. Davis
Mr. Davis employment agreement contains severance
provisions (including definitions of cause and
good reason) that mirror those contained in
Mr. Rodriguezs employment agreement, as described
above.
Under his employment agreement, Mr. Davis right to
receive post-termination benefits is contingent on his signing a
general release of claims against Endocare and his compliance
with his ongoing obligations to Endocare, including:
|
|
|
|
|
Mr. Davis is required to perform any and all acts requested
by Endocare to ensure the orderly and efficient transition of
his duties;
|
|
|
|
for a period of two years after the date of the termination of
his employment, Mr. Davis is prohibited (for himself or for
any third party) from diverting or attempting to divert from
Endocare any business, employee, consultant, customer, vendor or
service provider, through solicitation or otherwise, or
otherwise interfering with Endocares business or
Endocares relationships with its employees, consultants,
customers, vendors and service providers; and
|
|
|
|
Mr. Davis is required to comply with his obligations under
any other agreements with Endocare, including his agreement
relating to protection of Endocares confidential
information.
|
Upon the commencement of his employment, Mr. Davis received
options to purchase an aggregate of 83,333 shares of our
common stock. These options were granted under Endocares
2004 Stock Incentive Plan. This option is subject to
single-trigger vesting acceleration.
On February 23, 2007, Mr. Davis was granted 40,000
RSUs. The RSUs were granted under Endocares 2004 Stock
Incentive Plan and use the standard double-trigger
vesting acceleration under the 2004 Stock Incentive Plan.
On October 8, 2008, Mr. Davis was granted 18,248 RSUs.
The RSUs were granted under Endocares 2004 Stock Incentive
Plan and use the standard double-trigger vesting
acceleration under the 2004 Stock Incentive Plan.
180
The table below reflects the estimated amounts of payments and
other benefits Mr. Davis would be entitled to receive upon
termination or change in control in each situation assuming that
the event occurred on December 31, 2008 and based on our
closing stock price as of that date of $0.40 per share. Actual
payments made under Mr. Davis employment agreement at
any future date would likely vary, depending in part on the
market price of our common stock. The table does not reflect any
compensation adjustments or awards made in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and Benefits
|
|
|
|
|
|
|
Upon Termination by
|
|
|
|
|
|
|
Endocare Without
|
|
|
|
Payments and
|
|
|
Cause or by the
|
|
|
|
Benefits for
|
|
|
Employee with Good
|
|
Change in Control
|
|
Change in Control
|
|
|
Reason (Other Than
|
|
Payments and
|
|
Followed
|
|
|
in Connection with
|
|
Benefits
|
|
by Termination
|
|
|
Change in Control)
|
|
(Single-Trigger)(1)
|
|
(Double-Trigger)(1)
|
|
Severance
|
|
$
|
245,140
|
(2)
|
|
|
None
|
|
|
$
|
245,140
|
(2)
|
Bonus
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Early vesting of stock options
|
|
|
None
|
|
|
|
None
|
(3)
|
|
|
None
|
(3)
|
Early vesting of RSUs
|
|
|
None
|
|
|
|
None
|
|
|
$
|
23,299
|
(4)
|
Benefits
|
|
$
|
11,000
|
(5)
|
|
|
None
|
|
|
$
|
11,000
|
(5)
|
Totals
|
|
$
|
256,140
|
|
|
|
None
|
|
|
$
|
279,439
|
|
|
|
|
(1) |
|
See above for a description of the single-trigger
and double-trigger provisions to which
Mr. Davis is subject. |
|
(2) |
|
The severance is paid in the form of salary continuation during
the 12 months following termination. |
|
(3) |
|
On December 31, 2008, the closing price of Endocares
common stock ($0.40) was lower than the exercise price of any of
Mr. Davis stock options. |
|
(4) |
|
Amount reflects the 58,248 RSUs held by Mr. Davis,
multiplied by $0.40, which was the closing price per share of
Endocares common stock on December 31, 2008. |
|
(5) |
|
Estimated costs of continuing to provide Mr. Davis with the
benefits generally made available to our employees for one year. |
2008
DIRECTOR COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
|
|
|
|
|
Paid in
|
|
Stock
|
|
Option
|
|
|
|
|
Cash
|
|
Awards
|
|
Awards
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
John R. Daniels, M.D.
|
|
$
|
51,500
|
(2)
|
|
$
|
37,958
|
(3)
|
|
|
None
|
|
|
$
|
89,458
|
|
David L. Goldsmith
|
|
$
|
91,500
|
(2)
|
|
$
|
37,958
|
(3)
|
|
|
None
|
|
|
$
|
129,458
|
|
Eric S. Kentor
|
|
$
|
67,500
|
(2)
|
|
$
|
37,958
|
(3)
|
|
|
None
|
|
|
$
|
105,458
|
|
Terrence A. Noonan(1)
|
|
$
|
59,500
|
(2)
|
|
$
|
37,958
|
(3)
|
|
|
None
|
|
|
$
|
97,458
|
|
Thomas R. Testman
|
|
$
|
62,500
|
(2)
|
|
$
|
37,958
|
(3)
|
|
|
None
|
|
|
$
|
100,458
|
|
|
|
|
(1) |
|
This table reflects compensation paid to Mr. Noonan in his
capacity as director during 2008, prior to his appointment as
Interim Chief Executive Officer and Interim President on
October 2, 2008. |
|
(2) |
|
All of our non-employee directors elected to receive 100% of
their retainers and meeting fees earned in 2008 in the form of
DSUs rather than cash, pursuant to our Non-Employee Director DSU
Program described below. The ultimate value of the DSUs depends
on the market price of Endocares common stock on the
payout date selected by each director, in accordance with the
terms of the Non-Employee Director DSU Program. |
|
(3) |
|
Represents the aggregate expense under SFAS No. 123R
recognized by Endocare for 2008 with respect to RSUs held by the
applicable director, disregarding estimated forfeitures. For a
description of the assumptions made in the
SFAS No. 123R valuation, see Notes 3 and 8 to the
financial statements included for the year ended |
181
|
|
|
|
|
December 31, 2007. The RSU grants were made on
January 10, 2008 and May 15, 2008 pursuant to our
Non-Employee Director RSU Program under our 2004 Stock Incentive
Plan. |
As of December 31, 2008, the outstanding equity awards held
by our non-employee directors were as follows: Dr. Daniels
held 26,668 stock options (all of which were vested), 9,203 RSUs
(none of which were vested) and 27,226 DSUs; Mr. Goldsmith
held 23,334 stock options (all of which were vested), 9,203 RSUs
(none of which were vested) and 33,426 DSUs; Mr. Kentor
held 23,334 stock options (all of which were vested), 9,203 RSUs
(none of which were vested) and 32,688 DSUs; and
Mr. Testman held 28,335 stock options (all of which were
vested), 9,203 RSUs (none of which were vested) and 31,828 DSUs.
All DSUs granted under our Non-Employee Director DSU Program are
fully vested upon grant.
Retainers
Each of our non-employee directors receives an annual retainer
of $25,000 for his service as a director. The Lead Independent
Director receives an additional annual retainer of $15,000, the
Chairman of the Audit Committee receives an additional annual
retainer of $12,500, the Chairman of the Compensation Committee
receives an additional annual retainer of $7,500, the Chairman
of the Nominating and Corporate Governance Committee receives an
additional annual retainer of $7,500 and each member of the
Audit Committee receives an additional annual retainer of
$2,500. The additional annual retainers are cumulative for any
director who serves in multiple capacities for which such
director is entitled to more than one additional annual retainer
(for example, because the Lead Independent Director also serves
as Chairman of the Nominating and Corporate Governance Committee
and currently is a member of the Audit Committee, he is entitled
to receive an aggregate annual retainer of $50,000, equal to the
base annual retainer of $25,000 plus an aggregate additional
annual retainer of $25,000). All annual retainers are paid
quarterly in arrears. For the quarters ended September 30,
2006 and December 31, 2006, the year ended
December 31, 2007 and the year ending December 31,
2008, all of our non-employee directors elected to receive 100%
of their retainers in the form of DSUs rather than cash,
pursuant to our Non-Employee Director DSU Program described
below.
In addition to the standard retainers described above, our Board
may approve special retainers from time to time. For example,
Mr. Goldsmith received a retainer of $25,000 for his
service in 2008 as chairman of the Special Committee established
by the Board relating to the Merger and the Financing.
Meeting
Fees
Each non-employee director also receives $1,000 for each in
person meeting of our board of directors or any committee
thereof that he attends and an additional payment of $500 for
each telephonic meeting of our board of directors or any
committee thereof in which he participates. The meeting fees
apply to meetings of the Board, the Boards three standing
committees (i.e., Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee) and any special
committees established by the Board. For the quarters ended
September 30, 2006 and December 31, 2006, the year
ended December 31, 2007 and the year ending
December 31, 2008, all of our non-employee directors
elected to receive 100% of their meeting fees in the form of
DSUs rather than cash, pursuant to our Non-Employee Director DSU
Program described below.
Non-Employee
Director DSU Program
On May 18, 2006, our board of directors adopted a
Non-Employee Director DSU Program. The purposes of the program
are to: (i) enable us to conserve cash that otherwise would
be used to pay retainers and meeting fees to our non-employee
directors; and (ii) enable non-employee directors to obtain
equity on a tax-deferred basis. In addition, the Non-Employee
Director DSU Program further aligns participants interests
with those of our other stockholders.
Elections to participate in the program are made on an annual
basis. A participating director receives a percentage (minimum
of 25% and maximum of 100%) of the directors retainers and
meeting fees for the relevant year in the form of DSUs.
Participating directors select the percentage at the time of
electing to participate in the program for the relevant year.
For 2006, the election deadline was June 17, 2006.
Elections made for 2006 applied to retainers and meeting fees
earned in the final two quarters of 2006. The election deadline
applicable to 2007 and subsequent years is December 31 of the
immediately preceding year.
182
Each DSU represents the right to receive one share of our common
stock in the future on the DSU payout date, as
described below.
On the fifth trading day of each calendar quarter, each
participating director is granted fully vested DSUs equal in
value to the amount of retainers and meeting fees earned for the
immediately preceding quarter, based on the closing stock price
on the date of grant.
Ultimately, each directors DSUs will be paid
out to the director through the issuance to the director
of a corresponding number of shares of our common stock. At the
time of making an annual election to participate in the program,
the director selects as the payout date one of the
following three options: (i) a predetermined date at least
two years after the applicable election deadline (the date is
specified by the director in the directors election form);
(ii) the termination of the directors service with
Endocare; or (iii) the earlier of (i) or (ii);
provided, however, that if the termination of the
directors service occurs earlier than two years after the
applicable election deadline, then any issuance of shares that
would otherwise be triggered by such termination will be
deferred until the date that is two years after the applicable
election deadline. In any event, the payout date is
accelerated in the case of a change of control of Endocare or
the directors death. The director may elect to have a
portion (up to 50%) of his DSUs settled in cash (rather than
stock) to enable the director to pay taxes resulting from the
share issuance.
For the quarters ended September 30, 2006 and
December 31, 2006, the year ended December 31, 2007
and the year ending December 31, 2008, all of our
non-employee directors elected to receive 100% of their
retainers and meeting fees in the form of DSUs rather than cash.
A copy of the Non-Employee Director DSU Program is attached as
Exhibit 10.2 to the Current Report on
Form 8-K
that we filed with the SEC on May 22, 2006.
In order to satisfy certain regulatory requirements in
preparation for the planned listing of our common stock on The
Nasdaq Capital Market, on August 6, 2007 we amended the
Non-Employee Director DSU Program to impose a maximum
10-year term
for the program (from the original adoption date, which was
May 18, 2006) and establish a maximum number of shares
that may be issued under the program, which is
400,000 shares. As of December 31, 2008, 165,982 DSUs
were outstanding under the program.
Expense
Reimbursement
Directors are reimbursed for reasonable expenses incurred in
connection with serving as directors.
2004
Non-Employee Director Option Program
Each non-employee director also has participated in our 2004
Non-Employee Director Option Program (the Director Option
Program). The Director Option Program was adopted by our
board of directors in July 2004 as part of our 2004 Stock
Incentive Plan, and became effective upon approval of the 2004
Stock Incentive Plan by our stockholders at the Annual Meeting
of the Stockholders held September 10, 2004. The Director
Option Program is subject to the terms and conditions of the
2004 Stock Incentive Plan. Under the Director Option Program,
non-employee directors received a stock option grant of
6,667 shares on January 10 of each year beginning in 2005.
In addition, each non-employee director first elected or
appointed to the Board after stockholder approval of the 2004
Stock Incentive Plan received a stock option grant of
10,000 shares on the first trading day after such
non-employee director was first elected or appointed to the
Board. All of the options granted to non-employee directors
under the Director Option Program were granted at an exercise
price equal to the fair market value of the common stock on the
date the options were granted. A copy of the Director Option
Program is attached as Exhibit 10.34 to the Annual Report
on
Form 10-K
that we filed with the SEC on March 16, 2005. On
December 20, 2007, the Board, at the recommendation of the
Compensation Committee, terminated the Director Option Program
and adopted the Non-Employee Director RSU Program described
below.
Non-Employee
Director RSU Program
On December 20, 2007, the Board, at the recommendation of
the Compensation Committee, adopted a Non-Employee Director RSU
Program (the Director RSU Program) under our 2004
Stock Incentive Plan. The Director
183
RSU Program replaced the Director Option Program described
above. The Director RSU Program is subject to the terms and
conditions of the 2004 Stock Incentive Plan. Under the Director
RSU Program, each non-employee director initially elected or
initially appointed to the Board after the effective date of the
Director RSU Program will be granted $60,000 worth of RSUs on
the first trading day after he or she joins the Board. In
addition, each non-employee director who is reelected to the
Board receives a grant of $40,000 worth of RSUs on the date of
each annual meeting of stockholders at which he or she is
reelected. No reelection grant is made to any director who has
not served on the Board for at least six months prior to the
reelection. To address the fact that there is a period of time
between Endocares prior annual director equity grant date
of January 10 and the date of the 2008 Annual Meeting, on
January 10, 2008 each non-employee director was granted
$13,333 worth of RSUs. All RSUs granted under the Director RSU
Program are valued based on the closing price of our common
stock on the grant date. Copies of the Director RSU Program and
the form Director RSU Agreement are attached as
Exhibits 10.41 and 10.42, respectively, to the Annual
Report on
Form 10-K
that we filed with the SEC on March 17, 2008.
Equity
Compensation Plans Not Approved by Security Holders
2002
Supplemental Stock Plan
Under our 2002 Supplemental Stock Plan, employees, consultants
and outside directors could be granted options to purchase
shares of our common stock. The maximum aggregate number of
shares of our common stock that could be issued upon the
exercise of options under the 2002 Supplemental Stock Plan is
145,000 shares. The 2002 Supplemental Stock Plan became
effective on June 25, 2002. All options granted under the
2002 Supplemental Stock Plan become fully exercisable and each
optionee has the right to exercise any unexpired options
immediately prior to the occurrence of certain extraordinary
events, such as a sale of all or substantially all of our
assets, a merger in which we do not survive or the acquisition
by any person or group of beneficial ownership of more than 50%
of our common stock. The Board terminated the 2002 Supplemental
Stock Plan on February 22, 2007. As a result, no additional
options may be granted under the 2002 Supplemental Stock Plan,
but options outstanding on the date of termination of the 2002
Supplemental Stock Plan remain outstanding in accordance with
their terms.
Deferred
Stock Unit Programs
The Employee Deferred Stock Unit Program and the Non-Employee
Director Deferred Stock Unit Program are described above.
184
DESCRIPTION
OF ENDOCARE CAPITAL STOCK
When Endocare and Galil complete the Merger, Galil shareholders
will become Endocare stockholders. The following is a
description of Endocares capital stock and the common
stock to be issued in the Merger. The following is only a
summary of certain provisions of Endocares Restated
Certificate of Incorporation, as amended. Such summary does not
purport to be complete and is subject to, and is qualified in
its entirety by, all of the provisions of Endocares
Restated Certificate of Incorporation, as amended, filed as
Exhibit 3.2 to Endocares Registration Statement on
Form S-3, filed with the SEC on September 20, 2001, as
amended by the Certificate of Amendment to Endocares
Restated Certificate of Incorporation, filed as Exhibit 3.1 to
Endocares Registration Statement on Form S-3, filed
with the SEC on September 20, 2001.
General
Endocares authorized capital stock as stated in
Endocares Restated Certificate of Incorporation, as
amended, consists of 50,000,000 shares of common stock,
$.001 par value per share, and 1,000,000 shares of
preferred stock, $.001 par value per share. If
Proposal 4 is approved by Endocares stockholders, the
number of shares of Endocare common stock authorized to be
issued after the Merger will be increased to 75,000,000. The
following summary of Endocares common stock and preferred
stock is not complete and may not contain all the information
you should consider before investing Endocares common
stock. This description is subject to and qualified in its
entirety by provisions of Endocares Restated Certificate
of Incorporation, as amended, and amended and restated bylaws
and by applicable Delaware law.
Common
Stock
As of [ ], 2009, there were
[ ] shares of Endocare common stock issued
and outstanding. The holders of shares of common stock have no
subscription, redemption, subscription, sinking fund or
conversion rights. In addition, the holders of shares of common
stock have no preemptive rights to maintain their percentage of
ownership in future offerings or sales of Endocares stock.
The holders of shares of common stock have one vote per share in
all elections of directors and on all other matters submitted to
a vote of Endocares stockholders. The holders of common
stock are entitled to receive ratably dividends, if any, as and
when declared from time to time by Endocares board of
directors out of funds legally available therefor. Upon
liquidation, dissolution or winding up of Endocares
affairs, the holders of common stock will be entitled to
participate equally and ratably, in proportion to the number of
shares held, in Endocares net assets available for
distribution to holders of common stock. The shares of common
stock currently outstanding are fully paid and nonassessable.
Preferred
Stock
The board of directors, without further stockholder
authorization, may issue from time to time up to
1,000,000 shares of preferred stock in one or more series,
to establish the number of shares to be included in any of these
series and to fix the designations, powers, preferences and
rights of the shares of each of these series and any
qualifications, limitations or restrictions thereof, including
dividend rights and preferences over dividends on the common
stock, conversion rights, voting rights, redemption rights, the
terms of any sinking fund therefor and rights upon liquidation.
As set forth in Endocares Certificate of Designation, the
board of directors created and designated 250,000 shares of
its preferred stock as Series A Junior Participating
Preferred Stock (Series A Preferred Stock),
which rank senior to Endocares common stock with respect
to payment of distributions on liquidation, dissolution or
winding up and with respect to the payment of dividends but
which will rank junior to all series of any other class of
preferred stock with respect to dividends and the distribution
of assets. As of the date hereof, there are no shares of
Series A Preferred Stock issued and outstanding. The
section below describing the Rights Agreement that the board of
directors adopted in March 1999 contains additional information
on the rights to which a holder of Series A Preferred Stock
will be entitled.
185
Anti-Takeover
Effects of the Provisions of Endocares Restated
Certificate of Incorporation, as amended
Endocares Restated Certificate of Incorporation, as
amended, contains provisions intended to have, or to the
knowledge of the board of directors having, an anti-takeover
effect. We could issue Endocares authorized and available
common stock and preferred stock within the limits imposed by
applicable law and the rules of the Nasdaq Capital Market,
generally without further stockholder approval, and use such
stock to discourage, defer or prevent a change in control of the
company or an unsolicited acquisition proposal since issuance of
common stock
and/or
preferred stock could dilute the share ownership of a person or
entity seeking to obtain control of us. For example, we could
privately place shares with purchasers who might side with the
board of directors in opposing a hostile takeover bid. In
addition, shares of common stock and preferred stock may be
issued in the event that the rights issued in connection with
Endocares Rights Plan described below are exercised.
Depending on the rights and terms of any series of preferred
stock created, and the reaction of the market to the series, the
rights or the value of Endocares common stock could be
negatively affected. For example, subject to applicable law, the
Endocare board of directors could create a series of preferred
stock with preferential rights to dividends or assets upon
liquidation, or with superior voting rights to the existing
Endocare common stock.
Rights
Agreement
The following is a summary of the Rights Agreement, dated as of
March 31, 1999, between Endocare and U.S. Stock
Transfer Corporation, as amended (the Rights
Agreement), adopted by Endocares board of directors
in March 1999.
Pursuant to the Rights Agreement, Series A Preferred Stock
purchase rights (the Rights) were 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
establishment of the Rights Agreement will not prevent a
takeover attempt, but is intended to encourage anyone seeking to
acquire Endocare to negotiate with Endocares board of
directors prior to attempting a takeover. The Rights will be
exercisable only if a person or group acquires beneficial
ownership of 15% or more of Endocares common stock,
subject to exceptions stated in the Rights Agreement, or
commences or announces the intention to make a tender offer or
exchange offer, the consummation of which would result in
beneficial ownership by a person or a group of 15% or more of
Endocares common stock. Each Right will entitle
stockholders to buy three one-thousandths of a share of the
Series A Preferred Stock at an exercise price of $25.00,
subject to adjustment, upon specified triggering events.
If a person or group acquires beneficial ownership of 15% or
more of Endocares outstanding common stock, subject to
exceptions stated in the Rights Agreement, or a holder
beneficially owns 15% or more of Endocares common stock
engages in certain transactions, including a merger transaction
in which Endocare is the surviving corporation and its common
stock remains outstanding, then each Right not owned by such
person or group or related parties will entitle its holder to
purchase, at the Rights then-current exercise price, units
of Endocares Series A Preferred Stock, or, in some
circumstances, Endocares common stock, cash, property or
other Endocare securities, having a market value equal to twice
the then-current exercise price. In addition, if, after the
Rights become exercisable, Endocare is acquired in a merger or
other business combination transaction and is not the surviving
corporation, or sells 50% or more of Endocares assets or
earnings power, each Right will entitle its holder to purchase,
at the Rights then-current price, a number of the
acquiring companys common shares having a market value at
the time of twice the Rights exercise price. 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 Endocares common
stock, subject to exceptions stated in the Rights Agreement the
Rights are redeemable for one cent per Right at the option of
Endocares board of directors. The Rights are intended to
enable all stockholders to realize the long-term value of their
investment in Endocares business. The Rights will expire
on April 15, 2009. You should refer to the Rights Agreement
for a more detailed description of the terms and provisions of
the Rights. A copy of the Rights Agreement has been filed with
and is publicly available at or from the SEC as described under
the heading Where You Can Find More Information.
186
Delaware
Anti-Takeover Law
Section 203 of the Delaware General Corporation Law
prohibits certain publicly-held Delaware corporations from
engaging in a business combination with an interested
stockholder for a period of three years following the time such
person became an interested stockholder unless the business
combination is approved in a specified manner. Generally, an
interested stockholder is a person who, together with its
affiliates and associates, owns 15% or more of the
corporations voting stock, or is affiliated with the
corporation and owns or owned 15% of the corporations
voting stock within three years before the business combination.
Registration
Rights
Under the terms of stockholder and registration rights
agreements between Endocare and some of its stockholders, if
Endocare proposes to register any of its securities under the
Securities Act for Endocares own account, the parties to a
registration rights agreement are entitled to receive notice of
the registration and to include their shares of common stock in
the registration. These registration rights are subject to
limitations and conditions, including the rights of the
underwriters of the offering to limit the number of shares
included in any underwritten registration. In general, Endocare
is required to indemnify the holders of registrable securities
under described circumstances and to bear the expense of the
registrations, except for the selling stockholders pro
rata portion of the underwriting discounts and commissions.
Listing
Endocares common stock is listed for quotation on the
Nasdaq Capital Market under the trading symbol ENDO.
The issuance of Endocare common stock in the Merger and the
Financing may constitute a change of control for
purposes of Nasdaq Marketplace Rule 4340(a). Whether a
change of control exists under Nasdaq Marketplace
Rule 4340(a) is a facts and circumstances determination
that is currently being undertaken by Nasdaq based on an
evaluation of certain factors, such as changes in the
management, board of directors, voting power, ownership and
financial structure of the company. If Nasdaq determines that
the Merger and the Financing constitute a change of control of
Endocare, Endocare will be required to submit a new original
listing application with Nasdaq and comply with the Nasdaq
Capital Market initial listing requirements, including a $4.00
minimum bid price, in order for Endocares common stock to
continue to be listed on the Nasdaq Capital Market after
consummation of the Merger and the Financing. Endocares
common stock has traded below $4.00 since July 21, 2008 and
the closing price of Endocares common stock as of
[ ], 2009 was $[ ].
Accordingly, there can be no assurance that Endocare will be
able to retain its listing on the Nasdaq Capital Market.
187
COMPARISON
OF STOCKHOLDERS RIGHTS
Prior to the effective time of the Merger, the rights of Galil
shareholders are governed by the Israeli Companies Law and the
Amended and Restated Articles of Association of Galil Medical,
Ltd. At the effective time of the Merger, the shareholders of
Galil will become stockholders of Endocare, Inc., a Delaware
corporation. The rights of Galil shareholders differ in some
material respects from the rights they would have as
stockholders of Endocare. The following discussion summarizes
the material differences between the rights of holders of shares
of Galil and holders of shares of Endocare common stock, and
additionally, summarizes certain provisions of the Delaware
General Corporation Law, Israeli Companies Law, the Amended and
Restated Articles of Association of Galil and Endocares
Restated Certificate of Incorporation, as amended, and amended
and restated bylaws of Endocare.
|
|
|
|
|
|
|
Endocare
|
|
Galil
|
|
Capital Stock:
|
|
Endocares Restated Certificate of Incorporation, as
amended, authorizes the issuance of up to 50,000,000 shares
of common stock, par value $0.001 per share, and
1,000,000 shares of preferred stock, par value $0.001 per
share. (If Proposal 4 is approved by Endocares
stockholders, the number of shares of common stock that Endocare
is authorized to issue will be increased to
75,000,000 shares)
|
|
Galils Amended and Restated Articles of Association
authorize the issuance of up to 184,781,744 Ordinary Shares, par
value NIS 0.01 per share, 74,962,170
Series A-1
Preferred Shares, par value NIS 0.01 per share and 6,746,596
Series A-2
Preferred Shares, par value NIS 0.01 per share
|
|
|
|
|
|
Dividends:
|
|
Endocare has no legal or contractual obligation to pay
dividends. Endocare has never paid dividends on its common or
preferred stock. Endocares board of directors has the
authority to provide that any class or series of preferred stock
may be entitled to receive dividends (which may be cumulative or
non- cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or any other
series.
|
|
Galils Amended and Restated Articles of Association
provide that the Galil board of directors may adopt a resolution
for the distribution of a dividend, subject to the Israeli
Companies Law.
Under the Israeli Companies Law, dividends may be paid only out
of the balance of surplus or the surplus, accumulated over the
two years preceding the distribution, whichever is the
greater.
Galils Amended and Restated Articles of Association
provide that the Series A Preferred Shares accrue dividends
at the rate of 4% per annum as of their issuance, such accrued
dividends shall be paid (subject to declarations thereof) prior
to declaration or payment of dividends to the holders of the
ordinary shares.
|
|
|
|
|
|
Voting Rights:
|
|
Endocares amended and restated bylaws provide that at
every meeting of the stockholders each stockholder shall be
entitled to one (1) vote in person or by proxy for each share of
capital stock having voting
|
|
Galils Amended and Restated Articles of Association
provide that at every meeting of the shareholders each
shareholder holding ordinary share shall be entitled to one (1)
vote in person or by proxy for each
|
188
|
|
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|
|
Endocare
|
|
Galil
|
|
|
|
|
|
|
|
|
power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date unless the proxy provides
for a longer period.
|
|
ordinary share held by such shareholder, and each shareholder
holding Series A Preferred Share shall be entitled to a
number of votes equal to the number of ordinary shares into
which such Series A Preferred Shares are then convertible.
|
|
|
|
|
|
Number of Directors and Size
of Board:
|
|
Endocares amended and restated bylaws provide for between
three (3) and seven (7) directors to serve on its board of
directors and authorizes the board of directors to set the exact
number of directors. Endocares board of directors
currently consists of five (5) directors.
|
|
Galils Amended and Restated Articles of Association
provide for between one (1) and
seven (7) directors to serve on its board of
directors. Such directors shall be designated as
follows: (i) 3 directors shall be nominated by
the holders of a majority of the voting power of the issued and
outstanding Series A Preferred Shares;
(ii) 2 directors shall be nominated by the holders of
the majority of the ordinary shares (excluding the shareholders
who also hold
Series A-1
Preferred Shares); (iii) Galils CEO; and (iv) an
independent director to be nominated by Galils board of
directors, and if the board of directors is unable to agree on a
candidate within 6 month, the designator of such
independent director shall be the directors nominated by the
holders of the Series A Preferred Shares.
|
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|
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|
|
Galils board of directors currently consists of
six(6) directors.
|
|
|
|
|
|
Removal of Directors:
|
|
Under the Delaware General Corporation Law, a director may be
removed from office with or without cause by the affirmative
vote of the holders of at least a majority of the outstanding
shares entitled to vote at an election of directors.
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|
Galils Amended and Restated Articles of Association
provide that any director may only be removed from office by the
designator who has elected such director and any vacancy,
however created (i.e. resignation, death,
insolvency, incapacity, conviction or court resolution).
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Vacancies on the Board:
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|
Endocares amended and restated bylaws provide that any
vacancies on the board of directors may be filled by a majority
of the directors then in office, though less than a quorum, or
by a sole remaining
|
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Galils Amended and Restated Articles of Association
provide that any vacancies on the board of directors may be
filled only by the designator entitled to fill such vacancy.
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189
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Endocare
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Galil
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|
director. Under the Delaware General Corporation Law, a
corporations stockholders may also vote to fill a vacancy.
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Board Quorum and Vote
Requirement:
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At all Endocare board meetings, the presence of a majority of
the directors constitutes a quorum. Except as otherwise
required by law or by Endocares Restated Certificate of
Incorporation, as amended, or its amended and restated bylaws,
the vote of a majority of the directors present at any meeting
at which a quorum is present constitutes the act of the board of
directors.
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|
Galils Amended and Restated Articles of Association
provide that at all Galil board meetings, the presence of a
majority of the directors constitutes a quorum. At an adjourned
meeting, the presence of two directors constitutes a quorum.
Subject to certain veto rights granted to the holders of
Series A Preferred Shares, resolutions of the board of
directors shall be adopted by a simple majority of the directors
present and voting at that Meeting.
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Annual Stockholders Meeting:
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|
The annual meeting of the stockholders of Endocare shall be held
on such date and at such time as may be designated from time to
time by the board of directors.
The Delaware General Corporation Law provides that, unless
directors are elected by written consent in lieu of an annual
meeting, an annual meeting of stockholders shall be held for the
election of directors on a date and a time designated by or in
the manner provided in the bylaws. Any other proper business may
be transacted at the annual meeting.
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|
Galils Amended and Restated Articles of Association
provide that the General Meeting shall be held annually, within
no more than fifteen (15) months after the date of the last
preceding General Meeting, and at such time and place as
designated by Galil in such preceding General Meeting, or at
such other time and place as designated by the board of
directors.
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Special Stockholders
Meetings:
|
|
Special meetings of Endocare stockholders may not be called by
Endocare stockholders unless prescribed by statute. Special
meetings may be called only by the President, Chief Executive
Officer or the Chairman of the board of directors.
|
|
Galils Amended and Restated Articles of Association
provide that special meetings of Galil shareholders may be
called by the board of directors at its discretion, or at the
request of(i) one director, or (ii) one or more
shareholders holding at least ten percent of the issued capital
and at least one percent of the voting rights in Galil, or one
or more shareholders with at least ten percent of the voting
rights in Galil.
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Quorum for Stockholders
Meetings:
|
|
Except as otherwise provided by law or by Endocares
Restated Certificate of Incorporation, as amended, the presence
in person or by proxy of holders of a majority of Endocare
|
|
Galils Amended and Restated Articles of Association
provide that a legal quorum at any General Meeting shall require
that all of the following be present at a General
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190
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|
Endocare
|
|
Galil
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|
stock issued and outstanding and entitled to vote constitutes a
quorum for the transaction of business at that meeting.
|
|
Meeting personally or by proxy:(i) at least
one(1) shareholder, (ii) shareholder(s) holding
together at least fifty percent (50%) of the then issued and
outstanding share capital of Galil (determined on an as
converted basis), and (iii) shareholder(s) holding at least
a majority of the
Series A-1
Preferred Shares. At an adjourned meeting, in the event that a
legal quorum is not present within half an hour after, and adopt
resolutions with respect to, the time set therefor, the Meeting
shall be held with any number of participants who may discuss
all matters for which the first meeting was convened.
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|
|
Advance Notice Provisions:
|
|
Endocares amended and restated bylaws provide that in
order for a stockholder to properly bring business before an
annual meeting, the stockholder must give notice to
Endocares Secretary by no later than the due date for
stockholder proposals that is specified in Endocares proxy
statement released to stockholders in connection with the
previous years annual meeting of stockholders, which date
shall be not less than one hundred twenty (120) calendar days in
advance of the date of such proxy statement. In the event that
no annual meeting was held in the previous year or the date of
the annual meeting has been changed by more than thirty (30)
days from the date of the previous years annual meeting,
notice by the stockholder to be timely must be received a
reasonable time before Endocare begins to print and mail its
proxy materials.
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|
Shareholder Action by
Written Consent:
|
|
Endocares Restated Certificate of Incorporation, as
amended, and its amended and restated bylaws specify that no
action may be taken by the written consent of Endocares
stockholders in lieu of a meeting.
|
|
Galils Amended and Restated Articles of Association
provide that any resolution which may be adopted at a meeting,
shall be deemed adopted if approved by a unanimous written
consent of all shareholders entitled to participate in, and vote
at, such meeting.
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191
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|
|
Endocare
|
|
Galil
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|
|
Amendment of Governing
Documents:
|
|
Endocares Restated Certificate of Incorporation, as
amended, provides that Endocare reserves the right to amend,
alter, change or repeal any provision of the certificate of
incorporation. Under the Delaware General Corporation Law,
Endocares Restated Certificate of Incorporation, as
amended, may be amended only if the proposed amendment is
approved by the board of directors and the holders of a majority
of the outstanding shares of Endocare common stock.
Endocares amended and restated bylaws provide that the
affirmative vote of a majority of the voting power of all of the
then- outstanding shares of capital stock of Endocare entitled
to vote generally in the election of directors may alter or
amend the bylaws or adopt new bylaws, and that the board of
directors also has the power to alter or amend the bylaws or
adopt new bylaws by a vote of the majority of the board of
directors.
|
|
Galils Amended and Restated Articles of Association
provide that Galil reserves the right to amend, alter, change or
repeal any provision of the Articles of Association by a
resolution of the General Meeting adopted by a simple majority
of the shareholders, subject to certain veto rights granted to
the holders of Series A Preferred Shares.
The Israeli Companies Law provides that any amendment to the
Articles of Association of a corporation that obligates a
shareholder to acquire additional shares or to increase the
extent of his liability shall not obligate the shareholder
without his prior consent.
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|
|
|
|
|
Exculpation of Directors:
|
|
Endocares Restated Certificate of Incorporation, as
amended, provides that directors are not personally liable to
Endocare or its stockholders for monetary damages for breach of
fiduciary duty as a director, except: (i) for any breach of the
directors duty of loyalty to Endocare or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law (which
addresses the unlawful payment of dividends, stock purchases and
redemption) or (iv) for any transaction from which the director
derived an improper benefit.
|
|
Galils Amended and Restated Articles of Association
provide that, Galil may exempt an Office Holder
(including directors, as defined under the Israeli Companies
Law) from such Office Holder liability to Galil caused as a
result of a breach of duty of care owed to Galil by such Office
Holder, upon such terms and conditions as may determined from
time to time by the board of directors.
The Israeli Companies Law provides that a Company may not
exempt an Office Holder from liability for breach of his
fiduciary duty towards it, and may not exempt in advance an
Office Holder from liability for breach of his duty of care in
the event of a distribution.
|
|
|
|
|
|
Liability and Indemnification of
Directors and Officers:
|
|
Endocares amended and restated bylaws provide that
Endocare shall indemnify its directors and executive officers to
the fullest
|
|
Galils Amended and Restated Articles of Association
provide that, Galil may indemnify an Office Holder with respect
to any of the following:(i) a monetary
|
192
|
|
|
|
|
|
|
Endocare
|
|
Galil
|
|
|
|
|
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|
|
|
extent not prohibited by the Delaware General Corporation Law;
provided, however, that Endocare may limit the extent of such
indemnification by individual contracts with its directors and
executive officers; and, provided, further, that Endocare is not
required to indemnify any director or executive officer in
connection with a proceeding initiated by such person against
Endocare or its directors, officers, employees or other agents
unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the board of
directors of Endocare or (iii) such indemnification is provided
by Endocare pursuant to the powers vested in Endocare under the
Delaware General Corporation Law.
Delaware General Corporation Law allows the above
indemnification if the director or executive officer acted in
good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of Endocare, and, in the
case of a criminal action or proceeding, had no reasonable cause
to believe the persons conduct was unlawful. In addition,
in suits by or in the right of Endocare, against directors or
executive officers of Endocare, Delaware law does not allow
indemnification without judicial approval if the officer or
director is adjudged to be liable to Endocare.
Endocare will advance expenses before the final disposition of
any proceeding upon receipt of an undertaking by the director or
executive officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by
Endocare.
|
|
liability imposed on such Office Holder in favor of a third
party in any judgment, including any settlement confirmed as
judgment and an arbitrators award which has been confirmed
by court, in respect of an act performed by such Office Holder
in its capacity as a Office Holder of Galil;
(ii) reasonable litigation expenses, including legal fees
paid for by the Office Holder, due to investigation or
proceeding brought against such Office Holder by an authority
authorized to hold such investigation or bring such proceeding,
in which such Office Holder is not indicted and is not fined (as
an alternative to a criminal proceeding), or in which such
Office Holder is not indicted but fined (as an alternative to a
no fault criminal proceeding), provided that the alleged
criminal offense in question does not require proof of criminal
intent, (iii) reasonable litigation expenses, including
legal fees paid for by the Office Holder, or which such Office
Holder is obligated to pay under a court order, in a proceeding
brought against such Office Holder by Galil, or on its behalf,
or by a third party, or in a criminal proceeding in which such
Office Holder is found not guilty or in a no fault criminal
charge, even if such Office Holder is found guilty, in each
case, with respect to an act performed by such Office Holder in
its capacity as a Office Holder of Galil, provided that the
alleged criminal offense in question does not require proof of
criminal intent.
Subject to the provisions of any applicable law, Galil may
procure, for the benefit of any of its Office Holders, Office
Holders liability insurance with respect to any of the
following:(i) a breach of the duty of care owed to Galil or
any other person; (ii) a breach of the fiduciary duty owed
to Galil, provided that such Office Holder acted in good faith
and had reasonable grounds to assume that the action would not
injure Galil; (iii) A monetary liability imposed
|
193
|
|
|
|
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|
|
Endocare
|
|
Galil
|
|
|
|
|
|
|
|
|
|
|
on such Office Holder in favor of a third party, in respect of
an act performed by such Office Holder in its capacity as a
Office Holder of Galil.
Galil may undertake to indemnify Office Holders retroactively.
In addition, Galil may undertake to indemnify in advance for any
of the following:(a) monetary liability as mentioned above,
provided, however, that the undertaking is limited to events
which in the opinion of the board of directors are foreseen in
light of the actual activity of Galil when the undertaking to
indemnify is given, and to an amount or criteria set by the
board of directors as reasonable under the circumstances, and
that the undertaking to indemnify shall specify such events and
amount or criteria, or(b) reasonable litigation expenses as
mentioned above.
|
|
|
|
|
|
Anti-Takeover Provisions:
|
|
Endocare is subject to Section 203 of the Delaware General
Corporation Law, which prohibits specified business combinations
by an interested stockholder (defined as a holder of 15% or more
of the outstanding voting shares of a corporation or an
affiliate or associate of the corporation, that was the owner of
15% or more of the outstanding voting stock within the prior
three year period) for a period of three (3) years after the
stockholder becomes an interested stockholder unless:
|
|
The Israeli Companies Law provides for a specific corporate
approval procedures with respect to certain transactions between
a company and its interested parties. In certain cases, such
transaction needs to be approved by the shareholders.
|
|
|
|
|
|
|
|
prior to the stockholders
becoming an interested stockholder, the board of directors
approves the business combination or the transaction by which
the stockholder becomes an interested stockholder;
upon completion of the transaction by
which the stockholder becomes an interested stockholder, the
stockholder owns at least 85% of
|
|
|
194
|
|
|
|
|
|
|
Endocare
|
|
Galil
|
|
|
|
|
|
|
|
|
the voting stock of the corporation (excluding shares owned by
directors who are also officers and by certain employee stock
ownership plans); or
on or after the date the
stockholder becomes an interested stockholder, the business
combination receives the approval of both the directors and the
holders of at least two-thirds of the outstanding voting shares
not owned by the interested stockholder.
A Delaware corporation may opt out of Section 203 through an
amendment to its certificate of incorporation or bylaws adopted
by a majority of the outstanding voting shares, provided that,
in most cases, such an amendment will not become effective until
twelve (12) months after its adoption and will not apply to any
person who became an interested stockholder on or prior to its
adoption.
|
|
|
|
|
|
|
|
Conversion Rights and
Protective Rights:
|
|
Under Endocares Restated Certificate of Incorporation, as
amended, holders of Endocare stock have no preemptive rights.
|
|
Galils Amended and Restated Articles of Association
provide that holders of Series A Preferred Shares are
entitled to certain protective provisions (veto rights). In
addition, each holder of Ordinary Shares holding at least 5% of
Galils outstanding share capital (on a fully diluted, as
converted basis) and any holder of Series A Preferred
Shares and their respective affiliates, are entitled to
preemptive rights.
The Series A Preferred Shares are convertible to Ordinary
Shares in an initial ratio of 1:1, subject to certain anti
dilution protections and technical adjustments, as set forth in
Galils Amended and Restated Articles of Association.
|
195
BENEFICIAL
OWNERSHIP OF ENDOCARE STOCK
The following table sets forth information known to Endocare
with respect to the beneficial ownership of Endocares
common stock as of December 31, 2008, unless otherwise
noted, by:
|
|
|
|
|
each stockholder known to Endocare to own beneficially more than
5% of Endocares common stock;
|
|
|
|
each of Endocares directors;
|
|
|
|
each of Endocares executive officers, including each of
the Named Executive Officers listed in the 2008 Summary
Compensation Table included in this proxy
statement; and
|
|
|
|
all of Endocares current directors and executive officers
as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or dispositive power
relating to securities. Shares of common stock subject to
options, warrants or convertible securities currently
exercisable or exercisable within 60 days of
December 31, 2008 are deemed to be outstanding for
computing the percentage of the person holding such securities
and the percentage ownership of any group of which the holder is
a member, but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote,
and subject to the community property laws where applicable, the
persons or entities named in the table have sole voting and
dispositive power with respect to all shares of common stock
shown as beneficially owned by them. The information below is
based on information supplied to Endocare by the executive
officers, directors, certain stockholders and on
Schedule 13Gs filed with the SEC. None of the directors,
nominees or executive officers listed below owns any shares of
Endocare common stock of record but not beneficially. Except as
otherwise noted below, the address of each person or entity
listed in the table is
c/o Endocare,
Inc., 201 Technology Drive, Irvine, California 92618.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial
|
|
Percentage
|
Name and Address
|
|
Ownership(1)
|
|
of Total
|
|
DIRECTORS AND EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
John R. Daniels, M.D.(2)
|
|
|
94,361
|
|
|
|
*
|
|
David L. Goldsmith(3)
|
|
|
24,334
|
|
|
|
*
|
|
Eric S. Kentor(4)
|
|
|
28,000
|
|
|
|
*
|
|
Terrence A. Noonan(5)
|
|
|
66,668
|
|
|
|
*
|
|
Thomas R. Testman(6)
|
|
|
33,335
|
|
|
|
*
|
|
Michael R. Rodriguez(7)
|
|
|
104,861
|
|
|
|
*
|
|
Clint B. Davis(8)
|
|
|
68,964
|
|
|
|
*
|
|
All current directors and executive officers as a group
(7 persons)(9)
|
|
|
420,523
|
|
|
|
3.6
|
%
|
FORMER EXECUTIVE OFFICER
|
|
|
|
|
|
|
|
|
Craig T. Davenport(10)
|
|
|
83,526
|
|
|
|
3.7
|
%
|
STOCKHOLDERS OWNING MORE THAN 5% OF ENDOCARES STOCK
|
|
|
|
|
|
|
|
|
Frazier Healthcare V, L.P.(11)
|
|
|
1,721,915
|
|
|
|
14.6
|
%
|
Two Union Square, 601 Union Street, Suite 3200
Seattle, Washington 98101
|
|
|
|
|
|
|
|
|
Black River Asset Management LLC and affiliates(12)
|
|
|
983,937
|
|
|
|
8.3
|
%
|
12700 Whitewater Drive
Minnetonka, Minnesota 55343
|
|
|
|
|
|
|
|
|
State of Wisconsin Investment Board(13)
|
|
|
966,832
|
|
|
|
8.2
|
%
|
P.O. Box 7842
Madison, Wisconsin 53707
|
|
|
|
|
|
|
|
|
Goldman Capital Management Inc.(14)
|
|
|
773,920
|
|
|
|
6.6
|
%
|
320 Park Avenue
New York, New York 10022
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the class of
securities. |
196
|
|
|
(1) |
|
As of December 31, 2008, there were 11,811,451 shares
of Endocares common stock outstanding. |
|
(2) |
|
Consists of 41,101 outstanding shares, 26,668 shares
subject to options that are exercisable within 60 days
after December 31, 2008 and 26,592 shares underlying
currently exercisable warrants. 36,101 of the outstanding shares
and all of the warrants are held by Dr. Daniels and his
wife AnnaMarie Daniels, as trustees of the Daniels Family
Trust UTA 1993. 5,000 of the outstanding shares are held by
Dr. Daniels and Dorothy A. Trulsen, as trustees of the
Dorothy A. Trulsen Trust U/A 9/4/94. |
|
(3) |
|
Includes 500 shares held by Mr. Goldsmith, as trustee
of the Leah Goldsmith Trust dated January 24, 1998,
250 shares held by Mr. Goldsmith, as trustee of the
Aaron Goldsmith Trust, dated January 24, 1998, and
250 shares held by Aaron Goldsmith,
Mr. Goldsmiths son. Also includes 23,334 shares
subject to options that are exercisable within 60 days
after December 31, 2008. |
|
(4) |
|
Consists of 4,666 outstanding shares and 23,334 shares
subject to options that are exercisable within 60 days
after December 31, 2008. 666 of the outstanding shares are
held by Mr. Kentor and his wife Adrienne T. Kentor, as
trustees of the Kentor Trust, dated September 18, 2002. |
|
(5) |
|
Consists of 66,668 shares subject to options that are
exercisable within 60 days after December 31, 2008. |
|
(6) |
|
Consists of (i) 5,000 outstanding shares held by
Mr. Testman and his wife Jacqueline F. Testman, as trustees
of the Testman Trust and (ii) 28,335 shares subject to
options that are exercisable within 60 days after
December 31, 2008. |
|
(7) |
|
Consists of (i) 694 outstanding shares held by The Michael
R. and Helen L. Rodriguez Family Trust dated November 10,
1999 and (ii) 104,167 shares subject to options that
are exercisable within 60 days after December 31, 2008. |
|
(8) |
|
Consists of (i) 4,728 outstanding shares and
(ii) 64,236 shares subject to options that are
exercisable within 60 days after December 31, 2008. |
|
(9) |
|
Consists of (i) 57,189 outstanding shares,
(ii) 336,742 shares subject to options exercisable
within 60 days after December 31, 2008 and
(iii) 26,592 shares underlying currently exercisable
warrants. |
|
(10) |
|
Includes 67,131 outstanding shares and 16,395 shares
underlying currently exercisable warrants. |
|
(11) |
|
The information is based on a Schedule 13D amendment filed
with the SEC on November 14, 2008. The voting and
disposition of the shares held by Frazier Healthcare V,
L.P. is determined by FHM V, LLC, which is the general
partner of FHM V, L.P., which is the general partner of
Frazier Healthcare V, L.P. Alan Frazier, Nader Naini,
Trevor Moody, Nathan Every, Patrick Heron, James Topper and
Thomas Hodge are the members of FHM V, LLC and, therefore,
share dispositive and voting power over the shares held by
Frazier Healthcare V, L.P. |
|
(12) |
|
The information is based on a Schedule 13G/A filed with the
SEC on February 22, 2008. The Schedule 13G/A indicates
that (i) Black River Asset Management LLC has dispositive
and voting power over all 983,937 shares, and (ii) of
these shares, 819,105 shares are owned by Black River
Long/Short Fund Ltd. and the balance are owned by Black
River Long/Short Opportunity Fund LLC. |
|
(13) |
|
The information is based on a Schedule 13G filed with the
SEC on February 8, 2008. The Schedule 13G indicates
that the State of Wisconsin Investment Board has sole
dispositive and voting power over all 966,832 shares. |
|
(14) |
|
The information is as of January 6, 2009 and is based on a
Schedule 13G filed with the SEC on January 7, 2009.
The Schedule 13G indicates that Goldman Capital Management
Inc. has sole voting power over all 773,920 shares. |
197
BENEFICIAL
OWNERSHIP OF GALIL SHARES
The following tables set forth information with respect to the
ownership of ordinary shares,
Series A-1
Preferred Shares and
Series A-2
Preferred Shares of Galil as of December 31, 2008, by:
|
|
|
|
|
each shareholder known to Galil to beneficially own more than 5%
of such class of voting securities of Galil;
|
|
|
|
each of Galils directors;
|
|
|
|
each of Galils executive officers; and
|
|
|
|
all of Galils current directors and executive officers as
a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or dispositive power
with respect to securities. Ordinary shares relating to options,
warrants or convertible securities (other than
Series A-1
Preferred Shares or
Series A-2
Preferred Shares) currently exercisable, or exercisable within
60 days of December 31, 2008, are deemed outstanding
for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote,
and subject to the community property laws where applicable, the
persons or entities named in the tables have sole voting and
dispositive power with respect to all shares shown as
beneficially owned by them. As of December 31, 2008, there
were 85,308,120 ordinary shares, 74,962,166
Series A-1
Preferred Shares and 6,746,596
Series A-2
Preferred Shares outstanding. Except as otherwise noted in the
tables below, the address of each person or entity listed in the
tables is
c/o Galil
Medical Ltd., Tavor Building 1, Industrial Park, Yokneam 20692,
Israel. If an address is noted in Table 1 for any person or
entity, such address is applicable for such person or entity in
each subsequent table.
On November 10, 2008, in connection with the Merger
Agreement, Galil entered into a Pre-Closing Shareholders
Agreement with certain major shareholders of Galil, including
all the holders of
Series A-1
Preferred Shares and
Series A-2
Preferred Shares, to be effective as of immediately prior to the
Closing. Pursuant to such
Pre-Closing
Shareholders Agreement, the holders of the
Series A-1
Preferred Shares and the holders of the
Series A-2
Preferred Shares agreed to an amendment to the current Articles
of Association of Galil, whereby such preferred shares would be
automatically converted into ordinary shares of Galil
immediately prior to the Closing, at an agreed upon conversion
ratio and for no consideration. Consummation of the Pre-Closing
Shareholders Agreement is conditioned upon the closing of the
Merger.
TABLE
1: Ordinary Shares
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial Ownership
|
|
Percentage
|
Name and Address
|
|
of Ordinary Shares
|
|
of Total
|
|
DIRECTORS AND EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
Doron Birger(1)
|
|
|
0
|
|
|
|
|
|
c/o Elron
Electronic Industries Ltd.
3 Azrieli Center
The Triangular Tower,
42nd
Floor
Tel Aviv 67023, Israel
|
|
|
|
|
|
|
|
|
Richard B. Emmitt(2)
|
|
|
4,478,790
|
|
|
|
5.3
|
%
|
c/o The
Vertical Group GP, LLC
25 DeForest Ave.
Summit, New Jersey 07901
|
|
|
|
|
|
|
|
|
James E. Thomas(3)
|
|
|
9,731,778
|
|
|
|
11.4
|
%
|
c/o Thomas,
McNerney & Partners, LLC
One Stamford Plaza
263 Tresser Blvd.,
16th Floor
Stamford, Connecticut 06901
|
|
|
|
|
|
|
|
|
Avishai Friedman(4)
|
|
|
0
|
|
|
|
|
|
c/o RDC
Rafael Development Corporation Ltd.
P.O. Box 156
Yokneam 20692, Israel
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial Ownership
|
|
Percentage
|
Name and Address
|
|
of Ordinary Shares
|
|
of Total
|
|
Stephen Campe(5)
|
|
|
3,732,326
|
|
|
|
4.4
|
%
|
c/o Investor
Growth Capital Limited
Canada Court, Upland Road
St. Peter Port
Guernsey GY1 3BQ
Channel Islands
|
|
|
|
|
|
|
|
|
Martin J. Emerson
|
|
|
0
|
|
|
|
|
|
Karen Sarid(6)
|
|
|
2,200,000
|
|
|
|
2.5
|
%
|
Bill Jackmein(7)
|
|
|
233,333
|
|
|
|
*
|
|
Rosie Cunningham-Thomas(8)
|
|
|
1,000,000
|
|
|
|
1.2
|
%
|
Natan Carmon(9)
|
|
|
218,250
|
|
|
|
*
|
|
All current directors and executive officers as a group
(10 persons)
|
|
|
21,594,477
|
|
|
|
24.3
|
%
|
FORMER EXECUTIVE OFFICER
|
|
|
|
|
|
|
|
|
Chen Barir(10)
|
|
|
3,565,941
|
|
|
|
4.1
|
%
|
SHAREHOLDERS OWNING MORE THAN 5%
|
|
|
|
|
|
|
|
|
Thomas, McNerney & Partners and affiliates(3)
|
|
|
9,731,778
|
|
|
|
11.4
|
%
|
One Stamford Plaza
263 Tresser Blvd.,
16th Floor
Stamford, Connecticut 06901
|
|
|
|
|
|
|
|
|
The Vertical Group GP, LLC and affiliates(2)
|
|
|
4,478,790
|
|
|
|
5.3
|
%
|
25 DeForest Ave.
Summit, New Jersey 07901
|
|
|
|
|
|
|
|
|
Elron Electronic Industries Ltd.(1)
|
|
|
44,477,512
|
|
|
|
52.1
|
%
|
3 Azrieli Center
The Triangular Tower,
42nd
Floor
Tel Aviv 67023, Israel
|
|
|
|
|
|
|
|
|
RDC Rafael Development Corporation Ltd.(4)
|
|
|
27,230,384
|
|
|
|
31.9
|
%
|
P.O. Box 156
Yokneam 20692, Israel
|
|
|
|
|
|
|
|
|
Discount Investment Corporation Ltd.(11)
|
|
|
63,232,913
|
|
|
|
74.1
|
%
|
3 Azrieli Center
The Triangular Tower,
44th Floor
Tel Aviv 67023, Israel
|
|
|
|
|
|
|
|
|
199
TABLE
2:
Series A-1
Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial Ownership
|
|
|
|
|
of Series A-1
|
|
Percentage
|
Name and Address
|
|
Preferred Shares
|
|
of Total
|
|
DIRECTORS AND EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
Doron Birger
|
|
|
0
|
|
|
|
|
|
Richard B. Emmitt(2)
|
|
|
18,711,577
|
|
|
|
25.0
|
%
|
James E. Thomas(3)
|
|
|
40,657,609
|
|
|
|
54.2
|
%
|
Avishai Friedman
|
|
|
0
|
|
|
|
|
|
Stephen Campe(5)
|
|
|
15,592,980
|
|
|
|
20.8
|
%
|
Martin J. Emerson
|
|
|
0
|
|
|
|
|
|
Karen Sarid
|
|
|
0
|
|
|
|
|
|
Bill Jackmein
|
|
|
0
|
|
|
|
|
|
Rosie Cunningham-Thomas
|
|
|
0
|
|
|
|
|
|
Natan Carmon
|
|
|
0
|
|
|
|
|
|
All current directors and executive officers as a group
(10 persons)
|
|
|
74,962,166
|
|
|
|
100
|
%
|
FORMER EXECUTIVE OFFICER
|
|
|
|
|
|
|
|
|
Chen Barir
|
|
|
0
|
|
|
|
|
|
SHAREHOLDERS OWNING MORE THAN 5%
|
|
|
|
|
|
|
|
|
Thomas, McNerney & Partners and affiliates(3)
|
|
|
40,657,609
|
|
|
|
54.2
|
%
|
The Vertical Group GP, LLC and affiliates(2)
|
|
|
18,711,577
|
|
|
|
25.0
|
%
|
Investor Growth Capital Limited and affiliates(5)
|
|
|
15,592,980
|
|
|
|
20.8
|
%
|
Canada Court, Upland Road
St. Peter Port
Guernsey GY1 3BQ
Channel Islands
|
|
|
|
|
|
|
|
|
TABLE
3:
Series A-2
Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial Ownership
|
|
|
|
|
of Series A-2
|
|
Percentage
|
Name and Address
|
|
Preferred Shares
|
|
of Total
|
|
DIRECTORS AND EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
Doron Birger(1)
|
|
|
0
|
|
|
|
|
|
Richard B. Emmitt
|
|
|
0
|
|
|
|
|
|
James E. Thomas
|
|
|
0
|
|
|
|
|
|
Avishai Friedman(4)
|
|
|
0
|
|
|
|
|
|
Stephen Campe
|
|
|
0
|
|
|
|
|
|
Martin J. Emerson
|
|
|
0
|
|
|
|
|
|
Karen Sarid
|
|
|
0
|
|
|
|
|
|
Bill Jackmein
|
|
|
0
|
|
|
|
|
|
Rosie Cunningham-Thomas
|
|
|
0
|
|
|
|
|
|
Natan Carmon
|
|
|
0
|
|
|
|
|
|
All current directors and executive officers as a group
(10 persons)
|
|
|
0
|
|
|
|
|
|
FORMER EXECUTIVE OFFICER
|
|
|
|
|
|
|
|
|
Chen Barir
|
|
|
0
|
|
|
|
|
|
SHAREHOLDERS OWNING MORE THAN 5%
|
|
|
|
|
|
|
|
|
Elron Electronic Industries Ltd.(1)
|
|
|
4,119,763
|
|
|
|
61.1
|
%
|
RDC Rafael Development Corporation Ltd.(4)
|
|
|
1,492,930
|
|
|
|
22.1
|
%
|
Discount Investment Corporation Ltd.(11)
|
|
|
6,746,596
|
|
|
|
100
|
%
|
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the class of
securities. |
200
|
|
|
(1) |
|
The number of ordinary shares presented for Elron Electronic
Industries Ltd. (Elron) consists of
(i) 17,247,128 ordinary shares owned directly by Elron and
(ii) 27,230,384 ordinary shares owned directly by RDC
Rafael Development Corporation Ltd. (RDC). The
number of Series A-2 Preferred Shares presented for Elron
consists of (i) 2,626,833 Series A-2 Preferred Shares
owned directly by Elron and (ii) 1,492,930 Series A-2
Preferred Shares owned directly by RDC. Elron is an Israeli
public company which may be deemed to be controlled by Discount
Investment Corporation Ltd. (DIC), and controls RDC.
Elron may be deemed to share the power to vote and dispose of
its ordinary shares and Series A-2 Preferred Shares with
DIC. Elron may also be deemed to share the power to vote and
dispose of the ordinary shares and Series A-2 Preferred
Shares held by RDC. Doron Birger, a Director of Galil, is the
President and Chief Executive Officer of Elron. |
|
(2) |
|
The number of ordinary shares presented for The Vertical Group
GP, LLC and its affiliates consists of (i) 3,493,500
ordinary shares held by Vertical Fund I, L.P. (VF
I), and (ii) 985,290 ordinary shares held by Vertical
Fund II, L.P. (VF II and, together with
VF I, the Funds). The number of
Series A-1
Preferred Shares presented for The Vertical Group GP, LLC and
its affiliates consists of (i) 14,595,000
Series A-1
Preferred Shares held by VF I, and (ii) 4,116,577
Series A-1
Preferred Shares held by VF II. The Vertical Group GP, LLC
(VGGP) is a limited liability company that, through
other entities, controls the voting and investment decisions
made on behalf of the Funds, including in respect of all of the
ordinary shares and Series
A-1
Preferred Shares held by the Funds. There are six members and
managers of VGGP, each of whom may be deemed to share the voting
and investment control of all the ordinary shares and
Series A-1
Preferred Shares that VGGP may be deemed to beneficially own.
The six members and managers of VGGP are Stephen D. Baksa, Tony
Chou, Richard B. Emmitt (who is also a Director of Galil),
Yue-Teh Jang, Jack W. Lasersohn and John E. Runnells. |
|
(3) |
|
The number of ordinary shares presented for Thomas,
McNerney & Partners and its affiliates consists of
(i) 3,406,185 ordinary shares held by Thomas,
McNerney & Partners, L.P. (TMP),
(ii) 126,582 ordinary shares held by TMP Nominee, LLC
(Nominee), (iii) 12,942 ordinary shares held by
TMP Associates, L.P. (Associates),
(iv) 6,100,701 ordinary shares held by Thomas,
McNerney & Partners II, L.P. (TMP II),
(v) 63,717 ordinary shares held by TMP Nominee II, LLC
(Nominee II), and (vi) 21,651 ordinary shares
held by TMP Associates II, L.P. (Associates II and
collectively, the TMP Parties). The number of
Series A-1
Preferred Shares presented for Thomas, McNerney &
Partners and its affiliates consists of (i) 14,230,427
Series A-1
Preferred Shares held by TMP, (ii) 528,836
Series A-1
Preferred Shares held by Nominee, (iii) 54,069 Series
A-1
Preferred Shares held by Associates, (iv) 25,487,626
Series A-1
Preferred Shares held by TMP II, (v) 266,196
Series A-1
Preferred Shares held by Nominee II, and (vi) 90,455
Series A-1
Preferred Shares held by Associates II. Thomas,
McNerney & Partners, LLC (GP), the general
partner of TMP and Associates, and Thomas, McNerney &
Partners II, LLC (GP II), the general partner of TMP
II and Associates II, have voting and dispositive power over the
shares held by such TMP Parties. In addition, each of Nominee
and Nominee II has entered into an agreement that it shall
vote and dispose of securities in the same manner as directed by
GP and GP II with respect to the shares held by TMP and
Associates, and TMP II and Associates II, respectively. James E.
Thomas, a Director of Galil, is a member and manager of GP and
GP II and a member of Nominee and Nominee II. Mr. Thomas
disclaims beneficial ownership of the shares owned by the TMP
Parties, except to the extent of his proportionate pecuniary
interest therein. |
|
(4) |
|
RDC is an Israeli private company which is controlled by Elron.
RDC may be deemed to share the power to vote and dispose of its
ordinary shares and Series A-2 Preferred Shares with Elron
and DIC. Avishai Friedman, a Director of Galil, is the president
and Chief Executive Officer of RDC Rafael Development
Corporation Ltd. |
|
(5) |
|
The number of ordinary shares presented for Investor Growth
Capital Limited and its affiliates consists of
(i) 2,612,628 ordinary shares held by Investor Growth
Capital Limited, an indirectly wholly owned subsidiary of
Investor AB (Investor Growth), and
(ii) 1,119,698 ordinary shares held by Investor Group,
L.P., a limited partnership of which Investor AB serves as the
ultimate general partner (Investor Group). The
number of
Series A-1
Preferred Shares presented for Investor Growth Capital Limited
and its affiliates consists of (i) 10,915,086
Series A-1
Preferred Shares held by Investor Growth, and
(ii) 4,677,894
Series A-1
Preferred Shares held by Investor Group. Investor AB and
Investor Growth exercise shared voting and investment control
over all of such shares, and Investor AB may be deemed the
beneficial owner of all of such shares. Stephen Campe, a
Director of Galil, is the President of Investor Growth Capital
Inc., an indirectly wholly owned subsidiary of Investor AB.
Mr. Campe disclaims beneficial ownership of all shares
owned by the Investor entities. |
201
|
|
|
(6) |
|
Consists of 787,667 ordinary shares subject to options that are
exercisable within 60 days after December 31, 2008 and
1,412,333 ordinary shares subject to options that will be
immediately exercisable upon the Closing of the Merger. |
|
(7) |
|
Consists of 233,333 ordinary shares subject to options that are
exercisable within 60 days after December 31, 2008. |
|
(8) |
|
Consists of 473,344 ordinary shares subject to options that are
exercisable within 60 days after December 31, 2008 and
526,656 ordinary shares subject to options that will be
immediately exercisable upon the Closing of the Merger. |
|
(9) |
|
Consists of 218,250 ordinary shares subject to options that are
exercisable within 60 days after December 31, 2008. |
|
(10) |
|
The number of ordinary shares presented for Chen Barir consists
of (i) 264,372 ordinary shares held by Chen Barir,
(ii) 1,959,227 ordinary shares subject to options held by
Chen Barir that are exercisable within 60 days after
December 31, 2008, and (iii) 1,342,342 ordinary shares
held by Berman & Co. Trading and Investment Ltd., an
Israeli private company, which is controlled by Chen Barir. |
|
(11) |
|
The number of ordinary shares presented for DIC consists of
(i) 18,755,401 ordinary shares owned directly by DIC,
(ii)17,247,128 ordinary shares owned directly by Elron, and
(iii) 27,230,384 ordinary shares owned directly by RDC. The
number of
Series A-2
Preferred Shares presented for DIC consists of
(i) 2,626,833
Series A-2
Preferred Shares owned directly by DIC, (ii) 2,626,833
Series A-2
Preferred Shares owned directly by Elron, and
(iii) 1,492,930
Series A-2
Preferred Shares owned directly by RDC. DIC is an Israeli public
company which may be deemed to control Elron. DIC may be deemed
to share the power to vote and dispose of the ordinary shares
and
Series A-2
Preferred Shares held by Elron and RDC. DIC disclaims beneficial
ownership of all the ordinary shares and
Series A-2
Preferred Shares held by Elron and RDC. |
202
BENEFICIAL
OWNERSHIP OF THE COMBINED COMPANY
The following table sets forth information known to Endocare
with respect to the beneficial ownership of Endocares
common stock on a pro forma basis giving effect to the Merger
and the Financing (based on the beneficial ownership of
Endocares common stock and Galils ordinary shares,
Series A-1
Preferred Shares and
Series A-2
Preferred Shares (taking into account the effect of the
automatic conversion of Galils outstanding preferred
shares into ordinary shares immediately prior to the closing of
the Merger and the Financing, as contemplated by the Pre-Closing
Shareholders Agreement) as of December 31, 2008), unless
otherwise noted, by:
|
|
|
|
|
each stockholder known to Endocare that will own beneficially
more than 5% of Endocares common stock upon consummation
of the Merger and the Financing;
|
|
|
|
each of the directors currently serving and each individual who
will serve on Endocares board of directors upon
consummation of the Merger and the Financing;
|
|
|
|
each of Endocares current executive officers and each
individual who will serve as an executive officer of Endocare
upon consummation of the Merger and the Financing; and
|
|
|
|
all individuals who will serve as directors and executive
officers of Endocare upon consummation of the Merger and
Financing, as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or dispositive power
with respect to securities. Shares of common stock relating to
options, warrants or convertible securities currently
exercisable, or exercisable within 60 days of
March 31, 2009 (the projected closing date of the Merger
and the Financing), are deemed outstanding for computing the
percentage of the person holding such securities but are not
deemed outstanding for computing the percentage of any other
person. As of November 10, 2008, there were
11,811,451 shares of our common stock outstanding and no
additional shares have been issued since that date. The
percentages in the table are based on 39.0 million
outstanding shares, which is the pro forma estimated number of
outstanding shares immediately following closing of the Merger
and the Financing.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
|
|
of Beneficial
|
|
|
Percentage
|
|
Names
|
|
Ownership(1)
|
|
|
of Total(1)
|
|
|
DIRECTORS AND EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
Doron Birger(1)
|
|
|
0
|
|
|
|
|
|
John R. Daniels, M.D.(2)
|
|
|
94,361
|
|
|
|
*
|
|
Martin J. Emerson(3)
|
|
|
0
|
|
|
|
|
|
Richard B. Emmitt(4)
|
|
|
4,833,310
|
|
|
|
12.4
|
%
|
David L. Goldsmith(5)
|
|
|
33,536
|
|
|
|
*
|
|
Eric S. Kentor(6)
|
|
|
37,202
|
|
|
|
*
|
|
Terrence A. Noonan(7)
|
|
|
85,870
|
|
|
|
*
|
|
Daniel A. Pelak
|
|
|
0
|
|
|
|
|
|
Thomas R. Testman(8)
|
|
|
42,537
|
|
|
|
*
|
|
James E. Thomas(9)
|
|
|
10,526,737
|
|
|
|
27.0
|
%
|
Michael R. Rodriguez(10)
|
|
|
128,091
|
|
|
|
*
|
|
Clint B. Davis(11)
|
|
|
108,776
|
|
|
|
*
|
|
All directors and executive officers as a group on a pro forma
basis to give effect to the Merger and the Financing
(11 persons)(12)
|
|
|
15,796,059
|
|
|
|
40.5
|
%
|
203
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature
|
|
|
|
|
|
|
of Beneficial
|
|
|
Percentage
|
|
Names
|
|
Ownership(1)
|
|
|
of Total(1)
|
|
|
STOCKHOLDERS OWNING MORE THAN 5%
|
|
|
|
|
|
|
|
|
Thomas, McNerney & Partners and affiliates(9)
|
|
|
10,526,737
|
|
|
|
27.0
|
%
|
One Stamford Plaza
263 Tresser Blvd., Suite 1620
Stamford, Connecticut 06901
|
|
|
|
|
|
|
|
|
The Vertical Group GP, LLC and affiliates(4)
|
|
|
4,833,310
|
|
|
|
12.4
|
%
|
25 DeForest Ave.
Summit, New Jersey 07901
|
|
|
|
|
|
|
|
|
Elron Electronic Industries Ltd.(1)
|
|
|
3,028,329
|
|
|
|
7.8
|
%
|
3 Azrieli Center, Triangle Building,
42nd
Floor
Tel Aviv, Israel 67023
|
|
|
|
|
|
|
|
|
Discount Investment Corporation Ltd.(13)
|
|
|
4,420,805
|
|
|
|
11.3
|
%
|
3 Azrieli Center
The Triangular Tower,
44th
Floor
Tel Aviv 67023, Israel
|
|
|
|
|
|
|
|
|
Frazier Healthcare V, L.P. and affiliates(14)
|
|
|
4,721,915
|
|
|
|
12.1
|
%
|
Two Union Square, 601 Union Street, Suite 3200
Seattle, Washington 98101
|
|
|
|
|
|
|
|
|
Investor Growth Capital Limited and affiliates(15)
|
|
|
4,236,091
|
|
|
|
10.9
|
%
|
Canada Court, Upland Road
St. Peter Port
Guernsey, GYI 3BQ
Channel Islands
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the
outstanding shares of our common stock. |
|
(1) |
|
The number of shares of Endocare common stock presented for
Elron Electronic Industries Ltd. (Elron) consists of
(i) 1,346,711 shares to be issued to Elron and
(ii) 1,681,618 shares to be issued to RDC Rafael
Development Corporation Ltd. (RDC). Elron is an
Israeli public company which may be deemed to be controlled by
Discount Investment Corporation Ltd. (DIC) and
controls RDC. Elron may be deemed to share the power to vote and
dispose of its shares of Endocare common stock with DIC. Elron
may also be deemed to share the power to vote and dispose of the
shares of Endocare common stock held by RDC. Doron Birger, who
will become a director of Endocare upon consummation of the
Merger and the Financing, is the President and Chief Executive
Officer of Elron. |
|
(2) |
|
Consists of 41,101 outstanding shares, 26,668 shares
subject to options that are exercisable within 60 days of
March 31, 2009 and 26,592 shares underlying currently
exercisable warrants. 36,101 of the outstanding shares and all
of the warrants are held by Dr. Daniels and his wife
AnnaMarie Daniels, as trustees of the Daniels Family
Trust UTA 1993. 5,000 of the outstanding shares are held by
Dr. Daniels and Dorothy A. Trulsen, as trustees of the
Dorothy A. Trulsen Trust U/A
9/4/94. Upon
consummation of the Merger and the Financing, Dr. Daniels
will cease to be a director of Endocare. |
|
(3) |
|
Martin J. Emerson will become the President and Chief Executive
Officer and a director of Endocare upon the consummation of the
Merger and the Financing. |
|
(4) |
|
The number of shares of Endocare common stock presented for The
Vertical Group GP, LLC and its affiliates consists of
(i) 3,824,980 shares to be issued to Vertical
Fund I, L.P. (VF I) and
(ii) 1,008,330 shares to be issued to Vertical
Fund II, L.P. (VF II and, together with
VF I, the Funds). The Vertical Group GP, LLC
(VGGP) is a limited liability company that, through
other entities, controls the voting and investment decisions
made on behalf of the Funds, including in respect of all of the
shares of Endocare common stock expected to be held by the
Funds. There are six members and managers of VGGP, each of whom
may be deemed to share the voting and investment control of all
the shares of Endocare common stock that VGGP may be deemed to
beneficially own. The six members and managers of VGGP are
Stephen D. Baksa, Tony |
204
|
|
|
|
|
Chou, Richard B. Emmitt, Yue-Teh Jang, Jack W. Lasersohn and
John E. Runnells. Richard B. Emmitt will become a director of
Endocare upon consummation of the Merger and the Financing. |
|
(5) |
|
Includes 500 shares held by Mr. Goldsmith, as trustee
of the Leah Goldsmith Trust dated January 24, 1998,
250 shares held by Mr. Goldsmith, as trustee of the
Aaron Goldsmith Trust, dated January 24, 1998, and
250 shares held by Aaron Goldsmith,
Mr. Goldsmiths son. Also includes 23,334 shares
subject to options that are exercisable within 60 days of
March 31, 2009 and 9,202 restricted stock units (RSUs) with
respect to which shares will become issuable within 60 days
of March 31, 2009. |
|
(6) |
|
Consists of 4,666 outstanding shares, 23,334 shares subject
to options that are exercisable within 60 days of
March 31, 2009 and 9,202 RSUs with respect to which shares
will become issuable within 60 days of March 31, 2009.
666 of the outstanding shares are held by Mr. Kentor and
his wife Adrienne T. Kentor, as trustees of the Kentor Trust,
dated September 18, 2002. |
|
(7) |
|
Consists of 76,668 shares subject to options that are
exercisable within 60 days of March 31, 2009 and 9,202
RSUs with respect to which shares will become issuable within
60 days of March 31, 2009. |
|
(8) |
|
Consists of (i) 5,000 outstanding shares held by
Mr. Testman and his wife Jacqueline F. Testman, as trustees
of the Testman Trust, (ii) 28,335 shares subject to
options that are exercisable within 60 days of
March 31, 2009 and (iii) 9,202 RSUs with respect to
which shares will become issuable within 60 days of
March 31, 2009. |
|
(9) |
|
The number of shares of Endocare common stock presented for
Thomas, McNerney & Partners and its affiliates
consists of (i) 3,684,426 shares to be issued to
Thomas, McNerney & Partners, L.P. (TMP),
(ii) 136,922 shares to be issued to TMP Nominee, LLC
(Nominee), (iii) 13,999 shares to be
issued to TMP Associates, L.P. (Associates),
(iv) 6,599,050 shares to be issued to Thomas,
McNerney & Partners II, L.P. (TMP II),
(v) 68,921 shares to be issued to TMP Nominee II, LLC
(Nominee II) and (vi) 23,420 shares to be
issued to TMP Associates II, L.P. (Associates II and
collectively, the TMP Parties). Thomas,
McNerney & Partners, LLC (GP), the general
partner of TMP and Associates, and Thomas, McNerney &
Partners II, LLC (GP II), the general partner of TMP
II and Associates II, have voting and dispositive power over
shares of Endocare common stock held by such TMP Parties. In
addition, each of Nominee and Nominee II has entered into
an agreement that it shall vote and dispose of securities in the
same manner as directed by GP and GP II with respect to the
shares held by TMP and Associates, and TMP II and Associates II,
respectively. James E. Thomas, who will become a director of
Endocare upon consummation of the Merger and the Financing, is a
member and manager of GP and GP II and a member of Nominee and
Nominee II. Mr. Thomas disclaims beneficial ownership of
the shares owned by the TMP Parties, except to the extent of his
proportionate pecuniary interest therein. |
|
(10) |
|
Consists of (i) 694 outstanding shares held by The Michael
R. and Helen L. Rodriguez Family Trust dated November 10,
1999, (ii) 105,208 shares subject to options that are
exercisable within 60 days of March 31, 2009,
(iii) 18,248 RSUs with respect to which shares will become
issuable within 60 days of March 31, 2009 and
(iv) 3,941 deferred stock units (DSUs) with respect to
which shares will become issuable within 60 days of
March 31, 2009. |
|
(11) |
|
Consists of (i) 4,728 outstanding shares,
(ii) 69,444 shares subject to options that are
exercisable within 60 days of March 31, 2009,
(iii) 18,248 RSUs with respect to which shares will become
issuable within 60 days of March 31, 2009 and
(iv) 16,356 DSUs with respect to which shares will become
issuable within 60 days of March 31, 2009. |
|
(12) |
|
Includes (i) 15,376,135 outstanding shares,
(ii) 326,323 shares subject to options exercisable
within 60 days of March 31, 2009, (iii) 73,304
RSUs with respect to which shares will become issuable within
60 days of March 31, 2009, (iv) 20,297 DSUs with
respect to which shares will become issuable within 60 days
of March 31, 2009. Does not include shares beneficially
owned by Dr. John R. Daniels, who will cease to serve on
the Board of Directors of Endocare upon consummation of the
Merger and the Financing. |
|
(13) |
|
The number of shares of Endocare common stock presented for DIC
consists of (i) 1,392,476 shares to be issued to DIC,
(ii) 1,346,711 shares to be issued to Elron and
(iii) 1,681,618 shares to be issued to RDC. DIC is an
Israeli public company which may be deemed to control Elron. DIC
may be deemed to share the power to vote and dispose of the
shares held by Elron and RDC. DIC disclaims beneficial ownership
of all shares held by Elron and RDC. |
205
|
|
|
(14) |
|
The information is based on a Schedule 13D amendment filed
with the SEC on November 14, 2008. The voting and
disposition of the shares held by Frazier Healthcare V,
L.P. is determined by FHMV, LLC, which is the general partner of
FHM V, L.P., which is the general partner of Frazier
Healthcare V, L.P. Alan Frazier, Nader Naini, Trevor Moody,
Nathan Every, Patrick Heron, James Topper and Thomas Hodge are
the members of FHM V, LLC and, therefore, share dispositive
and voting power over the shares held by Frazier
Healthcare V, L.P. |
|
(15) |
|
The number of shares of Endocare common stock presented for
Investor Growth Capital Limited and its affiliates consists of
(i) 2,965,264 shares to be issued to Investor Growth
Capital Limited, an indirectly wholly owned subsidiary of
Investor AB (Investor Growth) and
(ii) 1,270,827 shares to be issued to Investor Group,
L.P., a limited partnership of which Investor AB serves as the
ultimate general partner (Investor Group). Investor
AB and Investor Growth exercise shared voting and investment
control over all of such shares, and Investor AB may be deemed
the beneficial owner of all of such shares. |
As a result of the issuance of shares of Endocare common stock
in the Merger and the Financing, the beneficial ownership as a
percentage of the total number of outstanding shares of Endocare
common stock on a pro forma basis of Black River Asset
Management and its affiliates, the State of Wisconsin Investment
Board and Goldman Capital Management Inc., each of which are
known to Endocare to currently beneficially own in excess of 5%
of Endocares outstanding common stock, is expected to fall
below 5%. The number of shares of Endocare common stock owned by
Black River Asset Management and its affiliates, the State of
Wisconsin Investment Board and Goldman Capital Management Inc.
will remain unaffected by the consummation of the Merger and the
Financing.
206
LEGAL
MATTERS
Certain legal matters with respect to the validity of the
issuance of the shares of Endocare common stock to be issued
pursuant to the Merger Agreement have been passed upon for
Endocare by Gibson, Dunn & Crutcher LLP, Irvine,
California. Additionally, Gibson, Dunn & Crutcher LLP
has rendered an opinion concerning the federal income tax
consequences of the Merger.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited Endocare, Inc.s consolidated
financial statements and schedule, at December 31, 2007 and
2006 and for each of the three years in the period ended
December 31, 2007, as set forth in their report. We have
included these financial statements and schedule in the
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLPs report, given on
their authority as experts of accounting and reporting.
Kost Forer Gabbay & Kasierer, a member of Ernst &
Young Global, independent registered public accounting firm, has
audited Galil Medical Ltd.s financial statements at
December 31, 2007 and 2006 and for each of the three years
in the period ended December 31, 2007, as set forth in
their report (which contains an explanatory paragraph describing
the fact that since the date of completion of their audit of the
year ended December 31, 2007, Galil Medical Ltd. incurred
an accumulated deficit and incurred a negative cash flow from
operating activities. Accordingly and considering
Galil Medical Ltd.s current cash resources, its
liquidity has been adversely affected, as discussed in Note 1b
of Galil Medical Ltd.s consolidated financial
statements). We have included these financial statements in the
prospectus and elsewhere in the registration statement in
reliance on Kost Forer Gabbay & Kasierers report,
given on their authority as experts of accounting and reporting.
Kost Forer Gabbay & Kasierer, a member of
Ernst & Young Global, independent auditor, has audited
the financial statements of the cryo business line of Oncura,
Inc. that was acquired by Galil Medical Ltd. for the period from
January 1, 2006 to December 8, 2006, as set forth in
their report. We have included these financial statements in the
prospectus and elsewhere in the registration statement in
reliance on Kost Forer Gabbay & Kasierers
report, given on their authority as experts of accounting and
reporting.
Stockholder
Proposals for the 2009 Annual Meeting
Stockholder proposals that are intended to be presented at
Endocares 2009 Annual Meeting must have been received no
later than December 18, 2008, in order that they may be
included in the proxy statement and form of proxy relating to
that meeting, and must meet all the other requirements as
specified in Endocares amended and restated bylaws. In
addition, the proxy solicited by the board of directors for the
2009 Annual Meeting will confer discretionary authority to vote
on any stockholder proposal presented at that meeting, unless we
receive notice of such proposal not later than March 3,
2009.
Other
Matters
As of the date of this proxy statement/prospectus, neither
Endocares nor Galils board of directors know of any
matters that will be presented for consideration at their
respective special meetings other than as described in this
proxy statement/prospectus. If any other matters properly come
before the Endocare special meeting or any adjournment or
postponement of the meeting and are voted upon, the enclosed
proxies will be deemed to confer discretionary authority on the
individuals named as proxies in the enclosed proxies to vote the
shares represented by those proxies as to any such matters. The
individuals named as proxies intend to vote or not to vote in
accordance with the recommendation of Endocares board of
directors.
207
WHERE YOU
CAN FIND MORE INFORMATION
Endocare files reports, proxy statements and other information
with the SEC as required by the Exchange Act. You can find, copy
and inspect information that Endocare files at the SECs
public reference room at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You can call the
SEC at
1-800-SEC-0330
for further information about the public reference room. You can
review Endocares electronically filed reports, proxy and
information statements on the SECs web site at
http://www.sec.gov
or on Endocares web site at
http://www.Endocare.com.
Information included on Endocares web site is not a part
of this proxy statement/prospectus.
You should rely only on the information contained in this proxy
statement/prospectus or on information to which Endocare has
referred you. Endocare has not authorized anyone else to provide
you with any information. Endocare provided the information
concerning Endocare, and Galil provided the information
concerning Galil, appearing in this proxy statement/prospectus.
This proxy statement/prospectus is part of a registration
statement that Endocare filed with the SEC. The registration
statement contains more information than this proxy
statement/prospectus regarding Endocare and the securities,
including exhibits and schedules. You can obtain a copy of the
registration statement at the address listed above or from the
SECs web site.
208
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
Endocare, Inc.
|
|
|
|
|
Annual Financial Statements
|
|
|
|
|
|
|
|
FI-2
|
|
|
|
|
FI-3
|
|
|
|
|
FI-4
|
|
|
|
|
FI-5
|
|
|
|
|
FI-6
|
|
|
|
|
FI-7
|
|
|
|
|
FI-39
|
|
Quarterly Financial Statements
|
|
|
|
|
|
|
|
FI-41
|
|
|
|
|
FI-42
|
|
|
|
|
FI-43
|
|
|
|
|
FI-44
|
|
Galil Medical Ltd.
|
|
|
|
|
Annual Financial Statements
|
|
|
|
|
|
|
|
FII-1
|
|
|
|
|
FII-2
|
|
|
|
|
FII-4
|
|
|
|
|
FII-5
|
|
|
|
|
FII-7
|
|
|
|
|
FII-9
|
|
Acquired Cryo Business
|
|
|
|
|
|
|
|
FII-34
|
|
|
|
|
FII-35
|
|
|
|
|
FII-36
|
|
FI-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Endocare, Inc.
We have audited the accompanying consolidated balance sheets of
Endocare, Inc. (the Company) and subsidiary as of
December 31, 2006 and 2007, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Endocare, Inc. and subsidiary at
December 31, 2006 and 2007, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 3 to the consolidated financial
statements, Endocare, Inc. changed its method of accounting for
stock-based compensation in accordance with Statement of
Financial Accounting Standards No. 123 (revised
2004) on January 1, 2006. Also, as discussed in
Note 6 to the consolidated financial statements, Endocare,
Inc. changed its method of accounting for common stock warrants
in accordance with FASB Staff Position (FSP) EITF
No. 00-19-2,
Accounting for Registration Payment Arrangements, on
January 1, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Endocare, Inc.s internal control over financial reporting
as of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 7, 2008 expressed an unqualified
opinion thereon.
Los Angeles, California
March 7, 2008
FI-2
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Product sales
|
|
$
|
7,533
|
|
|
$
|
15,044
|
|
|
$
|
22,730
|
|
Service revenues
|
|
|
19,780
|
|
|
|
12,298
|
|
|
|
6,418
|
|
Other
|
|
|
961
|
|
|
|
648
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,274
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
15,738
|
|
|
|
12,343
|
|
|
|
9,780
|
|
Research and development
|
|
|
2,283
|
|
|
|
2,781
|
|
|
|
2,555
|
|
Selling and marketing
|
|
|
13,001
|
|
|
|
15,195
|
|
|
|
14,855
|
|
General and administrative
|
|
|
13,858
|
|
|
|
13,107
|
|
|
|
12,506
|
|
Gain on legal settlement
|
|
|
|
|
|
|
|
|
|
|
(677
|
)
|
Goodwill impairment and other charges
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
44,906
|
|
|
|
43,426
|
|
|
|
39,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,632
|
)
|
|
|
(15,436
|
)
|
|
|
(9,332
|
)
|
Interest income, net
|
|
|
308
|
|
|
|
452
|
|
|
|
391
|
|
Interest expense related to common stock warrants
|
|
|
657
|
|
|
|
3,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes
|
|
|
(15,667
|
)
|
|
|
(11,268
|
)
|
|
|
(8,941
|
)
|
Tax benefit on continuing operations
|
|
|
829
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(14,838
|
)
|
|
|
(11,076
|
)
|
|
|
(8,941
|
)
|
Income from discontinued operations, net of taxes
|
|
|
1,159
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,679
|
)
|
|
$
|
(10,765
|
)
|
|
$
|
(8,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.54
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.80
|
)
|
Discontinued operations
|
|
$
|
0.12
|
|
|
$
|
0.03
|
|
|
$
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
9,659
|
|
|
|
10,084
|
|
|
|
11,122
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
FI-3
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,811
|
|
|
$
|
7,712
|
|
Accounts receivable less allowances for doubtful accounts and
sales returns of
$84 and $90 at December 31, 2006 and 2007, respectively
|
|
|
4,161
|
|
|
|
3,530
|
|
Inventories
|
|
|
2,260
|
|
|
|
3,022
|
|
Prepaid expenses and other current assets
|
|
|
1,284
|
|
|
|
2,081
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,516
|
|
|
|
16,345
|
|
Property and equipment, net
|
|
|
1,040
|
|
|
|
850
|
|
Intangibles, net
|
|
|
3,613
|
|
|
|
3,077
|
|
Investments and other assets
|
|
|
2,077
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,246
|
|
|
$
|
21,261
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,393
|
|
|
$
|
2,194
|
|
Accrued compensation
|
|
|
3,000
|
|
|
|
3,895
|
|
Other accrued liabilities
|
|
|
3,594
|
|
|
|
3,034
|
|
Loan payable
|
|
|
|
|
|
|
880
|
|
Obligations under capital lease, current portion
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,987
|
|
|
|
10,031
|
|
Common stock warrants
|
|
|
1,307
|
|
|
|
|
|
Deferred compensation
|
|
|
74
|
|
|
|
227
|
|
Obligations under capital lease less current portion
|
|
|
|
|
|
|
84
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 1,000,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares
authorized; 10,226,392 and 11,761,562 shares issued and
outstanding at December 31, 2006 and 2007, respectively
|
|
|
10
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
181,310
|
|
|
|
200,663
|
|
Accumulated deficit
|
|
|
(176,442
|
)
|
|
|
(189,756
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,878
|
|
|
|
10,919
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
16,246
|
|
|
$
|
21,261
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
FI-4
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31, 2004
|
|
|
8,114
|
|
|
$
|
8
|
|
|
$
|
169,416
|
|
|
$
|
(151,998
|
)
|
|
$
|
17,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,679
|
)
|
|
|
(13,679
|
)
|
Stock options exercised
|
|
|
37
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
Sale of common stock
|
|
|
1,878
|
|
|
|
2
|
|
|
|
8,914
|
|
|
|
|
|
|
|
8,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
10,029
|
|
|
$
|
10
|
|
|
$
|
178,497
|
|
|
$
|
(165,677
|
)
|
|
$
|
12,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,765
|
)
|
|
|
(10,765
|
)
|
Stock options exercised
|
|
|
29
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
108
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,797
|
|
|
|
|
|
|
|
2,797
|
|
Sale of common stock
|
|
|
168
|
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
10,226
|
|
|
$
|
10
|
|
|
$
|
181,310
|
|
|
$
|
(176,442
|
)
|
|
$
|
4,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,941
|
)
|
|
|
(8,941
|
)
|
Stock options exercised
|
|
|
167
|
|
|
|
|
|
|
|
1,125
|
|
|
|
|
|
|
|
1,125
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
3,950
|
|
Sale of common stock
|
|
|
1,369
|
|
|
|
2
|
|
|
|
8,598
|
|
|
|
|
|
|
|
8,600
|
|
Reclassification of common stock warrants to equity
|
|
|
|
|
|
|
|
|
|
|
5,680
|
|
|
|
(4,373
|
)
|
|
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
11,762
|
|
|
$
|
12
|
|
|
$
|
200,663
|
|
|
$
|
(189,756
|
)
|
|
$
|
10,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
FI-5
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,679
|
)
|
|
$
|
(10,765
|
)
|
|
$
|
(8,941
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,054
|
|
|
|
1,576
|
|
|
|
1,126
|
|
Reserve for uncollectible notes
|
|
|
|
|
|
|
695
|
|
|
|
|
|
Gain on divestitures, net
|
|
|
(609
|
)
|
|
|
(524
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
51
|
|
|
|
2,845
|
|
|
|
3,901
|
|
Goodwill impairment and other charges
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Loss on sale of placement units and other fixed assets
|
|
|
107
|
|
|
|
47
|
|
|
|
52
|
|
Minority interests
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
Extinguishment of payroll tax liabilities
|
|
|
(182
|
)
|
|
|
(891
|
)
|
|
|
(121
|
)
|
Interest expense on common stock warrants
|
|
|
(657
|
)
|
|
|
(3,716
|
)
|
|
|
|
|
Changes in operating assets and liabilities, net of effects from
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(354
|
)
|
|
|
(407
|
)
|
|
|
632
|
|
Inventories
|
|
|
(318
|
)
|
|
|
112
|
|
|
|
(993
|
)
|
Prepaid expenses and other current assets
|
|
|
(454
|
)
|
|
|
(83
|
)
|
|
|
291
|
|
Accounts payable
|
|
|
(337
|
)
|
|
|
(1,409
|
)
|
|
|
(1,199
|
)
|
Accrued compensation
|
|
|
429
|
|
|
|
281
|
|
|
|
1,217
|
|
Other accrued liabilities
|
|
|
(1,581
|
)
|
|
|
(1,364
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(14,718
|
)
|
|
|
(13,603
|
)
|
|
|
(4,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(423
|
)
|
|
|
(158
|
)
|
|
|
(109
|
)
|
Purchases of intangibles
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
Proceeds from divestitures
|
|
|
850
|
|
|
|
7,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
97
|
|
|
|
7,322
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants exercised
|
|
|
116
|
|
|
|
108
|
|
|
|
1,125
|
|
Borrowings on line of credit
|
|
|
|
|
|
|
250
|
|
|
|
13,450
|
|
Payments on line of credit
|
|
|
|
|
|
|
(250
|
)
|
|
|
(12,570
|
)
|
Proceeds from sale of stock and warrants, net
|
|
|
14,596
|
|
|
|
(92
|
)
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14,712
|
|
|
|
16
|
|
|
|
10,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
91
|
|
|
|
(6,265
|
)
|
|
|
5,901
|
|
Cash and cash equivalents, beginning of year
|
|
|
7,985
|
|
|
|
8,108
|
|
|
|
1,811
|
|
Less: Cash of discontinued operations
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
8,108
|
|
|
$
|
1,811
|
|
|
$
|
7,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of inventory to property and equipment for placement at
customer sites
|
|
$
|
532
|
|
|
$
|
587
|
|
|
$
|
334
|
|
Transfer from property and equipment to inventory for sale of
Cryocare Surgical Systems
|
|
|
|
|
|
|
470
|
|
|
|
103
|
|
Capital lease obligation
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Adoption of FSP EITF
No. 00-19-2
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in paid-in capital
|
|
|
|
|
|
|
|
|
|
|
5,680
|
|
Reduction of retained earnings
|
|
|
|
|
|
|
|
|
|
|
(4,373
|
)
|
Reduction in warrant liability
|
|
|
|
|
|
|
|
|
|
|
(1,307
|
)
|
Other supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
36
|
|
|
$
|
19
|
|
|
$
|
151
|
|
Income taxes paid
|
|
$
|
22
|
|
|
$
|
55
|
|
|
$
|
69
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
FI-6
ENDOCARE,
INC. AND SUBSIDIARY
|
|
1.
|
Organization
and Operations of the Company
|
Endocare is a medical device company focused on developing,
manufacturing and selling cryoablation products with the
potential to improve the treatment of cancer and other tumors.
We were formed in 1990 as a research and development division of
Medstone International, Inc. (Medstone), a manufacturer of
shockwave lithotripsy equipment for the treatment of kidney
stones. Following our incorporation under the laws of the state
of Delaware in 1994, we became an independent, publicly-owned
corporation upon Medstones distribution of our stock to
the existing stockholders on January 1, 1996.
Through February 10, 2006 we also offered vacuum therapy
systems for non-pharmaceutical treatment of erectile dysfunction
through our wholly-owned subsidiary Timm Medical Technologies,
Inc. (Timm Medical), which was sold to a third party effective
February 2006 (see Note 7 Dispositions
and Discontinued Operations). The operating results of
Timm Medical are included in discontinued operations.
Effective on August 20, 2007, we effected a
one-for-three
reverse split of our common stock. All share amounts and per
share amounts have been adjusted throughout the accompanying
consolidated financial statements and the related notes to
reflect this reverse stock split for all periods presented. The
reverse split did not affect the authorized shares and par value
per share. On October 10, 2007, our common stock commenced
trading on The NASDAQ Capital Market under the symbol ENDO.
|
|
2.
|
Recent
Operating Results and Liquidity
|
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of December 31, 2007,
we had an accumulated deficit of $189.8 million and cash
and cash equivalents of $7.7 million. $0.9 million of
the cash balance is borrowed under our line of credit, which is
payable on a current basis. During 2007, we also received
$1.6 million and $7.0 million from the sale of our
common shares to Fusion Capital Fund II, LLC (Fusion
Capital) and Frazier Healthcare V, L.P. (Frazier),
respectively, as more fully described below. We do not expect to
reach cash flow positive operations on an annual basis in 2008,
and we expect to continue to generate losses from operations for
the foreseeable future. These losses have resulted in part from
our continued investment to gain acceptance of our technology
and investment in initiatives that we believe should ultimately
result in cost reductions.
Although in July 2006 we resolved the investigations by the
Securities and Exchange Commission (SEC) and the Department of
Justice (DOJ) of our historical accounting and financial
reporting (see Note 12 Commitments and
Contingencies ), we still have obligations to
indemnify and advance the legal fees of our former officers and
former directors in connection with the ongoing investigations
and legal proceedings related to those individuals. The amounts
we pay under these obligations could have a material adverse
effect on our business, financial condition, results of
operations and liquidity. For the year ended December 31,
2007, we incurred expenses of $1.7 million relating to
legal fees of former officers and former directors, and recorded
insurance recoveries of $0.9 million. As of
December 31, 2007, we have $0.1 million available
under this insurance coverage.
We also face large cash expenditures in the future related to
past due state and local taxes, primarily sales and use tax
obligations, which we estimate to be approximately
$2.2 million. The amount was fully accrued as of
December 31, 2007. We are in the process of negotiating
resolutions of the past due state and local tax obligations with
the applicable tax authorities. However, there is no assurance
that these obligations will be reduced as a result of the
negotiations or that we will be allowed to pay the amounts due
over an extended period of time.
We also intend to continue investing in our sales and marketing
efforts to physicians in order to raise awareness and gain
further acceptance of our technology. This investment is
required in order to increase physicians usage of our
technology in the treatment of prostate and renal cancers, lung
and liver cancers and palliative intervention (treatment of pain
associated with metastases). Such costs will be reported as
current period charges under generally accepted accounting
principles.
FI-7
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our sources of funding include a $4 million credit facility
with Silicon Valley Bank and a $16 million common stock
purchase agreement with Fusion Capital. As discussed in
Note 6 Private Placement of Common
Stock and Warrants, on October 25, 2006, we
entered into an agreement with Fusion Capital which gives us the
right to sell to Fusion Capital up to $16.0 million of
common stock, at our election, over a two year period at prices
determined based upon the market price of our common stock at
the time of each sale without any fixed discount. We can sell
our shares in $100,000 increments every fourth business day,
with additional $150,000 increments available every third
business day if the market price per share of our common stock
is $4.50 or higher, subject to our ability to comply with
certain ongoing requirements. These requirements include, among
others, maintaining effectiveness of the registration statement
covering the resale of the shares purchased by Fusion Capital
and maintenance of per share trading prices at or above $3.00.
The $150,000 increment can be increased if the market price of
our common stock increases. The SEC declared the registration
statement effective on December 1, 2006.
Through December 31, 2007, we have sold 293,397 shares
of stock to Fusion Capital for total gross proceeds of
$1.6 million. The most recent sale of stock to Fusion
Capital occurred in May 2007. Since we have authorized
2,666,666 shares for sale under the stock purchase
agreement, the selling price of our common stock to Fusion
Capital would have had to average at least $6.00 per share for
us to receive the maximum proceeds of $16.0 million. We are
obligated to pay a transaction fee equal to 6.0 percent of
the stock proceeds to an investment advisory firm under a
pre-existing capital advisory agreement.
On May 24, 2007 we sold 1,085,271 shares of our common
stock to Frazier at a price per share of $6.45, for aggregate
proceeds of $7.0 million.
During the three months ended December 31, 2007, we also
received $1.1 million in proceeds from the exercise of
options by a former officer for 166,667 common shares at $6.75
per share.
We expect to use existing cash reserves, working capital through
the sale of our products, as well as future proceeds from sales,
if any, of common stock to Fusion Capital, to finance our
projected operating and cash flow needs, along with continued
expense management efforts. In addition, we may borrow funds
under the line of credit with our bank through February 2009 as
long as we remain in compliance with the representations,
warranties, covenants and borrowing conditions therein. As more
fully described in Note 13 Line of
Credit, the funds we can borrow are based on eligible
trade receivables and inventory as defined. The credit facility
contains restrictive covenants, a subjective acceleration clause
and a requirement to maintain a lock box with the lender, the
proceeds from which will be applied to reduce the outstanding
borrowings upon our default or if other conditions are met. The
subjective acceleration clause permits the lender to accelerate
payment on all outstanding balances and cease to make further
advances to us in the event of default or if the lender
determines in its judgment that a material adverse change has
occurred or will occur.
We believe that the Fusion Capital financing agreement and the
line of credit, together with the $7.0 million that we
received from Frazier, should provide us with the capital
resources that we need to reach the point where our operations
will generate positive cash flows on a consistent basis.
However, our cash needs are not entirely predictable and the
future availability of funds from Fusion Capital and our bank is
subject to many conditions, including the subjective
acceleration clause and other provisions that are predicated on
events not within our control. We are limited to amount of stock
we can sell to Fusion Capital each time. Our agreement with
Fusion Capital contains default provisions and is automatically
suspended if the trading prices of our shares fall below $3.00.
The extent of funds available from Fusion Capital also depends
on the prevailing market price of our common shares. We cannot
access the bank credit line if we fail to comply with all
covenants and borrowing conditions. Although we are in
compliance with the conditions and covenants under the Fusion
Capital agreement and bank credit facility as of
December 31, 2007, there is no assurance that we will be
able to comply with all requirements in future periods, that we
can obtain a waiver if an event of default occurs or that the
lender will not exercise the subject acceleration clause.
Accordingly, we cannot guarantee the availability of these
capital resources or that they will be sufficient to fund our
ongoing operations to the point where our operations will
generate positive cash flows on a consistent basis.
FI-8
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
the parent and all majority owned and controlled subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Comprehensive
Income
Statement of Financial Accounting Standard, or SFAS,
No. 130, Reporting Comprehensive Income, requires
reporting and displaying comprehensive income (loss) and its
components, which, for Endocare, is the same as the net loss
reflected in the consolidated statements of stockholders
equity.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date
of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Principal
areas requiring the use of estimates include: determination of
allowances for uncollectible accounts, notes receivable and
sales returns, warranty obligations, reserves for excess and
obsolete inventory, valuation allowances for investments and
deferred tax assets, impairment of long-lived and intangible
assets, determination of stock-based compensation to employees
and consultants, valuation of the warrants and reserves for
litigation and other legal and regulatory matters, among others.
Revenue
Recognition
Revenues from sales of Cryocare Surgical Systems and
cryoablation disposable products are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed and determinable and collectibility is reasonably
assured. For certain cryoablation treatments, we also contract
with medical facilities to provide cryoablation disposable
products and services for which we charge a per-procedure fee.
The cryoablation services provided generally consist of rental
and transport of a Cryocare Surgical System, as well as the
services of a technician to assist the physician with the
set-up, use
and monitoring of the equipment and include the necessary
disposable products and supplies. The medical facilities are
billed for procedures performed using Cryocare Surgical Systems
owned either by us or by third parties who perform the service
component of the procedure. We receive procedure fee revenue
from the medical facility and, where a third-party service
provider is involved, pay a fee to the service provider. The fee
billed to the medical facility is recorded as revenue in the
period when the procedure is performed. Cost of revenues
includes the cost of the necessary disposable products and
supplies and, if applicable, third party service provider fees
which are recorded at the time of the procedure. Cost of
revenues also includes depreciation related to Endocare-owned
Cryocare Surgical Systems over an estimated useful life of three
years.
We have continued to experience year over year growth in
cryoablation disposable product sales and procedure fee
revenues. In the past two years, we have placed increasing
emphasis on direct sale of our products rather than procedure
fee revenues. As a result of the shift in revenue mix from
cryoablation procedure fees to sales of cryoablation disposable
products (where we do not perform the service component and have
a lower average selling price as well as cost of sales per
procedure), we have experienced an increase in gross margins as
a percentage of revenues although the gross profit dollars per
case generally are the same. Our gross margin has also increased
due to reconfiguration of our products to reduce manufacturing
costs and sourcing products and components to lower cost
suppliers. We have also reduced operating expenses through
streamlining our corporate organization, elimination or deferral
of some longer-term research, development, clinical and
marketing activities, instituting
FI-9
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
additional equity incentive programs to reduce cash compensation
outlays, and in general better control of our operating expenses.
Revenues and the related cost of revenues from continuing
operations consist of the following for the three years ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
6,790
|
|
|
$
|
13,948
|
|
|
$
|
21,157
|
|
Cryocare Surgical Systems
|
|
|
743
|
|
|
|
1,096
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,533
|
|
|
|
15,044
|
|
|
|
22,730
|
|
Cryoablation procedure fees
|
|
|
19,780
|
|
|
|
12,298
|
|
|
|
6,418
|
|
Cardiac royalties
|
|
|
889
|
|
|
|
604
|
|
|
|
386
|
|
Other
|
|
|
72
|
|
|
|
44
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,274
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
15,278
|
|
|
|
11,541
|
|
|
|
9,006
|
|
Cryocare Surgical Systems
|
|
|
460
|
|
|
|
802
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,738
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues for cryoablation disposable products and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees incorporate
similar inventory when sold and we do not separately track the
cost of disposable products sold directly to customers and those
consumed in cryoablation procedures. Procedure fees relate to
services which are provided to medical facilities upon request
to facilitate the overall delivery of our technology into the
marketplace.
We provide customary sales incentives to customers and
distributors in the ordinary course of business. These
arrangements include volume discounts, equipment upgrades and
rent-to-own
programs. These transactions are accounted for in accordance
with Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, when
applicable. We defer the recognition of certain Cryocare
Surgical System revenues where we have continuing performance
obligations. Deferred revenues are adjusted in future periods
when remaining obligations have been met. Deferred revenue as of
December 31, 2005, 2006, and 2007 is not significant and
was included in other accrued liabilities. From time to time, we
may agree to provide equipment upgrades for free or at
significant discounts to select customers who purchased Cryocare
Surgical Systems in the prior years. These offers to upgrade are
at our discretion and intended to facilitate the delivery of our
latest cryoablation technology into the market place. The loss
on equipment provided for upgrades is expensed at the earlier of
the commitment or shipment date. We have reduced the selling
price of Cryocare Surgical Systems in select instances to at or
near cost to promote the use of cryoablation as a preferred
treatment option. These initiatives have decreased the gross
margin on sale of Cryocare Surgical Systems.
No customer accounted for more than 10 percent of total
revenues in 2005. In 2006 and 2007, one customer accounted for
28.8 percent and 42.1 percent of total revenues,
respectively. This customer accounted for 45.7 percent and
38.9 percent of our accounts receivable balance as of
December 31, 2006 and 2007, respectively. We derived
93.1 percent, 94.2 percent and 92.8 percent of
revenues from sales in the United States during this three-year
period.
FI-10
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We routinely assess the financial strength of our customers and
believe that our accounts receivable credit risk exposure is
limited. Accounts receivable are carried at original invoice
amount less an estimate for doubtful accounts and sales returns
based on a periodic review of outstanding receivables.
International shipments are billed and collected by Endocare in
U.S. dollars. Allowances are provided for known and
anticipated credit losses as determined by management in the
course of regularly evaluating individual customer receivables.
This evaluation takes into consideration a customers
financial condition and credit history as well as current
economic conditions. Accounts receivable are written off when
deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded when received.
Inventories
Inventories, consisting of raw materials,
work-in-process
and finished goods, are stated at the lower of cost or market,
with cost determined by the
first-in,
first-out method. Reserves for slow-moving and obsolete
inventories are provided based on historical experience and
product demand. We evaluate the adequacy of these reserves
periodically.
The following is a summary of inventory
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
1,750
|
|
|
$
|
2,331
|
|
Work in process
|
|
|
300
|
|
|
|
227
|
|
Finished goods
|
|
|
778
|
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
2,828
|
|
|
|
3,516
|
|
Less inventory reserve
|
|
|
(568
|
)
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
2,260
|
|
|
$
|
3,022
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment are stated at cost and are depreciated on
a straight-line basis over the estimated useful lives of the
respective assets, which range from three to seven years.
Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the related lease term.
Cryoablation equipment placed at customer sites for use with our
disposable cryoprobes is depreciated into cost of revenues over
estimated useful lives of three years. Repair and maintenance
costs are expensed as incurred. Depreciation expense from
continuing operations was $1.7 million, $1.0 million
and $0.6 million in 2005, 2006 and 2007, respectively.
The following is a summary of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Equipment and computers
|
|
$
|
1,825
|
|
|
$
|
1,899
|
|
Cryoablation systems placed at customer sites
|
|
|
5,019
|
|
|
|
5,169
|
|
Furniture and fixtures
|
|
|
908
|
|
|
|
1,040
|
|
Leasehold improvements
|
|
|
321
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, at cost
|
|
|
8,073
|
|
|
|
8,429
|
|
Accumulated depreciation and amortization
|
|
|
(7,033
|
)
|
|
|
(7,579
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,040
|
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
FI-11
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2007, we leased certain office equipment under a capital
lease agreement. Capital lease obligations are amortized over
the life of the lease and amortization for capitalized assets
under lease agreements are included in depreciation expense.
This office equipment included in property and equipment above
was $0.1 million at December 31, 2007 and related
depreciation expense was approximately $4,000 for the year ended
December 31, 2007
Long-Lived
Assets, Goodwill and Intangible Assets Subject to
Amortization
We acquire goodwill and amortizable intangible assets in
business combinations and asset purchases. The excess of the
purchase price over the fair value of net assets acquired are
allocated to goodwill and identifiable intangibles. We do not
amortize goodwill which is consistent with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and other Intangible Assets as more fully
described in Note 5 Impairment of Goodwill and
Other Intangible Assets. Goodwill and indefinite lived
assets are reviewed annually for impairment and on an interim
basis if events or changes in circumstances indicate that the
asset might be impaired.
Intangible assets that are deemed to have finite useful lives
are recorded at cost and amortized using the straight-line
method over their estimated useful lives, as follows:
|
|
|
Trade names (discontinued operations)
|
|
15 years
|
Domain names
|
|
5 years
|
Covenants not to compete
|
|
3 to 5 years
|
Developed technology (discontinued operations)
|
|
15 years
|
Patents
|
|
3 to 15 years
|
Patents comprise our largest intangible asset. We capitalize the
costs incurred to file patent applications when we believe there
is a high likelihood that the patent will be issued, the
patented technology has other specifically identified research
and development uses and there will be future economic benefit
associated with the patent. We expense all costs related to
abandoned patent applications. If we elect to abandon any of our
currently issued or unissued patents or determine that their
carrying value is impaired, we reduce the patent to fair value.
Costs associated with patents and licenses purchased from third
parties for products or technology prior to receipt of
regulatory approval to market are capitalized if the licenses
can be used in multiple research and development programs. Our
capitalized patent costs pertain to technology currently used in
our commercialized products and for which we expect to recover
their cost through product sales. Patent costs are amortized on
a straight-line basis over the useful life of the license, which
begin on the date of acquisition and continues through the end
of the estimated term during which the technology is expected to
generate substantial revenues. Patent maintenance costs are
expensed as incurred.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we review
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets
may not be recoverable. We consider assets to be impaired and
write them down to fair value if estimated undiscounted cash
flows associated with those assets are less than their carrying
amounts. Fair value is based upon the present value of the
associated cash flows. Changes in circumstances (for example,
changes in laws or regulations, technological advances or
changes in our strategies) may also reduce the useful lives from
initial estimates. Changes in the planned use of intangibles may
result from changes in customer base, contractual agreements, or
regulatory requirements. In such circumstances, we will revise
the useful life of the long-lived asset and amortize the
remaining net book value over the adjusted remaining useful
life. There were no changes in estimated useful lives during
2005, 2006 and 2007. No impairment charge was recorded in 2006
or 2007.
FI-12
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization expense for each of the years ending December 31
will consist of the following amounts:
|
|
|
|
|
2008
|
|
$
|
501
|
|
2009
|
|
|
501
|
|
2010
|
|
|
501
|
|
2011
|
|
|
501
|
|
2012
|
|
|
501
|
|
Thereafter
|
|
|
572
|
|
|
|
|
|
|
|
|
$
|
3,077
|
|
|
|
|
|
|
Amortization expense from continuing operations totaled
$0.6 million, $0.6 million and $0.5 million in
2005, 2006 and 2007, respectively.
The following is a summary of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Domain name
|
|
$
|
435
|
|
|
$
|
435
|
|
Covenant not to compete
|
|
|
352
|
|
|
|
352
|
|
Patents
|
|
|
6,205
|
|
|
|
6,205
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
6,992
|
|
|
|
6,992
|
|
Accumulated amortization
|
|
|
(3,379
|
)
|
|
|
(3,915
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
$
|
3,613
|
|
|
$
|
3,077
|
|
|
|
|
|
|
|
|
|
|
Investments
We hold minority investments of less than 20 percent in
certain private early stage technology companies acquired in
conjunction with various strategic alliances. We do not have the
ability to exercise significant influence over the financial or
operational policies or administration of these companies;
therefore, they are accounted for under the cost method.
Realized gains and losses are recorded when related investments
are sold. These investments are regularly assessed for
impairment through review of operations and indicators of
continued viability, including operating performance, financing
status, liquidity prospects and cash flow forecasts. Impairment
losses are recorded when events and circumstances indicate that
such assets might be impaired and the decline in value is
other-than-temporary.
These investments are included in investments and other assets.
Product
Warranties
Certain of our products are covered by warranties against
defects in material and workmanship for periods up to two years
after the sale date. The estimated warranty cost is recorded at
the time of sale and is adjusted periodically to reflect actual
experience. Factors that affect our warranty liability include
the number of units sold, historical and anticipated rates of
warranty claims, and cost per claim. Our warranty costs and
liability (included in other accrued liabilities) were not
significant for 2005, 2006 or 2007.
Research
and Development
Research and development activities are performed primarily
in-house. Expenditures primarily include personnel, clinical
studies, and material expenses incurred to design, create, and
test prototypes. These expenditures are charged to operations as
incurred until technological feasibility has been established.
Costs to maintain patents are included in general and
administrative expenses.
FI-13
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Advertising costs are included in selling and marketing expenses
as incurred and totaled $0.3 million, $0.3 million and
$0.2 million for 2005, 2006 and 2007, respectively.
Shipping
and Handling Costs
We incurred shipping and handling costs in the normal course of
business. All shipping and handling costs related to our
products are charged to cost of sales as incurred.
Cash
and Cash Equivalents
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents. Cash and cash equivalents include money market
funds and various deposit accounts.
Concentrations
of Credit Risk
Financial instruments, which potentially subject us to
concentrations of credit risk, primarily consist of cash and
cash equivalents, accounts receivable and notes receivable. We
may be exposed from time to time to credit risk with our bank
deposits in excess of the FDIC insurance limits. We have not
experienced any losses in such accounts and believe we are not
exposed to any significant credit risk on cash and cash
equivalents, except as described below. Our receivables are
derived primarily from sales of Cryocare Surgical Systems and
cryoablation disposable products to medical facilities, medical
groups and urologists. Cryoablation procedure fees are generated
from medical facilities. One customer accounted for
28.8 percent and 42.1 percent of our revenues for the
year ended December 31, 2006 and 2007, respectively. This
same customer accounted for 43.3 percent of our fourth
quarter 2007 revenues. Our accounts receivable as of
December 31, 2006 and 2007 consisted of 45.7 percent
and 38.9 percent of receivables from this customer. We have
no history of past due receivables from this customer. We
perform ongoing credit evaluations of our customers and
generally do not require collateral. Reserves are maintained for
potential credit losses. There are no significant concentrations
of credit risk with respect to trade receivables except for the
customer referenced above.
$7.1 million of our cash is invested in a money market
mutual fund (the Citi Institutional Liquid Reserves) which
includes in its investment portfolio commercial paper, time
deposits, certificates of deposits, bank notes, corporate bonds
and notes and U.S. government agency securities. The fund
is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the fund
seeks to preserve the value of the investment at $1.00 per
share, it is possible to lose our principal if the underlying
securities suffer losses as a result of current credit market
conditions. At January 31, 2008, the fund reported that
certain securities within the portfolio are illiquid, in
default, under restructuring or have been subject to a ratings
downgrade. However, the fund continues to report a per share net
asset value (NAV) of $1, which represents the price at which
investors buy (bid price) and sell (redemption
price) fund shares from and to the fund company. The NAV
is computed once at the end of each trading day based on the
closing market prices of the portfolios securities. We
believe that our investment has not been impaired and that we
can withdraw our finds at any time without restriction. We will
monitor the value of the fund periodically for impairment.
We also have a $2.7 million note receivable from the sale
of a Timm Medical product line in 2003 and a $1.4 million
note receivable from the divestiture of Timm Medical in 2006. We
also have a $0.3 million secured note receivable from a
shareholder consultant to Endocare. These are included in
investments and other assets. We evaluate the creditworthiness
of the debtors periodically and provide allowances for
uncollectible amounts. We collected the $1.4 million note
receivable from the sale of Timm Medical in February 2008 along
with related accrued interest. See Note 7
Dispositions and Discontinued Operations and
Note 14 Related Party
Transactions for further discussion.
FI-14
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The primary objective of our investment activities is to
preserve principal while at the same time maximize the income we
receive from our invested cash without significantly increasing
the risk of loss. Our consolidated balance sheets include the
following financial instruments: cash and cash equivalents,
accounts and notes receivable, minority investments, accounts
payable, accrued liabilities, a line of credit and common stock
warrants. The carrying amounts of current assets and liabilities
approximate their fair values because of the relatively short
period of time between the origination of these instruments and
their expected realization. The interest rates on the notes
receivable related to Timm Medical generally approximate market
rates for secured obligations of similar terms and maturity. The
fair value of minority investments cannot be estimated since the
investees are privately held, early stage companies. The common
stock warrants were recorded at fair value through
December 31, 2006, and was adjusted each quarter using a
modified Black-Scholes pricing model.
Risks
and Uncertainties
Our profitability depends in large part on increasing our
revenue base and effectively managing costs of sales, customer
acquisition costs and administrative overhead. We continually
review our pricing and cost structure in an effort to select the
optimal revenue and distribution models. Several factors could
adversely affect revenues and costs, such as changes in health
care practices, payer reimbursement, inflation, new
technologies, competition and product liability litigation,
which are beyond our control and could adversely affect our
ability to accurately predict revenues and effectively control
costs. Many purchasers of our products and services rely upon
reimbursement from third-party payers, including Medicare,
Medicaid and other government or private organizations. These
factors could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Reclassification
For the years ended December 31, 2005 and 2006,
$0.1 million and $44,000 previously reported as product
sales have been reclassified to other sales to conform to our
current presentation.
Off-Balance
Sheet Financings and Liabilities
Other than lease commitments, obligations under royalty and
joint technology development arrangements, legal contingencies
incurred in the normal course of business and employment
contracts, we do not have any off-balance sheet financing
arrangements or liabilities. In addition, our policy is not to
enter into derivative instruments, futures or forward contracts.
Our business is transacted solely in U.S. dollars and,
while future fluctuations of the U.S. dollar may affect the
price competitiveness of our products, there is no known
significant direct foreign currency exchange rate risk. Finally,
we do not have any majority-owned subsidiaries or any interests
in, or relationships with, any material special-purpose entities
that are not included in the consolidated financial statements.
Other
Accrued Liabilities
Other accrued liabilities as of December 31, 2006 and 2007
include $2.8 million and $2.2 million in state and
local taxes, primarily sales and use taxes in various
jurisdictions in the United States.
Capital
Stock and Earnings Per Share
Basic net income or loss per share is computed by dividing net
income or loss by the weighted average number of common shares
outstanding for the respective periods. Diluted loss per share,
calculated using the treasury stock method, gives effect to the
potential dilution that could occur upon the exercise of certain
stock options, warrants, and restricted and deferred stock units
that were outstanding during the respective periods presented.
For periods when we reported a net loss from continuing
operations, these potentially dilutive common shares were
excluded from the diluted income or loss per share calculation
because they were anti-dilutive. As of December 31, 2007,
FI-15
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006, and 2005, the company had 3.8 million,
3.3 million, and 3.2 million, respectively, in
potentially dilutive common shares outstanding (prior to the
application of the treasury stock method) in the form of stock
options, restricted stock units, deferred stock units, and
warrants.
Taxes
We recognize deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax
basis of our assets and liabilities along with net operating
loss and credit carry forwards, if it is more likely than not
that the tax benefits will be realized. To the extent a deferred
tax asset cannot be recognized under the preceding criteria,
allowances must be established. The impact on deferred taxes of
changes in tax rates and laws, if any, are applied to the years
during which temporary differences are expected to be settled
and reflected in the financial statements in the period of
enactment.
On January 1, 2007, we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS No. 109, Accounting for Income Taxes (see
Note 10 Income Taxes ).
Taxes that are not based on income (including sales and use,
payroll, capital and property taxes) continue to be accounted
for under SFAS No. 5, Accounting for
Contingencies.
We collect and remit sales tax on a gross basis. Our sales tax
liability is classified as current.
Stock-Based
Compensation
As of December 31, 2007, we have four stock-based employee
compensation plans and two non-employee director stock-based
compensation plans as more fully described in Note 8
Stock-Based Compensation Plans.
Equity awards include stock options, deferred stock units
and restricted stock units. Stock options generally have a
maximum contractual term of 10 years and vest pro-rata over
four years, which is the requisite service period. Certain
options may accelerate vest if performance milestones are
achieved and otherwise cliff vest after five years. The fair
value of share-based awards is estimated at the grant date using
the Black Scholes option pricing model described below, and the
portion that is ultimately expected to vest is recognized as
compensation expense over the explicit or implict service
period. Deferred stock units and restricted stock units are
accounted for similar to restricted stock grants. As more fully
described in Note 9 Equity Incentive
Plans, beginning in 2006, deferred stock units are
issued in lieu of cash bonuses to employees and board fees to
members of the board of directors at the election of the
eligible participants. These units vest when services are
rendered each year in the case of employee bonuses and each
quarter in the case of board fees. Beginning in 2007, restricted
stock units are also granted to employees with a contractual
life of 10 years. Certain restricted stock units vest based
on service over a specified period (3 years) while others
vest contingently based on performance conditions such as sales
and profitability goals over 2 to 3 years. For awards that
vest based on continuous service, we record compensation expense
ratably over the service period from the date of grant. For
grants that vest based on performance conditions, we begin
recording compensation expense over the service period when we
determine that achievement is probable. Change in estimates as
to probability of vesting is recorded through a cumulative
catch-up
adjustment when the assessment is made. Change in the estimated
implicit service period is recorded prospectively over the
remaining vesting period. During 2007, the Company determined
that profitability goals will likely be met and recorded
compensation expense of $0.6 million related to the
restricted stock units for services through December 31,
2007. If the goals are ultimately not met, no compensation will
be recognized and any recognized compensation costs will be
reversed.
Prior to January 1, 2006, we accounted for stock-based
compensation for those plans under the recognition and
measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25) as permitted by SFAS No. 123,
Accounting for Stock Based Compensation. Compensation
expense recorded under APB 25 was not been significant since we
generally grant options with an exercise price equal to the fair
value of our common stock on the date of grant.
FI-16
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2006, we adopted
SFAS No. 123 (revised 2004), Share Based Payment
(SFAS No. 123R) using the modified prospective
transition method. Among other items, SFAS No. 123R
eliminates the use of the intrinsic value method of accounting
under APB 25 and requires companies to recognize in the
financial statements the cost of employee services received in
exchange for awards of equity instruments based on the grant
date fair value of those awards. Under the modified prospective
method, we recognize compensation cost in the financial
statements beginning with the effective date based on the
requirements of SFAS No. 123R for all share-based
payments granted, modified or settled after January 1,
2006, and based on the requirements of SFAS No. 123
for all unvested awards granted prior to the effective date.
We use the Black-Scholes standard option pricing model and the
single option award approach to measure the fair value of the
stock options granted to employees. The determination of fair
value is affected by our stock price as well as assumptions
regarding a number of complex and subjective variables,
including expected stock price volatility, risk-free interest
rate, expected dividends and the projected exercise and
post-vesting employment termination behavior of employees.
In conjunction with the adoption of SFAS No. 123R on
January 1, 2006, we modified certain assumptions and
estimation methodologies for inputs to the Black-Scholes
valuation calculations in accordance with the requirements of
SFAS No. 123R and Staff Accounting Bulletin (SAB)
No. 107, Share-Based Payment. These changes
primarily include the following:
a. We increased the expected term from five years to
6.25 years using the shortcut method permitted
for plain vanilla options under SAB 107 (an
expected term based on the mid point between the vesting date
and the end of the contractual term). The short cut method is
permitted through December 31, 2007. We converted to
company-specific experience on January 1, 2008.
b. While we continue to use historical volatility (based on
daily trading prices) to estimate the fair value of options
granted, we have increased the period over which volatility is
measured from three years to 6.25 years. We have excluded
the period from October 24, 2002 to January 16, 2003
(inclusive) during which our common stock experienced unusually
high volatility as a result of announcement of our failure to
file the September 30, 2002
Form 10-Q,
temporary suspension of trading, delisting of our shares from
NASDAQ, and an investigation commenced by the SEC. These changes
resulted in a net decrease in volatility from previous
estimates. Average volatility for options granted in 2005, 2006
and during the year ended December 31, 2007 was
approximately 90.3 percent, 69.5 percent and
66.6 percent, respectively. We did not incorporate implied
volatility since there are no actively traded option contracts
on our common stock and sufficient data for an accurate measure
of implied volatility were not available.
c. Share based compensation is recognized only for those
awards that are ultimately expected to vest. Prior to
January 1, 2006, we accounted for forfeitures as they
occurred. Compensation expense related to unvested forfeited
options was reversed in the period the employee was terminated.
Upon adoption of SFAS No. 123R, we have estimated an
average forfeiture rate of approximately 25.0 percent based
on historical experience from 2001 through December 31,
2007. Stock-based compensation expense recorded in the 2006 and
2007 period is net of expected forfeitures. We will periodically
assess the forfeiture rate. Changes in estimates will be
recorded in the period of adjustment.
Due to our continuing losses, we do not recognize deferred tax
assets related to our stock-based compensation and we have not
recorded benefits for tax deductions in excess of recognized
compensation costs (required to be recorded as financing cash
flows) due to the uncertainty of when we will generate taxable
income to realize such benefits.
Total stock-based compensation expense for options, deferred
stock units and restricted stock units were $0.1 million,
$2.8 million and $3.9 million in 2005, 2006 and 2007,
respectively. As a result of adopting SFAS No. 123R,
our loss from continuing operations and net loss for the years
ended December 31, 2006 and 2007 was $2.6 million
($0.26 per basic and diluted share) and $2.5 million ($0.22
per basic and diluted share)
FI-17
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
greater, respectively, than if we had continued to account for
stock-based compensation under APB 25 and its related
interpretations. Stock-based compensation expense is included in
the following line items in the consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
56
|
|
|
$
|
86
|
|
Research and development
|
|
|
|
|
|
|
107
|
|
|
|
94
|
|
Selling and marketing
|
|
|
|
|
|
|
630
|
|
|
|
702
|
|
General and administrative
|
|
|
51
|
|
|
|
2,052
|
|
|
|
3,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51
|
|
|
$
|
2,845
|
|
|
$
|
3,901
|
|
As of December 31, 2007, there was $1.7 million (net
of estimated forfeitures) of total unrecognized compensation
costs related to unvested stock options. That cost is expected
to be amortized on a straight-line basis over a weighted average
period of 0.9 years. Unrecognized compensation for deferred
and restricted stock units was $2.1 million at
December 31, 2007 (assuming that all service and
performance milestones will be met) and will be recognized over
a weighted average period of 1.9 years. As of
December 31, 2006 and 2007, stock compensation cost
capitalized as inventory was insignificant.
Prior to January 1, 2006, we accounted for stock-based
employee compensation plans in accordance with APB 25 and
followed the pro forma disclosure requirements set forth in
SFAS No. 123. The following table illustrates the
effect on net loss and loss per share for the year ended
December 31, 2005 as if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
employee compensation. The amounts in the table below include
stock-based compensation expense related to Timm Medical which
was not significant (dollars in thousands, except per share
amounts):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net loss, as reported(a)
|
|
$
|
(13,679
|
)
|
Add: Stock-based employee compensation expense included in
reported net loss for all awards(b)
|
|
|
43
|
|
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards
|
|
|
(3,696
|
)
|
|
|
|
|
|
Net loss, as adjusted
|
|
$
|
(17,332
|
)
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
As reported
|
|
$
|
(1.42
|
)
|
As adjusted
|
|
$
|
(1.79
|
)
|
|
|
|
(a) |
|
In the past, we had issued stock options and warrants to
consultants for services performed. Compensation expense for the
fair value of these options was determined by the Black-Scholes
option-pricing model and was charged to operations over the
service period or as performance goals were achieved. Such
expense was included in net loss as reported. |
|
(b) |
|
Since we issue options with exercise prices equal to or
exceeding the fair values of the underlying common stock, no
compensation expense was recorded for options issued to
employees. The recorded expense generally related to
compensation charges upon modification of vesting terms,
cashless exercises, and other non-routine transactions. |
FI-18
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Recent
Accounting Pronouncements
|
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements
No. 133 and 140 (SFAS No. 155). Among other
things, SFAS No. 155 permits fair value remeasurement
for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS
No. 155 is effective for all financial instruments
beginning after September 15, 2006. The adoption of
SFAS No. 155 did not have an impact on the
Companys consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements. Certain provisions of
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, which will be effective as of the
first quarter of 2008. We do not expect that the adoption of
SFAS No. 157 will have a material impact on our
consolidated financial statements except that financial
statement disclosures will be revised to conform to the new
guidance.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159), which allows an entity to
voluntarily choose to measure certain financial assets and
liabilities at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007, which
will be effective as of the first quarter of 2008. We have not
decided if we will choose to measure any eligible financial
assets and liabilities at fair value.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Non controlling Interests
in Consolidated Financial Statements An Amendment of
ARB No. 51 . SFAS No. 160 establishes new
accounting and reporting standards for the non controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the
recognition of a non controlling interest (minority interest) as
equity in the consolidated financial statements and separate
from the parents equity. The amount of net income
attributable to the non controlling interest will be included in
consolidated net income on the face of the income statement.
SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non controlling
interest. SFAS No. 160 is effective for fiscal years, and
interim periods beginning after January 1, 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007), Business
Combinations or SFAS No. 141(R), which will
significantly change the accounting for business combinations.
Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with
limited exceptions. It also amends the accounting treatment for
certain specific items including acquisition costs and non
controlling minority interests and includes a substantial number
of new disclosure requirements. SFAS No. 141(R) will
be applied prospectively to business combinations with
acquisition dates on or after January 1, 2009.
In December 2007, the FASB ratified the consensus in EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative arrangements and requires collaborators to
present the result of activities for which they act as the
principal on a gross basis and report any payments received from
(made to) the other collaborators based on other applicable
authoritative accounting literature, and in the absence of other
applicable authoritative literature, on a reasonable, rational
and consistent accounting policy that is to be elected.
EITF 07-1
also provides for disclosures regarding the nature and purpose
of the arrangement, the entitys rights and obligations,
the accounting policy for the arrangement and the income
statement classification and amounts arising from the agreement.
EITF 07-1
will be effective for fiscal years beginning after
December 15, 2008, which will be our fiscal year 2009, and
will be applied as a change in accounting principle
retrospectively for all collaborative arrangements existing as
of the effective date. We have not yet evaluated the potential
impact of adopting
EITF 07-1
on our consolidated financial statements.
FI-19
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2007, the FASB ratified the consensus in EITF Issue No.
07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3),
which requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development (R&D) activities be deferred and amortized over
the period that the goods are delivered or the related services
are performed, subject to an assessment of recoverability.
EITF 07-3
will be effective for fiscal years beginning after
December 15, 2007, which will be our fiscal year 2008. We
do not expect that the adoption of
EITF 07-3
will have a material impact on our consolidated financial
statements.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA, and the
SEC did not, or are not believed by management to, have a
material impact on our present or future consolidated financial
statements.
|
|
5.
|
Impairment
of Goodwill and Other Intangible Assets
|
Under SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and indefinite-lived intangible assets are
not amortized but instead are reviewed annually for impairment
and on an interim basis if events or changes in circumstances
between annual tests indicate that an asset might be impaired.
Goodwill is tested for impairment by comparing its fair value to
its carrying value under a two-step process. The first step
requires us to compare the fair value of the reporting units to
the carrying value of the net assets of the respective reporting
units, including goodwill. Our management is primarily
responsible for estimating fair value for impairment purposes.
Management may consider a number of factors, including
valuations or appraisals, when estimating fair value. If the
fair value of the reporting unit is less than the carrying
value, goodwill of the reporting unit is potentially impaired
and we then complete step two to measure the impairment loss, if
any. The second step requires the calculation of the implied
fair value of goodwill by deducting the fair value of all
tangible and intangible net assets of the reporting unit from
the fair value of the reporting unit. If the implied fair value
of goodwill is less then the carrying amount of goodwill, an
impairment loss is recognized equal to the difference.
After Timm Medical was sold in February 2006, there was no
remaining goodwill or indefinite life intangibles.
|
|
6.
|
Private
Placement of Common Stock and Warrants
|
May
2007 Private Placement
On May 24, 2007 we entered into a common stock subscription
agreement with Frazier and on May 25, 2007 we entered into
a registration rights agreement with Frazier. Under the
subscription agreement, Frazier agreed to purchase
1,085,271 shares of our common stock at a price per share
of $6.45, for aggregate proceeds to us of $7.0 million.
In the subscription agreement, Frazier agreed to
lock-up
provisions restricting the transferability of the shares, for a
period of one year for 75 percent of the shares and a
period of 18 months for 25 percent of the shares. The
lock-up
provisions expire early if we undergo a change in control or if
we issue significant additional amounts of securities in certain
circumstances after May 25, 2007, as described in the
subscription agreement.
In the registration rights agreement, we agreed to file a
registration statement with the SEC on or before March 20,
2008 to register the shares for resale. We also agreed to use
commercially reasonable efforts to cause the registration
statement to become effective as promptly as possible
thereafter, with the intention that the registration statement
will be available for resale by Frazier once the
lock-up
restrictions expire. In addition, we agreed to use commercially
reasonable efforts to keep the registration statement effective
until May 25, 2010.
Fusion
Capital Equity Purchase Agreement
On October 25, 2006, we entered into a common stock
purchase agreement with Fusion Capital as described above under
Note 2 Recent Operating Results
and Liquidity. Under this agreement we have the right
to sell to
FI-20
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fusion Capital up to $16.0 million worth of common stock,
at our election, over a two year period at prices determined
based upon the market price of our common stock at the time of
each sale, without any fixed discount. Common stock may be sold
in $100,000 increments every fourth business day, with
additional $150,000 increments available every third business
day if the market price per share of our common stock is $4.50
or higher, subject to our ability to comply with certain ongoing
requirements discussed below. This $150,000 increment can be
further increased at graduated levels up to $1.0 million if
the market price per share increases from $4.50 to $18.00. If
the price of the stock is below $3.00 per share, the obligation
for Fusion Capital to buy any shares of stock is automatically
suspended. Under the terms of the agreement, we issued
157,985 shares of common stock to Fusion Capital in 2006
for no consideration as a commitment fee.
Under a related registration rights agreement, before Fusion
Capital was obligated to purchase shares, we were required to
file a registration statement covering the sale of up to
2,824,652 common shares within 20 days of signing the
agreement. The registration statement was filed in November 2006
and declared effective by the SEC on December 1, 2006. We
subsequently filed a post-effective amendment to the
registration statement, which was declared effective
March 30, 2007. We are required to maintain effectiveness
of the registration statement until the earlier of the date that
Fusion Capital may sell the shares without restriction pursuant
to Rule 144(k) or the date that Fusion Capital has sold all
purchased shares and no available unpurchased shares remain
under the agreement. Upon occurrence of certain events of
default as defined in the stock purchase agreement, including
lapse of effectiveness of the registration statement for 10 or
more consecutive business days or for 30 or more business days
within a
365-day
period, suspension of trading for three business days, delisting
of the shares from the principal market on which they are
traded, failure by our stock transfer agent to issue shares
within five business days or other material breaches, Fusion
Capital may terminate the stock purchase agreement. We have the
right to terminate the agreement at any time.
Through December 31, 2007, we had sold 293,397 shares
to Fusion Capital for gross proceeds of $1.6 million. We
are obligated to pay a transaction fee equal to 6.0 percent
of the stock proceeds to an investment advisory firm under a
pre-existing capital advisory agreement. As of December 31,
2007, we have approximately $14.4 million in remaining
funding available with Fusion Capital based on our closing stock
price on that date.
March
2005 Private Placement
On March 11, 2005, we completed a private placement of
1,878,448 shares of our common stock and detachable
warrants to purchase 1,314,892 common shares at an offering
price of $8.31 per share, for aggregate gross proceeds of
$15.6 million. Transaction costs were $1.0 million,
resulting in net proceeds of $14.6 million. Of the total
warrants, 657,446 had an initial exercise price of $10.50
(Series A warrants) per share and 657,446 had an initial
exercise price of $12.00 (Series B warrants) per share. The
expiration date of the warrants is May 1, 2010. One current
member and one former member of our management team made
personal investments totaling $0.7 million in the
aggregate, and a member of our Board of Directors invested
$0.3 million.
The warrants have an anti-dilution clause that is triggered upon
issuance of a certain number of shares of our common stock that
reduces the effective exercise price of the warrants to preserve
the ownership of the warrant holders. As a result of our May
2007 private placement and the issuance of shares to Fusion
Capital, the exercise price of the Series A Warrants
decreased to $10.02 to effectively provide holders the right to
purchase an additional 31,667 shares and the exercise price
of the Series B Warrants decreased to $11.37 to effectively
provide holders the right to purchase an additional
37,191 shares.
The warrants initially are exercisable at any time during their
term for cash only. The warrants may be exercised on a cashless
exercise basis in limited circumstances after the first
anniversary of the closing date if there is not an effective
registration statement covering the resale of the shares
underlying the warrants. Each warrant is callable by us at a
price of $0.01 per share underlying such warrant if our stock
trades above certain dollar per share thresholds ($19.50 for the
Series A warrants and $22.50 for Series B warrants)
for 20 consecutive days commencing on any date after the
effectiveness of the registration statement, provided that
(a) we provide
30-day
advanced
FI-21
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
written notice (Notice Period), (b) we simultaneously call
all warrants on the same terms and (c) all common shares
issuable are registered. Holders may exercise their warrants
during the Notice Period and warrants which remain unexercised
will be redeemed at $0.01 per share.
Upon exercise, we will pay transaction fees equal to
6.0 percent of the warrant proceeds under a pre-existing
capital advisory agreement.
Pursuant to the terms of the registration rights agreement, we
filed with the SEC a registration statement on
Form S-2
under the Securities Act of 1933, as amended, covering the
resale of all of the common stock purchased and the common stock
originally underlying the issued warrants. The
S-2
registration statement was declared effective September 28,
2005. We subsequently filed a post-effective amendment on
Form S-3,
which was declared effective March 28, 2006 and a
post-effective amendment on
Form S-1,
which was declared effective March 30, 2007.
The registration rights agreement provides that if a
registration statement is not filed within 30 days of
closing or does not become effective within 90 days
thereafter, then in addition to any other rights the holders may
have, we will be required to pay each holder an amount in cash,
as liquidated damages, equal to one percent of the aggregate
purchase price paid by such holder per month. We incurred
$0.6 million of liquidated damages through
September 28, 2005, when the
S-2
registration statement was declared effective. This amount was
included in general and administrative expenses in 2005.
Under the registration rights agreement, we could incur similar
liquidated damages in the future (equal to one percent of the
aggregate purchase price paid by each affected holder per month)
if holders are unable to make sales under the registration
statement (for example, if we fail to keep the registration
statement current as required by SEC rules or if future
amendments to the registration statement are not declared
effective in a timely manner). The registration obligation
remains outstanding until the earlier of the date on which all
shares issuable upon exercise of the warrants have been issued
and resold by the holders of the warrants or the date on which
all such shares can be resold by the holders without
registration.
Since the liquidated damages under the registration rights
agreement could in some cases exceed a reasonable discount for
delivering unregistered shares, we accounted for the
registration payment arrangement and warrants as one instrument
classified as a derivative (a non-current liability) under EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock . We
allocated $5.7 million of the March 2005 offering proceeds
to the warrants based on their fair value at issuance, which was
estimated using the Black Scholes model. Through
December 31, 2006, we revalued the warrants as a derivative
instrument quarterly in connection with changes in the
underlying stock price and other assumptions, with the change in
value recorded as interest expense. During 2005 and 2006, we
recorded non-cash negative interest expense of $0.7 million
and $3.7 million, respectively, which represents a
reduction in the fair value of the warrants, primarily due to a
decrease in our share price, lower overall stock price
volatility and the continual lapse of the warrants
remaining contractual term.
In December 2006, the Financial Accounting Standards Board
issued FASB Staff Position (FSP) EITF
No. 00-19-2,
Accounting for Registration Payment Arrangements, which
changed the way we account for the outstanding warrants. FSP
EITF
No. 00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in
accordance with SFAS No. 5, Accounting for
Contingencies. For registration payment arrangements and
financial instruments subject to those arrangements that were
entered into prior to the issuance of this FSP and that continue
to be outstanding at the adoption date, this guidance is
effective for fiscal years beginning after December 15,
2006 and interim periods within those fiscal years. Upon
adoption of FSP EITF
No. 00-19-2
on January 1, 2007, the value of the warrants as of the
original issue date ($5.7 million) was reclassified to
equity without regard to the contingent obligation to transfer
consideration under the registration payment arrangement. The
difference between the $5.7 million and the fair value of
the warrant liability as of December 31, 2006
FI-22
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
($1.3 million) was recorded as a cumulative-effect
adjustment to reduce opening retained earnings on
January 1, 2007. Hereafter, accruals for liquidated
damages, if any, will be recorded when they are probable and
reasonably estimable.
|
|
7.
|
Dispositions
and Discontinued Operations
|
Sale
of Timm Medical 2006
On January 13, 2006, we entered into a stock purchase
agreement to sell Timm Medical, our wholly-owned subsidiary, to
Plethora Solutions Holdings plc (Plethora), a British company
listed on the London Stock Exchange for $9.5 million. The
transaction closed on February 10, 2006 and resulted in a
gain on sale of $0.5 million in the first quarter of 2006.
After the sale, we did not receive significant direct cash flows
from Timm Medical and had no significant continuing involvement
in its operations since the sale. In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the assets, liabilities,
revenues and expenses of Timm Medical were classified as
discontinued operations in the consolidated financial statements
for each year presented.
The $9.5 million consideration included cash of
$8.1 million and a two-year, five percent promissory note
secured by the assets of Timm Medical for $1.4 million. The
note was convertible into Plethoras ordinary shares at any
time at our option. Net cash proceeds on the date of the
divestiture were $7.5 million (after $0.6 million in
transaction costs and $40,000 in cash of Timm Medical as of the
disposition date). The note and unpaid accrued interest totaling
$1.6 million was paid in full on February 11, 2008.
The note receivable was included in investments and other assets
at December 31, 2006 and in prepaid expenses and other
current assets at December 31, 2007.
We retained certain assets and liabilities of Timm Medical in
the sale, including all tax liabilities totaling
$1.1 million, obligations and rights to a $2.7 million
note receivable from SRS Medical Corporation relating to the
sale of Timm Medicals urinary incontinence product line in
2003, certain litigation to which Timm Medical was a party and
ownership of Urohealth BV (Timm Medicals wholly-owned
subsidiary with insignificant operations). Assets and
liabilities we retained and their related revenues and expenses
were excluded from discontinued operations.
Assets and liabilities of discontinued operations as of
February 10, 2006 included the following:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash, inventories and other current assets
|
|
$
|
1,041
|
|
Property and equipment, net
|
|
|
71
|
|
Goodwill, net
|
|
|
4,552
|
|
Intangibles, net
|
|
|
3,680
|
|
Other assets
|
|
|
65
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,409
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
502
|
|
Other accrued liabilities
|
|
|
486
|
|
|
|
|
|
|
Total liabilities
|
|
|
988
|
|
|
|
|
|
|
Net assets
|
|
$
|
8,421
|
|
|
|
|
|
|
No assets or liabilities of Timm Medical were held as of
December 31, 2006. Revenues for Timm Medical were
$9.3 million in 2005 and $1.0 million for the period
from January 1 to February 10, 2006, respectively. The
operations of Timm Medical are classified as discontinued
operations as a result of the sale of Timm Medical in
FI-23
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006. Income from discontinued operations for the year ended
December 31, 2006 includes a $0.5 million gain on
disposal and is net of $0.2 million in taxes.
Cryoablation
Products for Cardiac Applications 2003
On April 14, 2003, we sold our cardiac-related product
manufacturing operations and licensed the related intellectual
property to CryoCath Technologies, Inc. (CryoCath) for
$10.0 million. CryoCath was the exclusive distributor for
cryoprobes and consoles in connection with the SurgiFrost
tm system, a
cryoablation system designed to treat cardiac arrhythmias. We
transferred all of our manufacturing assets and inventory
related to the cardiac product line to CryoCath, including
technical know-how, vendor lists, production equipment and
inventory. In addition, CryoCath received an exclusive worldwide
perpetual license for cardiac uses to our proprietary argon gas
based technology associated with the product and makes payments
to us under a nine-year descending royalty stream based on net
sales of products incorporating the licensed technology. We also
agreed to a
12-year
worldwide covenant not to compete in the cardiac field. Upon the
consummation of the sale, we terminated our pre-existing
distribution agreement with CryoCath. We are required to attend
quarterly and annual technical update meetings through 2014.
Since the technology was internally developed and the tangible
assets sold had minimal value, the sale resulted in a 2003
second quarter gain of $10.0 million. The royalty stream
decreases from 10 percent to 3 percent of net sales
from the SurgiFrost
tm system during
the period 2004 to 2012. The royalty payments are recorded in
the periods earned. Royalty income was $0.9 million,
$0.6 million and $0.4 million in 2005, 2006 and 2007,
respectively.
On June 19, 2007, CryoCath and ATS Medical, Inc. (ATS)
entered into definitive agreement under which ATS acquired
CryoCaths surgical cryoablation business. In conjunction
with that transaction, we agreed to bifurcate our prior
agreement with CryoCath to give ATS the same rights with respect
to the cardiac surgical market as CryoCath had prior to
ATSs purchase.
Urinary
Incontinence and Urodynamics 2003
On October 15, 2003, Timm Medical agreed to sell the
manufacturing assets related to its urodynamics and urinary
incontinence product lines to SRS Medical Corp. (SRS) for a
$2.7 million note. These assets include certain patents and
trademarks related to the urodynamics and urinary incontinence
products, inventory, customer lists and technical know-how. The
note bears interest at 7.5 percent and is secured by the
assets sold. As amended in March 2004, the note requires
quarterly payments of $45,000 beginning March 31, 2004,
increasing to $60,000 for the quarter ended December 31,
2005. Amounts which remain outstanding at December 31, 2005
are payable at least $60,000 per quarter until the outstanding
principal and accrued interest are paid in full. The carrying
values of the urodynamics and urinary incontinence-related
assets were $1.3 million on the date of sale. Management
concluded that collection of the note from SRS was not
reasonably assured. As a result, a loss of $1.3 million was
recorded in the fourth quarter of 2003 equal to the carrying
value of the assets sold and collections on the note, if any,
will be reported as gain in the period received. Collections
during 2005, 2006 and 2007 were $0.3 million,
$0.2 million and $0.2 million respectively and have
been applied to accrued interest. As of December 31, 2005
the note was transferred from Timm Medical to Endocare prior to
the sale of Timm Medical.
|
|
8.
|
Stock-Based
Compensation Plans
|
As of December 31, 2007, we have four stock-based employee
compensation plans and two non-employee director stock-based
compensation plans.
FI-24
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following tables summarize our option activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Number of
|
|
|
Price
|
|
|
Number of
|
|
|
Price
|
|
|
Number of
|
|
|
Price
|
|
|
|
Options
|
|
|
per Option
|
|
|
Options
|
|
|
per Option
|
|
|
Options
|
|
|
per Option
|
|
|
Outstanding, beginning of year
|
|
|
1,787,051
|
|
|
$
|
14.16
|
|
|
|
1,873,748
|
|
|
$
|
12.77
|
|
|
|
1,969,734
|
|
|
$
|
12.31
|
|
Granted
|
|
|
516,421
|
|
|
|
9.57
|
|
|
|
372,087
|
|
|
|
8.51
|
|
|
|
69,056
|
|
|
|
5.46
|
|
Cancelled/forfeited
|
|
|
(364,647
|
)
|
|
|
16.24
|
|
|
|
(247,489
|
)
|
|
|
11.07
|
|
|
|
(114,161
|
)
|
|
|
9.42
|
|
Exercised
|
|
|
(65,077
|
)
|
|
|
6.29
|
|
|
|
(28,612
|
)
|
|
|
3.79
|
|
|
|
(166,667
|
)
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
1,873,748
|
|
|
|
12.77
|
|
|
|
1,969,734
|
|
|
|
12.31
|
|
|
|
1,757,962
|
|
|
|
12.75
|
|
Exercisable, end of year
|
|
|
870,315
|
|
|
|
16.25
|
|
|
|
1,139,632
|
|
|
|
14.53
|
|
|
|
1,305,882
|
|
|
|
14.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
Range of
|
|
Outstanding at
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Exercisable at
|
|
|
Exercise
|
|
Exercise Price
|
|
December 31, 2007
|
|
|
(Number of Years)
|
|
|
Price
|
|
|
December 31, 2007
|
|
|
Price
|
|
|
$ 4.95 - $ 6.45
|
|
|
207,088
|
|
|
|
7.02
|
|
|
$
|
6.01
|
|
|
|
108,660
|
|
|
$
|
6.33
|
|
$ 6.51 - $ 8.16
|
|
|
298,280
|
|
|
|
7.39
|
|
|
$
|
7.44
|
|
|
|
191,812
|
|
|
$
|
7.64
|
|
$ 8.20 - $ 9.00
|
|
|
231,816
|
|
|
|
7.11
|
|
|
$
|
8.60
|
|
|
|
144,364
|
|
|
$
|
8.64
|
|
$ 9.12 - $ 9.93
|
|
|
211,672
|
|
|
|
7.94
|
|
|
$
|
9.72
|
|
|
|
124,502
|
|
|
$
|
9.63
|
|
$10.05 - $12.45
|
|
|
199,875
|
|
|
|
6.71
|
|
|
$
|
11.44
|
|
|
|
163,563
|
|
|
$
|
11.58
|
|
$12.48 - $12.60
|
|
|
12,250
|
|
|
|
5.79
|
|
|
$
|
12.53
|
|
|
|
11,312
|
|
|
$
|
12.53
|
|
$12.81 - $12.81
|
|
|
333,333
|
|
|
|
5.96
|
|
|
$
|
12.81
|
|
|
|
300,000
|
|
|
$
|
12.81
|
|
$14.06 - $37.31
|
|
|
179,632
|
|
|
|
3.54
|
|
|
$
|
23.57
|
|
|
|
177,653
|
|
|
$
|
23.67
|
|
$37.32 - $56.52
|
|
|
83,683
|
|
|
|
3.84
|
|
|
$
|
47.02
|
|
|
|
83,683
|
|
|
$
|
47.02
|
|
$63.69 - $63.69
|
|
|
333
|
|
|
|
3.85
|
|
|
$
|
63.69
|
|
|
|
333
|
|
|
$
|
63.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4.95 - $63.69
|
|
|
1,757,962
|
|
|
|
6.45
|
|
|
$
|
12.75
|
|
|
|
1,305,882
|
|
|
$
|
14.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual term of options
outstanding and options exercisable at December 31, 2007 is
6.45 years and 5.94 years, respectively. The aggregate
intrinsic value of options outstanding and options exercisable
at December 31, 2007 is $0.5 million and
$0.2 million, respectively. The aggregate intrinsic value
is calculated as the difference between the exercise price of
the underlying awards and the quoted price of our common stock
at December 31, 2007 for those awards that have an exercise
price currently below the quoted price. In each of the years
ended December 31, 2005, 2006 and 2007, the aggregate
intrinsic value of options exercised under the stock option
plans was $0.3 million, $0.1 million and
$0.2 million, respectively. Cash received from option
exercises under all stock-based payment arrangements for the
years ended December 31, 2005, 2006 and 2007 was
$0.1 million, $0.1 million and $1.1 million,
respectively. The weighted average fair value of our options
granted at the grant date was approximately $6.75 in 2005, $5.69
in 2006, and $3.53 in 2007.
FI-25
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Stock volatility
|
|
0.90
|
|
0.70
|
|
0.67
|
Risk-free interest rate
|
|
4.0%
|
|
4.6%
|
|
4.7%
|
Expected life in years
|
|
5 years
|
|
6.25 years
|
|
6.25 years
|
Stock dividend yield
|
|
|
|
|
|
|
The total fair value of shares vested during 2007 is
approximately equal to the $2.5 million recorded as stock
compensation expense during 2007 related to employee stock
option vesting under SFAS no. 123R.
Stock
Units
During 2007, the Company issued 0.5 million restricted
stock units at a weighted average grant date fair value of
$5.76, all of which are non-vested and outstanding at
December 31, 2007. No restricted stock units were granted
or outstanding in 2005 and 2006. As of December 31, 2006
and 2007, the Company had 16,279 and 81,589 deferred stock units
outstanding with a weighted average grant date fair value of
$8.10 in 2006 and $6.66 in 2007, respectively, under the
employee deferred stock unit program. As of December 31,
2006 and 2007, the Company had 13,342 and 56,800 deferred stock
units outstanding with a weighted average grant date fair value
of $5.94 in 2006 and $6.78 in 2007, respectively, under the
non-employee director deferred stock unit program. All deferred
stock units have vested. The fair value of each stock unit is
based on the underlying stock price on the date of grant. The
aggregate intrinsic value of deferred and restricted stock units
at December 31, 2007 based on the difference between the
share price on the date of grant and at December 31, 2007
is approximately $1 million.
Employment related taxes payable associated with the exercise of
employee stock options and loan forgiveness as of
December 31, 2006 and 2007 were $0.1 million and zero,
respectively (included in accrued compensation).
|
|
9.
|
Equity
Incentive Plans
|
Share-based
payments
As of December 31, 2007, we had stock options, deferred
stock units and restricted stock units outstanding under four
employee and two non-employee director stock-based compensation
plans, as follows:
2004 Stock Incentive Plan. The 2004 Stock
Incentive Plan adopted in September 2004 authorizes the Board or
one or more committees designated by the Board (the Plan
Administrator) to grant options and rights to purchase common
stock to employees, directors and consultants. Options may be
either incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as
amended, non-statutory stock options or other equity
instruments. The 2004 Stock Incentive Plan replaced the 1995
Stock Plan and 1995 Director Plan described below. The
exercise price is equal to the fair market value of our common
stock on the date of grant (or 110 percent of such fair
market value, in the case of options granted to any participant
who owns stock representing more than 10 percent of our
combined voting power). Options generally vest 25 percent
on the one-year anniversary date, with the remaining
75 percent vesting monthly over the following three years
and are exercisable for 10 years. On the first trading day
of each calendar year beginning in 2005, shares available for
issuance will automatically increase by three percent of the
total number of outstanding common shares at the end of the
preceding calendar year, up to a maximum of 333,333 shares.
In addition, the maximum aggregate number of shares which may be
issued under the 2004 Stock Incentive Plan will be increased by
any shares (up to a maximum of 933,333 shares) awarded
under the 1995 Stock Plan and 1995 Director Plan that are
forfeited, expire or are cancelled. Options become fully vested
if an employee is terminated without cause within 12 months
of a change in control as defined. Upon a corporate transaction
as defined, options not assumed or replaced will vest
immediately. Options assumed or replaced will vest if the
FI-26
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employee is terminated without cause within 12 months. As
of December 31, 2007, there were outstanding under the 2004
Stock Incentive Plan options and restricted stock units to
purchase 1,435,500 shares of our common stock and 197,732
options were available for grant.
1995 Stock Plan. The 1995 Stock Plan
authorized the Board or one or more committees designated by the
Board (the Committee) to grant options and rights to purchase
common stock to employees and certain consultants and
distributors. Options granted under the 1995 Stock Plan may be
either incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as
amended, non-statutory stock options or other equity
instruments, as determined by the Board or the Committee. The
exercise price of options granted under the 1995 Stock Plan was
required to equal the fair market value of our common stock on
the date of grant. Options generally vest 25 percent on the
one-year anniversary date, with the remaining 75 percent
vesting monthly over the following three years. Options are
exercisable for 10 years. The 1995 Stock Plan was replaced
by the 2004 Stock Incentive Plan on September 10, 2004. As
of December 31, 2007, there were outstanding under the 1995
Stock Plan options to purchase 450,239 shares of our common
stock and no options were available for grant.
1995 Director Option Plan. The
1995 Director Option Plan (the Director Plan) provided
automatic, non-discretionary grants of options to our
non-employee directors (Outside Directors). Upon election, each
director received an initial option grant to purchase
6,666 shares of common stock which vest over two years and
an annual option grant to purchase 1,666 common shares which
becomes exercisable after one year. The exercise price of
options granted to Outside Directors was required to be the fair
market value of our common stock on the date of grant. Options
granted to Outside Directors have
10-year
terms, subject to an Outside Directors continued service
as a director. The 1995 Director Option Plan was replaced
by the 2004 Stock Incentive Plan on September 10, 2004. As
of December 31, 2007 there were outstanding under the
1995 Director Option Plan options to purchase
21,668 shares of Endocares common stock and no
options were available for grant.
2002 Supplemental Stock Plan. We adopted the
2002 Supplemental Stock Plan (2002 Plan) effective June 25,
2002. Under the 2002 Plan, non-statutory options may be granted
to employees, consultants and outside directors with an exercise
price equal to at least 85 percent of the fair market value
per share of our common stock on the date of grant. The 2002
Plan expires June 24, 2012, unless earlier terminated in
accordance with plan provisions. The 2002 Plan also terminates
automatically upon certain extraordinary events, such as the
sale of substantially all or our assets, a merger in which we
are not the surviving entity or acquisition of 50 percent
or more of the beneficial ownership in our common stock by other
parties. Upon such an event, all options become fully
exercisable. Through December 31, 2007, there were options
to purchase 46,666 shares of our common stock outstanding
under the 2002 Plan. On February 22, 2007 our Board of
Directors terminated the 2002 Plan. As a result, no additional
options may be granted under the 2002 Plan. The termination of
the 2002 Plan does not affect the 46,666 outstanding options
referred to above.
Employee Deferred Stock Unit Program. On
May 18, 2006 we adopted the Employee Deferred Stock
Unit Program and the Non-employee Director Deferred
Stock Unit Program. Under the terms of the employee
program, certain eligible employees have the option to elect to
receive all or a portion of their annual incentive award (at a
minimum of 25 percent) in deferred stock units in lieu of
cash. In addition each participating employee will also receive
an additional premium in stock at a percentage determined by the
Compensation Committee of our Board. That percentage premium for
2006 and 2007 was 20 percent. Each unit entitles the holder
to receive one common share at a specified future date.
Irrevocable deferral elections are made during a designated
period no later than June 30 of each year. The units vest upon
the determination of the incentive award achieved and the number
of stock units earned. This determination is made in the first
quarter of the following fiscal year. The stock price to
determine the number of shares to be issued is the fair market
value of the stock on the date on which the deferred stock units
are granted. In 2006 and 2007, the date of grant was
June 23, 2006 and March 30, 2007, respectively, on
which dates the closing stock price was $8.10
FI-27
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and $6.66, respectively. Compensation expense related to the
bonus incentive award program is recorded pro rata during the
performance year based on the estimated incentives achieved,
whether payable in cash or in stock units. The portion of
incentive award payable in stock units is recorded as additional
paid-in-capital.
The estimated value of the incentives is periodically adjusted
based on current expectations regarding the levels of
achievement. In order to satisfy certain regulatory requirements
in preparation for the planned listing of our common stock on
The NASDAQ Capital Market, on August 6, 2007 we amended the
Employee Deferred Stock Unit Program to impose a maximum
10-year term
for the program (from the original adoption date, which was
May 18, 2006) and establish a maximum number of shares
that may be issued under the program, which is
700,000 shares. As of December 31, 2007, 81,589
deferred stock units were outstanding under the program.
Non-employee Directors Deferred Stock Unit
Program. Under the directors plan, members of the
board of directors can choose to have all or a portion of their
director fees paid in fully vested deferred stock units (at a
minimum of 25 percent) commencing July 1, 2006. The
date of grant and share price used to determine the number of
deferred stock units is set on the fifth business day after the
end of the quarter in which the services are rendered.
Additionally, to cover taxes directors may choose to have up to
50 percent of their deferred stock units paid in cash at
the date the underlying common shares are to be issued based on
the share price at that time. During 2006, elections were made
in June. Subsequent annual deferred elections will be made in
December for the following year. Deferred stock units are
granted each quarter based on the director fees earned in the
prior quarter and the fair market value of the stock on the date
of grant. The first grant was made in October 2006 for the
September 30, 2006 quarter. Directors fees, whether
payable in cash or in stock units, are expensed in the quarter
the services are rendered. The maximum number of deferred stock
units that can be settled in cash at the option of the holder is
recorded as a liability (included in deferred compensation) and
adjusted each quarter to current fair value until settlement
occurs. The fair value of the portion of the deferred stock
units issuable in shares are fixed at the date of grant and are
included in additional paid-in capital. In order to satisfy
certain regulatory requirements in preparation for the planned
listing of our common stock on The NASDAQ Capital Market, on
August 6, 2007 we amended the Non-employee Director
Deferred Stock Unit Program to impose a maximum
10-year term
for the program (from the original adoption date, which was
May 18, 2006) and establish a maximum number of shares
that may be issued under the program, which is
400,000 shares. As of December 31, 2007, 56,800
deferred stock units were outstanding under the program.
Common shares underlying the vested stock units in the employee
and director plans are issued at the earlier of the payout date
specified by the participant (which is at least two years from
the applicable election deadline), a change in control event as
defined, or the month following the participants death.
Option Arrangements Outside of Plans. In
addition to the option plans described above, on March 3,
2003, we granted options to purchase 250,000 shares of
common stock to our then President and Chief Operating Officer.
The options were granted at $6.75 per share; 83,333 of the
options were available for accelerated vesting based on the
attainment of certain milestones and objectives or five years,
whichever came first. Twenty-five percent of the remaining
166,667 options vest on the first anniversary with the balance
ratably over three years. In September 2006, the former officer
forfeited 83,333 of unvested options upon separation from
Endocare. Pursuant to the original terms of the grant, the
former officer was entitled to continue vesting in 20,834
options for one year. The expense related to the unvested
options retained by the former officer (net of reversal of
expenses on the forfeited options) was included in the
$0.3 million severance charge recorded in the third quarter
of 2006.
On December 15, 2003, we granted 333,333 options to
purchase common stock to our Chief Executive Officer. The
options were granted at $12.81 per share; 33,333 of these
options are available for accelerated vesting based on the
attainment of certain milestones and objectives or five years,
whichever comes first. Twenty-five percent of the remaining
options vest immediately with the balance vesting ratably over
three years. These milestones were not met as of
December 31, 2007.
FI-28
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All options granted pursuant to our stock-based compensation
plans are subject to immediate vesting upon a change in control
as defined in the respective plan, except for special provisions
in the case of the 2004 Stock Incentive Plan as described above.
Stockholder
Rights Plan
In April 1999, we adopted a stockholder rights plan (the Plan)
in which preferred stock purchase rights were 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 us or to deprive our stockholders of
their interest in the long-term value of Endocare. The rights
will be exercisable only if a person or group acquires
15 percent or more of Endocares 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 percent or more of our 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 percent or more of our
common stock (subject to certain exceptions stated in the Plan),
the rights are redeemable for $0.01 per right at the option of
the Board of Directors. The rights will expire at the close of
business on April 15, 2009 (the Final Expiration Date),
unless the Final Expiration Date is extended or unless we redeem
or exchange the rights earlier.
On January 1, 2007, we adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of
SFAS No. 109, Accounting for Income Taxes
(FIN 48), which is effective for fiscal years beginning
after December 15, 2006. FIN 48 creates a single model
to address accounting for uncertainty in tax positions. It
clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also
provides guidance on de-recognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect of
adoption is recorded as an adjustment to beginning retained
earnings. Because of our historical losses, FIN 48 did not have
a significant effect on our accounting and disclosure for income
taxes. As of the adoption date and at December 31, 2007, we
had no unrecognized tax benefits and do not expect a material
change in the next 12 months.
The composition of the federal and state income tax provision
(benefit) from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Federal
|
|
$
|
(705
|
)
|
|
$
|
(163
|
)
|
|
$
|
|
|
State
|
|
|
(124
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(829
|
)
|
|
$
|
(192
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2005 and 2006 tax benefit is the result of current year
pre-tax book losses being utilized against pre-tax book income
from discontinued operations. There is an offsetting tax
provision within discontinued operations. As such, we reported
no net income tax expense from continuing and discontinued
operations combined in each of the three years due to our
operating losses.
FI-29
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the tax effects of temporary
differences, which give rise to significant portions of the
deferred tax assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
448
|
|
|
$
|
454
|
|
Nondeductible reserves and accruals
|
|
|
2,399
|
|
|
|
3,077
|
|
Research and experimentation tax credit carryforwards
|
|
|
1,153
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
45,430
|
|
|
|
|
|
Capital loss carryforwards
|
|
|
16,064
|
|
|
|
|
|
Stock-based compensation
|
|
|
724
|
|
|
|
1,999
|
|
Other
|
|
|
160
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,378
|
|
|
|
5,621
|
|
Valuation allowance
|
|
|
(66,378
|
)
|
|
|
(5,621
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense differs from amounts computed by
applying the United States federal income tax rate of
34 percent to pretax loss as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Computed expected tax benefit
|
|
$
|
(5,327
|
)
|
|
$
|
(3,831
|
)
|
|
$
|
(3,042
|
)
|
Nondeductible expenses
|
|
|
89
|
|
|
|
342
|
|
|
|
71
|
|
Increase in valuation allowance
|
|
|
4,490
|
|
|
|
4,296
|
|
|
|
2,678
|
|
State taxes
|
|
|
(81
|
)
|
|
|
(19
|
)
|
|
|
1
|
|
Other
|
|
|
|
|
|
|
(980
|
)
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense (benefit)
|
|
$
|
(829
|
)
|
|
$
|
(192
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we have federal and California net
operating loss carryforwards of $123.9 million and
$31.1 million, respectively. We also have approximately
$20.3 million in net operating loss carryforwards in
various other states. The federal net operating loss
carryforwards begin to expire in 2011 and the state net
operating loss carryforwards begin to expire in 2008. We also
have federal and state capital loss carryforwards in the amount
of $39.6 million and $30.0 million, that begin to
expire in 2009, respectively. In addition, we have federal and
state research and experimentation credit carryforwards of
$0.8 million and $0.2 million, respectively. The
federal research and experimentation credit carryforwards begin
to expire in 2017 and the state research and experimentation
credit carryforwards do not expire.
Under Internal Revenue Code (IRC) Sections 382 and 383 and
similar state provisions, ownership changes will limit the
annual utilization of net operating loss, capital loss and tax
credit carryforwards existing prior to a change in control that
are available to offset future taxable income and taxes due.
Based upon the equity transactions since our formation, some or
all of our existing net operating loss, capital loss and tax
credit carryforwards may be subject to annual limitations under
IRC Sections 382 and 383. We have not performed an analysis
to determine whether an ownership change or multiple ownership
changes have occurred for tax reporting purposes due to the
complexity and cost associated with such a study, and the fact
that there may be additional such ownership changes in the
future. If a study were to be performed, specific limitations on
the available net operating loss and tax credit carryforwards
may result. Until a study is completed and any limitation known,
no amounts are being considered as an uncertain
FI-30
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax position or disclosed as unrecognized tax benefit under
FIN 48. Effective January 1, 2007, we have also
removed the deferred tax assets related to these losses and tax
credit carryforwards and the offsetting valuation allowances.
These amounts are no longer recognized until they can be
measured after a Section 382 analysis is completed. Since
any recognizable deferred tax assets would be fully reserved,
future changes in our unrecognized tax benefits will not impact
our effective tax rate. We have also established a full
valuation allowance for other deferred tax assets due to
uncertainties surrounding our ability to generate future taxable
income to realize these assets.
We recognize interest and penalties related to uncertain tax
positions, if any, in income tax expense. The tax years 2003
through 2006 remain open to examination by the major taxing
jurisdictions to which we are subject.
|
|
11.
|
Collaborative
and Other Agreements
|
Sanarus
Medical Inc.
In October 1999, we entered into a strategic alliance with
Sanarus Medical, Inc. (Sanarus), a privately held medical device
company. We received 200,041 Series A voting convertible
preferred shares for $0.3 million and a warrant to acquire
3,166,000 common shares for $0.01 per share in consideration for
entering into a manufacturing, supply and license agreement (the
1999 Agreement). The 1999 Agreement provided Sanarus an
exclusive, royalty-free, worldwide non-sublicenseable right to
develop, manufacture and sell products using cryoablation
technology developed by Endocare for use in the field of
gynecology and breast diseases. The warrant is exercisable at
any time through October 12, 2009. In June 2001, the 1999
Agreement was amended (the 2001 Agreement) to provide for
(i) the termination of Sanaruss exclusive,
royalty-free, worldwide non-sublicenseable right under the 1999
Agreement; (ii) Sanaruss grant to us of an exclusive
(even as to Sanarus), worldwide, irrevocable, fully
paid-up
right to develop, manufacture and sell products using certain
Sanarus technology for use in the diagnosis, prevention and
treatment of prostate, kidney and liver diseases, disorders and
conditions; and (iii) our grant to Sanarus of an exclusive
(even as to Endocare), worldwide, irrevocable, fully
paid-up
right to develop, manufacture and sell products using certain of
our technology for use in the diagnosis, prevention and
treatment of gynecological and breast diseases, disorders and
conditions.
In April 2003, we and other investors entered into a second
bridge loan financing in which Sanarus issued to us a
convertible promissory note in the aggregate amount of
$0.6 million and a warrant to purchase equity shares in
Sanarus with an aggregate exercise price of up to
$0.3 million. Upon completion of an equity financing by
Sanarus in October 2003, the bridge loan and warrant were
canceled in exchange for 908,025 shares of Series C
voting preferred stock and a warrant to purchase 308,823
Series C shares at $0.68 per share. As of December 31,
2006 and 2007, our voting interest in Sanarus was approximately
4.1 percent on an as-converted fully diluted basis.
The total investment in Sanarus of $0.9 million as of
December 31, 2006 and 2007 is included in investments and
other assets. The investment is recorded at cost since we do not
exercise significant influence over the operations of Sanarus.
CryoDynamics,
LLC Research & Development
Agreement
On November 8, 2005, we entered into a commercialization
agreement (the Agreement) with CryoDynamics, LLC to design and
develop a cryoablation system utilizing nitrogen gas. The
parties will jointly own all inventions made or conceived by
CryoDynamics in performing the Agreement (Development
Inventions). To assist CryoDynamics in its research and
development efforts, we advance CryoDynamics $42,500 per month,
effective October 1, 2005 until such time as either party
enters into a license agreement based upon the nitrogen system
with an independent third party that results in CryoDynamics
receiving an amount sufficient to repay the advances and
fund CryoDynamics monthly operating expenses of
$42,500.
Under the Agreement, CryoDynamics granted to us an exclusive,
worldwide license (with the right to sublicense) to the
Development Inventions and pre-existing technology in all
medical fields of use. We also have granted to CryoDynamics an
exclusive, worldwide license (with the right to sublicense) to
such Development
FI-31
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventions in specified fields of use. Royalties and license
fees will be determined in accordance with the Agreement. The
Agreement also provides for a right of first refusal should
CryoDynamics intend to accept an offer from any potential buyer
for the sale of all or part of CryoDynamicss business.
The Agreement will continue until the later of
(a) December 31, 2015, or (b) expiration of the
parties obligations to pay royalties or until the
Agreement is terminated because of breach, insolvency or
bankruptcy.
Since repayment of amounts advanced under the agreement is
contingent upon the successful development, commercialization
and licensing of the technology and is not reasonably assured,
these advances are expensed as incurred. We recorded
$0.1 million, $0.5 million and $0.5 million of
research and development costs for 2005, 2006 and 2007,
respectively, in connection with the Agreement.
Patent,
Licensing, Royalty and Distribution Agreements
We have entered into other patent, licensing and royalty
agreements with third parties, some of whom also have consulting
agreements with us and are owners of or affiliated with entities
which have purchased products from us. These agreements
generally provide for purchase consideration in the form of
cash, common shares, warrants or options and royalties based on
a percentage of sales related to the licensed technology,
subject to minimum amounts per year. The patents and licensing
rights acquired were recorded based on the fair value of the
consideration paid. Options and warrants issued were valued
using the Black-Scholes option pricing model. These assets are
amortized over their respective estimated useful lives. Royalty
payments are expensed as incurred.
We have also entered into distribution agreements with third
parties. These agreements govern all terms of sale, including
shipping terms, pricing, discounts and minimum purchase quotas,
if applicable. Pricing is fixed and determinable and the
distributors contractual obligation to pay is not
contingent on other events, such as final sale to an end-user.
We generally do not grant a right of return except for defective
products in accordance with our warranty policy, and in some
cases for unsold inventory within a limited time period upon the
termination of the distribution agreement.
|
|
12.
|
Commitments
and Contingencies
|
Leases
We lease office space and equipment under operating leases,
which expire at various dates through 2012. Some of these leases
contain renewal options and rent escalation clauses. During
2007, we entered into a capital lease agreement for certain
office equipment valued at $0.1 million. The lease
agreement expires in 2011. Minimum lease payments due within the
next twelve months are classified as current liabilities on our
balance sheet. In calculating the capital lease obligation, we
used the incremental borrowing rate available through our credit
facility with Silicon
FI-32
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valley Bank. Future minimum lease payments by year and in the
aggregate under all non-cancelable capital and operating leases
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Lease
|
|
|
Leases
|
|
|
Year ending December 31, 2008
|
|
$
|
34
|
|
|
$
|
549
|
|
2009
|
|
|
34
|
|
|
|
566
|
|
2010
|
|
|
34
|
|
|
|
138
|
|
2011
|
|
|
34
|
|
|
|
6
|
|
2012
|
|
|
|
|
|
|
2
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
136
|
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense during 2005, 2006 and 2007 was $0.7 million,
$0.8 million and $0.7 million, respectively.
Employment
and Severance Agreements
We have entered into employment agreements with certain
executives which provide for annual base salaries and incentive
payments of up to 85 percent of base salary subject to
attainment of corporate goals and objectives pursuant to
incentive compensation programs approved by our board of
directors, stock options and restricted stock units. The
agreements provide for severance payments if the executive is
terminated other than for cause or terminates for good reason as
defined. The options vest over specified time periods with
accelerated vesting upon attainment of performance targets in
certain instances.
Former
Officers
As described in further detail below under
Governmental Legal Proceedings our
former Chief Executive Officer and Chairman of the Board (former
CEO) and former Chief Financial Officer and Chief Operating
Officer (former CFO) both of whom ceased to be employed by us in
2003, are defendants in a criminal lawsuit involving multiple
felony counts and a civil lawsuit filed by the SEC relating to
our historical financial reporting issues and related matters.
The former CEO and the former CFO have each agreed to repay us
severance and related amounts $750,000 in the case of the former
CEO and approximately $666,000 in the case of the former CFO)
upon either (i) his conviction in a court of law, or
entering into a plea of guilty or no contest to, any crime
directly relating to his activities on behalf of Endocare during
his employment, or (ii) successful prosecution of an
enforcement action by the SEC against him. The criminal trial
for these individuals is scheduled to begin in September 2008.
On October 2, 2006, we executed a General Release of All
Claims with our then President and Chief Operating Officer (the
former President) upon his separation effective October 2,
2006. We agreed to pay the former President his base salary of
$0.3 million per year via semi-monthly salary continuation
payments for a period of 12 months and continuation of his
health benefits pursuant to COBRA for one year. The former
President held 266,667 options from various grants, of which
145,833 options had vested prior to the separation date. He
forfeited 100,000 unvested options upon separation but was
entitled to continue vesting in the remaining 20,834 unvested
options for one year pursuant to the original grant terms. These
options became fully vested in March 2007. The expense related
to the unvested options retained by the employee (net of
reversal of stock-based compensation expense on the forfeited
options) was included in the $0.3 million severance charge
recorded in the third quarter of 2006. The former President
exercised the 166,667 options during the three months ended
December 31, 2007 for $1.1 million in cash ($6.75 per
share).
FI-33
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 27, 2004, we executed a General Release of All
Claims with our then Chief Financial Officer which was effective
as of August 10, 2004. Pursuant to the terms of the General
Release, we agreed to pay her current base salary of
$0.2 million per year via semi-monthly salary continuation
payments for a period of 12 months and continuation of her
health benefits pursuant to COBRA for one year. We also agreed
to permit our then Chief Financial Officer to continue to vest
in all stock options held at the separation date through
July 31, 2005. We recorded stock-based compensation expense
of $0.1 million. In 2004 and 2005, the former Chief
Financial Officer exercised options to purchase 5,208 and
43,402 shares, respectively. The remaining vested options
expired unexercised.
Employee
Benefit Plans
We have has a 401(k) savings plan covering substantially all
employees. The Plan currently provides for a discretionary match
of amounts contributed by each participant as approved by the
Compensation Committee of the Board of Directors. No matching
contributions were made in 2005, 2006 or 2007.
Legal
Matters
We are a party to lawsuits in the normal course of our business.
Litigation and governmental investigation can be expensive and
disruptive to normal business operations. Moreover, the results
of complex legal proceedings are difficult to predict.
Significant judgments or settlements in connection with the
legal proceedings described below may have a material adverse
effect on our business, financial condition, results of
operations and cash flows. Other than as described below, we are
not a party to any legal proceedings that we believe to be
material.
Governmental
Legal Proceedings
As reported in the
Form 8-K
that we filed on July 20, 2006, we executed a consent to
entry of judgment in favor of the SEC on July 14, 2006 and
entered into a non-prosecution agreement with the the DOJ on
July 18, 2006. These two agreements effectively resolved,
with respect to us, the investigations begun by the SEC and by
the DOJ in January 2003, regarding allegations that we and
certain of our former officers and former directors and one
current employee issued or caused to be issued, false and
misleading statements regarding our financial results for 2001
and 2002 and related matters. Under the terms of the consent
judgment with the SEC (i) we paid a total of the $750,000
in civil penalties and disgorgement; and (2) we agreed to a
stipulated judgment enjoining future violations of securities
laws. On April 7, 2006, we entered into an escrow agreement
with Morrison & Foerster LLP, our outside counsel,
pursuant to which we placed the $750,000 anticipated settlement
in escrow with Morrison & Foerster LLP at the request
of the SEC staff. The funds were released from the escrow to the
SEC in August 2006. A liability for the monetary penalty was
accrued in 2004.
The investigations and legal proceedings related to certain
former officers and former directors remain ongoing and are not
affected by our settlements with the SEC and DOJ. We remain
contractually obligated to pay legal fees for and otherwise
indemnify these former officers and former directors. On
August 9, 2006 the SEC filed civil fraud charges in federal
district court against two former officers, who were our former
Chief Executive Officer and Chairman of the Board and our former
Chief Financial Officer and Chief Operating Officer. On
April 9, 2007, these two former officers were indicted by a
federal grand jury in Orange County, California. The indictment
charges them with 18 counts of wire fraud, two counts of
securities fraud, one count of false certification of financial
reports, one count of false statements in reports filed with the
SEC, one count of lying to accountants and four counts of
honest services wire fraud. These former officers
were separated from Endocare in 2003. The criminal trial is
currently scheduled to begin on September 30, 2008. The
SECs civil case has been stayed pending the outcome of the
DOJs criminal case against these individuals. The SEC also
may decide to file civil charges against one or more former
directors. For the year ended December 31, 2007 we incurred
expenses of $1.7 million relating to legal fees of former
officers and former directors, and recorded insurance recoveries
of $0.9 million. As of December 31, 2007, we have
$0.1 million available under this insurance coverage.
FI-34
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Historical
Option Granting Practices
In July 2006 our Audit Committee requested that management
conduct an internal review of our historical stock option
practices, the timing of stock option grants and related
accounting and documentation. Based on this review, management
identified several stock option grants made between 1997 and
2002 for which the actual measurement dates appeared to differ
from the recorded grant dates. Management analyzed the potential
accounting impact, assuming that the measurement dates for these
option grants differ from the recorded grant dates, and
concluded that the financial impact did not necessitate
adjustment to or restatement of our previously-issued financial
reports. Management reported the results of its review to our
Audit Committee and Board of Directors at their regularly
scheduled meetings on July 26, 2006. Following these
meetings, we contacted the SEC and the DOJ and reported our
findings. On August 1, 2006, we met with the SEC staff to
discuss our findings and later received a subpoena from the SEC
requesting additional option-related information. We have
responded to this subpoena and will continue to fully cooperate
with the SEC and DOJ and with their ongoing investigations
related to certain of our former officers and former directors.
After receiving the subpoena from the SEC, management identified
certain stock option grants made in 2003 for which the actual
measurement dates may differ from the recorded grant dates.
However, similar to the grants between 1997 and 2002 previously
identified, management concluded that the financial impact of
the 2003 grants, individually and in the aggregate, did not
necessitate adjustment to or restatement of our
previously-issued financial reports.
Shareholder
Class Action and Derivative Lawsuits
In November 2002, we were named as a defendant, together with
certain former officers, in a
class-action
lawsuit filed in the United States District Court for the
Central District of California. This action, which was
consolidated with other similar complaints on October 31,
2003, alleged that the defendants violated sections of the
Securities Exchange Act of 1934 by purportedly issuing false and
misleading statements regarding our revenues and expenses in
press releases and SEC filings. On November 8, 2004, we
executed a settlement agreement with the lead plaintiffs and
their counsel. In exchange for a release of all claims, we and
certain individuals paid a total of $8.95 million in cash,
which was funded by our directors and officers
liability insurance carriers prior to December 31, 2004. On
February 7, 2005, the Court issued a final order approving
the agreement and dismissing the
class-action
lawsuit.
On December 6, 2002, Frederick Venables filed a purported
derivative action against us and certain former officers and a
former director in California based upon allegations that the
defendants issued false and misleading statements regarding our
revenues and expenses in press releases and SEC filings. On
December 6, 2004, we executed a settlement agreement with
the plaintiff and his counsel and the derivative lawsuit was
dismissed on December 8, 2004. Under the agreement, in
exchange for the plaintiffs release of all claims, we paid
a total of $0.5 million in cash prior to December 31,
2004. The agreement also required us to maintain various
corporate governance measures for a period of at least two
years, unless a modification is necessary in the good faith
business judgment of our Board of Directors.
The settlements referenced above, the related legal and defense
costs and costs under our ongoing indemnification obligations to
certain former officers and former directors were covered under
four directors and officers liability insurance
policies in effect at that time, with limits of $5 million
each and aggregate coverage of $20 million. The primary
carrier reimbursed our defense costs up to the limits of its
$5 million policy. The three excess carriers, representing
$15 million of the $20 million of coverage, filed
arbitration complaints seeking rescission of the policies. In
December 2004 and February 2005, we reached settlement with two
of the three excess carriers to reimburse us for current and
future legal defense and litigation settlement costs. On
December 1, 2005, we entered into a settlement agreement
with the remaining excess carrier pursuant to which we paid the
carrier $1.0 million in full settlement of any claims.
Under the settlement agreement, we also granted a mutual release
to the carrier. As of December 31, 2007, we have
$0.1 million in remaining available coverage through the
third excess
FI-35
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
carrier for legal costs under our continuing indemnification
obligations to our former officers and former directors who
remain under investigation and subject to legal proceedings by
the SEC and DOJ.
Lawsuit
with KPMG LLP
On October 26, 2006, we filed a lawsuit with the Superior
Court of the State of California for the County of Orange
against our former independent auditor, KPMG LLP, for
professional negligence and breach of contract, seeking damages
in an amount to be determined at trial. In response to our
claims against KPMG, KPMG filed a cross-complaint against us and
certain former officers.
On September 11, 2007, we entered into a binding memorandum
of understanding (MOU) with KPMG. The MOU resolves the
litigation with KPMG. Under the MOU the parties have granted
mutual releases and agreed to dismiss our respective claims in
the litigation. In addition, KPMG agreed that no later than
October 11, 2007 KPMG would pay to us a settlement amount
of $1.0 million and would return to us fees in the amount
of $0.2 million. KPMG made this payment and return of fees
on October 11, 2007. Under a preexisting contingency fee
agreement, we are required to pay one-third of the settlement
amount and one-third of the returned fees to our outside
litigation counsel. The net recovery of $0.7 million was
recorded as a litigation settlement recovery in the consolidated
statement of operations.
Other
Litigation
In January 2006, we entered into a settlement and release
agreement with certain parties against whom we had a claim from
a judgment awarded to us in prior years. We received
$0.2 million in the settlement of this claim, which was
recorded as a reduction of general and administrative expenses
in the first quarter of 2006.
In addition, in the normal course of business, we are subject to
various other legal matters, which we believe will not
individually or collectively have a material adverse effect on
our consolidated financial condition, results of operations or
cash flows. However, the results of litigation and claims cannot
be predicted with certainty, and we cannot provide assurance
that the outcome of various legal matters will not have a
material adverse effect on our consolidated financial condition,
results of operations or cash flows. As of December 31,
2007, we have not established a liability for contingencies in
the consolidated balance sheets since the likelihood of loss and
potential liability cannot be reliably estimated at this time.
However, our evaluation of the likelihood of an unfavorable
outcome with respect to these actions could change in the future.
As described above in Note 2 Recent
Operating Results and Liquidity, on October 26,
2005, we entered into a one-year credit facility with Silicon
Valley Bank (the Lender), which provided up to $4.0 million
in borrowings for working capital purposes in the form of a
revolving line of credit and term loans (not to exceed
$500,000). The agreement was amended on various dates during
2006 and 2007. In February 2008, the agreement was further
extended to February 27, 2009, as described below.
The credit facility permits the borrowings up to the lesser of
$4.0 million or amounts available under a borrowing base
formula based on eligible accounts receivable and inventory, but
availability of funds is ultimately subject to the good faith
business judgment of the Lender. As amended, the borrowing base
is (i) 85 percent of eligible accounts receivable,
plus (ii) the lesser of 30 percent of the value of
eligible inventory or $500,000. Borrowings are secured by all of
our assets, including all receivable collections which are held
in trust for the Lender. Interest is payable monthly at prime
rate plus 1.5 percent. The agreement requires a one-time
commitment fee of $40,000 paid on the effective date and an
annual facility fee equal to 0.5 percent of the unused
portion of the facility. A termination fee will also be assessed
if the credit facility is terminated prior to expiration. We had
no outstanding borrowings at December 31, 2006. As of
December 31, 2007 there was $0.9 million outstanding
on the line of credit.
FI-36
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a condition to each advance under the credit facility, all
representations and warranties by us must be materially true and
no event of default must have occurred or be continuing. In
addition, the Lender, in its good faith business judgment, must
determine that no material adverse change has occurred. A
material adverse change occurs when there is a material
impairment in the priority of the Lenders lien in the
collateral or its value, a material adverse change in our
business, operations or condition, a material impairment of the
prospect of repayment or if the Lender determines, in its good
faith reasonable judgment, that there is a reasonable likelihood
that we will fail to comply with one or more financial covenant
in the next financial reporting period.
The agreement governing the credit facility contains various
financial and operating covenants that impose limitations on our
ability, among other things, to incur additional indebtedness,
merge or consolidate, sell assets except in the ordinary course
of business, make certain investments, enter into leases and pay
dividends without the consent of the Lender. The credit facility
also includes a subjective acceleration clause and a requirement
to maintain a lock box with the Lender to which all collections
are deposited. Under the subjective acceleration clause, the
Lender may declare default and terminate the credit facility if
it determines that a material adverse charge has occurred. If
the aggregate outstanding advances plus reserves placed by the
Lender against the loan availability exceeds 50 percent of
the receivable borrowing base component as defined, or if a
default occurs, all current and future lock box proceeds will be
applied against the outstanding borrowings. The credit facility
also contains cross-default provisions and a minimum tangible
net worth requirement measured on a monthly basis. Tangible net
worth must be equal to or greater than the sum of a base amount
($1,000 as of December 31, 2007) plus 25 percent
of all consideration received from issuing equity securities and
subordinated debt and 25 percent of positive consolidated
net income in each quarter.
We were not in compliance with the minimum tangible net worth
covenant for the months September 2006 to November 2006. On
December 22, 2006, we signed an amendment to the agreement
governing the credit facility. Among other things, the amendment
(i) modified the borrowing base to increase the eligible
accounts receivable from 80 percent to 85 percent and
modified the definition of accounts that are ineligible under
the borrowing base calculation; (ii) modified the loan
margin as defined to 1.50 percent; and (iii) waived
non-compliance with the minimum tangible net worth requirement
at September 30, 2006, October 31, 2006 and
November 30, 2006, and modified the terms of the covenant.
On February 23, 2007, the credit agreement was amended to
further modify the minimum tangible net worth provision and to
extend the maturity date to February 27, 2008. In February
2008, the maturity date was extended for one year.
From February through May 2007, our outstanding advances
exceeded 50 percent of the receivable borrowing base
referred to above. As required by the agreement, our lock-box
proceeds were applied daily to reduce the outstanding advances
and we re-borrowed the amount subject to the Lenders
approval. In June 2007, the outstanding advances were reduced to
less than 50 percent of the receivable borrowing base, and
we were no longer required to repay and re-borrow funds on a
daily basis as of July 13, 2007.
We were in compliance with all covenants at December 31,
2006 and 2007. However, there is no assurance that we will be
able to comply with all the requirements in the future periods,
that we can obtain a waiver if another default occurs or that
the Lender will not exercise the subjective acceleration clause
to terminate the agreement.
|
|
14.
|
Related
Party Transactions
|
In February 2002, we purchased the patents to certain
cryoablation technologies and a covenant not to compete from a
cryosurgeon inventor for 33,333 shares of our common stock
valued at $1.4 million, of which $1.1 million
(25,000 shares) was allocated to the patent to be amortized
over 15 years and the remaining $0.3 million
(8,333 shares) was allocated to the covenant to be
amortized over five years.
The agreement also requires the seller to perform certain
consulting services over 15 years for the consideration
received. No consideration was allocated to the consulting
agreement since its value could not be accurately measured. In
January 2003, we extended a $344,000 loan to the seller to
assist with the payment of related federal
FI-37
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income taxes arising from the 2002 asset sale. The loan was
secured by the shares issued, bore interest at 1.8 percent
and was originally due in January 2005. In 2004 and 2006, we
extended the maturity date to January 2006 and January 2007,
respectively. We are currently in discussions with the borrower
to extend the maturity date further, in exchange for
cancellation of shares sufficient to pay accrued interest. The
outstanding balance of the note has been charged to bad debt in
2006, and was included in general and administrative expenses.
The accrued interest income in the amount of $25,000 was
reversed in the fourth quarter of 2006.
|
|
15.
|
Quarterly
Results of Operations (Unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2007 and 2006
(in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Revenues from continuing operations
|
|
$
|
7,546
|
|
|
$
|
7,901
|
|
|
$
|
7,326
|
|
|
$
|
6,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from continuing operations
|
|
$
|
2,622
|
|
|
$
|
2,713
|
|
|
$
|
2,171
|
|
|
$
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,259
|
)
|
|
$
|
(2,264
|
)
|
|
$
|
(984
|
)
|
|
$
|
(2,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,259
|
)
|
|
$
|
(2,264
|
)
|
|
$
|
(984
|
)
|
|
$
|
(2,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share of common
stock basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.21
|
)
|
Net loss per share of common stock basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.21
|
)
|
Weighted average shares of common stock outstanding
basic and diluted
|
|
|
10,313
|
|
|
|
10,916
|
|
|
|
11,595
|
|
|
|
11,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenues from continuing operations
|
|
$
|
7,262
|
|
|
$
|
6,908
|
|
|
$
|
6,700
|
|
|
$
|
7,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from continuing operations
|
|
$
|
3,766
|
|
|
$
|
3,256
|
|
|
$
|
2,677
|
|
|
$
|
2,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(5,174
|
)
|
|
$
|
(708
|
)
|
|
$
|
(2,149
|
)
|
|
$
|
(3,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,929
|
)
|
|
$
|
(708
|
)
|
|
$
|
(2,149
|
)
|
|
$
|
(2,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share of common
stock basic and diluted
|
|
$
|
(0.51
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.30
|
)
|
Net loss per share of common stock basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.29
|
)
|
Weighted average shares of common stock outstanding
basic and diluted
|
|
|
10,047
|
|
|
|
10,055
|
|
|
|
10,058
|
|
|
|
10,177
|
|
FI-38
ENDOCARE,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the
|
|
|
Additions
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charges to
|
|
|
|
|
|
|
|
|
the End of
|
|
|
|
the Period
|
|
|
Operations
|
|
|
Other
|
|
|
Deductions
|
|
|
the Period
|
|
|
|
(In thousands)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
74
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
(14
|
)
|
|
$
|
70
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
70
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
(22
|
)
|
|
$
|
84
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
84
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
90
|
|
Amounts exclude discontinued operations.
FI-39
Endocare,
Inc. and Subsidiary
Condensed
Financial Statements
for the
Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
|
|
|
|
|
|
|
Page
|
|
Condensed Financial Statements for the Three and Nine Months
Ended September 30, 2008 and 2007 (Unaudited)
|
|
|
|
|
Condensed Statements of Operations
|
|
|
FI-41
|
|
Condensed Balance Sheets
|
|
|
FI-42
|
|
Condensed Statements of Cash Flows
|
|
|
FI-43
|
|
Notes to Condensed Financial Statements
|
|
|
FI-44
|
|
FI-40
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
7,599
|
|
|
$
|
7,326
|
|
|
$
|
23,672
|
|
|
$
|
22,773
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
2,275
|
|
|
|
2,171
|
|
|
|
7,127
|
|
|
|
7,506
|
|
Research and development
|
|
|
626
|
|
|
|
699
|
|
|
|
1,765
|
|
|
|
1,935
|
|
Selling and marketing
|
|
|
3,423
|
|
|
|
3,500
|
|
|
|
11,120
|
|
|
|
11,362
|
|
General and administrative
|
|
|
2,951
|
|
|
|
2,881
|
|
|
|
9,234
|
|
|
|
9,556
|
|
Gain on recovery of note receivable
|
|
|
(750
|
)
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
Litigation settlement, net of related legal expenses
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
8,525
|
|
|
|
8,574
|
|
|
$
|
28,496
|
|
|
|
29,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(926
|
)
|
|
|
(1,248
|
)
|
|
|
(4,824
|
)
|
|
|
(6,909
|
)
|
Interest income, net
|
|
|
5
|
|
|
|
264
|
|
|
|
181
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(921
|
)
|
|
$
|
(984
|
)
|
|
$
|
(4,643
|
)
|
|
$
|
(6,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.59
|
)
|
Weighted average shares of common stock outstanding
|
|
|
11,972
|
|
|
|
11,595
|
|
|
|
11,854
|
|
|
|
10,947
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FI-41
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,346
|
|
|
$
|
7,712
|
|
Accounts receivable, net
|
|
|
3,579
|
|
|
|
3,530
|
|
Inventories, net
|
|
|
3,108
|
|
|
|
3,022
|
|
Prepaid expenses and other current assets
|
|
|
597
|
|
|
|
2,081
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,630
|
|
|
|
16,345
|
|
Property and equipment, net
|
|
|
724
|
|
|
|
850
|
|
Intangibles, net
|
|
|
2,701
|
|
|
|
3,077
|
|
Investments and other assets
|
|
|
993
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,048
|
|
|
$
|
21,261
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,042
|
|
|
$
|
2,194
|
|
Accrued compensation
|
|
|
2,111
|
|
|
|
3,895
|
|
Other accrued liabilities
|
|
|
2,931
|
|
|
|
3,034
|
|
Loan payable
|
|
|
880
|
|
|
|
880
|
|
Obligations under capital lease current portion
|
|
|
26
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,990
|
|
|
|
10,031
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
120
|
|
|
|
227
|
|
Obligations under capital lease less current portion
|
|
|
69
|
|
|
|
84
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 1,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000 shares
authorized; 11,811 and 11,762 issued and outstanding as of
September 30, 2008 and December 31, 2007, respectively
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
201,256
|
|
|
|
200,663
|
|
Accumulated deficit
|
|
|
(194,399
|
)
|
|
|
(189,756
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,869
|
|
|
|
10,919
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
17,048
|
|
|
$
|
21,261
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FI-42
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,643
|
)
|
|
$
|
(6,507
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Revaluation of Plethora note receivable
|
|
|
|
|
|
|
(442
|
)
|
Gain on recovery of note receivable
|
|
|
(750
|
)
|
|
|
|
|
Inventory reserve
|
|
|
238
|
|
|
|
(37
|
)
|
Depreciation and amortization
|
|
|
752
|
|
|
|
874
|
|
Loss on sale of placement units and other fixed assets
|
|
|
|
|
|
|
52
|
|
Extinguishment of payroll tax liabilities
|
|
|
|
|
|
|
(121
|
)
|
Stock-based compensation
|
|
|
810
|
|
|
|
2,949
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(49
|
)
|
|
|
581
|
|
Inventories
|
|
|
(492
|
)
|
|
|
(575
|
)
|
Prepaid expenses and other assets
|
|
|
(123
|
)
|
|
|
731
|
|
Litigation settlement receivable, net of related legal expenses
payable
|
|
|
|
|
|
|
(677
|
)
|
Accounts payable
|
|
|
1,849
|
|
|
|
(640
|
)
|
Accrued compensation
|
|
|
(1,891
|
)
|
|
|
427
|
|
Other liabilities
|
|
|
(117
|
)
|
|
|
(261
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,416
|
)
|
|
|
(3,646
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Collection of notes receivable
|
|
|
1,601
|
|
|
|
|
|
Proceeds from recovery of note receivable
|
|
|
750
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(81
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,270
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments under capital lease obligation
|
|
|
(18
|
)
|
|
|
|
|
Net borrowings on line of credit
|
|
|
|
|
|
|
880
|
|
Payroll tax on issuance of restricted stock
|
|
|
(202
|
)
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
|
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(220
|
)
|
|
|
9,480
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,366
|
)
|
|
|
5,758
|
|
Cash and cash equivalents, beginning of period
|
|
|
7,712
|
|
|
|
1,811
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
5,346
|
|
|
$
|
7,569
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Transfer of inventory to property and equipment for placement at
customer sites
|
|
$
|
270
|
|
|
$
|
273
|
|
Transfer of Cryocare Surgical Systems from property and
equipment to inventory for sale
|
|
$
|
101
|
|
|
$
|
103
|
|
Adoption of FSP
00-19-2:
|
|
|
|
|
|
|
|
|
Reduction of retained earnings
|
|
$
|
|
|
|
$
|
4,373
|
|
Increase in additional paid-in capital
|
|
|
|
|
|
|
5,680
|
|
Reduction of common stock warrant liability
|
|
|
|
|
|
|
1,307
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
FI-43
|
|
1.
|
Organization
and Operations
|
We are a medical device company focused on developing,
manufacturing and selling cryoablation products which have the
potential to assist physicians in improving and extending life
by use in the treatment of cancer and other tumors. We were
formed in 1990 as a research and development division of
Medstone International, Inc. (Medstone), a
manufacturer of shockwave lithotripsy equipment for the
treatment of kidney stones. Following our incorporation under
the laws of the state of Delaware in 1994, we became an
independent, publicly-owned corporation upon Medstones
distribution of our stock to the existing stockholders on
January 1, 1996.
Following the rules and regulations of the Securities and
Exchange Commission (SEC), we have omitted footnote disclosures
in this report that would substantially duplicate the
disclosures contained in our annual audited financial
statements. The accompanying condensed consolidated financial
statements should be read together with the consolidated
financial statements and the notes thereto included in our
Annual Report on
Form 10-K,
filed with the SEC on March 17, 2008.
The accompanying condensed consolidated financial statements
reflect all adjustments, consisting solely of normal recurring
accruals, needed to present fairly the financial results for
these interim periods. The condensed consolidated results of
operations presented for the interim periods are not necessarily
indicative of the results for a full year. All intercompany
transactions and accounts have been eliminated in consolidation.
Effective on August 20, 2007, we effected a one-for-three
reverse split of our common stock. All share amounts and per
share amounts have been adjusted throughout the condensed
consolidated financial statements and the related notes to
reflect this reverse stock split for all periods presented. The
reverse split did not affect the authorized shares and par value
per share. On October 10, 2007, our common stock commenced
trading on The NASDAQ Capital Market under the symbol
ENDO.
|
|
3.
|
Recent
Operating Results and Liquidity
|
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of September 30,
2008, we had an accumulated deficit of $194.4 million and
cash and cash equivalents of $5.3 million. Net cash used in
operations for the nine months ended September 30, 2008 and
2007 was $4.4 million and $3.6 million, respectively.
In addition to working capital needs for our operations and our
growth initiatives, we have also incurred significant
expenditures under indemnification obligations for our former
officers and directors and have large outstanding state and
local tax liabilities, as further described below.
We have historically funded our cash needs with borrowings and
equity financings. Of our total cash and cash equivalents,
$0.9 million is borrowed under a $4.0 million line of
credit with Silicon Valley Bank, which expires in February 2009
and is payable on a current basis. During 2007, we also received
$1.6 million and $7.0 million from the sale of our
common stock to Fusion Capital Fund II, LLC (Fusion
Capital) and Frazier Healthcare V, L.P. (Frazier),
respectively, as more fully described in Note 4
Private Placement of Common Stock and Warrants.
As discussed in Note 6 Collection
of Notes Receivable, during 2008, we have also
received one-time payments from collection of two notes
receivable totaling $2.3 million.
We do not expect to reach cash flow positive operations on an
annual basis in 2008 or 2009, and we expect to continue to
generate losses from operations for the foreseeable future.
These losses have resulted in part from our continued investment
to gain acceptance of our technology and investment in
initiatives that we believe should ultimately result in cost
reductions.
FI-44
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Although we have incurred significant payments under our
indemnification agreements with certain former officers and
directors in the past, we have no continuing obligations in the
future. In August and October 2008, we entered into agreements
with our former CFO and former CEO, respectively, who were under
investigation by the SEC and the Department of Justice (DOJ),
pursuant to which their indemnification agreements were
terminated in exchange for our waiver of certain severance and
legal fee reimbursement rights. As a result of these new
agreements, we are no longer obligated to pay any future legal
costs for these former officers. These former officers recently
entered into plea agreements with the DOJ to resolve the
criminal cases against them. For the nine months ended
September 30, 2008, we incurred expenses of
$1.9 million relating to legal fees of former officers and
former directors, and recorded insurance recoveries of
$0.1 million. As of March 31, 2008, we had exhausted
the remaining reimbursement available under this insurance
coverage. See Note 10 Commitments and
Contingencies for additional discussion.
We face large cash expenditures in the future related to past
due state and local taxes, primarily sales and use tax
obligations, which we estimate to be approximately
$2.1 million. This amount was fully accrued as of
September 30, 2008. We are in the process of negotiating
resolutions of the past due state and local tax obligations with
the applicable tax authorities. However, there is no assurance
that these obligations will be reduced as a result of the
negotiations or that we will be allowed to pay the amounts due
over an extended period of time.
We also intend to continue investing in our sales and marketing
efforts to physicians as well as the patients in order to raise
awareness and gain further acceptance of our technology. This
investment is required in order to increase physicians
usage of our technology in the treatment of prostate and renal
cancers, lung and liver cancers and palliative intervention
(treatment of pain associated with metastases). Such costs will
be reported as current period charges under generally accepted
accounting principles.
As previously announced, we continue to explore and evaluate
potential strategic opportunities aimed at enhancing stockholder
value and solidifying the long-term prospects of our
cryoablation technology in the marketplace. During the three
months ended September 30, 2008, we have incurred
$0.9 million in relation to potential strategic
transactions. These expenditures were recorded as general and
administrative expenses as incurred since any potential
transaction is not expected to occur until 2009, and these costs
will be required to be expensed under Statement of Financial
Accounting Standards (SFAS) No. 141 (R), Business
Combinations.
In the short term, we expect to use existing cash reserves and
working capital through the sale of our products to finance our
projected operating and cash flow needs, along with continued
expense management efforts. However, our cash needs are not
entirely predictable and the future availability of funds from
our bank is subject to many conditions, including the subjective
acceleration clause and other provisions that are predicated on
events not within our control. We cannot access the bank credit
facility if we fail to comply with all covenants and borrowing
conditions. Although we are in compliance with the conditions
and covenants under the bank credit facility as of
September 30, 2008, there is no assurance that we will be
able to comply with all requirements in future periods, that we
can obtain a waiver if an event of default occurs or that the
lender will not exercise the subject acceleration clause.
Accordingly, we cannot guarantee the availability of the bank
credit facility.
We will continue to assess the adequacy of our capital resources
and may use both existing and new sources of capital to finance
the growth of the business. The Company expects that it will
need to raise additional capital during 2009 to fund its ongoing
operations. Should the financing be unavailable or prohibitively
expensive when we require it, the consequences would have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
|
|
4.
|
Private
Placement of Common Stock and Warrants
|
May
2007 Private Placement
On May 24, 2007, we entered into a common stock
subscription agreement with Frazier and on May 25, 2007 we
entered into a registration rights agreement with Frazier. Under
the subscription agreement, Frazier agreed to
FI-45
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchase 1,085,271 shares of our common stock at a price
per share of $6.45, for aggregate proceeds to us of
$7.0 million.
In the subscription agreement, Frazier agreed to
lock-up
provisions restricting the transferability of the shares, for a
period of one year for 75 percent of the shares and a
period of 18 months for 25 percent of the shares. The
lock-up
provisions expire early if we undergo a change in control or if
we issue significant additional amounts of securities in certain
circumstances after May 25, 2007, as described in the
subscription agreement.
In the registration rights agreement, we agreed to file a
registration statement with the SEC to register the shares for
resale. We also agreed to use commercially reasonable efforts to
cause the registration statement to become effective as promptly
as possible thereafter, with the intention that the registration
statement will be available for resale by Frazier once the
lock-up
restrictions expire. In addition, we agreed to use commercially
reasonable efforts to keep the registration statement effective
until May 25, 2010. We filed this registration statement on
March 20, 2008 and the SEC declared the registration
statement effective on April 18, 2008.
Fusion
Capital Equity Purchase Agreement
On October 25, 2006, we entered into a common stock
purchase agreement with Fusion Capital as described above under
Note 3 Recent Operating Results and
Liquidity. Under this agreement we had the right to
sell to Fusion Capital up to $16.0 million worth of common
stock, at our election, over a two year period at prices
determined based upon the market price of our common stock at
the time of each sale, without any fixed discount. We could sell
common stock in $100,000 increments every fourth business day,
with additional increments available every third business day if
the market price per share of our common stock was $4.50 or
higher. Our agreement with Fusion Capital did not allow us to
sell shares to Fusion Capital on any date on which the purchase
price was less than $3.00. Under the terms of the agreement, we
issued 157,985 shares of common stock to Fusion Capital in
2006 for no consideration as a commitment fee. Our agreement
with Fusion Capital expired on November 6, 2008.
Through September 30, 2008, we had sold 293,397 shares
to Fusion Capital for gross proceeds of $1.6 million. The
most recent sale occurred in May 2007 and no additional shares
were issued after September 30, 2008 through the expiration
date. We paid a transaction fee equal to 6.0 percent of the
stock proceeds to an investment advisory firm under a
pre-existing capital advisory agreement.
March
2005 Private Placement
On March 11, 2005, we completed a private placement of
1,878,448 shares of our common stock and detachable
warrants to purchase 1,314,892 common shares at an offering
price of $8.31 per share, for aggregate gross proceeds of
$15.6 million. Transaction costs were $1.0 million,
resulting in net proceeds of $14.6 million. Of the total
warrants, 657,446 had an initial exercise price of $10.50
(Series A warrants) per share and 657,446 had an initial
exercise price of $12.00 (Series B warrants) per share. The
expiration date of the warrants is May 1, 2010. Two former
members of our management team made personal investments
totaling $0.7 million in the aggregate, and a member of our
Board of Directors invested $0.3 million.
The warrants have an anti-dilution clause that is triggered upon
issuance of a certain number of shares of our common stock that
reduces the effective exercise price of the warrants to preserve
the ownership of the warrant holders. As a result of our May
2007 private placement and the issuance of shares to Fusion
Capital through September 30, 2008, the exercise price of
the Series A Warrants decreased to $10.02 to effectively
provide holders the right to purchase an additional
31,667 shares and the exercise price of the Series B
Warrants decreased to $11.37 to effectively provide holders the
right to purchase an additional 37,191 shares.
The warrants initially are exercisable at any time during their
term for cash only. The warrants may be exercised on a cashless
exercise basis in limited circumstances after the first
anniversary of the closing date if there is not an effective
registration statement covering the resale of the shares
underlying the warrants. Each warrant is
FI-46
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
callable by us at a price of $0.01 per share underlying such
warrant if our stock trades above certain dollar per share
thresholds ($19.50 for the Series A warrants and $22.50 for
Series B warrants) for 20 consecutive days commencing on
any date after the effectiveness of the registration statement,
provided that (a) we provide
30-day
advanced written notice (Notice Period), (b) we
simultaneously call all warrants on the same terms and
(c) all common shares issuable are registered. Holders may
exercise their warrants during the Notice Period and warrants
which remain unexercised will be redeemed at $0.01 per share.
Pursuant to the terms of the registration rights agreement
relating to the March 2005 financing, we filed with the SEC a
registration statement on
Form S-2
under the Securities Act of 1933, as amended, covering the
resale of all of the common stock purchased and the common stock
originally underlying the issued warrants. The
Form S-2
registration statement was declared effective September 28,
2005. We subsequently filed a post-effective amendment on
Form S-3,
which was declared effective March 28, 2006, a
post-effective amendment on
Form S-1,
which was declared effective March 30, 2007 and a
post-effective amendment on
Form S-3,
which was declared effective April 18, 2008.
The registration rights agreement provides that if a
registration statement is not filed within 30 days of
closing or does not become effective within 90 days
thereafter, then in addition to any other rights the holders may
have, we will be required to pay each holder an amount in cash,
as liquidated damages, equal to one percent of the aggregate
purchase price paid by such holder per month. We incurred
$0.6 million of liquidated damages through
September 28, 2005, when the
S-2
registration statement was declared effective.
Under the registration rights agreement, we could incur similar
liquidated damages in the future (equal to one percent of the
aggregate purchase price paid by each affected holder per month)
if holders are unable to make sales under the registration
statement (for example, if we fail to keep the registration
statement current as required by SEC rules or if future
amendments to the registration statement are not declared
effective in a timely manner). The registration obligation
remains outstanding until the earlier of the date on which all
shares issuable upon exercise of the warrants have been issued
and resold by the holders of the warrants or the date on which
all such shares can be resold by the holders without
registration.
Since the liquidated damages under the registration rights
agreement could in some cases exceed a reasonable discount for
delivering unregistered shares, we accounted for the
registration payment arrangement and warrants as one instrument
classified as a derivative (a non-current liability) under EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock. We
allocated a portion of the March 2005 offering proceeds to the
warrants based on their fair value at issuance. Through
December 31, 2006, we revalued the warrants as a derivative
instrument quarterly in connection with changes in the
underlying stock price and other assumptions, with the change in
value recorded as interest expense. In December 2006, the
Financial Accounting Standards Board issued FASB Staff Position
(FSP) EITF
No. 00-19-2,
Accounting for Registration Payment Arrangements, which
changed the way we account for the outstanding warrants. FSP
EITF
No. 00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in
accordance with SFAS No. 5, Accounting for
Contingencies. For registration payment arrangements and
financial instruments subject to those arrangements that were
entered into prior to the issuance of this FSP and that continue
to be outstanding at the adoption date, this guidance is
effective for fiscal years beginning after December 15,
2006 and interim periods within those fiscal years. Upon
adoption of FSP EITF
No. 00-19-2
on January 1, 2007, the value of the warrants as of the
original issue date ($5.7 million) was reclassified to
equity without regard to the contingent obligation to transfer
consideration under the registration payment arrangement. The
difference between the $5.7 million and the carrying value
of the warrant liability as of December 31, 2006
($1.3 million) was recorded as a cumulative-effect
adjustment to reduce opening retained earnings on
January 1, 2007. Hereafter, accruals for liquidated
damages, if any, will be recorded when they are probable and
reasonably estimable.
FI-47
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As described above in Note 3 Recent
Operating Results and Liquidity, on October 26,
2005, we entered into a one-year credit facility with Silicon
Valley Bank (the Lender), which provided up to $4.0 million
in borrowings for working capital purposes in the form of a
revolving line of credit and term loans (not to exceed
$500,000). The agreement was amended on various dates during
2006 and 2007. On February 8, 2008 the agreement was
further extended to expire on February 26, 2009, as
described below.
The credit facility permits the borrowings up to the lesser of
$4.0 million or amounts available under a borrowing base
formula based on eligible accounts receivable and inventory, but
availability of funds is ultimately subject to the good faith
business judgment of the Lender. As amended, the borrowing base
is (i) 85 percent of eligible accounts receivable,
plus (ii) the lesser of 30 percent of the value of
eligible inventory or $500,000. Borrowings are secured by all of
our assets, including all accounts receivable collections which
are held in trust for the Lender. Interest is payable monthly at
prime rate plus 1.5 percent. The agreement requires a
one-time commitment fee of $40,000 paid on the effective date
and an annual facility fee equal to 0.5 percent of the
unused portion of the facility. A termination fee will also be
assessed if the credit facility is terminated prior to
expiration. As of September 30, 2008 and December 31,
2007, there was $0.9 million outstanding on the line of
credit.
As a condition to each advance under the credit facility, all
representations and warranties by us must be materially true and
no event of default must have occurred or be continuing. In
addition, the Lender, in its good faith business judgment, must
determine that no material adverse change has occurred. A
material adverse change occurs when there is a material
impairment in the priority of the Lenders lien in the
collateral or its value, a material adverse change in our
business, operations or condition, a material impairment of the
prospect of repayment or if the Lender determines, in its good
faith reasonable judgment, that there is a reasonable likelihood
that we will fail to comply with one or more financial covenant
in the next financial reporting period.
The agreement governing the credit facility contains various
financial and operating covenants that impose limitations on our
ability, among other things, to incur additional indebtedness,
merge or consolidate, sell assets except in the ordinary course
of business, make certain investments, enter into leases and pay
dividends without the consent of the Lender. The credit facility
also includes a subjective acceleration clause and a requirement
to maintain a lock box with the Lender to which all collections
are deposited. Under the subjective acceleration clause, the
Lender may declare default and terminate the credit facility if
it determines that a material adverse charge has occurred. If
the aggregate outstanding advances plus reserves placed by the
Lender against the loan availability exceeds 50 percent of
the receivable borrowing base component as defined, or if a
default occurs, all current and future lock box proceeds will be
applied against the outstanding borrowings. The credit facility
also contains cross-default provisions and a minimum tangible
net worth requirement measured on a monthly basis. Tangible net
worth must be equal to or greater than the sum of a base amount
($1,000 as of September 30, 2008) plus 25 percent
of all consideration received from issuing equity securities and
subordinated debt and 25 percent of positive consolidated
net income in each quarter.
As of December 31, 2007 and September 30, 2008, we
were in compliance with all covenants. During February through
May 2007, the outstanding advances exceeded 50 percent of
the receivable borrowing base referred to above. As required by
the agreement, our lock-box proceeds were applied daily to
reduce the outstanding advances and we re-borrowed the amount
subject to the Lenders approval. The daily borrowings and
repayments have been presented on a net basis in the condensed
consolidated statements of cash flows. In June 2007, outstanding
advances were reduced to less than 50 percent of the
receivable borrowing base, and we were no longer required to
repay and re-borrow funds on a daily basis as of July 13,
2007.
|
|
6.
|
Collection
of Notes Receivable
|
In February 2008, we collected a $1.4 million note
receivable and $0.1 million in related interest income from
Plethora Solutions Holdings plc (Plethora), who purchased our
former subsidiary Timm Medical Technology, Inc.
FI-48
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in February 2006. In anticipation of a potential accelerated
settlement of the note in exchange for a discount, we had
recorded a $0.3 million reserve on the note balance in the
fourth quarter of 2006 and ceased accruing interest income.
During the three months ended September 30, 2007, we
reversed the $0.3 million allowance and reinstated the note
to its face value and recorded $0.1 million in interest
income previously suspended. In February 2008, the note and
interest income was collected in full. Also, during August 2008
we negotiated and received a $750,000 payment from SRS Medical,
Inc. (SRS), in full satisfaction of a fully-reserved
$2.7 million note receivable recorded in October 2003
related to the sale of a product line to SRS. A full reserve was
recorded on the note receivable at the time of the sale since it
was determined at that time that collection was not reasonably
assured and any collections would be reported as a gain in the
period received.
|
|
7.
|
Capital
Stock and Net Loss Per Share
|
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the
respective periods. Diluted loss per share, calculated using the
treasury stock method, gives effect to the potential dilution
that could occur upon the exercise of certain stock options,
warrants, deferred stock units and restricted stock units that
were outstanding during the respective periods presented. For
periods when we reported a net loss, these potentially dilutive
common shares were excluded from the diluted loss per share
calculation because they were anti-dilutive. The total number of
shares excluded from the calculation of diluted net loss per
share, prior to application of the treasury stock method for
options and warrants was 3.1 million and 3.6 million
for the nine months ended September 30, 2008 and 2007,
respectively.
|
|
8.
|
Stock-Based
Compensation
|
Our equity incentive programs include stock options, restricted
stock units and deferred stock units. Some awards vest based on
continuous service while others vest based on performance
conditions, such as profitability and sales goals. We account
for equity awards in accordance with SFAS No. 123
(revised), Share-Based Payment (SFAS No. 123R),
which requires measurement and recognition of compensation
expense for all share-based awards made to employees and
directors.
Under SFAS No. 123R, the fair value of share-based
awards is estimated at grant date using an option pricing model,
and the portion that is ultimately expected to vest is
recognized as compensation cost over the requisite service
period. For awards that vest based on continuous service, we
record compensation expense ratably over the service period from
the date of grant. For performance-based awards, we begin
recording compensation expense over the remaining service period
when we determine that achievement is probable. Change in
estimates as to the probability of vesting is recorded through
cumulative
catch-up
adjustments when the assessment is made. Change in the estimated
implicit service period is recorded prospectively over the
adjusted vesting period. Since share-based compensation under
SFAS No. 123R is recognized only for those awards that
are ultimately expected to vest, we have applied an estimated
forfeiture rate to unvested awards for the purpose of
calculating compensation cost. These estimates will be revised,
if necessary, in future periods if actual forfeitures differ
from the estimates. Changes in forfeiture estimates impact
compensation cost in the period in which the change in estimate
occurs. We use the Black-Scholes option-pricing model to
estimate the fair value of share-based awards. The determination
of fair value using the Black-Scholes option-pricing model is
affected by our stock price as well as assumptions regarding a
number of complex and subjective variables, including expected
stock price volatility, risk-free interest rate, expected
dividends and projected employee stock option exercise behaviors.
During the third quarter of 2007, we determined that it was
probable the profitability goals would be met during 2009, and
that the related performance-based awards would vest. In
conjunction with this change in assessment, we recorded
$0.5 million of compensation expense in the third quarter
of 2007, including a cumulative adjustment for expenses relating
to the second quarter of 2007 as if the probable assessment had
been determined at the original grant date. During the third
quarter of 2008, we reassessed the profitability goals and
determined that it is no longer probable the profitability goals
will be met during the performance measurement period and as
such, the
FI-49
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related performance based awards will not vest. In conjunction
with this change in assessment, we recorded a $1.2 million
reduction in stock-based compensation expense in the three
months ended September 30, 2008 to reverse the prior
expense recorded.
Due to the resignation of our CEO in September 2008, we recorded
a $0.1 million reduction in the stock-based compensation
expense during the three months ended September 30, 2008
for his time-based stock awards. The CEO resignation is further
discussed in Note 14 Subsequent
Events.
Net stock-based compensation expense recorded in the three and
nine months ended September 30, 2008 was a reduction
(negative expense) of $0.6 million and expense of
$0.8 million, respectively. Total stock-based compensation
expense recorded in the three and nine months ended
September 30, 2007 was $1.4 million and
$2.9 million, respectively. These amounts are primarily
included in selling and marketing and general and administrative
expenses.
Inventories, consisting of raw materials,
work-in-process
and finished goods, are stated at the lower of cost or market,
with cost determined by the
first-in,
first-out method. Reserves for slow-moving and obsolete
inventories are provided based on historical experience and
product demand. We evaluate the adequacy of these reserves
quarterly.
The following is a summary of inventories:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
1,774
|
|
|
$
|
2,331
|
|
Work in process
|
|
|
541
|
|
|
|
227
|
|
Finished goods
|
|
|
1,187
|
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
3,502
|
|
|
|
3,516
|
|
Less: inventory reserve
|
|
|
(394
|
)
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
3,108
|
|
|
$
|
3,022
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Commitments
and Contingencies
|
Governmental
Investigations and Legal Proceedings
As reported in the
Form 8-K
that we filed on July 20, 2006, we executed a consent to
entry of judgment in favor of the SEC on July 14, 2006 and
entered into a non-prosecution agreement with the DOJ on
July 18, 2006. These two agreements effectively resolved
with respect to us the investigations begun by the SEC and by
the DOJ in January 2003, regarding allegations that we and
certain of our former officers and former directors and one
current employee issued, or caused to be issued, false and
misleading statements regarding our financial results for 2001
and 2002 and related matters. Under the terms of the consent
judgment with the SEC: (i) we paid $750,000 in civil
penalties and disgorgement; and (2) we agreed to a
stipulated judgment enjoining future violations of securities
laws. On April 7, 2006, we entered into an escrow agreement
with our outside counsel, pursuant to which we placed the
$750,000 anticipated settlement in escrow with our outside
counsel at the request of the SEC staff. The funds were released
from the escrow to the SEC in August 2006. A liability for the
monetary penalty was accrued in 2004.
On August 9, 2006, the SEC filed civil fraud charges in
federal district court against our former CEO and CFO, both of
whom were terminated in 2003, but for whom we were contractually
obligated to advance legal fees under indemnification
agreements. On April 9, 2007, these two former officers
were indicted by a federal grand jury in Orange County,
California. Our directors and officers liability
insurance has funded certain losses, including defense costs,
related to these matters. As of March 31, 2008, we had
exhausted all remaining available coverage
FI-50
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the applicable excess directors and officers
liability policy and began funding the payments with our cash
reserves. In August and October 2008, we entered into agreements
with our former CFO and former CEO, respectively, pursuant to
which their indemnification agreements were terminated in
exchange for our waiver of certain severance and legal fee
reimbursement rights. As a result of these new agreements, we
are no longer obligated to pay any future legal costs for these
former officers. Under the agreement with our former CEO in
October 2008, the agreement also provides that our obligation to
pay for legal costs incurred by our former CEO in August 2008
and September 2008 is limited to the amount, if any, that we
receive from the former CEO as restitution. These former
officers recently entered into plea agreements with the DOJ to
resolve the criminal cases against them.
Other
Litigation
In addition, in the normal course of business, we are subject to
various other legal matters, which we believe will not
individually or collectively have a material adverse effect on
our consolidated financial condition, results of operations or
cash flows. However, the results of litigation and claims cannot
be predicted with certainty, and we cannot provide assurance
that the outcome of various legal matters will not have a
material adverse effect on our consolidated financial condition,
results of operations or cash flows.
Investments
Included in investments and other assets is $0.9 million
for the equity interest that we hold in a privately held medical
device company. This investment is recorded at cost since we do
not exercise significant influence over the operations of the
investee. The independent auditors report for the
financial statements of the investee as of and for the year
ended December 31, 2007 included an explanatory paragraph,
to the effect that there is substantial doubt about the
investees ability to continue as a going concern. In light
of this opinion, we believe that there is a risk that the value
of the equity investment in the investee may be subject to
impairment and that an impairment charge may be recorded in the
future if it is determined that the fair value of the investment
has declined below our cost and that the impairment is
other-than-temporary in nature.
We reported no income tax expense during the nine months ended
September 30, 2008 and 2007 due to our operating losses.
Due to our history of operating losses, management has
determined that it is more likely than not that our deferred tax
assets will not be realized through future earnings.
Accordingly, valuation allowances were recorded to fully reserve
the deferred tax assets as of September 30, 2008 and
December 31, 2007.
On January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of
SFAS No. 109, Accounting for Income Taxes
(FIN 48). As of the adoption date and as of
September 30, 2008, we had no unrecognized tax benefits and
do not expect a material change in the next 12 months.
We recognize interest and penalties related to uncertain tax
positions, if any, in income tax expense. The tax years 2004
through 2007 remain open to examination by the major taxing
jurisdictions to which we are subject.
|
|
12.
|
Fair
Value Measurement
|
We adopted the provisions of SFAS No. 157, Fair
Value Measurements, effective January 1, 2008, for our
financial assets and liabilities. The FASB delayed the effective
date of SFAS No. 157 until January 1, 2009, with
respect to the fair value measurement requirements for
non-financial assets and liabilities that are not re-measured on
a recurring basis (at least annually). Under this standard, fair
value is defined as the exchange price that would be received to
sell an asset or paid to transfer a liability (i.e., the
exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants at the measurement date.
FI-51
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 157 establishes a three-level hierarchy for
inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs
by requiring that observable inputs be used when available.
Observable inputs are inputs that market participants would use
in pricing the asset or liability based on market data obtained
from sources independent of us. Unobservable inputs are inputs
that reflect our assumptions about the inputs that market
participants would use in pricing the asset or liability and are
developed based on the best information available in the
circumstances.
The fair value hierarchy is broken down into three levels based
on the source of inputs. In general, fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access. We classify our money market funds as
Level 1 assets. As of September 30, 2008, we had
$5.0 million in money market securities included in cash
and cash equivalents. Fair values determined by Level 2
inputs are based on quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
models for which all significant inputs are observable or can be
corroborated, either directly or indirectly by observable market
data. We do not hold any Level 2 instruments. Level 3
inputs are unobservable inputs for the asset or liability, and
include situations where there is little, if any, market
activity for the asset or liability. These include certain
pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs. We do not
hold any Level 3 instruments.
During the three and nine months ended September 30, 2008,
there were no re-measurements to fair value of financial assets
and liabilities that are not measured at fair value on a
recurring basis. The adoption of SFAS No. 157 did not
have a material impact on our consolidated financial position,
results of operations or cash flows.
On January 1, 2008, we also adopted the provision of
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159),
which allows an entity to voluntarily choose to measure certain
financial assets and liabilities at fair value. We have chosen
not to elect the fair value option for any items that are not
already required to be measured at fair value in accordance with
generally accepted accounting principles (GAAP).
|
|
13.
|
Results
of Operations
|
Revenues and cost of revenues related to the following products
and services for the periods ended September 30, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
5,676
|
|
|
$
|
5,312
|
|
|
$
|
17,186
|
|
|
$
|
15,932
|
|
Cryocare Surgical Systems
|
|
|
195
|
|
|
|
385
|
|
|
|
1,093
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,871
|
|
|
|
5,697
|
|
|
|
18,279
|
|
|
|
17,315
|
|
Cryoablation procedure fees
|
|
|
1,592
|
|
|
|
1,541
|
|
|
|
5,028
|
|
|
|
5,029
|
|
Cardiac royalties
|
|
|
146
|
|
|
|
86
|
|
|
|
383
|
|
|
|
278
|
|
Other
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
(18
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,599
|
|
|
$
|
7,326
|
|
|
$
|
23,672
|
|
|
$
|
22,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
2,180
|
|
|
$
|
2,057
|
|
|
$
|
6,765
|
|
|
$
|
6,803
|
|
Cryocare Surgical Systems
|
|
|
95
|
|
|
|
114
|
|
|
|
362
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,275
|
|
|
$
|
2,171
|
|
|
$
|
7,127
|
|
|
$
|
7,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FI-52
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost of revenues for cryoablation disposable product sales and
procedure fees are combined for reporting purposes. Sales of
cryoablation disposable products and procedure fees both
incorporate similar inventory when sold and we do not separately
track the cost of disposals sold directly to customers and those
consumed in cryoablation procedures. Cryoablation procedure
services are provided to medical facilities upon request to
facilitate the overall delivery of our technology into the
marketplace.
On October 2, 2008, our former lead independent director
Terrence A. Noonan was named interim president and interim CEO
replacing Craig T. Davenport, our former Chairman, President and
CEO, who resigned effective September 30, 2008 to assume
the CEO position with a privately held healthcare company. In
addition, on October 6, 2008 we announced that we are
actively evaluating succession alternatives and we continue to
explore and evaluate potential strategic opportunities aimed at
enhancing stockholder value and solidifying the long-term
prospects of our cryoablation technology in the marketplace.
On October 14, 2008, we entered into an agreement with our
former CEO Paul W. Mikus that terminates his indemnification
agreement in exchange for our waiver of certain severance and
legal fee reimbursement rights. As a result of this new
agreement, we are no longer obligated to pay any future legal
costs for Mr. Mikus. The agreement also provides that our
obligation to pay for legal costs incurred by our former CEO in
August 2008 and September 2008 is limited to the amount, if any,
that we receive from the former CEO as restitution.
On November 10, 2008, we entered into an Agreement and Plan
of Merger (the Merger Agreement), with Galil Medical
Ltd., a Israeli medical device corporation (Galil),
and Orange Acquisitions Ltd., a newly formed Israeli corporation
and our wholly-owned subsidiary (Merger Sub). The
agreement provides for the merger of Merger Sub with and into
Galil (the Merger), with Galil surviving the Merger
as a wholly-owned subsidiary of the Company. Upon the terms and
subject to the conditions set forth in the Merger Agreement, at
the effective time of the Merger, each issued and outstanding
share of Galil will be converted into the right to receive
shares of our common stock, such that upon consummation of the
Merger (and prior to consummation of the financing described
below), our stockholders will own approximately 52% of our
common stock and the former shareholders of Galil will own
approximately 48% of our common stock. The Merger is subject to
customary closing conditions, and is expected to close in the
first quarter of 2009.
On November 10, 2008, concurrent with the execution of the
Merger Agreement, we also entered into a Stock Purchase
Agreement with certain existing stockholders of the Company and
Galil (the Purchase Agreement), providing for the
sale by us of approximately 16.25 million shares of our
common stock at a purchase price of $1.00 per share. The
offering proceeds to the Company are expected to be
approximately $16.25 million. Pursuant to the Purchase
Agreement, the closing of the financing is subject to the
concurrent closing of the Merger and certain other conditions,
including the sale of shares with a minimum aggregate purchase
price of $12,000,000 and that Endocares common stock
remains listed on the Nasdaq Capital Market or the
Over-The-Counter Bulletin Board. The issuance of the shares of
our common stock pursuant to the Merger Agreement and the
Purchase Agreement is also subject to approval by our
stockholders.
As of December 31, 2008, Endocare was not in compliance
with the minimum tangible net worth covenant in its credit
facility with Silicon Valley Bank, which is measured on a
monthly basis. Endocare is currently in the process of seeking a
waiver from the bank with respect to this noncompliance.
Endocare believes that a waiver will be granted. However, if the
waiver is not granted, the bank could accelerate the outstanding
indebtedness under the credit facility and terminate the credit
facility.
|
|
15.
|
Recent
Accounting Pronouncements
|
In December 2007, the FASB ratified EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements. EITF
No. 07-1
provides guidance regarding financial statement presentation and
disclosure of collaborative
FI-53
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
arrangements to jointly develop, manufacture, distribute and
market a product whereby the collaborators will share, based on
contractually defined calculations, the profits or losses from
the associated activities. The consensus requires collaborators
in such an arrangement to present the result of activities for
which they act as the principal on a gross basis and report any
payments received from (made to) other collaborators based on
other applicable GAAP or, in the absence of other applicable
GAAP, based on analogy to authoritative accounting literature or
a reasonable, rational and consistently applied accounting
policy election. EITF Issue
No. 07-1
is effective for fiscal years beginning after December 31,
2008, which will be our fiscal year 2009, and will be applied as
a change in accounting principle retrospectively for all
collaborative agreements existing as of the effective date. We
have not yet evaluated the potential impact of adopting EITF
No. 07-1
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations and SFAS No. 160,
Accounting and Reporting of Noncontrolling Interests in
Consolidated Financial Statements an amendment of
ARB No. 51. These standards will significantly change
the accounting and reporting for business combination
transactions and noncontrolling (minority) interests in
consolidated financial statements. SFAS No. 141(R)
requires companies to recognize all the assets acquired and
liabilities assumed in a business combination and establishes
the acquisition-date fair value as the measurement objective for
all assets acquired and liabilities assumed, including
capitalizing at the acquisition date the fair value of acquired
in-process research and development, and re-measuring and
writing down these assets, if necessary, in subsequent periods
during their development. SFAS No. 141(R) will also
impact the determination of acquisition-date fair value of
consideration paid in a business combination (including
contingent consideration), exclude transaction costs from
acquisition accounting, and change accounting practices for
acquired contingencies, acquisition-related restructuring costs,
indemnification assets, and tax benefits.
SFAS No. 141(R) and SFAS No. 160 will be
applied prospectively for business combinations that occur on or
after January 1, 2009, except that presentation and
disclosure requirements of SFAS No. 160 regarding
noncontrolling interests shall be applied retrospectively. We
are evaluating the future impacts and disclosures of these
standards.
In April 2008, the FASB issued FSP
FAS No. 142-3,
which amends the factors that must be considered in developing
renewal or extension assumptions used to determine the useful
life over which the cost of a recognized intangible asset is
amortized under SFAS No. 142, Goodwill and Other
Intangible Assets. The FSP requires an entity to consider
its own assumptions about renewal or extension of the term of
the arrangement, consistent with its expected use of the asset,
and is an attempt to improve consistency between the useful life
of a recognized intangible asset under SFAS No. 142
and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141, Business
Combinations . The FSP is effective for fiscal years
beginning after December 15, 2008, and the guidance for
determining the useful life of a recognized intangible asset
must be applied prospectively to intangible assets acquired
after the effective date. We are evaluating the impact of the
FSP on our results of operations, financial condition or
liquidity.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the American
Institute of Certified Public Accountants and the SEC did not,
or are not believed by management to, have a material impact on
our present or future consolidated financial statements.
FI-54
To the Board of Directors and Shareholders of
Galil Medical Ltd. and its subsidiaries
We have audited the accompanying consolidated balance sheets of
Galil Medical Ltd. (the Company) and its
subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Since the date of completion of our audit of the accompanying
financial statements and the initial issuance of our report
thereon dated March 4, 2008, as discussed in Note 1b,
the Company incurred an accumulated deficit and incurred a
negative cash flow from operating activities. Accordingly and
considering the Companys current cash resources, its
liquidity has been adversely affected. Note 1b describes
managements plans to address these issues.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company and its
subsidiaries as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2o and Note 12 to the
consolidated financial statements, in 2007, the Company adopted
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
January 19, 2009
FII-1
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
U.S. dollars in thousands
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,612
|
|
|
$
|
14,248
|
|
|
$
|
3,482
|
|
Trade receivables (net of allowance for doubtful accounts of $5,
$13 and $252 at December 31, 2006 and 2007 and
September 30, 2008, respectively)
|
|
|
5,253
|
|
|
|
4,622
|
|
|
|
4,418
|
|
Other accounts receivable and prepaid expenses (Note 3)
|
|
|
333
|
|
|
|
501
|
|
|
|
772
|
|
Inventories (Note 4)
|
|
|
3,713
|
|
|
|
3,591
|
|
|
|
4,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
27,911
|
|
|
|
22,962
|
|
|
|
13,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEVERANCE PAY FUNDS
|
|
|
546
|
|
|
|
625
|
|
|
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET (Note 5)
|
|
|
2,621
|
|
|
|
2,406
|
|
|
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, NET (Note 6)
|
|
|
11,448
|
|
|
|
10,296
|
|
|
|
9,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
17,045
|
|
|
|
16,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
59,571
|
|
|
$
|
53,047
|
|
|
$
|
26,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
FII-2
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of capital lease obligations
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
67
|
|
Trade payables
|
|
|
2,147
|
|
|
|
2,575
|
|
|
|
1,717
|
|
Other accounts payable and accrued expenses (Note 8)
|
|
|
4,278
|
|
|
|
8,437
|
|
|
|
8,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,425
|
|
|
|
11,076
|
|
|
|
10,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
71
|
|
|
|
38
|
|
Accrued severance pay
|
|
|
636
|
|
|
|
729
|
|
|
|
915
|
|
Other long term liabilities
|
|
|
148
|
|
|
|
603
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
784
|
|
|
|
1,403
|
|
|
|
1,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of NIS 0.01 par value
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized: 184,781,744 shares at December 31, 2006
and 2007, and September 30, 2008; Issued and outstanding:
85,799,588 at December 31, 2006 and 2007, and
85,308,120 shares at September 30, 2008
|
|
|
197
|
|
|
|
197
|
|
|
|
195
|
|
Series A-1
Convertible Preferred shares of NIS 0.01 par
value Authorized: 74,962,170 at December 31,
2006 and 2007; Issued and outstanding: 74,962,170 at
December 31, 2006 and 2007, and September 30, 2008;
Aggregate liquidation preference of approximately $50,119 at
December 31, 2007
|
|
|
179
|
|
|
|
179
|
|
|
|
179
|
|
Series A-2
Convertible Preferred shares of NIS 0.01 par
value Authorized: 6,746,596 at December 31,
2006 and 2007; Issued and outstanding: 6,746,596 at
December 31, 2006 and 2007, and September 30, 2008;
Aggregate liquidation preference of approximately $3,753 at
December 31, 2007
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
Additional paid-in capital
|
|
|
85,136
|
|
|
|
85,781
|
|
|
|
86,508
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
21
|
|
Accumulated deficit
|
|
|
(33,166
|
)
|
|
|
(45,605
|
)
|
|
|
(73,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
52,362
|
|
|
|
40,568
|
|
|
|
13,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
59,571
|
|
|
$
|
53,047
|
|
|
$
|
26,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
FII-3
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
Revenues from sales to non-related party
|
|
$
|
215
|
|
|
$
|
1,822
|
|
|
$
|
25,622
|
|
|
$
|
19,272
|
|
|
$
|
18,662
|
|
Revenues from sales to Oncura
|
|
|
8,046
|
|
|
|
6,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
8,261
|
|
|
|
8,521
|
|
|
|
25,622
|
|
|
|
19,272
|
|
|
|
18,662
|
|
Cost of revenues
|
|
|
6,020
|
|
|
|
5,038
|
|
|
|
8,296
|
|
|
|
6,049
|
|
|
|
5,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,241
|
|
|
|
3,483
|
|
|
|
17,326
|
|
|
|
13,223
|
|
|
|
12,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,088
|
|
|
|
1,444
|
|
|
|
5,245
|
|
|
|
3,526
|
|
|
|
5,686
|
|
Sales and marketing
|
|
|
218
|
|
|
|
1,368
|
|
|
|
18,414
|
|
|
|
13,453
|
|
|
|
13,361
|
|
General and administrative
|
|
|
1,466
|
|
|
|
2,617
|
|
|
|
3,557
|
|
|
|
2,474
|
|
|
|
4,280
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,772
|
|
|
|
5,429
|
|
|
|
27,216
|
|
|
|
19,453
|
|
|
|
40,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
531
|
|
|
|
1,946
|
|
|
|
9,890
|
|
|
|
6,230
|
|
|
|
27,231
|
|
Financial income (expenses), net
|
|
|
(178
|
)
|
|
|
140
|
|
|
|
401
|
|
|
|
275
|
|
|
|
(142
|
)
|
Other income, net
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and direct expenses related to acquisition of additional
75% in the Cryo Business and disposal of 25% holding in Oncura
|
|
|
|
|
|
|
(2,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in losses of an affiliate and impairment of
investment in affiliate
|
|
|
684
|
|
|
|
4,094
|
|
|
|
9,489
|
|
|
|
5,955
|
|
|
|
27,373
|
|
Equity in losses of an affiliate and impairment of investment in
affiliate
|
|
|
7,030
|
|
|
|
8,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (Note 16)
|
|
$
|
7,714
|
|
|
$
|
12,979
|
|
|
$
|
9,489
|
|
|
$
|
5,955
|
|
|
$
|
27,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share (Note 16)
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Ordinary shares used in computing
basic and diluted net loss per share
|
|
|
76,603,535
|
|
|
|
83,862,766
|
|
|
|
85,799,588
|
|
|
|
85,799,588
|
|
|
|
85,553,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
FII-4
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
Preferred Shares
|
|
|
Series A-2 Convertible Preferred Shares
|
|
|
Ordinary Shares
|
|
|
Convertible
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Notes
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
U.S. dollars in thousands, except share data
|
|
|
Balance as of January 1, 2005
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
76,577,285
|
|
|
$
|
176
|
|
|
$
|
|
|
|
$
|
40,967
|
|
|
$
|
|
|
|
$
|
(12,473
|
)
|
|
$
|
|
|
|
$
|
28,670
|
|
Issuance of convertible notes, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,497
|
|
Issuance of shares upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
*)
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Stock based compensation expenses in respect of share options
whose terms have been modified or accelerated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Stock based compensation expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,714
|
)
|
|
|
(7,714
|
)
|
|
|
(7,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,594,785
|
|
|
|
176
|
|
|
|
3,497
|
|
|
|
41,071
|
|
|
|
|
|
|
|
(20,187
|
)
|
|
|
|
|
|
|
24,557
|
|
Conversion of convertible notes into Ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,364,883
|
|
|
|
17
|
|
|
|
(3,497
|
)
|
|
|
3,480
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Issuance of shares upon exercise of stock options to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,839,920
|
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Issuance of
Series A-1
Convertible Preferred shares, net
|
|
|
74,962,166
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,899
|
|
Conversion of long-term loan from shareholders into
Series A-2
Convertible Preferred shares
|
|
|
|
|
|
|
|
|
|
|
6,746,596
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,600
|
|
Stock based compensation expenses in respect of share options
whose terms have been modified or accelerated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Stock based compensation expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,979
|
)
|
|
|
(12,979
|
)
|
|
|
(12,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
74,962,166
|
|
|
|
179
|
|
|
|
6,746,596
|
|
|
|
16
|
|
|
|
85,799,588
|
|
|
|
197
|
|
|
|
|
|
|
|
85,136
|
|
|
|
|
|
|
|
(33,166
|
)
|
|
|
|
|
|
|
52,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FII-5
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
STATEMENTS
OF CHANGES IN SHAREHOLDERS
EQUITY (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Series A-2 Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
Ordinary Shares
|
|
|
Convertible
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Notes
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
U.S. dollars in thousands, except share data
|
|
|
Balance as of December 31, 2006
|
|
|
74,962,166
|
|
|
|
179
|
|
|
|
6,746,596
|
|
|
|
16
|
|
|
|
85,799,588
|
|
|
|
197
|
|
|
|
|
|
|
|
85,136
|
|
|
|
|
|
|
|
(33,166
|
)
|
|
|
|
|
|
|
52,362
|
|
Accumulated affect of adjustment upon adoption of FASB
Interpretation No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,950
|
)
|
|
|
|
|
|
|
(2,950
|
)
|
Stock based compensation expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
645
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,489
|
)
|
|
|
(9,489
|
)
|
|
|
(9,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
74,962,166
|
|
|
|
179
|
|
|
|
6,746,596
|
|
|
|
16
|
|
|
|
85,799,588
|
|
|
|
197
|
|
|
|
|
|
|
|
85,781
|
|
|
|
|
|
|
|
(45,605
|
)
|
|
|
|
|
|
|
40,568
|
|
Repurchase of shares (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(586,258
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175
|
)
|
|
$
|
(175
|
)
|
|
|
(177
|
)
|
Issuance of shares upon exercise of stock options granted to
employees, (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,790
|
*)
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Unrealized gain on forward and call option contracts, net
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
21
|
|
Stock based compensation expenses (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723
|
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,373
|
)
|
|
|
(27,373
|
)
|
|
|
(27,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008 (unaudited)
|
|
|
74,962,166
|
|
|
$
|
179
|
|
|
|
6,746,596
|
|
|
$
|
16
|
|
|
|
85,308,120
|
|
|
$
|
195
|
|
|
$
|
|
|
|
$
|
86,508
|
|
|
$
|
21
|
|
|
$
|
(73,153
|
)
|
|
|
|
|
|
$
|
13,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) |
|
Represents an amount lower than $1. |
The accompanying notes are an integral part of the consolidated
financial statements.
FII-6
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
U.S. dollars in thousands
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,714
|
)
|
|
$
|
(12,979
|
)
|
|
$
|
(9,489
|
)
|
|
$
|
(5,955
|
)
|
|
$
|
(27,373
|
)
|
Adjustments required to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories write-off
|
|
|
18
|
|
|
|
33
|
|
|
|
312
|
|
|
|
182
|
|
|
|
393
|
|
Depreciation and amortization
|
|
|
76
|
|
|
|
223
|
|
|
|
2,240
|
|
|
|
1,881
|
|
|
|
1,618
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,758
|
|
Adjustment to carrying amount of goodwill
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
Impairment of fixed assets
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
Compensation expenses in respect of options whose terms have
been modified or accelerated
|
|
|
23
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
73
|
|
|
|
264
|
|
|
|
645
|
|
|
|
469
|
|
|
|
723
|
|
Amortization expenses on long-term loan from shareholders
|
|
|
76
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in trade receivables, net
|
|
|
(2,737
|
)
|
|
|
(1,115
|
)
|
|
|
631
|
|
|
|
(61
|
)
|
|
|
204
|
|
Decrease (increase) in other accounts receivable, prepaid
expenses and accrued interest
|
|
|
(44
|
)
|
|
|
33
|
|
|
|
(168
|
)
|
|
|
(301
|
)
|
|
|
(251
|
)
|
Increase in inventories
|
|
|
(111
|
)
|
|
|
(339
|
)
|
|
|
(425
|
)
|
|
|
(2
|
)
|
|
|
(2,020
|
)
|
Increase (decrease) in trade payables
|
|
|
(163
|
)
|
|
|
803
|
|
|
|
428
|
|
|
|
(372
|
)
|
|
|
(858
|
)
|
Increase in other accounts payable and accrued expenses
|
|
|
481
|
|
|
|
1,600
|
|
|
|
1,209
|
|
|
|
859
|
|
|
|
481
|
|
Accrued severance pay, net
|
|
|
16
|
|
|
|
36
|
|
|
|
14
|
|
|
|
11
|
|
|
|
29
|
|
Increase in other long-term liabilities
|
|
|
|
|
|
|
148
|
|
|
|
455
|
|
|
|
340
|
|
|
|
116
|
|
Loss from acquisition of additional 75% in the Cryo Business and
disposal of 25% holding in Oncura(a)
|
|
|
|
|
|
|
1,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of an affiliate and impairment of investment
|
|
|
7,030
|
|
|
|
8,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities:
|
|
|
(2,976
|
)
|
|
|
(585
|
)
|
|
|
(3,786
|
)
|
|
|
(2,874
|
)
|
|
|
(10,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(160
|
)
|
|
|
(168
|
)
|
|
|
(549
|
)
|
|
|
(193
|
)
|
|
|
(289
|
)
|
Net cash payment for acquisition of the Cryo business from
Oncura and disposal of 25% holding in Oncura(a)
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(160
|
)
|
|
|
(20,168
|
)
|
|
|
(549
|
)
|
|
|
(193
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FII-7
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
U.S. dollars in thousands
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes, net
|
|
|
3,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Issuance of
Series A-1
Convertible Preferred shares
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payment of capital lease
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
(38
|
)
|
Issuance expenses
|
|
|
|
|
|
|
(3,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options to employees
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,505
|
|
|
|
36,905
|
|
|
|
(29
|
)
|
|
|
(14
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
369
|
|
|
|
16,152
|
|
|
|
(4,364
|
)
|
|
|
(3,081
|
)
|
|
|
(10,766
|
)
|
Cash and cash equivalents at the beginning of the year
|
|
|
2,091
|
|
|
|
2,460
|
|
|
|
18,612
|
|
|
|
18,612
|
|
|
|
14,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
2,460
|
|
|
$
|
18,612
|
|
|
$
|
14,248
|
|
|
$
|
15,531
|
|
|
$
|
3,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
209
|
|
|
$
|
110
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes into Ordinary shares
|
|
$
|
|
|
|
$
|
3,497
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of long-term loan into
Series A-2
Convertible Preferred shares
|
|
$
|
|
|
|
$
|
3,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated effect of adjustment upon adoption of FASB
Interpretation No. 48, which was accounted with a
corresponding increase to the January 1, 2007 balance of
accumulated deficit against other accounts payable and accrued
expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,950
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories transferred to property and equipment
|
|
$
|
|
|
|
$
|
43
|
|
|
$
|
235
|
|
|
$
|
234
|
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Acquisition of Cryo Business and disposal of
25% equity investment in Oncura
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital, excluding cash and cash equivalents, net of
receivables due to Galil
|
|
$
|
|
|
|
$
|
(2,386
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Property and equipment
|
|
|
|
|
|
|
(2,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of 25% equity investment in Oncura
|
|
|
|
|
|
|
13,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets and goodwill
|
|
|
|
|
|
|
(28,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(20,000
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
FII-8
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
U.S.
dollars in thousands except share and per share data
NOTE 1:
GENERAL
a. Galil Medical Ltd. (the Company) was
incorporated on December 16, 1996, in Israel and commenced
its business operations on January 1, 1997. The Company is
engaged in the development, manufacture and marketing of medical
supplies based on an innovative cryotherapy technology
(Cryotherapy) while incorporating powerful freezing
technology and revolutionary needle design to destroy malignant
and benign tumors (Cryo). In 2006 the Company
established three wholly owned subsidiaries, Galil Medical Inc,
Galil Medical UK Ltd. and Galil Medical Italy Srl., which are
engaged in the marketing and sales of the Companys
products in the USA and the European markets, respectively.
b. Subsequent to the last audited balance sheet date, as of
September 30, 2008, the Company incurred an accumulated
deficit of approximately $73,153 (unaudited) since inception and
incurred a negative cash flow from operating activities. The
Companys ability to continue to operate is dependent upon
additional financial support until profitability is achieved.
The Companys management believes that sufficient
additional funds can be raised from existing and new investors
(See also Note 17d and 17e). However, there are no
assurances that the Company will be successful in obtaining an
adequate level of financing needed for current operations and
long-term development. Should the Company not raise the
financing needed, substantial doubt about the Companys
ability to continue as a going concern may raise. The
accompanying financial statements do not include any adjustments
to reflect the possible future effects on recoverability and
reclassification of assets or the amounts and classification of
liabilities that may result from the outcome of this
uncertainty.
c. On July 1, 2003, the Company completed the merger
of its urology cryotherapy business and the urology
brachytherapy business of Amersham plc. (acquired on
April 8, 2004 by General Electronic Corporation
(GE)). Upon the merger, a new company, Oncura Inc.
(Oncura), was incorporated under the laws of
Delaware with the Company holding an aggregate ownership
interest of 25%. Oncura aimed to provide minimally invasive
treatment options for prostate cancer using brachytherapy and
cryotherapy technologies. The Company and Amersham each entered,
separately, into supply and research and development service
agreements with Oncura based on a cost plus pricing, according
to the terms and conditions stipulated in the relevant
agreements.
d. Acquisition of the Cryo Business and disposal of 25%
equity investment in Oncura:
On December 8, 2006 (the December 8, 2006
Transaction) the Company signed two agreements whereby:
(1) the Company sold to GE its holdings in Oncura (25%) in
consideration of $20,000; (2) the Company acquired the Cryo
business from Oncura in consideration of $46,000, thereby
effectively increasing its indirect holding in the Cryo business
from 25% to a direct holding of 100%.
By concluding the acquisition, the Company obtained the full
urology based cryo business, including all the related
customers, inventories, fixed assets and licenses to use the
technology.
The December 8, 2006 Transaction was considered as a single
acquisition accounted for under applicable business combination
accounting principles, whereby the Company increased its holding
in the Cryo Business from 25% to 100% in consideration of
$20,000 in cash and surrendering its accounts receivables and
loan balances of approximately $6,000 due from Oncura, and a 25%
holding in the brachy business.
According to SFAS 153, Exchange of Nonmonetary
Assets and SFAS 141, Business Combination, the
transaction does not involve an exchange of similar productive
assets but rather a transaction using the purchase method of
accounting, therefore, the Company effectively kept its original
25% interest in the cryo business at its carrying value amount
of the cryo business as reflected in the Companys
financial statements through the investment in Oncura and
revalued to fair value the remaining 75% cryo business purchased
from Oncura.
As a result, in 2006 the Company has recorded a loss of $1,748,
which is included in the statement of operations as loss from
acquisition of additional 75% in the cryo business and disposal
of 25% holding in Oncura.
FII-9
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated fair value of the identifiable assets acquired and
liabilities assumed as of December 8, 2006 is as follows:
|
|
|
|
|
Current assets
|
|
$
|
3,189
|
|
Inventory
|
|
|
1,816
|
|
Property and equipment
|
|
|
1,554
|
|
Intangible assets
|
|
|
11,520
|
|
|
|
|
|
|
|
|
|
18,079
|
|
Accrued expenses and other liabilities
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
(649
|
)
|
|
|
|
|
|
Fair value of net assets, representing the remaining 75% Cryo
Business purchased from Oncura
|
|
|
17,430
|
|
Original 25% interest in the Cryo Business at its carrying value
amount as reflected in the companys financial statements
through the investment in Oncura
|
|
|
2,245
|
|
Goodwill arising on acquisition
|
|
|
17,045
|
|
|
|
|
|
|
|
|
$
|
36,720
|
|
|
|
|
|
|
Adjustment to the carrying amount of goodwill for the period
ended December 31, 2007 is as follows:
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
17,045
|
|
Accounts receivable related to the Cryo business collected
before December 31, 2007 at amounts in excess of amounts
initially estimated at closing date during the allocation
period, net
|
|
|
(287
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
16,758
|
*)
|
|
|
|
|
|
|
|
|
*) |
|
Goodwill impairment had occurred during the quarter ended
September 30, 2008 (see below). |
In accordance with SFAS No. 142, goodwill arising from
the acquisition will not be amortized. In lieu of amortization,
the Company is required to perform an annual impairment review.
If the Company determines through the impairment review process
that goodwill has been impaired, it will record the impairment
charge in its statement of operations. The Company will also
assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. The Company performs the annual impairment test in
the fourth quarter of each year. During the third quarter of
2008, certain indicators for impairment of the Companys
goodwill occurred, such as fair market value of publicly traded
competitive companies, and the Companys recent results.
The Companys management used the income approach in order
to determine the Companys total fair value. After
comparing the fair value with the carrying amounts of its total
assets and liabilities, it was concluded that the carrying value
of the Companys net assets exceeded the estimated fair
value. Accordingly the Companys management has continued
to the next step as provided by SFAS No. 142 and
calculated the implied fair value of goodwill by deducting the
fair value of all tangible and intangible net assets (including
unrecognized intangible assets).The Companys management
used operational projections, discounted cash flow analysis and
third partys valuations in performing the analysis. As a
result of this analysis, the Companys management
determined that goodwill impairment had occurred and recognized
a non-cash impairment charge of $16,758 during the quarter ended
September 30, 2008. The impairment is primarily a result of
a reduction in the estimated future cash flows attributable to
the cryoablation urology business (see also Note 2j).
FII-10
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited pro-forma results:
The following represents the unaudited pro-forma results of
operations of the Cryo Business and the Companys
consolidated statements of operations for the years ended
December 31, 2005 and 2006, assuming that Cryo Business
acquisition occurred on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
Unaudited
|
|
|
|
Total consolidated
|
|
|
Revenues
|
|
$
|
17,629
|
|
|
$
|
19,963
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(10,748
|
)
|
|
$
|
(10,007
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,885
|
)
|
|
$
|
(10,149
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States (U.S. GAAP).
a. Use of estimates:
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
b. Financial statements in U.S. dollars:
A majority of the revenues of the Company is generated in
U.S. dollars (dollar). In addition, a
substantial portion of the Companys costs is incurred in
dollars. The Companys management believes that the dollar
is the currency of the primary economic environment in which the
Company and each of its subsidiaries operate. Thus, the
functional and reporting currency of the Company and its
subsidiaries is the U.S. dollar.
Accordingly, accounts maintained in currencies other than the
dollar are remeasured into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation
(SFAS No. 52). All transaction gains and
losses of the remeasurement of monetary balance sheet items are
reflected in the consolidated statements of operations as
financial income or expenses, as appropriate.
c. Interim financial information:
The consolidated balance sheet as of September 30, 2008 and
the related consolidated statements of operations and cash flows
for the nine months ended September 30, 2007, and 2008, and
the statement of changes in shareholders equity for the
nine months ended September 30, 2008 are unaudited. This
unaudited information has been prepared by the Company on the
same basis as the audited annual consolidated financial
statements and, in managements opinion, reflects all
adjustments necessary for a fair presentation of the financial
information, in accordance with generally accepted accounting
principles, for interim financial reporting for the period
presented and accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for audited financial statements. Results
for interim periods are not necessarily indicative of the
results to be expected for the entire year.
FII-11
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
d. Principles of consolidation:
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Inter-company
transactions and balances, including profits from inter-company
sales not yet realized, have been eliminated upon consolidation.
e. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of
three months or less.
f. Investment in an affiliate (see also
Note 1d):
In these financial statements, affiliate is a company held to
the extent of 20% or more (which is not a subsidiary), or a
company less than 20% held, where the Company can exercise
significant influence over operating and financial policies of
the affiliate. The investment in an affiliate was accounted for
in accordance with the equity method of accounting. Profits on
intercompany sales, not realized outside the group have been
eliminated. The excess of the purchase price over the fair value
of net tangible assets acquired has been attributed to goodwill
and other intangible assets.
The investment in the affiliate was accounted for under the
equity method of accounting in accordance with APB No. 18,
The Equity Method of Accounting for Investments in Common
Stock (APB 18).
Summarized financial information of the affiliate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
January 1,
|
|
|
January 1,
|
|
|
|
2005 through
|
|
|
2006 through
|
|
|
|
December 31,
|
|
|
December 8,
|
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
72,063
|
|
|
$
|
41,664
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
31,183
|
|
|
$
|
17,127
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,209
|
)
|
|
$
|
(9,566
|
)
|
|
|
|
|
|
|
|
|
|
The Companys investment in the affiliate was reviewed for
impairment by the Companys management whenever events or
changes in circumstances indicated that the carrying amount of
the investment may not be recoverable and when indications of
goodwill or intangible assets impairments were indicated. During
2005 and 2006, in light of the affiliates results of
operations and other indicators, the Company recorded an
impairment loss in the amount of $4,964 and $6,122, respectively
due to other-than-temporary decline in the value of the
investment. The impairment has been recorded within the equity
in losses of an affiliate and impairment of investment in
affiliate, in the statements of operations.
g. Inventories:
1. Inventories are stated at the lower of cost or market
value. Inventory write-offs are provided to cover risks arising
from slow-moving items or technological obsolescence.
Cost is determined as follows:
Raw materials, parts and supplies : using the
first-in,
first-out method. Finished products and work in progress :
With respect to raw materials using the
first-in,
first-out method. With respect to labor and manufacturing
expenses on the basis of actual expenses.
2. Inventory write-off recorded in 2005, 2006, 2007 and the
nine-month period ended September 30, 2008, amounted to
$18, $33, $312 and $393, respectively.
FII-12
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
h. Property and equipment, net:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line
method, over the estimated useful lives of the assets at the
following annual rates:
|
|
|
|
|
%
|
|
Machinery and equipment
|
|
15 - 20
|
Office furniture and equipment
|
|
6 - 15
|
Computers and peripheral equipment
|
|
20 - 33
|
Medical equipment*)
|
|
20
|
Leasehold improvements
|
|
Over the term of the lease or the life of
the asset, whichever is shorter
|
|
|
|
*) |
|
Equipment placed at customer sites for use with the
Companys disposable kits is depreciated into cost of goods
sold ratably over 5 years. |
Impairment
of long lived assets
The Companys long-lived assets are reviewed for impairment
in accordance with SFAS No. 144 whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected to be
generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs. As of
December 31, 2005 and 2006 no impairment losses have been
identified. As of December 31, 2007 the Company recorded an
impairment loss in the amount of $75 in respect of unusable
production equipment. As of September 30, 2008 no
impairment losses have been identified
i. Intangible assets:
Intangible assets acquired in a business combination are
recorded at fair value at the date of acquisition. Following
initial recognition, intangible assets are carried at cost less
any accumulated amortization and any accumulated impairment
losses. The useful lives of intangible assets are assessed to be
either finite or indefinite. Intangible assets with finite lives
are amortized over their useful economic life using a method of
amortization that reflects the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used
up and are assessed for impairment whenever there is an
indication that the intangible asset may be impaired. The
amortization period and the amortization method for an
intangible asset with a finite useful life is reviewed at least
at each financial year-end. The amortization expense on
intangible assets with finite lives is recognized in the
statement of operations.
The Companys intangible assets consist of patent
technology and customer relationships. Both assets are amortized
over an estimated useful life which benefits are expected to be
received. As of December 31, 2006 and 2007, no impairment
losses have been identified.
The Company assessed whether there had been an impairment of the
Companys intangible assets in accordance with
SFAS No. 144 as of September 30, 2008. Impairment
is considered to exist if total estimated future cash flows on
an undiscounted basis are less than the carrying value of the
asset. Based upon this analysis the Company concluded that
impairment of the intangible assets is not required as of
September 30, 2008.
FII-13
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
j. Goodwill:
Goodwill reflects the excess of the purchase price of business
acquired over the fair value of net assets acquired. Goodwill is
not amortized but instead is tested for impairment at least,
annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
Annual impairment test is performed by the Company in the fourth
quarter of each year.
In accordance with SFAS No. 142, due to certain
indicators as more fully described in Note 1d, the Company
performed an interim assessment of goodwill impairment as of
September 30, 2008. As a result of this analysis, the
Company determined that goodwill impairment had occurred and
recognized a non-cash impairment charge of $16,758 during the
quarter ended September 30, 2008. The impairment is
primarily a result of a reduction in the estimated future cash
flows attributable to the cryoablation urology business.
k. Warranty costs:
The Company generally offers a standard limited warranty for a
period of one year for its products. The Company estimates the
costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs at the time
revenues are recognized. Provision for warranty as of
December 31, 2006 and 2007 and September 30, 2008,
amounted to $29. A tabular reconciliation of the changes in the
Companys aggregate product warranty liability was not
provided due to immateriality.
l. Employee related benefits:
Severance
pay
The Companys liability for severance pay for its Israeli
employees is calculated pursuant to Israels Severance Pay
Law based on the most recent salary of the employees multiplied
by the number of years of employment, as of the balance sheet
date. Employees are entitled to one months salary for each
year of employment or a portion thereof. The Companys
liability for its Israeli employees is fully provided by monthly
deposits with insurance policies and by an accrual.
The deposited funds include net profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to Israels
Severance Pay Law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of these
policies, and includes immaterial profits.
Severance pay expense for the years ended December 31,
2005, 2006, 2007, amounted to approximately $16, $36 and$14,
respectively.
401K
profit sharing plans
The Companys USA subsidiary has a savings plan in the
United States that qualifies under Section 401(k) of the
Internal Revenue Code. U.S employees may contribute up to 100%
of their pretax salary, but not more than statutory limits. The
Company contributes one dollar for each dollar a participant
contributes in this plan, in an amount of up to 3% of a
participants earnings and in addition, it contributes
fifty cents for each dollar a participant contributes in this
plan, for an additional 1% of a participants earnings.
Matching contributions in 2007 for all the plans were $187.
Matching contributions are invested in proportion to each
participants voluntary contributions in the investment
options provided under the plan.
Notice
period
The Company accrued a long term liability in respect of its
notice period obligations to its employees. In the event
employment is terminated, the Company shall pay the employees
their base salary and benefits otherwise
FII-14
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
payable to them at such times and in such installments as would
be the case if there had been no termination of employment
through the day which is determined in each of their employment
agreements.
m. Revenue recognition:
Most of the Companys revenues are derived from systems and
disposable kits sales which are recognized in accordance with
SEC Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB No. 104), when
persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable and
collectability is probable. Generally, the Company does not have
any significant obligations after delivery and does not grant a
right of return to its customers. Revenues related to services
performed in the US by third party providers in connection with
the Companys procedures are recognized when the procedures
performed.
The Company routinely assesses the financial position of its
customers to determine its exposure to credit risk. Accounts
receivable are carried at the original invoice amount, less a
provision for doubtful accounts, based on a periodic review of
outstanding receivables. Allowances are provided for known and
anticipated credit losses, as determined by management in the
course of regularly evaluating customer receivables. This
evaluation takes into consideration a customers financial
position and credit history, as well as current economic
conditions. Accounts receivable are written off when deemed
uncollectible.
n. Research and development costs:
Research and development costs are charged to the statement of
operations as incurred.
o. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards
(SFAS) 109, Accounting for Income Taxes.
This Statement prescribes the use of the liability method
whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 utilizes a
two-step approach for evaluating tax positions. Recognition
(step one) occurs when an enterprise concludes that a tax
position, based solely on its technical merits, is
more-likely-than-not to be sustained upon examination.
Measurement (step two) is only addressed if step one has been
satisfied (i.e., the position is more-likely-than-not to be
sustained) otherwise a full liability in respect of a tax
position not meeting the more-than-likely-than-not criteria is
recognized. Under step two, the tax benefit is measured as the
largest amount of benefit, determined on a cumulative
probability basis that is more-likely-than-not to be realized
upon ultimate settlement.
FIN 48 applies to all tax positions related to income taxes
subject to FAS 109. This includes tax positions considered
to be routine as well as those with a high degree of
uncertainty. FIN 48 has expanded disclosure requirements, which
include a tabular roll forward of the beginning and ending
aggregate unrecognized tax benefits as well as specific detail
related to tax uncertainties for which it is reasonably possible
the amount of unrecognized tax benefit will significantly
increase or decrease within twelve months (see also
Note 12).
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The cumulative effect of applying
FIN 48 is reported as an adjustment to the opening balance
of accumulated deficit. The adoption of FIN 48 resulted in
an increase of the tax provision in the amount of $2,950, which
was accounted with a corresponding increase to the
January 1, 2007 balance of accumulated deficit.
FII-15
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
p. Fair value of financial instruments:
The following methods and assumptions were used by the Company
and its subsidiaries in estimating their fair value disclosures
for financial instruments:
The carrying amounts for cash and cash equivalents, trade
receivables, other accounts receivable, trade payables and other
accounts payable approximate their fair value due to the
short-term maturity of such instruments.
q. Accounting for stock-based compensation:
Effective January 1, 2006 (the effective date),
the Company adopted SFAS No. 123(R), Share-Base
Payment, which is a revision of FASB Statement
No. 123, Accounting for Stock-Based
Compensation (SFAS 123) which required
the measurement and recognition of compensation expenses based
on estimated fair value for all share based payment awards made
to employees and directors. In March 2005, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107) relating
to SFAS 123(R).
The Company adopted SFAS 123(R) using the
modified-prospective transition method. According to the
modified-prospective transition method, compensation cost is
recognized beginning with the effective date (a) based on
the grant date fair value estimated in accordance with the
provisions of SFAS 123(R) for all share-based payments
granted after the effective date and (b) based on the grant
date fair value estimated in accordance with the provisions of
SFAS 123 Accounting For Stock-Based
Compensation (SFAS 123) for all awards
granted to employees prior to the effective date of
SFAS 123(R) that remain unvested on the effective date.
Results of prior periods have not been restated, in accordance
with the modified prospective transition method.
Previously, the Company adopted the fair-value-based method of
accounting based on the provisions of SFAS 123 for
share-based payments effective January 1, 2003 using the
prospective methods described in SFAS 148, Accounting
for Stock-Based Compensation- Transition and Disclosure.
The difference between the expense related to stock-based
employee compensation included in the determination of net
income for 2006, and the expense which would have been
recognized if SFAS 123 been applied to all awards granted
after the original effective date of SFAS 123R is
immaterial.
The Company recognizes compensation expenses for the value of
its awards based on the straight line method over the requisite
service period of each of the awards.
The Company applies
EITF 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, with respect to options issued to
non-employees.
The Companys additional disclosures required by
SFAS 123R are provided in Note 11.
r. Losses per share:
Basic net loss per share (Basic EPS) is computed by
dividing net loss attributable to Ordinary shareholders by the
weighted average number of shares of Ordinary shares outstanding
during the period, excluding shares subject to repurchase. The
Company applied the two-class method as required by
EITF 03-6,
Participating Securities and the Two-Class Method
under FASB Statement No. 128. The two-class method is
an allocation formula that determines earnings per share for
each class of Ordinary shares and participating security
according to dividends declared (or accumulated) and
participation rights in undistributed earnings.
FII-16
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Diluted net loss per share (Diluted EPS) gives
effect to all dilutive potential Ordinary shares outstanding
during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities
that would have an anti-dilutive effect on losses. For the years
ended December 31, 2005, 2006 and 2007 and the nine months
ended September 30, 2008 and 2007, the Company had
outstanding convertible Preferred stock, warrants to purchase
common stock and stock options to purchase common stock, which
were not included in the calculation of Diluted EPS due to the
anti-dilutive nature of these instruments in the following
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Series A-1
Convertible Preferred shares
|
|
|
|
|
|
|
74,962,166
|
|
|
|
74,962,166
|
|
|
|
74,962,166
|
|
|
|
74,962,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-2
Convertible Preferred shares
|
|
|
|
|
|
|
6,746,596
|
|
|
|
6,746,596
|
|
|
|
6,746,596
|
|
|
|
6,746,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase Common stock
|
|
|
4,714,785
|
|
|
|
12,181,165
|
|
|
|
14,467,956
|
|
|
|
13,299,915
|
|
|
|
25,209,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase Common stock
|
|
|
1,070,956
|
|
|
|
1,070,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
7,364,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
s. Concentrations of credit risks:
Financial instruments that potentially subject the Company and
its subsidiaries to concentrations of credit risk consist
principally of cash and cash equivalents and trade receivables.
Cash and cash equivalents are invested in major banks in Israel,
the U.S.A. and in the U.K. Management believes that minimal
credit risk exists with respect to these investments.
Trade receivables are derived from sales to customers primarily
located in North America, Europe and Asia Pacific. The Company
and its subsidiaries perform ongoing credit evaluations of their
major customers and to date have not experienced any material
losses.
t. Impact of recently issued accounting standards:
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157) which defines fair
value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or
permit fair value measurements and, accordingly, does not
require any new fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15,
2007 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a
recurring basis, and should be applied prospectively. The
adoption of the provisions of SFAS 157 related to financial
assets and liabilities and other assets and liabilities that are
carried at fair value on a recurring basis is not anticipated to
materially impact the Companys consolidated financial
position and results of operations. Subsequently, the FASB
provided for a one-year deferral of the provisions of
SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the consolidated
financial statements on a non-recurring basis. The Company does
not expect that the adoption of SFAS 157 will have any
effect on non-financial assets and liabilities that are
recognized or disclosed on a non-recurring basis.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS 159). Under this Standard, the Company may elect to
report financial instruments and certain other items at fair
value on a
contract-by-contract
basis with changes in value reported in earnings. This election
is irrevocable. SFAS 159 provides an opportunity to
mitigate volatility in
FII-17
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reported earnings that is caused by measuring hedged assets and
liabilities that were previously required to use a different
accounting method than the related hedging contracts when the
complex provisions of SFAS 133 hedge accounting are not
met. SFAS 159 is effective for years beginning after
November 15, 2007. The Companys management has
determined that the adoption of SFAS 159 will not have a
significant impact on its consolidated financial statements
since it has not elected the fair value option for any of its
existing assets or liabilities as of FAS 159 effective date.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007)
(SFAS 141R), Business Combinations.
SFAS 141R will change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting
treatment and disclosure for certain specific items in a
business combination. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. As such, it is
expected that the Company would account for the Merger under the
provisions of SFAS 141R, should the Merger be consummated
after December 31, 2008. The adoption of SFAS 141R may
affect the Companys financial statements with respect to
the Merger (See Note 17a).
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160). SFAS 160
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. This standard is
effective for fiscal years beginning after December 15,
2008 and should be applied prospectively. However, the
presentation and disclosure requirements of the statement shall
be applied retrospectively for all periods presented. The
adoption of SFAS 160 is not expected to have any effect on
the Companys existing consolidated financial statements.
On December 21, 2007, the SEC staff issued Staff Accounting
Bulletin No. 110 (SAB 110), which, effective
January 1, 2008, amends and replaces a section of
SAB 107, Share-Based Payment. SAB 110
expresses the views of the SEC staff regarding the use of a
simplified method in developing an estimate of
expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R),
Share-Based Payment. Under the
simplified method, the expected term is calculated
as the midpoint between the vesting date and the end of the
contractual term of the option. The adoption of SAB 110 is
not expected to have any effect on the Companys existing
consolidated financial statements.
NOTE 3:
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Government authorities
|
|
$
|
109
|
|
|
$
|
145
|
|
|
$
|
82
|
|
Prepaid expenses
|
|
|
171
|
|
|
|
222
|
|
|
|
474
|
|
Deposits
|
|
|
49
|
|
|
|
113
|
|
|
|
141
|
|
Other
|
|
|
4
|
|
|
|
21
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
333
|
|
|
$
|
501
|
|
|
$
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FII-18
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 4:
INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Raw materials, parts and supplies
|
|
$
|
740
|
|
|
$
|
1,380
|
|
|
$
|
2,162
|
|
Work-in-progress
|
|
|
470
|
|
|
|
261
|
|
|
|
338
|
|
Finished products
|
|
|
2,503
|
|
|
|
1,950
|
|
|
|
2,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,713
|
|
|
$
|
3,591
|
|
|
$
|
4,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5:
PROPERTY AND EQUIPMENT, NET
a. Comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
493
|
|
|
$
|
423
|
|
|
$
|
501
|
|
Office furniture and equipment
|
|
|
240
|
|
|
|
355
|
|
|
|
522
|
|
Computers and peripheral equipment
|
|
|
413
|
|
|
|
717
|
|
|
|
797
|
|
Medical equipment*)
|
|
|
2,163
|
|
|
|
2,363
|
|
|
|
2,761
|
|
Leasehold improvements
|
|
|
31
|
|
|
|
299
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,340
|
|
|
|
4,157
|
|
|
|
4,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
289
|
|
|
|
322
|
|
|
|
369
|
|
Office furniture and equipment
|
|
|
42
|
|
|
|
110
|
|
|
|
168
|
|
Computers and peripheral equipment
|
|
|
324
|
|
|
|
421
|
|
|
|
520
|
|
Medical equipment*)
|
|
|
54
|
|
|
|
878
|
|
|
|
1,418
|
|
Leasehold improvements
|
|
|
10
|
|
|
|
20
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
|
|
1,751
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
2,621
|
|
|
$
|
2,406
|
|
|
$
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) |
|
Equipment placed at customer sites for use with the
Companys disposable kits. |
b. Depreciation expense amounted to $76, $151, $1,088 and
$756 for the years ended December 31, 2005, 2006, 2007 and
for the nine-month period ended September 30, 2008,
respectively.
FII-19
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 6:
INTANGIBLE ASSETS
a. Comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship
|
|
$
|
2,155
|
|
|
$
|
2,155
|
|
|
$
|
2,155
|
|
Patented technology
|
|
|
9,365
|
|
|
|
9,365
|
|
|
|
9,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,520
|
|
|
|
11,520
|
|
|
|
11,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship
|
|
|
13
|
|
|
|
229
|
|
|
|
390
|
|
Patented technology
|
|
|
59
|
|
|
|
995
|
|
|
|
1,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
1,224
|
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
11,448
|
|
|
$
|
10,296
|
|
|
$
|
9,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b. Amortization expense amounted to $72, $1,152 and $863
for the years ended December 31, 2006, and 2007 and for the
nine-month period ended September 30, 2008, respectively.
c. Estimated amortization expenses for the following years
is as follows:
|
|
|
|
|
2008
|
|
$
|
1,153
|
|
2009
|
|
|
1,153
|
|
2010
|
|
|
1,153
|
|
2011
|
|
|
1,153
|
|
2012 and thereafter
|
|
|
5,684
|
|
|
|
|
|
|
|
|
$
|
10,296
|
|
|
|
|
|
|
NOTE 7:
GOODWILL
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
17,045
|
|
Accounts receivable related to the Cryo business collected
before December 31, 2007 at amounts in excess of amounts
initially estimated at closing date, net
|
|
|
(287
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
16,758
|
|
Impairment of goodwill
|
|
|
(16,758
|
)
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
$
|
|
|
|
|
|
|
|
FII-20
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE
8: OTHER ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Employees and payroll accruals
|
|
$
|
1,472
|
|
|
$
|
2,045
|
|
|
$
|
1,786
|
|
Accrued expenses
|
|
|
2,192
|
|
|
|
2,608
|
|
|
|
3,024
|
|
Government authorities and tax provisions
|
|
|
585
|
|
|
|
3,755
|
|
|
|
3,990
|
|
Warranty reserve
|
|
|
29
|
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,278
|
|
|
$
|
8,437
|
|
|
$
|
8,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9:
COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments:
1. Royalties to the Office of the Chief Scientist
(OCS):
The Company participated in programs sponsored by the Government
of Israel for the support of research and development
activities. The Company has obtained grants from the Office of
the Chief Scientist at Israels Ministry of Industry, Trade
and Labor (the OCS), aggregating approximately
$1,820 for the Companys development projects. The Company
was required to pay royalties at the rate of 3.5% of sales of
products developed with funds provided by the OCS, up to an
amount equal to 100% of the OCS research and development grants
received, linked to the dollar, and for grants received after
January 1, 1999, which also bear interest at the rate of
LIBOR. The Company was obligated to repay the Government for the
grants received only to the extent that there are sales of the
funded products.
The Company paid or accrued royalties in the amounts of $706,
$306 and $767 for the years ended December 31, 2005, 2006
and 2007, respectively relating to the repayment of such grants.
As of December 31, 2007 and September 30, 2008, the
Company has no contingent obligation to pay royalties to the OCS.
2. Royalty obligation to the Marketing Fund of the
Government of Israel:
The Israeli Government, through the Fund for the Encouragement
of Marketing Activities, awarded the Company grants for
participation in foreign marketing expenses. The Company is
committed to pay royalties at the rate of 4% of the increase in
foreign sales, up to an amount equal to 100% of the grant
received, linked to the dollar, plus interest on the unpaid
amount based on the six-month LIBOR rate applicable to dollar
deposits.
The Company accrued royalties in the amount of $30, $0 and $0
for the years ended December 31, 2005, 2006 and 2007,
respectively, relating to the repayment of such grants.
As of December 31, 2007 and September 30, 2008, the
Company has no contingent obligation to pay royalties to the
Marketing Fund of the Government of Israel.
FII-21
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
b. Operating lease:
The Company rents its offices in Israel, United States and
United Kingdom under operating lease agreements. It also rents
cars in Europe and in Israel under operating lease agreements.
Aggregate minimum lease commitment under non-cancelable
operating lease as of September 30, 2008, is as follows:
|
|
|
|
|
2008
|
|
$
|
386
|
|
|
|
|
|
|
2009
|
|
$
|
783
|
|
|
|
|
|
|
2010
|
|
$
|
540
|
|
|
|
|
|
|
2011
|
|
$
|
93
|
|
|
|
|
|
|
Total rental expenses for the years ended December 31,
2005, 2006 and 2007 and for the nine-month period ended
September 30, 2008 amounted to $306, $329 $701 and $734,
respectively.
c. Purchase commitments
The Company signs agreements to purchase goods or services in
its ordinary course of business. These obligations are not
recorded in the consolidated financial statements until contract
payment terms take effect. These obligations are subject to
changes based on, among other things, the Companys
manufacturing operations not operating in the normal course of
business, the demand for the Companys products, and the
ability of the Companys suppliers to deliver the products
or services as promised. As of December 31, 2007 the
Company had obligations of $1,524, which will materialize
through 2008. As of September 30, 2008, the Company had
obligations of $910, which will materialize through 2009.
d. Guarantees:
The Company provided a bank guarantee in the amount of $50 and
$60 in respect of office rental agreements and a bank guarantee
in the amount of $5 and $0 in respect of products supply
agreement, as of December 31, 2007 and September 30,
2008, respectively.
e. Litigation:
From time to time, the Company becomes involved in legal
proceedings and claims, which arise in the ordinary course of
business. The Company considers that the ultimate liability with
respect to any known action will not materially affect the
business, financial position, results of operations or cash
flows of the Company.
NOTE 10:
HEDGING INSTRUMENTS
During 2008, the Company entered into put and call option
contracts to hedge portions of its anticipated NIS payroll
payments for periods of one to three months. These contracts are
designated as cash flow hedges, as defined by Financial
Accounting Standard Board Statement No. 133 Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133), as amended, and are all
considered by management as highly effective as hedges of these
expenses.
As of September 30, 2008, the Company had outstanding put
and call options with commercial banks, having a total notional
principal amount of approximately $1,000.
During the nine months ended September 30, 2008, the
Company recognized a net unrecognized gain of $25 related to the
effective portion of its hedging instruments. The effective
portion of the hedged instruments has been included as payroll
expenses (income) in the statement of operations.
At September 30, 2008, the Company expects to reclassify
$21 of net gain on derivative instruments from accumulated other
comprehensive income to earnings during the next twelve months.
FII-22
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 11:
SHAREHOLDERS EQUITY
a. Issuance of shares:
1. On January 20, 2006 the Company issued 7,364,883
Ordinary shares upon the conversion of a Convertible Note at a
conversion rate of $0.48 per share (see also (c) below).
2. Upon the December 8, 2006 Transaction, the Company
issued 74,962,166
Series A-1
Convertible Preferred shares for a total consideration of
$40,000. In addition, a loan granted to the Company in April
2004 was converted into 6,746,596
Series A-2
Convertible Preferred shares based on per share price of $0.5336.
Considering the economic characteristics, risks and the
contractual terms of the Series A-1 Convertible Preferred
shares and Series A-2 Convertible Preferred shares
(together Series A Convertible Preferred
shares), the fact that these shares are non redeemable and
could not be settled in cash, based on the applicable guidance,
the Company has classified these shares within permanent equity
(see also (b) below).
3. During 2006, the Company issued 1,839,920 Ordinary
shares upon exercise of options by employees and directors.
b. Rights of shares:
1. Ordinary shares:
The Ordinary shares confer upon the holders the right to receive
notice to participate and vote in shareholders meetings of the
Company and to receive dividend, if declared.
2. Series A Convertible Preferred shares confer upon
the holders the following rights:
Voting:
Each outstanding Series A Convertible Preferred share shall
be entitled to a number of votes equal to the number of Ordinary
Shares into which such Series A Convertible Preferred share
is then convertible.
Dividend:
Dividends at the rate of 4% per annum compounded annually on the
applicable Original Liquidation Price. Dividends shall accrue
from day to day, whether or not declared, and shall be
cumulative.
Liquidation
preference:
Upon any liquidation, dissolution or winding up of the Company
and its subsidiaries, each holder of outstanding Series A
Convertible Preferred shares shall be entitled to be paid in
cash or in securities or property other than cash, before any
amount shall be paid or distributed to the holders of the
Ordinary shares or any other shares ranking on liquidation
junior to the Series A Convertible Preferred shares, an
amount per share of series of Series A Convertible
Preferred shares equal to (a) the applicable Original
Liquidation Price to each such series of Series A
Convertible Preferred shares ($0.6413 for
Series A-1
Convertible Preferred shares and $0.5336 for
Series A-2
Convertible Preferred shares) plus (b) any declared but
unpaid dividends on such Series Convertible Preferred
share, plus (c) any Accrued Dividends not previously paid
(the Preference Amount).
After the payment in full of the Series A Preference amount
the remaining assets and funds of the Company available for
distribution to its shareholders, if any, shall be paid to, or
distributed among, the holders of Series A Convertible
Preferred shares and the holders of Ordinary shares and other
shares ranking on liquidation junior to Series A
Convertible Preferred shares then outstanding, pro rata, on an
as-converted basis.
FII-23
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Conversion:
Each outstanding Series A Convertible Preferred share shall
be converted into such number of fully paid and nonassessable
Ordinary shares as is determined by dividing (a) the
applicable Original Liquidation Price by (b) the applicable
Conversion Price at the time in effect for such Series A
Convertible Preferred share (the Conversion Rate).
The initial applicable Conversion Price per share
shall be the Convertible Preferred shares Original Liquidation
Prices, subject to adjustment as defined in the Companys
articles of association.
Tag-along
rights:
At any time following the fourth anniversary of December 8,
2006 and prior to an IPO of the Company (QPO in the
Companys Articles), the holders of 66.66% of the voting
power of the then issued and outstanding
Series A-1 shares
have the right to force the Companys shareholders to a
Sale Event as defined in the Companys articles.
c. Convertible notes:
On May 19, 2005, the Company signed a convertible debenture
(the Convertible Notes) agreement with certain of
its existing shareholders, according to which it had received
during 2005 an aggregate amount of approximately $3,500, in two
equal installments.
The Convertible Notes bear no interest and shall be
automatically converted into Ordinary shares of the Company at
the earlier of (i) December 31, 2005, which was postponed
to January 20, 2006, or (ii) the date of an agreement for
an investment in either the Company or Oncura, or for an
acquisition with respect to either the Company or Oncura, or for
an Oncura equity transaction (all as defined in the agreement),
or (iii) the date of an IPO with respect to either the Company
or Oncura. Since the Convertible Notes holders did not have the
right to be repaid in cash or to redeem the Convertible Notes,
the Notes were classified within shareholder equity. The
Convertible Notes were converted into Ordinary shares on
January 20, 2006 (see also a above).
d. Share option plans:
Under the Companys Stock Option Plans (the
Plans), options may be granted to officers,
directors, employees and consultants of the Company or its
subsidiaries.
Pursuant to the Plans, the Company reserved for issuance
31,228,503 Ordinary shares. During 2005, the Company granted
401,000 options to employees and 50,000 options to consultants
with an average exercise price of $0.45 per share. During 2006,
the Company granted 9,364,176 options to employees and 90,000 to
consultants with an average exercise price of $0.45 per share.
During 2007, the Company granted 4,966,666 options to employees
and 300,000 options to consultants with an average exercise
price of $0.27 per share. During the nine-month period ended
September 30, 2008, the Company granted 13,673,334 options
to employees and 30,000 options to consultants, with an average
exercise price of $0.27 per share.
Each option granted under those Plans is exercisable until the
earlier of ten years from the date of the grant of the option or
the expiration dates of the respective option plans. The options
vest primarily over four years (unless the Board of Directors
approves otherwise in accordance with the provisions of the
plans). In certain circumstances, several executive officers of
the Company have accelerated option vesting terms. Any options
canceled or forfeited before expiration, become available for
future grants.
On December 8, 2006, the Company repriced all outstanding
options with exercise price over $0.45 to an exercise price of
$0.45. On June 27, 2007, the Company re-priced all
outstanding options granted in December 2006 and thereafter to
an exercise price of $0.27.
FII-24
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company estimates the fair value of stock options granted to
employees on the date of the grant using the
Black-Scholes-Merton option-pricing model. The option-pricing
model requires a number of assumptions, noted in the following
table, of which the most significant are expected stock price
volatility and the expected option term.
The expected option term represents the period that the
Companys stock options are expected to be outstanding and
was determined based on the simplified method permitted by
SAB 107 as the average of the vesting period and the
contractual term. The computation of expected volatility is
based on realized historical stock price volatility of peer
companies. The risk-free interest rate is based on the yield
from U.S. Treasury zero-coupon bonds with an equivalent
term. The Company has historically not paid dividends and has no
foreseeable plans to pay dividends.
The fair value of the Companys stock options granted to
employees and directors for the years ended December 31,
2005, 2006 and 2007 and for the nine months ended
September 30, 2007 and 2008, was estimated using the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Risk-free interest rate
|
|
|
3.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
50
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
Expected lives
|
|
|
4
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
The fair value of each option granted to consultant is estimated
on the measurement date using the Black-Scholes formula with the
following weighted average assumptions: expected volatility of
75%, risk-free interest rates of 4.5% dividend yields of 0% and
an expected life equal to the options contractual life.
A summary of employee option activity under the Plans as of
September 30, 2008 and changes during the nine-months
period ended September 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
|
(Unaudited)
|
|
|
Outstanding at beginning of year
|
|
|
14,467,956
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
13,703,334
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(94,790
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(2,867,165
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year:
|
|
|
25,209,335
|
|
|
$
|
0.26
|
|
|
|
8.6
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2008
|
|
|
23,948,868
|
|
|
$
|
0.26
|
|
|
|
8.6
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at September 30, 2008
|
|
|
7,141,213
|
|
|
$
|
0.23
|
|
|
|
6.8
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FII-25
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of employee option activity under the Plans as of
December 31, 2007 and changes during the year ended
December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding at beginning of year
|
|
|
12,181,165
|
|
|
$
|
0.26
|
*)
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,966,666
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(2,679,875
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year:
|
|
|
14,467,956
|
|
|
$
|
0.26
|
|
|
|
8.20
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
13,744,558
|
|
|
$
|
0.26
|
|
|
|
8.20
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at December 31, 2007
|
|
|
6,017,546
|
|
|
$
|
0.24
|
|
|
|
6.9
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) |
|
As mentioned above, on June 27, 2007, the Company re-priced
all outstanding options granted in December 2006 and
thereafter to an exercise price of $0.27. |
The weighted-average grant-date fair value of options granted
during the years ended December 31, 2005, 2006 and 2007 was
$0.23, $0.19 and $0.19, respectively. The aggregate intrinsic
value in the table above represents the total intrinsic value
that would have been received by the option holders had all
option holders exercised their options on December 31, 2007
and September 30, 2008. As of December 31, 2007, there
was approximately $1,140 of total unrecognized compensation
costs related to non-vested share-based compensation
arrangements granted under the Companys Plans. That cost
is expected to be recognized over a weighted-average period of
3 years. The total intrinsic value of options exercisable
during the years ended December 31, 2005, 2006 and 2007 was
$0, $500 and $0, respectively.
Total compensation expenses recognized by the Company related to
its stock-based employee and consultants compensation
awards, including modifications of terms as mentioned, amounted
to $96, $279, $645 and $723 for the years ended
December 31, 2005, 2006, 2007 and for the nine-month period
ended September 30, 2008, respectively. Modification of the
assumptions used in 2005 to estimate the fair value of the
Companys stock options, to the assumptions used in 2006
and 2007, will not cause a material difference in the
compensation expenses recognized by the Company.
e. In November 2007, the Companys Board of Directors
authorized to repurchase up to 586,258 Ordinary shares from a
former executive of the Company. During 2008, the Company
purchased 586,258 of its Ordinary shares (see also
Note 11f).
f. Put Option for former executive
In May 2008, the Company purchased the Shares from the Executive
for a total consideration of $264, of which $87 was recognized
as salary expenses during 2007 and the remaining, in the amount
of $177, was recognized in the shareholders equity as
accumulated deficit.
NOTE 12:
INCOME TAXES
a. In June 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
FAS 109. This interpretation prescribes a minimum
recognition threshold a tax
FII-26
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on
derecognition of tax positions, classification on the balance
sheet, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 requires significant
judgment in determining what constitutes an individual tax
position as well as assessing the outcome of each tax position.
Changes in judgment as to recognition or measurement of tax
positions can materially affect the estimate of the effective
tax rate and consequently, affect the operating results of the
Company.
The Company adopted the provisions of FIN 48 as of
January 1, 2007. As a result of the implementation of
FIN 48, the Company recognized $2,950 increase in liability
for unrecognized tax positions which was accounted with a
corresponding increase to the January 1, 2007 balance of
accumulated deficit. As of January 1, 2007, liabilities for
unrecognized tax positions in accordance with FIN 48
amounted to $2,950.
Interest associated with uncertain tax position, which during
the year ended December 31, 2007 and for the nine month
period ended September 30, 2008 amounted to $220 and $235,
respectively, is classified as financial expenses in the
financial statements. The Companys policy for interest
related to income tax exposures was not impacted as a result of
the adoption of the recognition and measurement provisions of
FIN 48.
A reconciliation of the beginning and ending amount of
unrecognized tax positions is as follows:
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
Balance at January 1, 2007
|
|
$
|
2,950
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions of exchange rate, penalties and interest related to
unrecognized tax liabilities from previous years
|
|
|
220
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
3,170
|
|
Additions based on tax positions related to the current period
(unaudited)
|
|
|
|
|
Additions of exchange rate, penalties and interest related to
unrecognized tax liabilities from previous years (unaudited)
|
|
|
235
|
|
|
|
|
|
|
Balance at September 30, 2008 (unaudited)
|
|
$
|
3,405
|
|
|
|
|
|
|
The Company and its subsidiaries file income tax returns in
Israel and in other jurisdictions of its subsidiaries. As of
December 31, 2007, the tax returns of the Company and its
subsidiaries are open to examination by the Israeli and other
tax authorities for the tax years 2003 through 2007.
b. The Company:
1. Measurement of taxable income under the Israeli Income
Tax (Inflationary Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in
NIS after certain adjustments for increases in the Israeli
Consumer Price Index (CPI). As explained in
Note 2b, the financial statements are measured in
U.S. dollars. The difference between the annual change in
the Israeli CPI and in the NIS/dollar exchange rate causes a
further difference between taxable income and the income before
taxes shown in the financial statements. In accordance with
paragraph 9(f) of SFAS No. 109, the Company has
not provided deferred income taxes on the difference between the
functional currency and the tax bases of assets and liabilities.
2. Tax rates:
On July 25, 2005, the Knesset (Israeli Parliament) approved
the Law of the Amendment of the Income Tax Ordinance (No. 147),
2005, which prescribes, among others, a gradual decrease in the
corporate tax rate in Israel to the following tax rates: in
2007 29%, in 2008 27%, in
2009 26% and in 2010 and thereafter 25%.
FII-27
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amendment is not expected to have a material effect on the
Companys financial position and results of operations.
3. Tax benefits under the Israeli Law for the Encouragement
of Capital Investments, 1959:
The Company applied for an Approved Enterprise
status for its production facilities in Israel under the above
law. The main benefit, to which the Company is entitled, is the
exemption from tax on income derived from Approved
Enterprise for ten years. The period of tax benefits is
subject to limits of 12 years from the commencement of
production, or 14 years from the approval date, whichever
is earlier.
The Company completed in 2000 the implementation of its first
program. According to approval of the Investment Center for the
Companys first program, the Company was entitled to a
shorter period of benefits of three years of tax exemption
commencing in 2001, which was utilized in the years 2002 and
2003, and on the January 1, 2004 the plan was cancelled.
The base turnover was determined at $2,500. The Company has
decided not to distribute dividends out of such tax-exempt
income. Accordingly, no deferred income taxes have been provided
on income attributable to the Companys Approved
Enterprise. The Companys second program has been
completed at the end of 2005 and final approval of the
Investment Center was received during 2007. Accordingly, income
that will not be attributed to the second program may be subject
to the tax at the regular rate.
On April 1, 2005, an amendment to the Law came into effect
(the Amendment) and has significantly changed the
provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by
setting criteria for the approval of a facility as a
Beneficiary Enterprise (rather than the previous
terminology of Approved Enterprise), such as a provision
requiring that at least 25% of the Beneficiary
Enterprises income will be derived from export.
Additionally, the Amendment enacted major changes in the manner
in which tax benefits are awarded under the Law so that
companies are no longer required for Investment Center approval
in order to qualify for tax benefits. The period of tax benefits
for a new Beneficiary Enterprise commences in the
Year of Commencement. This year is the later of:
(1) the year in which taxable income is first generated by
the company, or (2) a year selected by the company for
commencement, on the condition that the company meets certain
provisions provided by the Law (Year of Election).
However, the Law provides that terms and benefits included in
any letter of approval already granted will remain subject to
the provisions of the Law as they were on the date of such
approval. Therefore, the Companys existing Approved
Enterprises programs will generally not be subject to the
provisions of the Amendment. As a result of the Amendment,
tax-exempt income generated under the provisions of the new law,
will subject the Company to taxes upon distribution or
liquidation and the Company may be required in the future to
record deferred tax liability with respect to such tax-exempt
income. As of December 31, 2007, the Company did not
generate income under the provisions of the new law.
The entitlement to the above benefits is conditional upon the
Companys fulfilling the conditions stipulated by the above
law, regulations published there under and the instruments of
approval for the specific investments in Approved
Enterprises. In the event of failure to comply with these
conditions, in whole or in part, the Company may be required to
pay additional taxes for the period in which it benefited from
the tax exemption and would likely be denied these benefits in
the future.
In the event of a dividend distribution (including withdrawals
and charges that are deemed to be dividends) out of the income
originating from the approved enterprise, income from such
distributed dividend will be subject to the corporate tax rate
applicable to such profits as if the Company had not elected the
alternative system of benefits.
Income from sources other than the Approved
Enterprise or Beneficiary Enterprise during
the benefit period will be subject to tax at the regular rate.
FII-28
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September, 2007, the Company applied to the Israeli tax
authorities for approval of a new Beneficiary
Enterprise status and requested the year 2007 to be the
Year of Election (as defined thereunder).
c. Non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed based on tax laws in their
countries of residence.
d. Carryforward tax losses and credits:
The Company has estimated total available carryforward operating
tax losses of approximately $7,500, to offset against future
taxable profit. As of December 31, 2007, the Company
provided a full valuation allowance in respect of all the
deferred tax assets resulting from the carryforward operating
tax losses for which future offset is doubtful. Management
currently believes that it is more likely than not that those
deferred tax deductions will not be realized in the foreseeable
future.
e. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys and its subsidiaries deferred tax
liabilities and assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Carryforward tax losses
|
|
$
|
5,284
|
|
|
$
|
8,069
|
|
Temporary differences relating to intangible assets
|
|
|
929
|
|
|
|
694
|
|
Other
|
|
|
229
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
6,442
|
|
|
|
9,101
|
|
Valuation allowance
|
|
|
(6,442
|
)
|
|
|
(9,101
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
FII-29
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
f. Reconciling items between the statutory tax rate of
the Company and the effective tax rate:
A reconciliation between the theoretical tax expense, assuming
all income is taxed at the statutory tax rate applicable to loss
of the Company and the actual tax expense as reported in the
statement of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Loss before equity in losses of an affiliate and impairment of
investment in affiliate
|
|
$
|
684
|
|
|
$
|
4,094
|
|
|
$
|
9,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expenses (benefit) on the above amount at the
Israeli statutory tax rate
|
|
$
|
233
|
|
|
$
|
1,269
|
|
|
$
|
2,752
|
|
Tax adjustment in respect of different tax rates and
Approved Enterprise status
|
|
|
(174
|
)
|
|
|
(709
|
)
|
|
|
(1,945
|
)
|
Tax adjustment in respect of different tax rate of foreign
subsidiary
|
|
|
|
|
|
|
166
|
|
|
|
1,306
|
|
Non-deductible expenses and other permanent differences
|
|
|
(9
|
)
|
|
|
(71
|
)
|
|
|
(4
|
)
|
Deferred taxes on losses for which valuation allowance was
provided, net
|
|
|
(19
|
)
|
|
|
(232
|
)
|
|
|
(2,785
|
)
|
Stock compensation relating to option per SFAS 123(R)
|
|
|
(15
|
)
|
|
|
(28
|
)
|
|
|
(59
|
)
|
Other temporary differences for which deferred tax assets were
not recorded
|
|
|
(12
|
)
|
|
|
(359
|
)
|
|
|
147
|
|
Currency differences
|
|
|
(4
|
)
|
|
|
(36
|
)
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13:
GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF INCOME
DATA
The Company operates in one reportable segment (see Note 1
for a brief description of the Companys business). The
total revenues are attributed to geographic areas based on the
location of end-users.
The following table sets forth total revenues for the year ended
December 31, 2007 (for the years ended December 31,
2006 and 2005 most of the Company revenues derived from Oncura
which is located in the United States):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Revenues from sales to customers located in:
|
|
|
|
|
United States
|
|
$
|
18,955
|
|
Europe
|
|
|
4,508
|
|
ROW*)
|
|
|
2,159
|
|
|
|
|
|
|
|
|
$
|
25,622
|
|
|
|
|
|
|
FII-30
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth long-lived assets by geographic
area, for the year ended December 31, 2007:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
United States
|
|
$
|
1,323
|
|
Europe
|
|
|
428
|
|
Israel and ROW
|
|
|
655
|
|
|
|
|
|
|
|
|
$
|
2,406
|
|
|
|
|
|
|
Major customer data as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Customer A
|
|
|
97
|
%
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
|
|
|
|
|
|
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
|
|
|
|
|
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14:
FINANCIAL INCOME (EXPENSES), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bank deposits
|
|
$
|
39
|
|
|
$
|
162
|
|
|
$
|
702
|
|
Income related to long-term loan and trade receivables balances
|
|
|
165
|
|
|
|
271
|
|
|
|
|
|
Foreign currency translation differences
|
|
|
60
|
|
|
|
85
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264
|
|
|
|
518
|
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and bank charges
|
|
|
22
|
|
|
|
20
|
|
|
|
64
|
|
Interest relating to FIN 48 accrual
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Interest related to long-term loan from shareholders
|
|
|
301
|
|
|
|
232
|
|
|
|
17
|
|
Foreign currency translation differences
|
|
|
119
|
|
|
|
126
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
378
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(178
|
)
|
|
$
|
140
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FII-31
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 15:
TRANSACTIONS WITH RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Sales of medical equipment to Oncura*)
|
|
$
|
6,113
|
|
|
$
|
5,116
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Research and development services provided to Oncura*)
|
|
|
1,933
|
|
|
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,046
|
|
|
$
|
6,699
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other services provided to Oncura, net*)
|
|
$
|
25
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses related to long-term loan from shareholders
|
|
$
|
301
|
|
|
$
|
232
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income related to long-term loan and trade receivables
balances with Oncura*)
|
|
$
|
165
|
|
|
$
|
271
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees to shareholders
|
|
$
|
72
|
|
|
$
|
294
|
|
|
$
|
507
|
|
|
$
|
380
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) |
|
Not a related party since December 8, 2006. |
As for additional information see Note 1c.
NOTE 16:
NET LOSS PER SHARE
The calculation of basic and diluted net loss per share for the
year ended December 31, 2005, 2006 and 2007 and for the
nine months period ended September 30, 2007 and 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
7,714
|
|
|
$
|
12,979
|
|
|
$
|
9,489
|
|
|
$
|
5,955
|
|
|
$
|
27,373
|
|
Adjustment from accumulative dividend
|
|
|
|
|
|
|
128
|
|
|
|
2,072
|
|
|
|
1,542
|
|
|
|
1,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net loss per share
|
|
$
|
7,714
|
|
|
$
|
13,107
|
|
|
$
|
11,561
|
|
|
$
|
7,497
|
|
|
$
|
29,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of Common Stock
|
|
|
76,603,535
|
|
|
|
83,862,766
|
|
|
|
85,799,588
|
|
|
|
85,799,588
|
|
|
|
85,553,854
|
|
Denominator for basic net loss per share
|
|
|
76,603,535
|
|
|
|
83,862,766
|
|
|
|
85,799,588
|
|
|
|
85,799,588
|
|
|
|
85,553,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 17:
SUBSEQUENT EVENTS (UNAUDITED)
a. On November 10, 2008, the Company signed a
definitive Merger Agreement with Endocare Inc., a Nasdaq public
traded US based Company (the Merger). The terms of
the agreement call for a stock-for-stock merger transaction,
resulting in the Company becoming a wholly-owned subsidiary of
Endocare, and would provide, the
FII-32
GALIL
MEDICAL LTD. AND ITS SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
current Companys shareholders 48% of the outstanding stock
of the combined company. In addition, the agreement calls for a
concurrent private placement of approximately $16,250 to the
merged company, to be invested by several of the current
investors of the Company and Endocare. The transaction is
subject to approval of Endocares stockholders, as well as
customary regulatory approvals and is expected to close in the
period from the late first quarter of 2009 to the end of the
second quarter of 2009. If the Merger will not be completed by
June 30, 2009 the Merger Agreement will be terminated. The
Merger Agreement defines certain covenants regarding the
Companys operations during the period until the
consummation of the Merger.
At the same date, the Company and its shareholders signed an
agreement, under which immediately prior to and subject to the
closing of the Merger, the outstanding Convertible Preferred
shares of the Company will be converted into ordinary shares,
based on a conversion rate of 3.43 Ordinary Shares per each
Preferred A Share. The agreement also defines certain value
sharing arrangements between certain groups of the
Companys Shareholders to be effective upon certain
earn-out events, as defined in the agreement.
For accounting purposes the Company is considered to be
acquiring Endocare in the Merger, in accordance with Statement
of Financial Accounting Standards No. 141 (Revised 2007)
(SFAS 141R), Business Combinations.
During the nine months ended September 30, 2008, the
Company incurred expenses of $540 in relation to the pending
Merger, which were recorded under general and administrative
expenses. Additional expenses are expected to continue to be
accrued till the Merger closes. In addition, upon the closing of
the Merger, the Company will be paying transaction fees of about
$200 to its investment bankers.
b. During the fourth quarter of 2008, the Company had made
several commitments to its employees, which are subject to the
close of the Merger. It includes bonuses of $90 to be paid upon
the Merger closing, retention bonuses of $1,200 to be paid
during the
12-month
period following the closing and severance and extended notice
period payments of $400 to be paid upon employees
terminations during the
24-month
period following the closing, if such terminations occurred.
c. During the fourth quarter of 2008, the Company had
terminated the employment of several of its employees, and
incurred incremental commitments to severance and extended
notice period payments in a total amount of $400.
d. On January 8, 2009, the Companys US
subsidiary (the US Subsidiary) signed a Sale
of Accounts agreement with Rexford Funding LLC. Based on
this agreement the US Subsidiary can borrow up to $3,000 based
on eligible US trade receivables as defined in the agreement.
e. On January 8, 2009, the Company signed a
Convertible Loan Agreement with several of its shareholders for
a bridge loan of $2,000, to be granted to the Company in two
installments of $1,400 and $600 during January and February
2009, respectively. The loan bears interest of 18% and will be
repaid on the earlier of: (1) June 30, 2009
(2) the closing of the Merger (out of the Merger Financing
proceeds) or (3) upon mandatory conversion into shares
based on a discounted conversion rate of 75% of any share price
agreed under future equity financing round of at least $5,000.
- -
- - - - - -
- - - - - - - - - - - - - - -
FII-33
REPORT OF
INDEPENDENT AUDITOR
To the shareholders of
Galil Medical Ltd.
We have audited the accompanying special purpose statements of
attributable direct income and expenses (Statements of
Operations) of Oncura Inc. Cryo business line
(Acquired Cryo Business) for the period from
January 1, 2006 through December 8, 2006. These
financial statements are the responsibility of the Galil Medical
Ltd, management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the Statements of Operations are free of
material misstatement. We were not engaged to perform an audit
of the Acquired Cryo Business internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Acquired Cryo Business internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Statements of Operations,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
Statement of Operations presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 1, the accompanying Statements of
Operations have been prepared from the separate records
maintained by Oncura Inc. and may not necessarily be indicative
of the conditions that would have existed or the results of
operations if the Acquired Cryo Business had been operated as an
unaffiliated company. In addition, US GAAP financial statements
were not previously prepared for the Acquired Cryo Business as
it had no separate legal status. Furthermore, there was no
general ledger for the Acquired Cryo Business on a stand-alone
basis and neither complete statements of operations. As a
result, full audited financial statements are not provided, and
the preparation of such Statements of Operations requires a
significant judgment and estimations, and allocations determined
by the management of Galil Medical Ltd.
In our opinion, except to the above mentioned, such Statements
of Operations present fairly, in all material respects, the
Statements of Operations of the Acquired Cryo Business for the
period from January 1, 2006 through December 8, 2006,
in conformity with accounting principles generally accepted in
the United States of America.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
January 19, 2009
FII-34
ACQUIRED
CRYO BUSINESS
|
|
|
|
|
|
|
Period from
|
|
|
|
January 1, 2006
|
|
|
|
through
|
|
|
|
December 8, 2006
|
|
|
|
U.S. dollars in thousands
|
|
|
Revenues
|
|
$
|
18,141
|
|
Cost of revenues
|
|
|
(9,490
|
)
|
|
|
|
|
|
Gross profit
|
|
|
8,651
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Research and development
|
|
|
1,669
|
|
Selling and marketing, general and administrative
|
|
|
15,526
|
|
Amortization of intangible assets
|
|
|
920
|
|
|
|
|
|
|
|
|
|
18,115
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,464
|
)
|
Financial expenses, net
|
|
|
(263
|
)
|
|
|
|
|
|
Net loss
|
|
$
|
(9,727
|
)
|
|
|
|
|
|
The accompanying notes are an integral part of the Statements of
Operations.
FII-35
ACQUIRED
CRYO BUSINESS
U.S.
dollars in thousands
NOTE 1:
GENERAL
a. Through December 8, 2006, Oncura
Inc.(Oncura), a Delaware corporation was engaged in
marketing and selling therapeutic device systems and related
consumables used primarily in the performance of
minimally-invasive, urologic cancer treatment. Oncuras
products included implantable radioactive seeds and cryotherapy
devices and related disposable kits used in the treatment of
prostate and other urologic cancers.
b. Oncuras formation was the result of a business
combination, completed on July 1, 2003, between
Medi-Physics,
Inc. (MPI), a wholly-owned subsidiary of
GEHealthcare Limited (GEHealthcare), and Galil
Medical Ltd (Galil). Under the Formation and
Contribution Agreement (the Formation Agreement) by
and between MPI and Galil, MPI contributed substantially all of
the assets and certain liabilities of its urologic implantable
radioactive seeds business (the Brachy Business) and
Galil contributed substantially all of the assets and certain
liabilities of its urologic cryotherapy device business (the
Cryo Business). Oncura was incorporated on
May 9, 2003 and commenced operations on July 1, 2003.
c. On December 8, 2006, GEHealthcare and Galil signed
Purchase and Sale Transactions that provided for the purchase by
GEHealthcare of Galils 25% ownership stake in Oncura and
immediate sale thereafter of the net assets of Oncuras
Cryo Business (Acquired Cryo Business) to Galil (the
Purchase and Sale Transactions). Following the
acquisition, Galil obtained the full Cryo Business and the
Acquired Cryo Business was not operated under Oncura.
d. As a result of the Purchase and Sale Transactions, the
Statements of Operations of the Acquired Cryo Business and
related notes have been prepared from the separate records
maintained by Oncura and may not necessarily be indicative of
the conditions that would have existed or the results of
operations if the Acquired Cryo Business had been operated as an
unaffiliated Company.
NOTE 2:
SIGNIFICANT ACCOUNTING POLICIES
The carve-out Statements of Operations are prepared in
accordance with generally accepted accounting principles in the
United States of America (U.S. GAAP).
a. Carve-out Statements of Operations:
The accompanying carve-out Statements of Operations have been
prepared from the historical accounting records of Oncura and
present the direct income and expenses attributable to the
Acquired Cryo Business for the period from January 1, 2006
through December 8, 2006, the Purchase and Sale Transaction
date, including allocations of certain common expenses based
upon selected criteria. US GAAP financial statements were not
previously prepared for the Acquired Cryo Business as it had no
separate legal status. Furthermore, there was no general ledger
for the Acquired Cryo Business on a stand-alone basis and
neither complete statements of operations. As a result, full
audited financial statements are not provided.
The accompanying Statements of Operations of direct income and
expenses were prepared to present the direct revenues and direct
operating costs attributable to the Acquired Cryo Business.
Galil Management believes the assumptions and allocations
underlying the direct revenues and expenses are reasonable and
appropriate under the circumstances.
As a result, the accompanying carve-out Statements of Operations
are not intended to be a complete presentation of the Acquired
Cryo Business results of operations and financial position and
they do not purport to reflect the revenues and direct operating
expenses that would have resulted if the Acquired Cryo Business
had operated as an unaffiliated independent business.
Accordingly, the Statements of Operations of the Acquired Cryo
Business for this period are not indicative of future results
and financial position of Galil inclusive of the Acquired Cryo
Business.
FII-36
ACQUIRED
CRYO BUSINESS
NOTES TO
STATEMENTS OF OPERATIONS (Continued)
Allocation methodology:
Revenues, cost of revenues and research and development expenses
are allocated specifically, based on identifiable and discrete
financial records.
Selling and marketing expenses: expenses which
were identified as related to Acquired Cryo Business were
allocated specifically, based on identifiable and discrete
financial records. Expenses which could not been identified
specifically were allocated according to the commissions ratio
paid to sales persons for selling Cryo products.
General and Administrative expenses: expenses
which were identified as related to Acquired Cryo Business were
allocated specifically, based on identifiable and discrete
financial records. Expenses which could not been identified
specifically were allocated according to the respective ratio of
Cryo Business and Brachy Business.
Interest expenses: expenses related to loans
received from Oncuras shareholders were allocated
according to the respective ratio of Cryo Business and Brachy
Business.
b. Use of estimate
The preparation of the Statements of Operations requires
Galils management to make significant estimates and
assumptions that affect amounts reported in the carve-out
Statements of Operations in order to conform to generally
accepted accounting principles. Actual results could differ from
those estimates. US GAAP financial statements were not
previously prepared for the Acquired Cryo Business as it had no
separate legal status. Furthermore, there was no general ledger
for the Acquired Cryo Business on a stand-alone basis and
neither complete statements of operations. As a result, full
audited financial statements are not provided.
c. Research and development
Research and development costs are charged to the Statements of
Operations as incurred.
d. Revenue recognition:
Revenues from systems and disposable kits sales are recognized
when persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable and
collectability is probable. Generally, the Cryo Business does
not provide significant obligations after delivery and does not
grant rights of return to customers.
- -
- - - - - - -
FII-37
Annex A
EXECUTION COPY
AGREEMENT
AND PLAN OF MERGER
by and among
ENDOCARE, INC.,
ORANGE ACQUISITIONS LTD.,
and
GALIL MEDICAL LTD.
Dated as of November 10, 2008
TABLE OF
CONTENTS
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Page
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ARTICLE I DEFINITIONS
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A-2
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Section 1.1
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Certain Defined Terms
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A-2
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Section 1.2
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Table of Definitions
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A-7
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ARTICLE II THE MERGER
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A-10
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Section 2.1
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The Merger
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A-10
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Section 2.2
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Closing; Effective Time
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A-10
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Section 2.3
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Effects of the Merger
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A-10
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Section 2.4
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Tax-Free Reorganization
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A-10
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Section 2.5
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Articles of Association
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A-10
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Section 2.6
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Directors and Officers
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A-10
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Section 2.7
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Subsequent Actions
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A-10
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Section 2.8
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Conversion of Shares of the Company and Merger Sub
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A-11
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Section 2.9
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Associated Parent Common Stock Rights
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A-12
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Section 2.10
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Company Share Options
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A-12
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Section 2.11
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Exchange Fund
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A-12
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Section 2.12
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Exchange of Shares
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A-13
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Section 2.13
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Escrow Deposits
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A-14
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Section 2.14
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Withholding Rights
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A-14
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Section 2.15
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Shareholder Representative
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A-14
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB
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A-15
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Section 3.1
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Organization and Qualification
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A-15
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Section 3.2
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Authority
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A-16
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Section 3.3
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Application of Anti-takeover Protections
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A-16
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Section 3.4
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Termination of License Agreement with Sanarus
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A-16
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Section 3.5
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No Conflict; Required Filings and Consents
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A-17
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Section 3.6
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Capitalization
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A-17
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Section 3.7
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SEC Reports; Financial Statements; No Undisclosed Liabilities
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A-18
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Section 3.8
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Absence of Certain Changes or Events
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A-19
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Section 3.9
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Litigation
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A-19
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Section 3.10
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Compliance with Applicable Law
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A-19
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Section 3.11
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Intellectual Property
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A-20
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Section 3.12
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Parent Information
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A-21
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Section 3.13
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Health Care Regulatory Compliance
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A-22
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Section 3.14
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General Tax Matters
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A-22
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Section 3.15
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Material Contracts
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A-24
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Section 3.16
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Customers and Suppliers
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A-26
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Section 3.17
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Affiliate Interests and Transactions
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A-27
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Section 3.18
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No Prior Activities
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A-27
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Section 3.19
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Brokers Fees
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A-27
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Section 3.20
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Parent Disclosure
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A-27
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A-i
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Page
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
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A-27
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Section 4.1
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Organization and Qualification
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A-27
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Section 4.2
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Authority
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A-28
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Section 4.3
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No Conflict; Required Filings and Consents
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A-28
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Section 4.4
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Capitalization
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A-29
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Section 4.5
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Equity Interests
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A-31
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Section 4.6
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Financial Statements; No Undisclosed Liabilities
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A-31
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Section 4.7
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Absence of Certain Changes or Events
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A-32
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Section 4.8
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Compliance with Applicable Law; Permits
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A-32
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Section 4.9
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Litigation
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A-33
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Section 4.10
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Benefit Plans
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A-33
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Section 4.11
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U.S. and European Labor and Employment Matters
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A-35
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Section 4.12
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Israeli Employee Matters and Benefit Plans
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A-36
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Section 4.13
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Title, Sufficiency and Condition of Assets
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A-37
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Section 4.14
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Real Property
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A-38
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Section 4.15
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Intellectual Property
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A-38
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Section 4.16
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General Tax Matters
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A-40
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Section 4.17
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Environmental Matters
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A-43
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Section 4.18
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Material Contracts
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A-43
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Section 4.19
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Customers and Suppliers
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A-45
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Section 4.20
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Warranties
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A-46
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Section 4.21
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Accounts Receivable
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A-46
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Section 4.22
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Accounts Payable
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A-46
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Section 4.23
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Grants, Incentives and Subsidies
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A-46
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Section 4.24
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Affiliate Interests and Transactions
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A-46
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Section 4.25
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Health Care Regulatory Compliance
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A-47
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Section 4.26
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Insurance
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A-48
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Section 4.27
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Brokers
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A-48
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Section 4.28
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Company Shareholders
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A-48
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Section 4.29
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Company Information
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A-48
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ARTICLE V COVENANTS
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A-49
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Section 5.1
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Company Conduct of Business Prior to the Closing
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A-49
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Section 5.2
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Parent and Merger Sub Conduct of Business Prior to Closing
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A-51
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Section 5.3
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Merger Proposal
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A-52
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Section 5.4
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Company Shareholders Approval
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A-53
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Section 5.5
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Counsel Access to Information
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A-54
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Section 5.6
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Filings; Other Actions; Notification
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A-54
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Section 5.7
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Israeli Tax Rulings
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A-55
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Section 5.8
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Israeli Securities Exemption
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A-56
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Section 5.9
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Public Filings; Regulatory Matters; Parent Stockholder Approval;
Financing Disclosure Package
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A-56
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A-ii
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Page
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Section 5.10
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Access to Information
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A-57
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Section 5.11
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Exclusivity; No Change in Recommendation
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A-57
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Section 5.12
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Notification of Certain Matters; Supplements to Disclosure
Schedule
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A-59
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Section 5.13
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Takeover Statutes
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A-60
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Section 5.14
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Share Option Plans
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A-60
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Section 5.15
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Director and Officer Indemnification
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A-60
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Section 5.16
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Directors
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A-61
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Section 5.17
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Control of the Other Partys Business
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A-61
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Section 5.18
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Confidentiality
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A-61
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Section 5.19
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Exemption from Liability Under Section 16(b)
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A-61
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Section 5.20
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Financial Statements
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A-61
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Section 5.21
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Public Announcements
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A-62
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Section 5.22
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Reorganization Matters
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A-62
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Section 5.23
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Parent Corporate Compliance Program
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A-62
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Section 5.24
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Transfer Taxes
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A-62
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ARTICLE VI CONDITIONS TO CLOSING
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A-62
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Section 6.1
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General Conditions
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A-62
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Section 6.2
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Conditions to Obligations of the Company
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A-63
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Section 6.3
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Conditions to Obligations of Parent and Merger Sub
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A-64
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ARTICLE VII SURVIVAL; INDEMNIFICATION; REMEDIES
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A-65
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Section 7.1
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Survival of Representations and Warranties and Covenants
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A-65
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Section 7.2
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Indemnification and Other Rights
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A-65
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Section 7.3
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Time Limitations
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A-66
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Section 7.4
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Other Limitations
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A-66
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Section 7.5
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Value Used for Indemnity
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A-67
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Section 7.6
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Procedures Relating to Indemnification Involving Third Party
Claims
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A-67
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Section 7.7
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Other Claims
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A-67
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Section 7.8
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Recovery in the Case of Strict Liability or Negligence
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A-67
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Section 7.9
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Sole and Exclusive Remedy if the Closing Occurs
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A-68
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ARTICLE VIII TERMINATION
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A-68
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Section 8.1
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Termination by Mutual Consent
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A-68
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Section 8.2
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Termination by Parent or the Company
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A-68
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Section 8.3
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Termination by the Company
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A-68
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Section 8.4
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Termination by Parent
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A-70
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Section 8.5
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Fees and Expenses
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A-71
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Section 8.6
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Circumstances Relating to Specific Performance
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A-72
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Section 8.7
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Effect of Termination
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A-73
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A-iii
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Page
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ARTICLE IX GENERAL PROVISIONS
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A-73
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Section 9.1
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Nonsurvival of Representations and Warranties
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A-73
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Section 9.2
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Amendment and Modification
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A-73
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Section 9.3
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Settlement of Disputes
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A-73
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Section 9.4
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Extension; Waiver
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A-74
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Section 9.5
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Notices
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A-74
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Section 9.6
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Interpretation
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A-75
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Section 9.7
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Exclusivity of Representations and Warranties
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A-76
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Section 9.8
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Entire Agreement
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A-76
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Section 9.9
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No Third-Party Beneficiaries
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A-76
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Section 9.10
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Governing Law
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A-76
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Section 9.11
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Submission to Jurisdiction
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A-76
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Section 9.12
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Assignment; Successors
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A-76
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Section 9.13
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Currency
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A-77
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Section 9.14
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Severability
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A-77
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Section 9.15
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Waiver of Jury Trial
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A-77
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Section 9.16
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Counterparts
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A-77
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Section 9.17
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Facsimile Signature
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A-77
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Section 9.18
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Time of Essence
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A-77
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Section 9.19
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No Presumption Against Drafting Party
|
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A-77
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Section 9.20
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Disclosure
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A-77
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Exhibits
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Exhibit A: Form of Escrow Agreement
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Exhibit B: Form of Proposed Amendment to Articles of
Association of the Company
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Exhibit C: Form of Merger Proposal
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Exhibit D: Form of Opinion of Parent Counsel
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Exhibit E: Form of Opinion of Company Counsel
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Schedules
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|
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Schedule 1.1(a): Major Shareholders
|
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Schedule 5.16(i): Board of Directors Composition
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Schedule 5.16(ii): Board of Directors Committee Composition
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|
A-iv
AGREEMENT
AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this
Agreement), is dated as of November 10,
2008, by and among Endocare, Inc., a Delaware corporation
(Parent), Orange Acquisitions Ltd., an
Israeli corporation and a wholly owned subsidiary of Parent
(Merger Sub) and Galil Medical Ltd., an
Israeli corporation.
RECITALS
A. The parties hereto desire to effect a transaction
whereby Merger Sub will merge with and into the Company, with
the Company surviving such merger by way and upon the terms and
conditions set forth in this Agreement and in accordance with
the provisions of
Sections 314-327
of the Companies Law, following which, Merger Sub will cease to
exist, the Company will become a wholly owned Subsidiary of
Parent, and the Company Shares will be exchanged for the right
to receive shares of Parent Common Stock, all subject to and in
accordance with the provisions set forth herein (the
Merger).
B. The Board of Directors of the Company has:
(i) determined that this Agreement, the Merger, the
Ancillary Agreements and the other transactions contemplated by
this Agreement and the Ancillary Agreements (collectively, the
Transactions) are fair to, and in the
best interests of, the Company and its Shareholders, and that,
considering the financial position of the merging companies, no
reasonable concern exists that the Surviving Company will be
unable to fulfill the obligations of the Company to its
creditors, (ii) approved this Agreement, the Merger, the
Ancillary Agreements to which it is a party and the
Transactions, upon the terms and subject to the conditions set
forth in this Agreement, and (iii) determined to recommend
to the Shareholders the approval of this Agreement, the Merger
and the other Transactions.
C. The Board of Directors of Parent has: (i) approved
this Agreement, the Merger, the Ancillary Agreements to which it
is a party and the other Transactions, upon the terms and
subject to the conditions set forth in this Agreement, and
(ii) determined to recommend to the Parent Stockholders the
approval of the issuance of shares of Parent Common Stock in
connection with the Merger, the Financing and the other
Transactions.
D. The Board of Directors of Merger Sub has
(i) determined that this Agreement, the Merger, the
Ancillary Agreements and the other Transactions are fair to, and
in the best interests of Merger Sub and of Parent as its sole
shareholder and that, considering the financial position of the
merging companies, no reasonable concern exists that the
Surviving Company will be unable to fulfill the obligations of
Merger Sub to its creditors, (ii) approved this Agreement,
the Merger, the Ancillary Agreements to which it is a party and
the other Transactions, and (iii) determined to recommend
that Parent, in its capacity as the sole shareholder of Merger
Sub, vote to approve this Agreement, the Merger and the other
Transactions.
E. As a condition to and concurrently with the execution of
this Agreement, Shareholders representing 75% of the outstanding
Ordinary Shares, par value NIS 0.01 per share, of the Company
(the Company Ordinary Shares), Shareholders
representing 75% of the outstanding Preferred
A-1 Shares,
par value NIS 0.01 per share, of the Company (the
Preferred
A-1 Shares),
and Shareholders representing 75% of the outstanding Preferred
A-2 Shares,
par value NIS 0.01 per share, of the Company (the
Preferred
A-2 Shares
together with the Preferred
A-1 Shares,
the Company Preferred Shares, and the Company
Preferred Shares collectively with the Company Ordinary Shares,
the Company Shares) have each entered into a
voting agreement with Parent (each, a Company
Shareholders Voting Agreement) pursuant to which each
such Shareholder has agreed to vote its Company Shares
(including any Company Ordinary Shares issued upon conversion of
such Company Preferred Shares) in favor of the approval and
adoption of this Agreement, the Merger and the other
Transactions.
F. As a condition to and concurrently with the execution of
this Agreement, the Major Shareholders have entered into an
agreement with Parent (the Company Shareholder
Agreement) pursuant to which each such Major
Shareholder has (A) made certain representations and
warranties to Parent with respect to its Company Shares
(including any Company Ordinary Shares issued upon conversion of
such Company Preferred Shares), the Merger and the other
Transactions, (B) entered into a mutual general release
with Parent relating to pre-Closing matters, such release to
become effective at and subject to the Closing, and
(C) agreed to indemnify Parent with respect to certain tax
liabilities of the Company and its Subsidiaries for tax periods
ending on or before the Closing Date to the extent set forth
therein.
G. Parent Stockholders representing no more than 40% of the
outstanding common stock, par value $0.001 per share, of Parent
(the Parent Common Stock), have each entered,
or may enter, into voting agreements with the Company (each, a
Parent Stockholders Voting Agreement and,
together with the Company Shareholders Voting Agreements, the
Voting Agreements) pursuant to which each
such Parent Stockholder has agreed, or will agree, to vote its
Parent Common Stock in favor of the approval of the issuance of
shares of Parent Common Stock in connection with the Merger, the
Financing and the other Transactions.
AGREEMENT
In consideration of the foregoing and the mutual covenants and
agreements herein contained, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Certain
Defined Terms. For purposes of this Agreement:
Action means any claim, action, suit,
inquiry, proceeding, audit or investigation by or before any
Governmental Authority, or any other arbitration, mediation or
similar proceeding.
Affiliate means, with respect to any
Person, any other Person that directly, or indirectly through
one or more intermediaries, controls, is controlled by, or is
under common control with, such first Person.
Ancillary Agreements means the Escrow
Agreement, the Voting Agreements, the Company Shareholder
Agreement and all certificates required to be delivered by any
party pursuant to this Agreement.
Beneficially Own means, with respect
to any Person, in the aggregate, the subject securities that
(i) such Person or any of such Persons Affiliates
beneficially owns, directly or indirectly (as determined
pursuant to
Rule 13d-3
of the Exchange Act); (ii) such Person or any of such
Persons Affiliates, directly or indirectly, has the right
to acquire, whether or not immediately exercisable;
(iii) are Beneficially Owned, directly or indirectly, by
any other Person (or any Affiliate thereof) and with respect to
which such first Person or any of such first Persons
Affiliates has any Contract, for the purpose of holding, voting
or disposing of such securities; or (iv) are represented by
any derivative of the subject securities, which gives such
Person the economic equivalent of ownership of an amount of such
subject securities due to the fact that the value of the
derivative is explicitly determined by reference to the price or
value of such subject securities, without regard to whether such
derivative conveys any voting rights in such subject securities
to such Person, or the derivative is required to be, or capable
of being, settled through delivery of such subject securities.
Business Day means (i) any day
that is not a Saturday, a Sunday or other day on which banks are
required or authorized by Law to be closed in the City of New
York, New York, USA or (ii) for actions solely to be taken
in Israel, any day that is not a Friday, a Saturday, or any
other day on which banks are required or authorized by Law to be
closed in the State of Israel; provided that if it is not clear
where an action is to be taken or if any or all of such action
is to be taken outside of Israel, the definition of
Business Day in clause (i) shall apply.
Capital Stock or Share
Capital means (i) any common stock and
preferred stock, ordinary shares and preferred shares,
partnership interests, limited liability company interests,
profits interests or other equity, equity equivalent, or other
ownership interests entitling the holder thereof to vote with
respect to matters involving the issuer thereof, or to share in
its profits, or to share in its distributions upon its
liquidation, or the sale or transfer of its assets, and
(ii) any securities exercisable, or exchangeable for, or
convertible into, such Capital Stock or Share Capital described
in clause (i).
Company means Galil Medical Ltd., an
Israeli corporation, and after the Effective Time, shall mean
the Surviving Company.
Companies Law means the Israeli
Companies Law
5759-1999.
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Company Intellectual Property Rights
means any Intellectual Property, including Company Registered
IP, that is owned, used or held for use by the Company or any of
its Subsidiaries or necessary for the conduct of the business of
the Company or any of its Subsidiaries.
Company Share Option means each
outstanding option to purchase Company Ordinary Shares under any
Company Plan.
Company Transaction Expenses means all
costs and expenses (including fees of attorneys, accountants and
brokers or finders) of the Company or its Shareholders incurred
or payable in connection with this Agreement and the Ancillary
Agreements, the Financing and the Transactions, including the
negotiation and preparation thereof and related diligence and
all amounts owed to the brokers disclosed in
Section 4.27; provided that the Company Transaction
Expenses, in the aggregate, shall not exceed $850,000.
Contract means any contract,
agreement, or other instrument or understanding of any kind,
including any amendment, supplement, modification, extension or
renewal in respect of the foregoing, in each case, whether
written or oral, express or implied.
control, including the terms
controlled by and under common
control with, as to any Person means the possession,
directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether
through the ownership of voting securities, as trustee or
executor, as general partner or managing member, by Contract or
otherwise, including the ownership, directly or indirectly, of
securities having the power to elect a majority of the board of
directors or similar body governing the affairs of such Person.
Encumbrance means any charge, claim,
equitable interest, mortgage, lien, option, pledge, security
interest, easement, encroachment, right of first refusal, right
of preemption, imperfection in title, or restriction by way of
security of any kind or nature or other encumbrance of any kind,
including any restriction on or transfer or other assignment, as
security or otherwise, of or relating to use, quiet enjoyment,
voting, transfer, receipt of income or exercise of any other
attribute of ownership.
ERISA Affiliate means any trade or
business, whether or not incorporated, under common control with
the Company or any of its Subsidiaries and that, together with
the Company or any of its Subsidiaries, is treated as a single
employer within the meaning of Section 414(b), (c),
(m) or (o) of the Code.
Escrow Agent means Deutsche Bank
National Trust Company, or its successor under the Escrow
Agreement.
Escrow Agreement means the Escrow
Agreement to be entered into by Parent, the Shareholder
Representative and the Escrow Agent as of the Closing Date,
substantially in the form of Exhibit A.
Escrow Period means the period from
the Closing Date through the due date (without regard to any
extensions) of Parents required filing with the SEC of its
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
Exchange Act means the Securities
Exchange Act of 1934, as amended from time to time.
Exchange Ratio means 0.923077.
Financing means the sale of shares of
Parent Capital Stock in a private placement or otherwise,
pursuant to the Financing Agreement, which provides that such
sale will be consummated concurrent with the Closing.
Financing Agreement means that certain
Purchase Agreement, pursuant to which the Financing will be
consummated.
Financing Commitment shall mean the
binding commitment of each purchaser under the Financing
Agreement to purchase the shares it has committed to purchase
pursuant thereto, concurrent with the Closing.
Financing Disclosure Package means all
written information provided, disclosed or otherwise made
available to the participants in the Financing in connection
with the negotiation of the Financing and entry into the
Financing Agreement, including, among other things, this
Agreement, the term sheet describing the terms of the
A-3
Financing, the financial data with respect to Parent, the
Company and the Surviving Company, including pro forma financial
information.
Fraud means fraud or intentional
misrepresentation or omission.
GAAP means, with respect to any
period, United States generally accepted accounting principles
and practices as in effect for such period.
Governmental Authority means any
United States, Israeli or any other
non-United
States, federal, national, state, provincial, local or similar
government, governmental, regulatory or administrative
authority, branch, agency, commission or official, or
self-regulatory organization or any court, tribunal, or arbitral
or judicial body (including any grand jury) or other
substantially similar authority.
Health Care Laws means any and all
Laws regarding healthcare or the delivery of medical services,
including (i) all rules and regulations of the Medicare and
Medicaid programs, and any other health care programs;
(ii) all Laws relating to health care fraud and abuse,
including (A) the Anti-Kickback Law, 42 U.S.C. §
1320a 7b(b), (B) the Federal Civil Monetary Penalties
statute, 42 U.S.C. § 1320a 7a, (C) the federal
physician self-referral prohibition, 42 U.S.C. §
1395nn, 42 C.F.R. § 411.351 et seq., (D) the
False Claims Act, 31 U.S.C. § 3729 et seq.,
(E) any and all parallel state Laws relating to health care
fraud and abuse; and (F) any other Laws relating to
fraudulent, abusive or unlawful practices connected in any way
with the provision of health care items or services, or the
billing for or claims for reimbursement for such items or
services provided to a beneficiary of any state, federal or
other governmental health care or health insurance program or
any private payor; (iii) the Federal Food, Drug and
Cosmetic Act and all other Laws relating to the manufacture,
purchase, sale, packaging, repackaging, labeling, advertising,
handling, provision, distribution, prescribing, compounding,
dispensing, importation, exportation, or disposal of any medical
equipment, supplies, devices or similar products or services
bought or sold by the Company or any of its Subsidiaries or by
Parent; and (iv) Laws related to the privacy, security,
and/or
transmission of health information.
HIPAA means the Health Insurance
Portability and Accountability Act of 1996.
Immediate Family, with respect to any
specified person, means such persons spouse, parents,
children and siblings, including adoptive relationships and
relationships through marriage, or any other relative of such
person that shares such persons home.
Indemnity Escrow Shares means a number
of shares of Parent Common Stock equal to 7.5% of the total
number of shares of Parent Common Stock comprising the aggregate
Merger Consideration rounded down to the nearest whole share.
Indemnity Escrow Fund means the escrow
account into which the Indemnity Escrow Shares are deposited
with the Escrow Agent.
Intellectual Property means all right,
title and interest in and to all proprietary rights arising from
or associated with the following, whether protected, created or
arising under the Laws of the United States, Israel, any other
jurisdiction or any treaty regime or under any international
convention: (i) trade names, trademarks, corporate names,
brands, and service marks (registered and unregistered), domain
names and other Internet addresses or identifiers, trade dress
and similar rights, and applications (including intent to use
applications) to register any of the foregoing, together with
the goodwill associated with any of the foregoing (collectively,
Marks); (ii) patents and patent
applications, including continuations, divisionals,
continuations-in-part,
extensions, reexaminations, renewals, substitutions and
reissues, and patents issuing thereon (collectively,
Patents); (iii) copyrights (registered
and unregistered) and applications for registration and works of
authorship (collectively, Copyrights);
(iv) trade secrets, discoveries, innovations, formulae,
software, know-how, inventions, methods, processes, technical
data, specifications, research and development information,
technology, in each case to the extent any of the foregoing
derives economic value (actual or potential) from not being
generally known to other Persons who can obtain economic value
from its disclosure or use, excluding any Copyrights or Patents
that may cover or protect any of the foregoing (collectively,
Trade Secrets); and (v) moral rights,
publicity rights, data base rights and any other proprietary or
intellectual property rights of any kind or nature that do not
comprise or are not protected by Marks, Patents, Copyrights or
Trade Secrets.
A-4
Israeli Tax Ordinance means the
Israeli Income Tax Ordinance New Version, 1961, as amended from
time to time, and any and all regulations and rules promulgated
thereunder, and, where applicable, any interpretation thereof by
any Governmental Authority having jurisdiction with respect
thereto or charged with the administration thereof.
Knowledge means actual knowledge,
provided that, in each case, a Persons Knowledge of any
matter will be deemed to include such Knowledge as such Person
could have obtained after making reasonable inquiry and
investigation of the matter, including, without limitation, in
the case of an entity, reasonable consultation with subordinates
of the officers of such entity as to whom such officers
reasonably believe would have actual knowledge of the matters
represented. Knowledge of an entity includes the knowledge of
such entitys officers and directors (or other persons
serving in comparable positions).
Law means any statute, law, ordinance,
regulation, rule, code, executive order or Order of any
Governmental Authority, and, where applicable, any
interpretation thereof by any Governmental Authority having
jurisdiction with respect thereto or charged with the
administration thereof.
Leased Real Property means all real
property leased, subleased or licensed to the Company or any of
its Subsidiaries or which the Company or any of its Subsidiaries
otherwise has a right or option to use or occupy, together with
all structures, facilities, fixtures, systems, improvements and
items of property located thereon, or attached or appurtenant
thereto, and all easements, rights and appurtenances relating to
the foregoing.
Liability means, with respect to any
Person, any losses, liabilities, obligations, debts, duties,
claims, damages or expenses of such Person of any kind,
character or description, whether known or unknown, absolute or
contingent, accrued or unaccrued, disputed or undisputed,
liquidated or unliquidated, secured or unsecured, joint or
several, due or to become due, vested or unvested, executory,
determined, determinable or otherwise, whether or not the same
is required to be accrued on the financial statements of such
Person and whether or not the same is disclosed on any schedule
to this Agreement.
Major Shareholder means the Persons
set forth on Schedule 1.1(a).
Material Adverse Change means with
respect to any Person, any change, event, occurrence, condition
or circumstance (whether or not covered by insurance) which,
individually or in the aggregate, results in a Material Adverse
Effect, in each case other than to the extent caused by, arising
out of or attributable to any of the following: (i) changes
or proposed changes in Law or accounting standards or
interpretations thereof applicable to such Person,
(ii) changes in global, national or regional economic or
political conditions (including acts of war (whether or not
declared), armed hostilities, sabotage, military actions or the
escalation thereof (whether underway on the date hereof or
hereafter commenced), and terrorism) or in general financial,
credit, business, or securities market conditions, including
changes in interest rates or the availability of credit
financing; (iii) changes generally applicable in the
industries in which such Person operates, (iv) any failure
of such Person to meet internal or analysts estimates,
projections or forecasts of revenues, earnings or other
financial or business metrics (it being understood that the
cause of any such failure may be taken into consideration when
determining whether a Material Adverse Change has occurred or
would be reasonably likely to occur); (v) a decline in the
market price, or a change in the trading volume, of the Capital
Stock or Share Capital of such Person (it being understood that
the cause of any such decline or change may be taken into
consideration when determining whether a Material Adverse Change
has occurred or would be reasonably likely to occur); provided,
in the case of clauses (i) and (ii), that such conditions
or changes do not have a materially disproportionate impact on
such Person and its Subsidiaries, taken as a whole, relative to
other participants in the industries in which such Person
operates.
Material Adverse Effect means with
respect to any Person, one or more events, occurrences,
conditions or circumstances (whether or not covered by
insurance) which, individually or in the aggregate, result in a
material adverse effect on or change in (i) the business,
operations, assets, Liabilities, condition (financial or
otherwise), prospects, or results of operations of such Person,
taken as a whole with its Subsidiaries, or (ii) the ability
of such Person (and, in the case of the Company, including the
Shareholders) to timely (A) perform his, her or its
material obligations under this Agreement or any Ancillary
Agreement, or (B) consummate the transactions contemplated
in this Agreement and the Ancillary Agreements.
Nasdaq means the Nasdaq Capital Market.
A-5
Order means any award, decision,
injunction, judgment, decree, stipulation, order, ruling,
subpoena, or verdict entered, issued, made or rendered by any
court, administrative agency or other Governmental Authority or
by any arbitrator.
Owned Real Property means all real
property owned by the Company or any of its Subsidiaries,
together with all structures, facilities, fixtures, systems,
improvements and items of property located thereon, or attached
or appurtenant thereto, and all easements, rights and
appurtenances relating to the foregoing.
Parent Intellectual Property Rights
means any Intellectual Property, including Parent Registered IP,
that is owned, used or held for use by Parent or any of its
Subsidiaries or necessary for the conduct of the business of
Parent or any of its Subsidiaries.
Parent Stock Option means each
outstanding option to purchase shares of Parent Common Stock
under any Parent Stock Plan.
Parent Stock Plan means Parents
1995 Director Option Plan (as amended and restated through
March 2, 1999), Parents 1995 Stock Plan (as amended
through December 30, 2003), Parents 2004 Stock
Incentive Plan, Parents 2004 Non-Employee Director Option
Program under 2004 Stock Incentive Plan or any other similar
plan under which options to purchase Parent Common Stock are
issued.
Parent Stockholder means any holder of
Parent Common Stock.
Parent Transaction Expenses means all
costs and expenses (including fees of attorneys, accountants and
brokers or finders) of Parent incurred or payable in connection
with this Agreement and the Ancillary Agreements, the Financing
and the Transactions, including the negotiation and preparation
thereof and related diligence and all amounts owed to the
brokers disclosed in Section 3.19, provided that the
Parent Transaction Expenses in the aggregate shall not exceed
$850,000.
Person means an individual,
corporation, partnership, limited liability company, limited
liability partnership, syndicate, trust, association,
organization or other entity, including any Governmental
Authority.
Pre-Closing Shareholders Agreement
means that certain shareholders agreement between the Company
and certain of its shareholders, dated November 10, 2008,
which provides for certain matters in connection with the
consummation of the Transactions hereunder (including, inter
alia, for the conversion of all outstanding Company Preferred
Shares into Company Ordinary Shares).
Purchaser means any Person who has
agreed to purchase shares of Parent Capital Stock pursuant to
the Financing Agreement.
Related Party, with respect to any
specified Person, means: (i) any Affiliate of such
specified Person; (ii) any Person who serves or within the
past two years has served as a director, executive officer,
partner, managing member or in a similar capacity of such
specified Person; (iii) any Immediate Family member of such
specified Person or a Person described in clause (ii); or
(iv) any other Person who holds, individually or together
with any Affiliate of such Person, and any Immediate Family
member of such Person, more than 5% of the outstanding Capital
Stock or Share Capital of such specified Person.
Return means any return, declaration,
estimate, report, statement, information statement and other
document required to be filed with a taxing authority with
respect to Taxes, including information returns or reports with
respect to withholding or payments to third parties.
SEC means the United States Securities
and Exchange Commission.
Securities Act means the Securities
Act of 1933, as amended from time to time.
Shareholder means any holder of
Company Shares.
Shareholder Fraud means Fraud by any
of the Shareholders, or Fraud by any employee or other
representative of the Company.
Subsidiary means, with respect to any
Person, any other Person controlled by such first Person,
directly or indirectly, through one or more intermediaries.
A-6
Taxes means: (i) all federal,
state, local, foreign and other net income, gross income, gross
receipts, capital stock, value added, estimated, sales, use, ad
valorem, transfer, franchise, profits, registration, license,
lease, service, service use, withholding, payroll, employment,
unemployment, disability, workers compensation, social
security, national health insurance, excise, severance, stamp,
occupation, premium, property, windfall profits, customs duties
or other taxes, duties, fees, assessments or charges of any kind
whatsoever, together with any interest and any penalties,
additions to tax or additional amounts with respect thereto and
any interest with respect to such penalties or additions;
(ii) any liability for payment of amounts described in
clause (i) whether as a result of transferee liability, of
being a member of an affiliated, consolidated, combined or
unitary group for any period or otherwise through operation of
law; and (iii) any liability for the payment of amounts
described in clauses (i) or (ii) as a result of any
tax sharing, tax indemnity or tax allocation agreement or any
other express or implied agreement to indemnify any other Person
in connection with such liabilities.
Section 1.2 Table
of Definitions. The following terms have the
meanings set forth in the Sections referenced below:
|
|
|
Definition
|
|
Location
|
|
Accounts Payable
|
|
4.22
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Accounts Receivable
|
|
4.21
|
Acquisition Proposal
|
|
5.11(e)(i)
|
Agreement
|
|
Preamble
|
Balance Sheet
|
|
4.6(b)
|
Basket Amount
|
|
7.4(a)
|
Benefits
|
|
4.12(b)
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CERCLA
|
|
4.17(c)(ii)
|
Certificate
|
|
2.12(a)
|
Closing
|
|
2.2(a)
|
Closing Date
|
|
2.2(a)
|
Closing Date Merger Consideration
|
|
2.8(e)
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Closing Date Per Share Merger Consideration
|
|
2.8(e)
|
Code
|
|
2.4
|
Company Annual Financial Statements
|
|
4.6(a)
|
Company Charter Documents
|
|
4.1(b)
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Company Disclosure Schedule
|
|
Article IV
|
Company Financial Statements
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|
4.6(a)
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Company Insiders
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|
5.19
|
Company Interim Financial Statements
|
|
4.6(a)
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Company Material Contracts
|
|
4.18(a)
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Company Ordinary Shares
|
|
Recitals
|
Company Parties
|
|
8.5(d)
|
Company Permits
|
|
4.8(b)
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Company Permitted Encumbrances
|
|
4.13(a)
|
Company Plan
|
|
4.10(a)
|
Company Preferred Shares
|
|
Recitals
|
Company Registered IP
|
|
4.15(e)
|
Company Shareholder Agreement
|
|
Recitals
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Company Shareholder Approval
|
|
4.3(c)
|
Company Shareholders Voting Agreement
|
|
Recitals
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Company Shareholders Meeting
|
|
5.4
|
Company Shares
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|
Recitals
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A-7
|
|
|
Definition
|
|
Location
|
|
Company Termination Fee
|
|
8.5(b)
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Confidentiality Agreement
|
|
5.18
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D&O Indemnified Parties
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|
5.15(b)
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Damages
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|
7.2(a)
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Defaulting Party
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|
8.5(j)
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DGCL
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|
5.11(a)(i)
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Effective Time
|
|
2.2(b)
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Environmental Laws
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|
4.17(c)(i)
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ERISA
|
|
4.10(a)(i)
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Exchange Agent
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|
2.11
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Exchange Fund
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|
2.11
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FDA
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|
3.13(c)
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Form S-4
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|
3.12
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Grants
|
|
4.23
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Hazardous Substances
|
|
4.17(c)(ii)
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Indemnity Escrow Fund Per Share Merger Consideration
|
|
2.8(e)
|
Investment Center
|
|
4.3(b)
|
IRS
|
|
4.10(b)
|
Israeli Companies Registrar
|
|
2.2(b)
|
Israeli Consultants
|
|
4.12(a)
|
Israeli Employees
|
|
4.12(a)
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Israeli Escrow Tax Ruling
|
|
5.7(a)(iii)
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Israeli Options Tax Ruling
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|
5.7(a)(ii)
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Israeli Securities Exemption
|
|
5.8
|
Israeli Securities Law
|
|
5.8
|
Israeli Tax Rulings
|
|
5.7(a)(iii)
|
Israeli Withholding Tax Ruling
|
|
5.7(a)(i)
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Law for the Encouragement of Capital Investment
|
|
4.16(s)
|
MAGNET
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|
4.3(b)
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Merger
|
|
Recitals
|
Merger Certificate
|
|
2.2(b)
|
Merger Consideration
|
|
2.8(e)
|
Merger Proposal
|
|
5.3(a)(i)
|
Merger Sub
|
|
Preamble
|
Multiemployer Plan
|
|
4.10(c)
|
Multiple Employer Plan
|
|
4.10(c)
|
Non-US Plans
|
|
4.10(h)
|
OCS
|
|
4.3(b)
|
Parent
|
|
Preamble
|
Parent Affiliate
|
|
4.3(c)
|
Parent Annual Financial Statements
|
|
3.7(b)
|
Parent Balance Sheet
|
|
3.7(c)
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Parent Capital Stock
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3.6(a)
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Parent Certificate
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2.12(a)
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A-8
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Definition
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Location
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Parent Common Stock
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Recitals
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Parent Disclosure Schedule
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Article III
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Parent Financial Statements
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3.7(b)
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Parent Indemnified Parties
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7.2(a)
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Parent Interim Financial Statements
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3.7(b)
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Parent Material Contracts
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3.15(a)
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Parent Parties
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8.5(g)
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Parent Permits
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3.10(b)
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Parent Preferred Stock
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3.6(a)
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Parent Recommendation
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5.9(b)
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Parent Registered IP
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3.11(e)
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Parent Rights
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2.9
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Parent Rights Agreement
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2.9
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Parent SEC Reports
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3.7(a)
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Parent Stockholder Approval
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3.2(a)
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Parent Stockholders Voting Agreement
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Recitals
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Parent Stockholders Meeting
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3.12
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Parent Subs
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3.1(a)
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Parent Termination Fee
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8.5(e)
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Permitted Supplement
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5.12
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Preferred
A-1 Shares
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Recitals
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Preferred
A-2 Shares
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Recitals
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Proxy Statement
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5.9(a)
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Recommendation
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5.4
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Representatives
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5.10
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Sanarus
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3.4
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Section 16 Information
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5.19
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Severance Pay Law
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4.12(a)(viii)
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Shareholder Representative
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2.15(a)
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Subsidiary Shares
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4.5(b)
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Superior Proposal
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5.11(e)(ii)
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Surviving Company
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2.1
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Surviving Company Articles
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2.5
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Termination Date
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8.3(a)(i)
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Third Party Claim
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7.6(a)
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Transactions
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Recitals
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Transfer Taxes
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5.24
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UK Pension Plan
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4.11(e)
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Voting Agreements
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Recitals
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A-9
ARTICLE II
THE MERGER
Section 2.1 The
Merger. Subject to the satisfaction or waiver
(to the extent permitted hereunder and by applicable Law) of the
conditions set forth in Article VI hereof, at the
Effective Time and subject to and upon the terms and conditions
set forth in this Agreement and the applicable provisions of
Sections 314 through 327 of the Companies Law,
(i) Merger Sub (as the target company) shall be merged with
and into the Company (as the absorbing company), (ii) the
separate corporate existence of Merger Sub shall thereupon
cease, (iii) the Company shall continue as the surviving
company (the Surviving Company),
(iv) the Surviving Company shall continue to be governed by
Israeli Law and shall become a wholly owned Subsidiary of
Parent, and (v) all the properties, rights, privileges and
powers of the Company and Merger Sub shall vest in the Surviving
Company, and all debts, liabilities and duties of the Company
and Merger Sub shall become the debts, liabilities and duties of
the Surviving Company.
Section 2.2 Closing;
Effective Time.
(a) The closing of the Merger (the
Closing) shall take place at the offices of
Gibson, Dunn & Crutcher LLP, 3161 Michelson Drive,
Irvine, CA 92612, at 10:00 A.M., California time, on the
third Business Day following the satisfaction or, to the extent
permitted hereunder and by applicable Law, waiver of all
conditions to the obligations of the parties set forth in
Article VI (other than such conditions as may, by
their terms, only be satisfied at the Closing or on the Closing
Date, subject to such satisfaction or waiver thereof), or at
such other place or at such other time or on such other date as
Parent and the Company mutually agree in writing. The day on
which the Closing takes place is referred to as the
Closing Date.
(b) Merger Sub and the Company shall deliver (and Parent
shall cause Merger Sub to deliver) to the Registrar of Companies
of the State of Israel (the Israeli Companies
Registrar) a notice of the contemplated Merger and the
proposed Closing Date on which the Israeli Companies Registrar
is requested to issue a certificate evidencing the Merger in
accordance with Section 323(5) of the Companies Law (the
Merger Certificate) after notice that the
Closing has occurred is served to the Israeli Companies
Registrar. The Merger shall become effective only upon issuance
of the Merger Certificate by the Israeli Companies Registrar
(the Effective Time).
Section 2.3 Effects
of the Merger. The Merger shall have the
effects provided for herein and in the applicable provisions of
the Companies Law.
Section 2.4 Tax-Free
Reorganization. The parties intend to adopt
this Agreement as a plan of reorganization within the meaning of
Sections 354(a) and 368(a) of the Internal Revenue Code of
1986, as amended (the Code), and to
consummate the Merger in accordance with
Section 368(a)(2)(E) of the Code.
Section 2.5 Articles
of Association. The articles of association
of Merger Sub in effect immediately prior to the Effective Time,
which shall be in a customary form, reasonably acceptable to
Parent and the Company, shall be the articles of association of
the Surviving Company (the Surviving Company
Articles), until duly amended as provided therein or
by applicable Law.
Section 2.6 Directors
and Officers. From and after the Effective
Time, (a) the board composition of the Surviving Company
shall be Parents Chief Executive Officer, Chief Financial
Officer and General Counsel until the earlier of the
directors resignation or removal or until their respective
successors are duly elected and qualified, as the case may be,
in accordance with the Surviving Company Articles (as amended
from time to time), and (b) the officers of the Company
serving immediately prior to the Effective Time shall remain the
officers of the Surviving Company, and Parents Chief
Financial Officer will become the Surviving Companys
Treasurer and Parents General Counsel shall become the
Surviving Companys Secretary; in each case, until the
earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the
case may be, in accordance with the Surviving Company Articles
(as amended from time to time).
Section 2.7 Subsequent
Actions. If, at any time after the Effective
Time, the Surviving Company shall consider or be advised that
any deeds, bills of sale, assignments, assurances or any other
actions or things are necessary or desirable to vest, perfect or
confirm of record or otherwise in the Surviving Company its
right, title or interest in, to or under any of the rights,
properties or assets of either the Company or Merger Sub
acquired or to be acquired by the Surviving Company as a result
of or in connection with the Merger or otherwise to carry out
this
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Agreement, the officers and directors of the Surviving Company
shall be authorized to execute and deliver, in the name of and
on behalf of either the Company or Merger Sub, as applicable,
all such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of such
corporations or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any
and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Company or otherwise to
carry out this Agreement.
Section 2.8 Conversion
of Shares of the Company and Merger Sub. At
the Effective Time, by virtue of the Merger and without any
further action on the part of Parent, Merger Sub, the Company or
any holder of any Company Shares or any shares of Capital Stock
of Merger Sub:
(a) Each Company Share issued and outstanding immediately
prior to the Effective Time (other than any Company Shares
described in Sections 2.8(b) and (c)) shall
be converted into the right to receive a number of fully paid,
nonassessable shares of Parent Common Stock equal to
(i) the Closing Date Per Share Merger Consideration,
plus (ii) any Indemnity Escrow Fund Per Share
Merger Consideration payable pursuant to the Escrow Agreement,
at the respective times and subject to the contingencies
specified herein and therein.
(b) Each Company Share that is owned by Parent or Merger
Sub immediately prior to the Effective Time shall automatically
be cancelled and retired and shall cease to exist, and no Parent
Common Stock or other consideration shall be delivered or
deliverable in exchange therefor.
(c) Each Company Share that is held in the treasury of the
Company or owned by the Company or any of its wholly owned
Subsidiaries immediately prior to the Effective Time shall
automatically be cancelled and retired and shall cease to exist,
and no Parent Common Stock or other consideration shall be
delivered or deliverable in exchange therefor.
(d) Each ordinary share, par value NIS 1.00 per share, of
Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into one fully paid ordinary
share, par value NIS 0.01 per share, of the Surviving Company
and shall be registered in the name of Parent in the shareholder
register of the Surviving Company, and such ordinary shares
shall constitute the only outstanding Share Capital of the
Surviving Company.
(e) For purposes of this Agreement:
(i) Merger Consideration means
the product of the Exchange Ratio and the number of shares of
Parent Common Stock outstanding calculated using the treasury
method at the Effective Time, without giving effect to the
Merger or the Financing;
(ii) Closing Date Merger
Consideration means (A) the Merger
Consideration minus (B) the Indemnity Escrow Shares;
(iii) Closing Date Per Share Merger
Consideration means the number of whole shares of
Parent Common Stock (rounded down) equal to (A) the Closing
Date Merger Consideration, divided by (B) the
number of Company Shares outstanding immediately prior to the
Effective Time calculated using the treasury method; and
(iv) Indemnity Escrow Fund Per Share
Merger Consideration means the number of whole
shares of Parent Common Stock (rounded down) equal to
(A) the number of Indemnity Escrow Shares payable out of
the Indemnity Escrow Fund to the Shareholders pursuant to the
Escrow Agreement, if any, after payment of all claims pursuant
to Article VII, divided by
(B) the number of Company Shares outstanding immediately
prior to the Effective Time.
(f) Notwithstanding anything contained herein, if, between
the date of this Agreement and the Effective Time, the
outstanding shares of Parent Common Stock or the Company Shares
have been changed into a different number of shares or a
different class by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination, exchange
of shares or similar event, then the Exchange Ratio shall be
correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split,
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combination, exchange of shares or similar event, to the extent
required to retain the same relative post-Closing allocation
between the Parent Stockholders and the Shareholders as existed
prior to such event.
Section 2.9 Associated
Parent Common Stock Rights. All references in
this Agreement to Parent Common Stock shall include,
unless the context requires otherwise, the associated preferred
share purchase rights (Parent Rights) issued
pursuant to the Rights Agreement, dated as of March 31,
1999, between Parent and U.S. Stock Transfer Corporation
(as amended from time to time prior to the Effective Time, the
Parent Rights Agreement), to the extent
associated with outstanding Parent Common Stock at the Effective
Time.
Section 2.10 Company
Share Options.
(a) At the Effective Time, unless otherwise agreed by
Parent and any affected Company Share Option holder, each
outstanding Company Share Option (whether vested or unvested)
shall be converted into an option to purchase, on the same terms
and conditions as such Company Share Option, a number of shares
of Parent Common Stock equal to the number of shares of Parent
Common Stock (rounded up to the nearest whole share) that the
holder of such Company Share Option would have been entitled to
receive pursuant to the provisions of this
Article II had such holder exercised such Company
Share Option immediately prior to the Effective Time, at an
exercise price per share of Parent Common Stock (rounded down to
the nearest whole cent) equal to (x) the aggregate existing
exercise price for the Company Shares purchasable pursuant to
such Company Share Option divided by (y) the number of
shares of Parent Common Stock for which the Company Stock Option
will become exerciseable.
(b) Within 20 Business Days after the Effective Time,
Parent shall deliver to the holders of Company Share Options
notices setting forth such holders rights pursuant to the
relevant Company Plan and that the agreements evidencing the
grants of such Company Share Options shall continue in effect on
the same terms and conditions (subject to the adjustments
required by this Section 2.10 after giving effect to
the Merger). Parent shall assume and comply with the terms of
the Company Plans and the conversion of each Company Share
Option into an option to purchase Parent Common Stock pursuant
to this Section 2.10 shall comply with the
requirements of Treasury
Regulation Section 1.409A-1(b)(5)(v)(D),
provided that the conversion of each Company Share Option
that is intended to be an incentive stock option under
Section 422 of the Code into an option to purchase Parent
Common Stock shall comply with the requirements of Treasury
Regulation Section 1.424-1(a).
Company Share Options subject to Section 102 of the Israeli
Tax Ordinance, under the Capital Gains Track
pursuant to Section 102(b)(2) of the Israeli Tax Ordinance
or any other special tax treatment, if applicable, prior to the
Effective Time shall continue to qualify as options subject to
Section 102(b)(2) of the Israeli Tax Ordinance or any other
special tax treatment (as applicable) after the Effective Time.
(c) Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent
Common Stock for delivery upon exercise of Company Share Options
assumed in accordance with this Section 2.10. As
soon as practicable after the Effective Time, Parent shall, if
no registration statement is in effect covering the shares of
Parent Common Stock issuable upon exercise of the Company Share
Options under this Section 2.10, file a registration
statement on
Form S-8
(or any successor form) with respect to the shares of Parent
Common Stock issuable upon exercise of such Company Share
Options to the extent registrable on
Form S-8
(or any successor form) and shall maintain the effectiveness of
such registration statement for so long as such Company Share
Options remain outstanding.
(d) At or prior to the Effective Time, the Company shall,
to the extent necessary, cause to be effected, in a manner
reasonably satisfactory to Parent, amendments to the Company
Plans and any other documents governing the Company Share
Options to give effect to the foregoing provisions of this
Section 2.10.
Section 2.11 Exchange
Fund. Prior to the Effective Time, Parent
shall appoint a commercial bank or trust company, or a
Subsidiary thereof, reasonably acceptable to the Company, to act
as exchange agent hereunder for the purpose of exchanging
Certificates for the Merger Consideration (the Exchange
Agent). At or prior to the Effective Time, Parent
shall deposit with the Exchange Agent, in trust for the benefit
of holders of Company Shares, the shares of Parent Common Stock
representing the Closing Date Merger Consideration. Any Parent
Common Stock deposited with the Exchange Agent is referred to
herein as the Exchange Fund.
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Section 2.12 Exchange
of Shares.
(a) As soon as practicable after the Effective Time, the
Exchange Agent will mail to each holder of record of one or more
certificates representing Company Shares immediately prior to
the Effective Time (each, a
Certificate) a letter of transmittal in
customary form satisfactory to Parent (which will specify, among
other things, that delivery will be effected, and risk of loss
and title to the Certificates will pass, only upon delivery of
the Certificates to the Exchange Agent) and instructions for use
in effecting the surrender of the Certificates. Upon proper
surrender of a Certificate for exchange and cancellation or an
affidavit of the fact that such Certificate has been lost,
stolen or destroyed pursuant to Section 2.12(g), to
the Exchange Agent, together with such properly completed letter
of transmittal, duly executed, the holder of such Certificate
will be entitled to receive in exchange therefor,
(i) promptly thereafter a stock certificate representing
the number of whole shares of Parent Common Stock (a
Parent Certificate) equal to the product of
(A) the number of Company Shares represented by the
surrendered Certificate and (B) the Closing Date Per Share
Merger Consideration (rounded down to the nearest whole share),
(ii) a check representing the amount of any dividends or
distributions then payable pursuant to
Section 2.12(b)(i), and (iii) at the time set
forth in the Escrow Agreement, a Parent Certificate equal to the
product of (A) the number of Company Shares represented by
the surrendered Certificate and (B) the Indemnity Escrow
Fund Per Share Merger Consideration, if any (rounded down
to the nearest whole share), and upon such surrender the
Certificates so surrendered will forthwith be cancelled. No
interest will be paid or accrued on any unpaid dividends and
distributions payable to holders of Certificates.
(b) No dividends or other distributions declared with
respect to Parent Common Stock will be paid to the holder of any
unsurrendered Certificate until the holder thereof surrenders
such Certificate in accordance with this Article II.
After the surrender of a Certificate in accordance with this
Article II, the record holder thereof will be
entitled to receive (i) within 10 Business Days thereafter
the amount of any dividends or other distributions with a record
date after the Effective Time theretofore paid, without any
interest thereon, with respect to the whole shares of Parent
Common Stock represented by such Certificate, and (ii) at
the appropriate payment date, the amount of any dividends or
other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to
surrender, with respect to whole shares of Parent Common Stock
represented by such Certificate.
(c) If any Parent Certificate is to be issued in a name
other than that in which the Certificate surrendered in exchange
therefor is registered, it will be a condition to the issuance
thereof that the Certificate so surrendered is properly endorsed
(or accompanied by an appropriate instrument of transfer) and
otherwise in proper form for transfer, and that the Person
requesting such exchange pays to the Exchange Agent, in advance,
any transfer or other Taxes required by reason of the issuance
of a Parent Certificate in any name other than that of the
registered holder of the Certificate surrendered, or required
for any other reason, or establishes to the satisfaction of the
Exchange Agent that such Tax has been paid or is not payable.
(d) After the Effective Time, there will be no transfers on
the stock transfer books of the Company or the Surviving Company
of Company Shares that were issued and outstanding immediately
prior to the Effective Time. If, after the Effective Time,
Certificates representing such Company Shares are presented for
transfer to the Exchange Agent, they will be cancelled and
exchanged for Parent Certificates as provided in this
Article II, promptly after receipt of a properly
completed letter of transmittal.
(e) Notwithstanding anything to the contrary contained in
this Agreement, no certificates or scrip representing fractional
shares of Parent Common Stock will be issued upon the surrender
of Certificates for exchange. Each Shareholder shall only be
entitled to such number of shares of Parent Common Stock rounded
down to the nearest whole number as set forth herein, and no
Shareholder shall be entitled to any fractional shares, or any
consideration in lieu thereof, and no dividend or distribution
with respect to Parent Common Stock will be payable on or with
respect to any fractional share.
(f) Any portion of the Exchange Fund that remains unclaimed
by the former Shareholders as of the six month anniversary of
the Effective Time will be paid by the Exchange Agent to Parent.
Any former Shareholders who have not theretofore complied with
this Article II will thereafter look only to Parent
for payment of the shares of Parent Common Stock and any unpaid
dividends and distributions on Parent Common Stock deliverable
in respect of each Company Share that such Shareholder holds
immediately prior to the Effective Time, in each case, as
determined pursuant to this Agreement, and without any interest
thereon. Notwithstanding the foregoing, none of Parent, the
A-13
Company, Merger Sub, the Surviving Company, the Exchange Agent
or any other Person will be liable to any former holder of
Company Shares for any amount delivered in good faith to a
public official pursuant to applicable abandoned property,
escheat or similar Laws.
(g) In the event any Certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
Person claiming such Certificate to be lost, stolen or destroyed
and delivery of a properly completed letter of transmittal and,
if reasonably required by Parent or the Exchange Agent, the
posting by such Person of a bond in such amount as Parent or the
Exchange Agent may determine is reasonably necessary as
indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the
shares of Parent Common Stock payable pursuant to the terms
hereof.
(h) The Exchange Agent will invest any cash included in the
Exchange Fund, as directed by Parent. Any interest and other
income resulting from such investments will be for the benefit
of and paid to Parent.
Section 2.13 Escrow
Deposits. At the Closing, Parent shall
deposit or cause to be deposited with the Escrow Agent for
deposit into the Indemnity Escrow Fund, the Indemnity Escrow
Shares. The Indemnity Escrow Fund shall be held and distributed
as provided in the Escrow Agreement and this Agreement.
Section 2.14 Withholding
Rights. Each of Parent, the Surviving
Company, the Exchange Agent and the Escrow Agent shall be
entitled, with respect to payments made by each such entity, to
deduct and withhold from the Merger Consideration and any other
amounts otherwise payable pursuant to this Agreement such
amounts as it reasonably determines it is required to deduct and
withhold with respect to the making of such payment under the
Israeli Withholding Tax Ruling, if obtained, the Code, the
Israeli Tax Ordinance or under any other applicable Law,
provided that no withholding or a reduced rate of withholding,
as applicable, under Israeli Tax Law will be made from any
consideration payable hereunder to a holder of Company Shares to
the extent that such Shareholder has provided Parent, the
Exchange Agent or the Escrow Agent with an appropriate
unequivocal exemption by the Israeli Tax Authority confirming
that no withholding of Israeli Tax is required with respect to
the particular Shareholder in question, prior to the time such
payment is made. To the extent that amounts are so withheld by
Parent, the Surviving Company, the Exchange Agent or the Escrow
Agent, as the case may be, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid
to the Shareholders, in respect to which such deduction and
withholding was made by Parent, the Surviving Company, the
Exchange Agent or the Escrow Agent, as the case may be. Any
amounts deducted and withheld pursuant to this
Section 2.14 shall be remitted to the appropriate
Tax authority in accordance with applicable Law.
Section 2.15 Shareholder
Representative.
(a) The Shareholders shall at all times maintain a
representative (the Shareholder
Representative) for purposes of taking certain actions
and giving certain consents on behalf of the Shareholders, as
specified herein. Pursuant to the Company Shareholder Agreement,
the Major Shareholders appointed Thomas, McNerney
Representative, LLC, as the initial Shareholder Representative,
and immediately upon the approval of this Agreement by the
requisite vote or written consent of the Shareholders, each
other Shareholder shall be deemed to have consented to such
appointment (or any applicable successor) and the terms hereof.
Another person shall be appointed as the Shareholder
Representative if the person so designated (or any successor
thereof) is unwilling or unable to so act. Actions taken,
consents given and representations made by the Shareholder
Representative pursuant hereto shall be final, binding and
conclusive upon the Shareholders, including all actions under
Article VII and under the Escrow Agreement and the
Company Shareholder Agreement. This appointment and grant of
power and authority by each Shareholder is coupled with an
interest and is irrevocable and shall not be terminated by any
act of any Shareholder or by operation of Law, whether by the
death or incapacity of any individual Shareholder, or by the
occurrence of any other event. The Shareholder Representative is
entitled to authorize delivery to the Parent Indemnified Parties
of the funds or other property from the Indemnity Escrow Fund in
satisfaction of claims by the Parent Indemnified Parties, to
agree to, negotiate, enter into settlements and compromises of,
and comply with orders of courts and awards of arbitrators with
respect to such claims, and to take all actions on behalf of all
of the Shareholders deemed necessary or appropriate in the
judgment of the Shareholder Representative to accomplish the
foregoing or to facilitate or administer the transactions
contemplated by this Agreement, the Escrow Agreement and the
Company Shareholder Agreement, including, without limitation,
executing such other documents or instruments as the Shareholder
Representative deems necessary or appropriate, provided however,
that no such action
A-14
may incur additional liabilities on the Shareholders, other than
as set forth in this Agreement. The Escrow Agent and Parent may
rely upon any decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent
or instruction of each and every Shareholder. The Shareholder
Representative may resign at any time, and may be removed for
any reason or no reason by the vote or written consent of
Shareholders holding a majority of the aggregate Company
Ordinary Shares (on an as-converted basis) outstanding
immediately prior to the Effective Time. No bond shall be
required of the Shareholder Representative.
(b) The Shareholder Representative shall not be liable to
the Shareholders for actions taken pursuant to this Agreement,
the Company Shareholder Agreement or the Escrow Agreement,
except to the extent such actions shall have been determined in
a final and non-appealable judgment by a court of competent
jurisdiction to have constituted willful misconduct or Fraud.
Except in cases where a court of competent jurisdiction has made
such a finding in a final and non-appealable judgment, the
Shareholders shall jointly and severally indemnify and hold
harmless, first from the Indemnity Escrow Fund (if any, after
payment of all claims to which the Parent Indemnified Parties
are entitled to payment pursuant to Article VII) and
thereafter directly, the Shareholder Representative from and
against any and all Damages (including reasonable legal and
expert fees and expenses incurred by the Shareholder
Representative in investigating or defending (including any
appeal) any claim for indemnification made against the
Shareholders or Major Shareholders), arising out of and in
connection with his or her activities as Shareholder
Representative under this Agreement, the Company Shareholder
Agreement, the Escrow Agreement or otherwise.
(c) The approval of this Agreement by the requisite vote or
written consent of the Shareholders shall also be deemed to
constitute approval of all arrangements relating to the
transactions contemplated hereby and to the provisions hereof
binding upon the Shareholders, including, without limitation,
those set forth in Article VII. All actions taken,
consents given and representations made by the Shareholder
Representative pursuant hereto shall be binding upon the
Shareholders after the Closing, including all actions under
Article VII and under the Escrow Agreement.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES
OF PARENT
AND MERGER SUB
Except as set forth in the Disclosure Schedule of Parent and
Merger Sub attached hereto and delivered concurrently herewith
that is arranged in Sections corresponding to the numbered and
lettered Sections contained in this Agreement (the
Parent Disclosure Schedule), or the Parent
SEC Reports filed prior to the date hereof, Parent and Merger
Sub hereby represent and warrant to the Company as follows:
Section 3.1 Organization
and Qualification.
(a) Parent is (i) a corporation duly organized,
validly existing and in good standing under the laws of the
State of Delaware, and has full corporate power and authority to
own, lease and operate its properties and to carry on its
business as it is now being conducted and (ii) duly
qualified or licensed as a foreign corporation to do business,
and is in good standing (to the extent the concept of good
standing is recognized in the applicable jurisdiction), in each
jurisdiction where the character of the properties owned, leased
or operated by it or the nature of its business makes such
qualification or licensing necessary, except for any such
failure to be so qualified or licensed and in good standing as
that, individually or in the aggregate, have not had and would
not reasonably be expected to have a Material Adverse Effect on
Parent. Merger Sub is a company duly organized and validly
existing under the laws of the State of Israel. Parent owns,
beneficially and of record, all of the outstanding capital stock
of Urohealth B.V., a company duly organized, validly existing
and in good standing (to the extent the concept of good standing
is recognized in the applicable jurisdiction) under the laws of
The Netherlands. Urohealth B.V. is an inactive subsidiary which
does not currently conduct any business activities. Except for
Merger Sub and Urohealth B.V. (collectively, the Parent
Subs), Parent does not have any Subsidiaries.
(b) Parent has heretofore furnished to the Company a
complete and correct copy of the certificate of incorporation
and bylaws, each as amended to date, of Parent and a complete
and correct copy of the articles of association of Merger Sub.
Such certificate of incorporation, bylaws and articles of
association are in full force and
A-15
effect. Neither Parent nor Merger Sub is in violation of any of
the provisions of its certificate of incorporation, bylaws or
articles of association, as applicable. Copies of the minutes of
all meetings of shareholders, the Board of Directors and each
committee of the Board of Directors of each of Parent and Merger
Sub, in each case since January 1, 2004 through the date
hereof, have been made available for inspection by the Company
prior to the date hereof and such copies are true and complete.
Section 3.2 Authority.
(a) Each of Parent and Merger Sub have full corporate power
and authority to execute and deliver this Agreement and each of
the Ancillary Agreements to which it is or will be a party and,
subject to obtaining approval of the stockholders representing a
majority of the shares of Parent Common Stock present in person
or by proxy at a meeting of the Parent Stockholders called to
approve the issuance of Parent Common Stock in the Merger and
the Financing (the Parent Stockholder
Approval), to perform its obligations hereunder and
thereunder and to consummate the Transactions. The execution,
delivery and performance by each of Parent and Merger Sub of
this Agreement and each of the Ancillary Agreements to which it
is or will be party and the consummation by it of the
Transactions have been duly and validly authorized by the Board
of Directors of Parent or Merger Sub, as applicable. Except for
obtaining the Parent Stockholder Approval, no other corporate
proceedings on the part of Parent or Merger Sub are necessary to
authorize the execution, delivery or performance of this
Agreement or any Ancillary Agreement or to consummate the
Transactions. This Agreement has been, and upon their execution
and delivery each of the Ancillary Agreements to which Parent or
Merger Sub is or will be a party has or, with respect to the
Ancillary Agreements to be entered into after the date hereof as
of delivery, will have been, duly executed and delivered by
Parent or Merger Sub, as applicable. This Agreement constitutes,
and upon their execution each of the Ancillary Agreements to
which Parent or Merger Sub is or, with respect to the Ancillary
Agreements to be entered into after the date hereof, will be, a
party do or will as of the date of delivery constitute, the
legal, valid and binding obligations of Parent or Merger Sub, as
applicable, enforceable against Parent or Merger Sub in
accordance with their respective terms.
(b) The Board of Directors of Parent, at a meeting duly
called, and held on November 8, 2008, (i) approved
this Agreement, the Merger, the Financing, the Ancillary
Agreements to which it is a party and the other Transactions,
and (ii) determined to recommend to the Parent Stockholders
the approval pursuant to this Agreement of the issuance of
shares of Parent Common Stock in connection with the Merger, the
Financing and the other Transactions.
(c) The Board of Directors of Merger Sub, by unanimous
written consent, dated as of November 10, 2008,
(i) determined that this Agreement, the Merger, the
Ancillary Agreements and the Transactions would be advisable and
fair to, and in the best interests of Merger Sub and of Parent
as its sole stockholder and that, considering the financial
position of the merging companies, no reasonable concern exists
that the Surviving Company will be unable to fulfill the
obligations of Merger Sub to its creditors, (ii) approved
this Agreement, the Merger, the Ancillary Agreements and the
other Transactions to which it is a party, and
(iii) recommended that Parent, in its capacity as the sole
shareholder of Merger Sub, vote to approve this Agreement, the
Merger and the other Transactions.
Section 3.3 Application
of Anti-takeover Protections. Parent has
taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business
combination, poison pill, shareholder rights agreements or other
similar anti-takeover provision under Parents certificate
of incorporation or bylaws or any applicable state laws that is
or could become applicable to each Shareholders
acquisition or ownership of Parent Common Stock issued to such
Shareholder pursuant to the terms hereof.
Section 3.4 Termination
of License Agreement with Sanarus. Parent
represents and warrants that, except as set forth on
Schedule 3.4 of the Parent Disclosure Schedule, all
agreements between Parent and Sanarus Medical Incorporated
(Sanarus) have been terminated as evidenced by the
Mutual Termination Agreement dated as of June 19, 2008
between Parent and Sanarus, and Sanarus has no continuing rights
in, or licenses to, Parents Intellectual Property in the
fields of gynecological and breast diseases, disorders and
conditions to develop, make, sell or use cryomedical devices
within such fields.
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Section 3.5 No
Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by Parent and
Merger Sub of this Agreement and each of the Ancillary
Agreements to which Parent or Merger Sub is or will be a party,
and the consummation of the Transactions, do not and will not:
(i) conflict with or violate the certificate of
incorporation or, except as set forth on
Schedule 3.5(a)(i) of the Parent Disclosure
Schedule, bylaws of Parent or the articles of association or
equivalent constituent documents of either of the Parent Subs;
(ii) conflict with or violate any Law applicable to Parent
or either of the Parent Subs or by which any property or asset
of Parent or either of the Parent Subs is bound; or
(iii) except as set forth on
Schedule 3.5(a)(iii) of the Parent Disclosure
Schedule, result in any breach of, constitute a default (or an
event that, with notice or lapse of time or both, would become a
default) under, require any consent of any Person pursuant to,
give to others any right of termination, amendment,
modification, acceleration or cancellation of, allow the
imposition of any fees or penalties, require the offering or
making of any payment or redemption, give rise to any increased,
guaranteed, accelerated or additional rights or entitlements of
any Person or otherwise adversely affect any rights of Parent or
either of the Parent Subs under, or result in the creation of
any Encumbrance on any property, asset or right of Parent or
either of the Parent Subs pursuant to, any note, bond, mortgage,
indenture, agreement, lease, license, permit, franchise,
instrument, obligation or other Contract to which Parent or
either of the Parent Subs is a party or by which any of their
respective properties, assets or rights are bound;
except, in the case of clauses (ii) and (iii), for any such
conflicts, breaches, defaults or other occurrences that,
individually or in the aggregate, have not had and would not
reasonably be expected to have a Material Adverse Effect on
Parent.
(b) Neither Parent nor either of the Parent Subs is
required to file, seek or obtain any notice, authorization,
approval, order, permit or consent of or with any Governmental
Authority in connection with the execution, delivery and
performance by Parent or Merger Sub of this Agreement and each
of the Ancillary Agreements to which Parent and Merger Sub is or
will be a party or the consummation by Parent or Merger Sub of
the Transactions, except for such filings, notices,
authorizations, approvals, orders permits or consents as may be
required by any applicable federal or state securities or
blue sky Laws.
Section 3.6 Capitalization.
(a) As of the date hereof, the authorized Capital Stock of
Parent consists of 51,000,000 shares of Capital Stock (the
Parent Capital Stock), divided into
50,000,000 shares of Parent Common Stock and
1,000,000 shares of preferred stock, par value $0.001 per
share (the Parent Preferred Stock). As of the
date hereof, (i) 11,811,451 shares of Parent Common
Stock, are issued and outstanding, (ii) no shares of Parent
Preferred Stock are issued or outstanding,
(iii) 2,270,723 shares of Parent Common Stock are
issuable upon exercise or payout of currently outstanding stock
options and restricted stock units previously granted under
Parent Stock Plans; (iv) 78,363 shares of Parent
Common Stock are issuable upon payout of deferred stock units
under Parents Employee Deferred Stock Unit Program;
(v) 165,981 shares of Parent Common Stock are issuable
upon payout of deferred stock units under Parents
Non-Employee Director Deferred Stock Unit Program;
(vi) 474,437 shares of Parent Common Stock remain
available for future awards under Parents 2004 Stock
Incentive Plan; (vii) 606,292 shares of Parent Common
Stock remain available for future awards under Parents
Employee Deferred Stock Unit Program;
(viii) 234,019 shares of Parent Common Stock remain
available for future awards under Parents Non-Employee
Director Deferred Stock Unit Program;
(ix) 689,113 shares of Parent Common Stock are
issuable upon exercise of currently outstanding Series A
Warrants; (x) 694,637 shares of Parent Common Stock
are issuable upon exercise of currently outstanding
Series B Warrants; and (xi) 250,000 shares of
Parent Preferred Stock have been designated as
Series A Junior Participating Preferred Stock,
par value $0.001 per share, and are reserved for issuance upon
exercise of Parent Rights issued pursuant to the Parent Rights
Agreement. Each issued and outstanding share of Parent Capital
Stock is, and each share of Parent Capital Stock reserved for
issuance as specified above will be, upon issuance on the terms
and conditions specified in the instruments pursuant to which it
is issuable, duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights or similar rights,
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and has been, or will be, issued in compliance in all respects
with applicable Law and Parents bylaws and certificate of
incorporation.
(b) Except for the items described above in
subsection (a) and under this Agreement and the Financing
Agreement, as of the date hereof, there are no outstanding
subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any
outstanding security, instrument or other Contract and also
including any rights plan or other similar agreement, obligating
Parent to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of Parent Capital Stock or
obligating Parent to grant, extend or enter into any such
Contract or commitment. As of the date hereof, there are no
obligations, contingent or otherwise, of Parent to
(i) repurchase, redeem or otherwise acquire any shares of
Parent Capital Stock or (ii) provide material funds to, or
make any material investment in (in the form of a loan, capital
contribution or otherwise), or provide any guarantee with
respect to the obligations of, any Person. There are no
outstanding stock appreciation rights or similar derivative
securities or rights of Parent. There are no bonds, debentures,
notes or other indebtedness of Parent having the right to vote
(or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which stockholders of Parent
may vote. There are no voting trusts, irrevocable proxies or
other Contracts to which Parent is a party or is bound with
respect to the voting of any shares of Parent Capital Stock.
(c) Each of the issued and outstanding shares of Share
Capital of Merger Sub has been duly authorized and validly
issued, is fully paid and nonassessable, has not been issued in
violation of any preemptive or similar rights, and has been
issued in compliance in all respects with all applicable Laws
and the provisions of its articles of association, and Parent
owns, directly or indirectly, one hundred percent of the
outstanding shares of Share Capital of Merger Sub. There are no
(i) securities convertible into or exchangeable for shares
of Share Capital or other securities of Merger Sub, or
(ii) subscriptions, options, warrants, puts, calls, phantom
stock rights, stock appreciation rights, stock-based performance
units, agreements, understandings, claims or other Contracts or
rights of any type granted or entered into by Parent or Merger
Sub relating to the issuance, sale, repurchase or transfer of
any securities of Merger Sub or that give any Person, other than
Parent, the right to receive any economic benefit or right
similar to or derived from the economic benefits and rights of
securities of Merger Sub.
(d) Each share of Parent Common Stock to be issued as
Merger Consideration has been duly authorized, and upon issuance
in accordance with the terms hereof, such shares of Parent
Common Stock shall be (i) validly issued, fully paid and
non-assessable and (ii) free from all taxes, liens and
charges with respect to the issue thereof (other than any taxes,
liens and charges arising from the acts or omissions of the
Shareholders). Prior to the Closing, Parent shall have duly
authorized and reserved for issuance sufficient shares of Parent
Common Stock for issuance to the Shareholders upon consummation
of the Financing and the Merger.
(e) Except for Merger Sub and Urohealth B.V., and except as
set forth on Schedule 3.6(e) of the Parent
Disclosure Schedule, Parent does not, directly or indirectly,
own any equity, partnership, membership or similar interest in,
or any interest convertible into, exercisable for the purchase
of or exchangeable for any such equity, partnership, membership
or similar interest in, any Person, or is under any current or
prospective obligation to form or participate in, provide funds
to, make any loan, capital contribution or other investment in,
or assume any liability or obligation of, any Person, in each
case, other than as contemplated by this Agreement or the
Transactions.
Section 3.7 SEC
Reports; Financial Statements; No Undisclosed
Liabilities.
(a) Parent has filed all material forms, reports and
documents required to be filed by Parent with the SEC since
January 1, 2007 (collectively, the Parent
SEC Reports), each of which complied at the time of
filing in all material respects with all applicable requirements
of the Securities Act and the Exchange Act. None of the Parent
SEC Reports contained when filed any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made
not misleading, except to the extent superseded by a
subsequently filed Parent SEC Report prior to the date hereof.
(b) True and complete copies of (i) the audited
consolidated balance sheet of Parent as of December 31,
2005, December 31, 2006 and December 31, 2007, and the
related audited consolidated statements of income, retained
earnings, shareholders equity and changes in financial
position of Parent for the periods covered therein, together
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with all related notes and schedules thereto, accompanied by the
reports thereon of Parents independent auditors
(collectively, the Parent Annual Financial
Statements), (ii) the unaudited consolidated
balance sheet of Parent as of June 30, 2008, and the
related consolidated statements of income, retained earnings,
shareholders equity and changes in financial position of
Parent for the six months and quarter then ended, together with
all related notes and schedules thereto, (iii) the
unaudited consolidated balance sheet of Parent as of
July 31, 2008, August 31, 2008 and September 30,
2008, and the related consolidated statements of income,
retained earnings, shareholders equity and changes in
financial position of Parent for the month then ended, and
(iv) any subsequent financials delivered pursuant to
Section 5.20 (collectively, the financial statements
delivered pursuant to clauses (ii) through (iv), the
Parent Interim Financial Statements, and with
the Parent Annual Financial Statements, the Parent
Financial Statements), with respect to the financial
statements described in clauses (i) and (ii) have been
delivered or made available to the Company, with respect to the
financial statements described in clause (iii), attached hereto
as Schedule 3.7(b) of the Parent Disclosure
Schedule, or with respect to any financial statements to be
delivered pursuant to Section 5.20, will be
delivered to the Company pursuant thereto. Each of the Parent
Financial Statements are, or in the case of the Parent Interim
Financial Statements to be delivered pursuant to
Section 5.20, when so delivered will be
(i) correct and complete in all material respects and have
been prepared in accordance with the books and records of
Parent; (ii) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods indicated
(except as may be indicated in the notes thereto); and
(iii) fairly present, in all material respects, the
consolidated financial position, results of operations and cash
flows of Parent as at the respective dates thereof and for the
respective periods indicated therein, except as otherwise noted
therein and subject, in the case of the Parent Interim Financial
Statements, to normal and recurring year-end adjustments that
will not, individually or in the aggregate, be material. The
Parent Financial Statements do not contain any material items of
a special or nonrecurring nature, except as expressly stated
therein. Except for the Parent Subs, no financial statements of
any other Person are required by GAAP to be consolidated in the
financial statements of Parent.
(c) Except for those liabilities that are reflected or
reserved against on the audited consolidated balance sheet of
Parent as of December 31, 2007 (such balance sheet,
together with all related notes and schedules thereto, the
Parent Balance Sheet), and for
liabilities incurred in the ordinary course of business
consistent with past practice after such date, Parent has not
incurred any liability, whether or not required by GAAP to be
reflected in a consolidated balance sheet of Parent or disclosed
in the notes thereto, except those liabilities and obligations
that are not, individually or in the aggregate, material to
Parent and that do not exceed $100,000 in the aggregate.
Section 3.8 Absence
of Certain Changes or Events. Since the date
of the Parent Balance Sheet: (a) the business of Parent has
been conducted, in all material respects, only in the ordinary
course of business consistent with past practice; (b) there
has not been any change, event or development or prospective
change, event or development that, individually or in the
aggregate, has had or would be reasonably likely to have a
Material Adverse Change on Parent; (c) Parent has not
suffered any material loss, damage, destruction or other
casualty affecting any of its material properties or assets,
whether or not covered by insurance; and (d) except as set
forth on Schedule 3.8 of the Parent Disclosure
Schedule, Parent has not taken any action that, if taken after
the date of this Agreement, would constitute a breach of any of
the covenants set forth in Section 5.2.
Section 3.9 Litigation. Except
as set forth on Schedule 3.9 of the Parent
Disclosure Schedule, there is no material Action pending or, to
the Knowledge of Parent, threatened against Parent or any of its
Subsidiaries, or any material property or asset of Parent or any
of its Subsidiaries, nor to its Knowledge is there any event,
circumstance or fact existing or that has occurred that would
reasonably be expected to result in any such material Action.
There is no Action pending or, to the Knowledge of Parent,
threatened, seeking to prevent, hinder, modify, delay or
challenge the Transactions. There is no pending or outstanding
Order or, pending, or to the Knowledge of Parent, threatened,
investigation by, any Governmental Authority relating to Parent
or any of its Subsidiaries, any of its properties or assets or
the Transactions. There is no Action by Parent or any of its
Subsidiaries pending, or which Parent or any of its Subsidiaries
has commenced preparations to initiate, against any other Person.
Section 3.10 Compliance
with Applicable Law.
(a) Each of Parent and the Parent Subs is and has been in
compliance in all material respects with all Laws applicable to
it. Parent has not received during the past seven years, nor is
there any basis for, any notice, order,
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complaint or other communication from any Governmental Authority
or any other Person that Parent or either of the Parent Subs is
not and has not been in compliance in any material respect with
any Law applicable to it.
(b) Parent is in possession of all licenses, franchises,
permits, certificates, approvals, variances, registrations,
accreditations, permissions and billing and other authorizations
that are required for Parent to own, lease and operate its
properties and to carry on its business in all material respects
as currently conducted (the Parent Permits).
Parent is and has been in compliance in all respects with all
Parent Permits, except where the failure to so comply has not
and would not reasonably be expected to have a material
detriment on Parent and its Subsidiaries, taken as a whole, in
excess of $250,000. Except as set forth on
Schedule 3.10 of the Parent Disclosure Schedule, no
suspension, cancellation, modification, revocation or nonrenewal
of any Parent Permit is pending or, to the Knowledge of Parent,
threatened, and Parent will continue to have the use and benefit
of all Parent Permits following consummation of the
Transactions. No Parent Permit is held in the name of any
employee, officer, director, shareholder, agent or otherwise on
behalf of Parent.
Section 3.11 Intellectual
Property.
(a) Schedule 3.11 of the Parent Disclosure
Schedule sets forth a true and complete list of all material
Intellectual Property including registered and material
unregistered Marks, Patents and registered Copyrights, including
any pending applications to register any of the foregoing, owned
(in whole or in part) by or exclusively licensed to Parent or
either of the Parent Subs, identifying for each whether it is
owned by or exclusively licensed to Parent.
Schedule 3.11 of the Parent Disclosure Schedule
lists the record owner of each such item of Intellectual
Property, and the jurisdiction in which each such item of
Intellectual Property has been issued or registered or in which
each such application for the issuance or registration of such
item of Intellectual Property has been filed. The Parent
Intellectual Property includes all Intellectual Property
necessary and sufficient to enable Parent to conduct its
business as it is currently and proposed to be conducted. To the
Knowledge of Parent, the Parent Intellectual Property Rights are
valid and enforceable.
(b) No registered Mark identified on
Schedule 3.11 of the Parent Disclosure Schedule has
been or is now involved in any opposition or cancellation
proceeding and, to the Knowledge of Parent, no such proceeding
is or has been threatened with respect to any of such Marks. No
Patent identified on Schedule 3.11 of the Parent
Disclosure Schedule has been or is now involved in any
interference, reissue or reexamination proceeding and, to the
Knowledge of Parent, no such proceeding is or has been
threatened with respect to any of such Patents.
(c) Parent is the sole and exclusive owner of all right,
title and interest in and to, free and clear of any and all
liens, licenses (royalty bearing or royalty-free), obligations
or other Encumbrances to others requiring payment to any Person
or any obligation to grant any right to any Person, of all
Intellectual Property identified on Schedule 3.11 of
the Parent Disclosure Schedule and all other Intellectual
Property used in Parents business, other than Intellectual
Property that is licensed to Parent by a third party licensor
pursuant to a written license agreement that remains in effect.
Parent has valid licenses to all material software and
technology and other material Intellectual Property that is
licensed to Parent by a third party licensor and used by Parent
in the ordinary course of business, free and clear of all
Encumbrances, except to the extent such a failure is the result
of a defect in the license of the third party owner. Parent has
not received any notice or claim challenging Parents
ownership of any of the Intellectual Property owned (in whole or
in part) by Parent, nor to the Knowledge of Parent is there a
reasonable basis for any claim that Parent does not so own any
of such Intellectual Property.
(d) Parent has taken all reasonable steps in accordance
with standard industry practices to protect its rights in its
Intellectual Property and at all times has taken adequate
security measures to protect the secrecy, confidentiality and
value of all information that constitutes or constituted a Trade
Secret of Parent and any other confidential information. To the
Knowledge of Parent, during the most recent two years, there
have been no material unauthorized disclosures of Parents
trade secrets and non-public proprietary information to a third
party. All current and former employees and consultants of
Parent have executed and delivered proprietary information,
trade secret and confidentiality and assignment agreements
substantially in Parents standard forms. In addition, all
current and former employees and consultants involved in
research or development for Parent or who otherwise develop or
conceive of any Intellectual Property for or on behalf of Parent
have executed and delivered enforceable Contracts that assign to
Parent all such employees or consultants rights,
title and interests in any Intellectual Property conceived,
developed, authorized or reduced to practice by such employee or
consultant relating to the
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business of Parent. To the Knowledge of Parent, no current
employee or consultant of Parent is in default or breach of any
material term of any such Contract with Parent.
(e) All registered Marks, issued Patents and registered
Copyrights identified on Schedule 3.11 of the Parent
Disclosure Schedule (Parent Registered IP)
are valid and subsisting and, to the Knowledge of Parent,
enforceable, and Parent has not received any notice or claim or
cease-and-desist
letters or invitations to license patent letters or written
threats from any third party challenging the validity or
enforceability of any Parent Registered IP or alleging any
misuse of such Parent Registered IP. Parent has not taken any
action or failed to take any action that could reasonably be
expected to result in the abandonment, cancellation, forfeiture,
relinquishment, invalidation or unenforceability of any Parent
Registered IP (including the failure to pay any filing,
examination, issuance, post registration and maintenance fees,
annuities and the like and the failure to disclose any known
material prior art in connection with the prosecution of patent
applications). All necessary registration, maintenance, renewal
and other relevant filing fees in connection with Parent
Registered IP have been paid and all necessary documents,
certificates and other relevant filings in connection with
Parent Registered IP have been timely filed with the relevant
patent, trademark, copyright or other relevant authorities in
the United States or other jurisdictions, for the purpose of
maintaining Parent Registered IP in the relevant jurisdiction.
(f) To Parents Knowledge, the development,
manufacture, sale, distribution or other commercial exploitation
of products, and the provision of any services, by or on behalf
of Parent or either of the Parent Subs, and all of the other
activities or operations of Parent or either of the Parent Subs,
have not interfered with, infringed upon, misappropriated,
violated, diluted or constituted the unauthorized use of, any
Intellectual Property of any third party. Except as set forth on
Schedule 3.11(f) of the Parent Disclosure Schedule,
neither Parent nor either of the Parent Subs has received any
notice or claim or
cease-and-desist
letters or invitations to license patent letters or written
threats from any third party asserting or suggesting that any
such infringement, misappropriation, violation, dilution or
unauthorized use is or may be occurring or has or may have
occurred, nor to the Knowledge of Parent, is there a reasonable
basis therefor. No Intellectual Property owned by or licensed to
Parent or either of the Parent Subs is subject to any
outstanding Order or Contract restricting the use or licensing
thereof by Parent or either of the Parent Subs. To the Knowledge
of Parent, no third party is misappropriating, infringing,
diluting or violating any Intellectual Property owned by or
exclusively licensed to Parent in a material manner.
(g) Neither Parent nor either of the Parent Subs has
transferred ownership of, or granted any exclusive license with
respect to, any material Intellectual Property. No loss or
expiration of any of the material Intellectual Property used by
Parent in the conduct of its business is threatened, pending or
reasonably foreseeable.
(h) To the Knowledge of Parent, Parents business does
not constitute unfair competition or trade practices and Parent
has not engaged and does not engage in any false or misleading
advertising or practices under the Laws of any jurisdiction in
which Parent operates or markets any of its products or services.
(i) Parent and each of the Parent Subs maintains policies
and procedures regarding data security and privacy that are in
compliance with all applicable Laws. To the Knowledge of Parent,
there have been no security breaches relating to violations or
any security policy or any unauthorized access of any data or
information of Parents software or technology systems in
the last two years. Except as would not have a Material Adverse
Effect on Parent, the use and dissemination by Parent of any and
all data or information concerning individuals is in compliance
with all such privacy policies and applicable Laws, including
HIPAA, and with respect to Parent and Merger Sub, the
transactions contemplated to be consummated hereunder as of the
Closing will not violate any such privacy policies or Laws.
Section 3.12 Parent
Information. The registration statement on
Form S-4
(or any successor form) to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in
the Merger, and any amendment or supplement thereto (the
Form S-4)
will not at the time the
Form S-4
is filed with the SEC and at the time it becomes effective under
the Securities Act contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading. The Proxy Statement will not as of the date mailed
to stockholders of Parent and at the time of the meeting of the
stockholders of Parent to be held for the purpose of obtaining
the Parent Stockholder Approval (the Parent
Stockholders Meeting) contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they are
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made, not misleading. The information included in the Financing
Disclosure Package did not as of the date provided, disclosed or
otherwise made available to the participants in the Financing
contain any untrue statement of material fact or omit to state
any material fact necessary in order to make the statements
therein in light of the circumstances under which they were made
not misleading, and no amendment or supplement to the Financing
Disclosure Package will, as of the date provided, disclosed or
otherwise made available to the participants in the Financing
subsequent to the date hereof contain any untrue statement of
material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
Notwithstanding the foregoing, neither Parent nor Merger Sub
makes any representation or warranty with respect to any
information supplied or required to be supplied by the Company
or the Shareholders that is contained in or omitted from any of
the foregoing documents.
Section 3.13 Health
Care Regulatory Compliance. Without limiting
the provisions of Section 3.10:
(a) Except as set forth on Schedule 3.13(a) of
the Parent Disclosure Schedule, parent has all Parent Permits
necessary for the conduct of its businesses and the use of its
properties and assets as presently conducted and used, and
Parents employees and agents have all Parent Permits
necessary for the conduct of their professional activities, and
all such Parent Permits are in full force and effect. Parent has
had at all times during the previous three years all Parent
Permits necessary for the conduct of its business and the use of
its properties and assets as conducted and used at such
respective times. Parents employees have and have had at
all times during the previous three years all Parent Permits
necessary for the conduct of their professional activities at
such respective times. Parent has not received written notice
from any Governmental Authority, nor does Parent have Knowledge,
that any Parent Permit is subject to revocation, suspension, or
any other disciplinary or adverse administrative action by any
Governmental Authority. No Parent Permit applicable to Parent is
subject to a consent order or any other final adverse
disciplinary or administrative action, any of which is still in
force and effect. The consummation of the Merger will not cause
the revocation or cancellation of any Parent Permit.
(b) Parent is in material compliance with all Health Care
Laws and the terms of all Parent Permits to the extent
applicable to Parent, or its business or operations.
(c) Parent in compliance with all requirements of the Food
and Drug Administration (the FDA), or any
other Governmental Authority engaged in the regulation of
Parents products, including but not limited to FDAs
requirements pertaining to establishment registration, product
listing, manufacturing (i.e., cGMPs/QSR,), labeling and
advertising and promotion, adverse event reporting and record
keeping and reporting requirements.
(d) Parent is not currently, and has not been at any time:
(i) excluded from participation in any federal or state
health care program, including those defined in 42 U.S.C.
§ 1320a 7b(f), (ii) convicted of any civil
or criminal offense under any Health Care Law,
(iii) debarred or disqualified from participation in any
Federal health care program or other regulated activities for
any violation or alleged violation of any Health Care Law,
(iv) listed on the General Services Administration List of
Parties Excluded from Federal Programs, (v) debarred
pursuant to the Generic Drug Enforcement Act (21 U.S.C.
§§ 301 et seq.) or disqualified as a clinical
investigator pursuant to 21 C.F.R. § 812.119 or §
312.70, or (vi) a party to or subject to, or, to the
Knowledge of Parent, threatened to be made a party to or subject
to, any Action concerning any of the matters described in
clauses (i), (ii), (iii), (iv) or (v).
(e) The products introduced into interstate commerce by
Parent were neither adulterated nor misbranded at the time of
introduction into commerce, nor based on the actions of Parent,
adulterated or misbranded after introduction into commerce.
Section 3.14 General
Tax Matters.
(a) Each of Parent and its Subsidiaries has accurately
prepared and properly and timely filed (including any
extensions) all material Returns required to be filed by it
under any applicable Law. Such Returns are true, complete,
accurate and correct in all material respects and do not contain
a disclosure statement under Section 6662 of the Code or
any predecessor provision or comparable provision of state,
local or foreign Law. Each of Parent and its
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Subsidiaries is and has been in material compliance with all
applicable Laws pertaining to Taxes, including all applicable
Laws relating to record retention.
(b) Each of Parent and its Subsidiaries has timely paid all
Taxes (whether or not shown on any Return) it is required to
have paid except where contested in good faith by appropriate
proceedings. All Taxes of Parent and its Subsidiaries accrued
following the end of the most recent period covered by the
Parent Interim Financial Statements delivered on or prior to the
date hereof have been accrued in the ordinary course of business
and do not exceed comparable amounts incurred in similar periods
in prior years (taking into account any changes in Parents
or the applicable Subsidiarys operating results).
(c) No claim has been made by any taxing authority in any
jurisdiction where Parent or any of its Subsidiaries does not
file Returns that it is or may be subject to Tax by that
jurisdiction. No extensions or waivers of statutes of
limitations with respect to any Returns have been given by or
requested from Parent or any of its Subsidiaries.
(d) Schedule 3.14(d) of the Parent Disclosure
Schedule sets forth (i) the taxable years of Parent and
each of its Subsidiaries as to which the applicable statutes of
limitations on the assessment and collection of Taxes have not
expired, (ii) those years for which examinations by the
taxing authorities have been completed and (iii) those
taxable years for which examinations by taxing authorities are
presently being conducted.
(e) Except as disclosed on Schedule 3.14(e) of
the Parent Disclosure Schedule, neither Parent nor any of its
Subsidiaries is a party to any Action by any taxing authority,
nor does Parent or any of its Subsidiaries have Knowledge of any
pending or threatened Action by any taxing authority.
(f) All deficiencies asserted or assessments made against
Parent or any of its Subsidiaries as a result of any
examinations by any taxing authority have been fully paid and no
rationale underlying a claim for Taxes has been asserted
previously by any taxing authority that reasonably could be
expected to be asserted in any other period.
(g) There are no Encumbrances for Taxes, other than
Encumbrances for current Taxes not yet due and payable, upon the
assets of Parent or any of its Subsidiaries.
(h) Neither Parent nor any of its Subsidiaries is a party
to or bound by any Tax indemnity, Tax sharing or Tax allocation
Contract.
(i) Neither Parent nor any of its Subsidiaries is a party
to or bound by any closing agreement, Tax ruling or offer in
compromise with any taxing authority.
(j) Neither Parent nor any of its Subsidiaries has been a
member of an affiliated group of corporations, within the
meaning of Section 1504 of the Code, or a member of a
combined, consolidated or unitary group for state, local or
foreign Tax purposes, other than a group of which Parent is the
common parent. Neither Parent nor any of its Subsidiaries has
any liability for Taxes of any Person other than Parent and its
Subsidiaries under Treasury Regulations
Section 1.1502-6
or any corresponding provision of state, local or foreign Tax
Law, as transferee or successor, by Contract or otherwise.
Neither Parent nor any of its Subsidiaries has participated in
an international boycott within the meaning of Section 999
of the Code.
(k) Neither Parent nor any of its Subsidiaries has agreed
to make, or is required to make, any adjustment under
Sections 481(a) or 263A of the Code or any comparable
provision of state, local or foreign Tax Laws by reason of a
change in accounting method or otherwise. Neither Parent nor any
of its Subsidiaries has taken any action that is not in
accordance with past practice that could defer a liability for
Taxes of Parent or any Subsidiary from any taxable period ending
on or before the Closing Date to any taxable period ending after
such date. Each of Parent and its Subsidiaries has at all times
used the accrual method of accounting for income Tax purposes.
(l) Neither Parent nor any of its Subsidiaries is a party
to any Contract or plan that has resulted or would result,
separately or in the aggregate, in connection with this
Agreement or any change of control of Parent or any of its
Subsidiaries, in the payment of any excess parachute
payments within the meaning of Section 280G of the
Code.
(m) Schedule 3.14(m) of the Parent Disclosure
Schedule sets forth all foreign jurisdictions in which Parent
and its Subsidiaries are subject to Tax, are engaged in business
or have a permanent establishment. Neither Parent nor any of its
Subsidiaries has entered into a gain recognition agreement
pursuant to Treas. Reg. § 1.367(a)-8.
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Neither Parent nor any of its Subsidiaries has transferred an
intangible the transfer of which would be subject to the rules
of Section 367(d) of the Code.
(n) Neither Parent nor any of its Subsidiaries is a party
to any joint venture, partnership, or other arrangement or
Contract that could be treated as a partnership for federal
income tax purposes. Schedule 3.14(n) of the Parent
Disclosure Schedule sets forth all elections pursuant to Treas.
Reg. § 301.7701-3 that have been made by business entities
in which Parent or any of its Subsidiaries owns an equity
interest.
(o) Neither Parent nor any of its Subsidiaries is, or has
been, a United States real property holding corporation, as
defined in Section 897(c)(2) of the Code, during the
applicable period specified in Section 897(c)(1)(A) of the
Code.
(p) Neither Parent nor any of its Subsidiaries is an
investment company within the meaning of
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(q) Except as set forth on Schedule 3.14(q) of
the Parent Disclosure Schedule, Parent (i) does not own,
directly or indirectly, a single member limited liability
company that is treated as a disregarded entity; (ii) is
not a direct or indirect stockholder of a controlled
foreign corporation as defined in Section 957 of the
Code; and (iii) is not and has not been a direct or
indirect stockholder in a passive foreign investment
company within the meaning of Section 1297 of the
Code.
(r) Neither Parent nor any of its Subsidiaries has or has
ever had a branch or similar establishment, including a
permanent establishment (as defined in any applicable Tax treaty
between the United States and a foreign jurisdiction) or a
disregarded entity, in any foreign jurisdiction.
(s) Neither Parent nor any of its Subsidiaries will be
required to include any item of income in, or exclude any item
of deduction from, taxable income for any period (or any portion
thereof) ending after the Closing Date as a result of any
(i) deferred intercompany gain or any excess loss account
described in the Treasury Regulations under Section 1502 of
the Code (or any corresponding provision of state, local or
foreign Tax Law), (ii) installment sale or other open
transaction disposition made on or prior to the Closing Date, or
(iii) material prepaid amount received on or prior to the
Closing Date.
(t) Each of Parent and its Subsidiaries is in compliance,
in all material respects, with all transfer pricing requirements
in all relevant jurisdictions. Each of Parent and its
Subsidiaries has contemporaneous documentation of, and Parent
has made available to the Company, or, in the case of each of
its Subsidiaries, has made available or caused each such
Subsidiary to make available, all transfer pricing
methodologies, including a transfer pricing analysis or study
for each material or ongoing intercompany or related party
transaction. Parent has made available to the Company or, in the
case of each of its Subsidiaries, has made available or caused
each such Subsidiary to make available, all intercompany
Contracts relating to transfer pricing.
(u) Neither Parent nor any of its Subsidiaries has
participated in a reportable transaction, as
currently defined in Treas. Reg. § 1.6011-4(b) or
Section 6111 of the Code or any analogous provision of
state, local or foreign Law.
Section 3.15 Material
Contracts.
(a) Except as disclosed in the Parent SEC Reports or as
disclosed on Schedule 3.15(a) of the Parent
Disclosure Schedule, neither Parent nor any of its Subsidiaries
is a party to nor are their assets or properties bound by any
Contract of the following nature (such Contracts as are set
forth or required to be set forth on
Schedule 3.15(a) of the Parent Disclosure Schedule
being Parent Material Contracts):
(i) any Contract pursuant to which Parent has provided
funds to or made any loan, capital contribution or other
investment in, or assumed any liability or obligation of, any
Person, including take-or-pay Contracts or keepwell agreements,
or any Contract relating to or evidencing indebtedness of
Parent, including mortgages, other grants of security interests,
guarantees or notes; all except such agreements entered into by
the Parent in the ordinary course of business;
A-24
(ii) any Contract for the purchase of any debt or equity
security or other ownership interest of any Person, or for the
issuance of any debt or equity security or other ownership
interest, or the conversion of any obligation, instrument or
security into debt or equity securities or other ownership
interests of Parent;
(iii) any lease, sublease or similar Contract under which
(A) Parent is a lessor or sublessor of real property owned
by any other Person, or makes available for use by any Person,
any portion of any premises otherwise occupied, leased or
subleased by it, or (B) Parent is a lessee or sublessee of,
or holds or uses any real property owned by any other Person;
(iv) any lease, sublease or similar Contract under which
(A) Parent is a lessee or sublessee of, or holds or uses,
any machinery, equipment, vehicle or other tangible personal
property owned by any Person, or (B) Parent is a lessor or
sublessor of, or makes available for use by any Person, any
tangible personal property owned or leased by it;
(v) any Contract with any customer, distributor or supplier;
(vi) any Contract with any Governmental Authority;
(vii) any Tax sharing or Tax allocation Contract;
(viii) any Contract with any Related Party of Parent;
(ix) any employment or consulting Contract;
(x) any Contract that limits, or purports to limit, the
ability of Parent to compete in any line of business or with any
Person or in any geographic area or during any period of time,
or that restricts the right of Parent to sell to or purchase
from any Person or to hire any Person, or that grants the other
party or any third person exclusive rights (including any
exclusive license or right to use any Intellectual Property) or
most favored nation status or any type of special
discount rights;
(xi) any Contract providing for indemnification to or from
any Person, except for such indemnification provisions granted
to distributors, representatives, consultants or customers of
Parent pursuant to Parents standard Contracts with such
parties;
(xii) any royalty Contract and any Contract relating in
whole or in part to any Intellectual Property;
(xiii) any joint venture or partnership, merger, asset or
stock purchase or divestiture Contract (other than Contracts for
the purchase or sale of assets in the ordinary course of
business);
(xiv) any Contract relating to settlement of any
administrative, judicial or arbitration proceedings within the
past five years;
(xv) any Contract that results in any Person holding a
power of attorney from Parent that relates to Parent or its
business;
(xvi) any Contract, whether or not made in the ordinary
course of business that (A) involves a future or potential
liability or receivable, as the case may be, in excess of
$100,000 on an annual basis or in excess of $250,000 over the
current Contract term, or (B) has a term greater than one
year and cannot be cancelled by Parent without penalty or
further payment and without more than 60 days
notice; and
(xvii) any other Contract not referenced in the foregoing
clauses (i) through (xvi) that is material to the
business, operations, assets, financial condition, results of
operations or prospects of Parent, taken as a whole.
(b) (i) Each of the Parent Material Contracts is
valid, binding and in full force and effect and is enforceable
against Parent, and to the Knowledge of Parent, the other
parties thereto, in accordance with its terms, except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws affecting
creditors rights generally and by general principles of
equity (regardless of whether considered in a proceeding in
equity or at Law), (ii) Parent has performed all material
obligations required to be performed by it under the Parent
Material Contracts and it is not (with or without the lapse of
time or the giving of notice, or both) in breach or default in
any material respect thereunder, (iii) to the Knowledge of
Parent, (A) no other party to any Parent Material Contract
is (with or without the lapse of time or the giving of notice,
or both) in breach or default in
A-25
any material respect thereunder, and (B) no event has
occurred or circumstance or condition exists (with or without
the lapse of time or the giving of notice, or both) that may
contravene, conflict with, or result in a violation or breach of
any Parent Material Contract, result in the termination or in a
right of termination or cancellation of, or accelerate the
performance required by, or result in the triggering of any
payment obligations under, or result in the creation of any
Encumbrance upon any of the assets or properties of Parent
under, or result in being declared void, voidable, or without
further binding effect, or result in any other modification of
or trigger any right or obligation under, any Parent Material
Contract or provisions thereof; (iv) no party to any Parent
Material Contract has given any written notice of an alleged
breach thereof or otherwise threatened such a breach; and
(v) Parent has not received any written notice that any
party to any Parent Material Contract intends to cancel or
terminate such Parent Material Contract, to renegotiate such
Parent Material Contract, or to exercise or not exercise any
options thereunder, and, to the Knowledge of Parent, no such
intent to cancel, terminate, renegotiate or exercise has been
otherwise threatened.
(c) The execution and delivery by Parent of this Agreement
and the Ancillary Agreements to which it is a party, and the
consummation by Parent of the Transactions contemplated hereby
and thereby in accordance with the terms hereof and thereof,
will not violate, or conflict with, or result in a material
breach of any provision of, or constitute a material default (or
an event that, with notice or lapse of time or both, would
constitute a material breach or default) under, or result in the
termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the
triggering of any payment obligations under, or result in the
creation of any Encumbrance upon any of the assets or properties
of Parent under, or result in being declared void, voidable, or
without further binding effect, or result in any other
modification of or trigger any right or obligation under, any
Parent Material Contract or provision thereof.
(d) Except as set forth on Schedule 3.15(d) of
the Parent Disclosure Schedule, no consent of any party to a
Parent Material Contract is required in connection with the
execution, delivery and performance of this Agreement and the
Ancillary Agreements and the consummation of the Transactions.
(e) True, complete and accurate copies (or, as to oral
Contracts, written summaries of the terms), of the Parent
Material Contracts entered into on or prior to the date hereof
have been provided or made available to the Company and true,
complete and accurate copies (or, as to oral Contracts, written
summaries of the terms) of any Parent Material Contracts entered
into after the date hereof and prior to or on the Closing Date
will be provided or made available to the Company promptly after
being so entered into.
Section 3.16 Customers
and Suppliers.
(a) Except as set forth on Schedule 3.16 of the
Parent Disclosure Schedule, during the past two years, neither
Parent nor Merger Sub has received from: (i) any current or
former customer of Parent any written notice or assertion of
breach, misrepresentation, breach of warranty, design errors or
malfunctions, or other failures of Parent to deliver upon any
promises or legal or contractual obligations, and no such
assertion of breach, misrepresentation, breach of warranty,
design errors or malfunctions, or other failures have been
otherwise threatened; or (ii) any current customer of
Parent any written notice that such customer has ceased or
intends to cease or terminate its use of the products or
services of Parent, or reduced or intends to reduce such use,
whether or not as a result of the transactions contemplated
hereby, or has sought to change the terms for its purchases of
products and services, and no customer has otherwise threatened
such a cessation, termination, or change in use or terms, except
in each case where such alleged breach, misrepresentation,
breach of warranty, design errors or malfunctions, or cessation,
termination or reduction has not and would not reasonably be
expected to result in Parent incurring, individually or in the
aggregate with all other instances thereof, any loss of revenue
or other Liability in excess of $100,000.
(b) Except as set forth on Schedule 3.16 of the
Parent Disclosure Schedule, during the past two years, neither
Parent nor Merger Sub has received from: (i) any current or
former supplier of Parent any notice or assertion of breach,
misrepresentation, breach of warranty, or other failures of
Parent to deliver upon any promises or legal or contractual
obligations; or (ii) any current supplier of Parent any
notice that such supplier has ceased or intends to cease or
terminate supplying the products or services to Parent, or
reduced or intends to reduce such supply, whether or not as a
result of the transactions contemplated hereby, or has sought to
change the terms for the supply of such products and services,
other than general and customary changes in the terms in the
ordinary course of business, consistent with past practice,
except in each case where such alleged breach,
misrepresentation, breach of warranty, failure to deliver, or
cessation, termination or reduction has not and would not
reasonably be expected to result in
A-26
Parent incurring, individually or in the aggregate with all
other instances thereof, any additional expense or other
Liability in excess of $100,000.
Section 3.17 Affiliate
Interests and Transactions.
(a) Except as set forth on Schedule 3.17 of the
Parent Disclosure Schedule and except for ownership (of record
or as a beneficial owner) of less than five percent of the
outstanding Capital Stock or Share Capital of any Person that is
publicly traded on any national or foreign stock exchange, or
over-the-counter market, no Related Party of Parent to the
Knowledge of Parent, (i) owns or has, since January 1,
2005, owned, directly or indirectly, any equity or other
financial or voting interest in any competitor, supplier,
licensor of Intellectual Property or distributor of Parent,
(ii) owns or has, since January 1, 2005, owned,
directly or indirectly, or has or has had any interest in any
material property (real or personal, tangible or intangible)
that Parent uses or has used in or pertaining to the business of
Parent, (iii) has or has had since January 1, 2005,
any business dealings or a financial interest in any transaction
with Parent or involving any assets or property of Parent, or
has derived, received, or was entitled to, any interest,
incentive, or other form of benefit in connection with
Parents business, or any of the Contracts to which Parent
is a party.
(b) There are no outstanding notes payable to, accounts
receivable from or advances by Parent to, and Parent is not
otherwise a debtor or creditor of, or has any liability or other
obligation of any nature to, any Related Party of Parent. Except
as set forth on Schedule 3.17 of the Parent
Disclosure Schedule, Parent has not incurred any outstanding
obligation or liability to, or entered into or agreed to enter
into any agreement or transaction with or for the benefit of,
any Related Party of Parent, other than the Transactions and the
Financing.
Section 3.18 No
Prior Activities. Except for obligations
incurred in connection with its organization, entry into this
Agreement and anticipation of the Transactions, Merger Sub has
neither incurred any obligation or liability nor engaged in any
business or activity of any type or kind whatsoever or entered
into any agreement or arrangement with any Person.
Section 3.19 Brokers
Fees. Other than Oppenheimer & Co.
Inc. and Seven Hills Partners LLC, whose fees will be paid by
Parent, no broker, finder or investment banker is entitled to
any brokerage, finders or other fee or commission in
connection with the Transactions based upon arrangements made by
or on behalf of Parent or Merger Sub. Parent has furnished to
Company a complete and correct copy of all agreements between
Parent and Oppenheimer & Co. Inc. or Seven Hills
Partners LLC pursuant to which such firm would be entitled to
any payment relating to the Transactions.
Section 3.20 Parent
Disclosure. None of the representations or
warranties of Parent contained in this Agreement or any
Ancillary Agreement and none of the information contained in any
schedule, certificate or other document delivered by Parent or
that will at anytime be delivered by Parent pursuant hereto or
thereto or in connection with the Transactions contains any
untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not
misleading.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
Except as set forth in the Disclosure Schedule of the Company
attached hereto and delivered concurrently herewith that is
arranged in Sections corresponding to the numbered and lettered
Sections contained in this Agreement (the Company
Disclosure Schedule), the Company hereby represents
and warrants to Parent and Merger Sub as follows:
Section 4.1 Organization
and Qualification.
(a) Each of the Company and its Subsidiaries is (i) a
corporation duly organized, validly existing and in good
standing (to the extent the concept of good standing is
recognized in the applicable jurisdiction) under the laws of the
jurisdiction of its incorporation as set forth on
Schedule 4.1(a) of the Company Disclosure Schedule,
and has full corporate power and authority to own, lease and
operate its properties and to carry on its business as it is now
being conducted, and (ii) duly qualified or licensed as a
foreign corporation to do business, and is in good standing
A-27
(to the extent the concept of good standing is recognized in the
applicable jurisdiction), in each jurisdiction where the
character of the properties owned, leased or operated by it or
the nature of its business makes such qualification or licensing
necessary, except in each case for any such failure to be so
qualified or licensed and in good standing that, individually or
in the aggregate, have not had and would not reasonably be
expected to have a Material Adverse Effect on the Company. Galil
Medical (USA), Inc. is an inactive subsidiary, which does not
currently conduct any business activities.
(b) The Company has heretofore furnished to Parent a
complete and correct copy of the Memorandum of Association and
Articles of Association of the Company, as amended to date (the
Company Charter Documents), and the
certificate of incorporation and bylaws or equivalent
organizational documents, each as amended to date, of the
Company and each of its Subsidiaries. Such Company Charter
Documents, the certificates of incorporation, bylaws and
equivalent organizational documents are in full force and
effect. Neither the Company nor any of its Subsidiaries is in
violation of any of the provisions of its Charter Documents,
certificate of incorporation, bylaws or equivalent
organizational documents. Copies of the transfer books and the
minutes of all meetings of shareholders, the Board of Directors
and each committee of the Board of Directors of each of the
Company and its Subsidiaries have been made available for
inspection by Parent prior to the date hereof and such copies
are true and complete.
Section 4.2 Authority.
(a) The Company has full corporate power and authority to
execute and deliver this Agreement, and each of the Ancillary
Agreements to which it will be a party, and, subject to
obtaining the Company Shareholder Approval, to perform its
obligations hereunder and thereunder and to consummate the
Transactions. The execution, delivery and performance by the
Company of this Agreement and each of the Ancillary Agreements
to which the Company is or will be party and the consummation by
the Company of the Transactions have been duly and validly
authorized by the Board of Directors of the Company. Except for
obtaining Company Shareholder Approval, no other corporate
proceedings on the part of the Company are necessary to
authorize the execution, delivery or performance of this
Agreement or any Ancillary Agreement or to consummate the
Transactions. This Agreement has been, and upon their execution
and delivery each of the Ancillary Agreements to which the
Company will be a party will have been, duly executed and
delivered by the Company. This Agreement constitutes, and upon
their execution and delivery each of the Ancillary Agreements to
be entered into after the date hereof to which the Company will
be a party, will as of the date of delivery constitute, the
legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
(b) The Board of Directors of the Company, at a meeting
thereof duly called, and held on November 9, 2008,
(i) determined that this Agreement, the Merger, the
Ancillary Agreements and the other Transactions are fair to, and
in the best interests of, the Company and its Shareholders, and
that, considering the financial position of the merging
companies, no reasonable concern exists that the Surviving
Company will be unable to fulfill the obligations of the Company
to its creditors, (ii) approved this Agreement, the Merger,
the Ancillary Agreements to which it is a party and the other
Transactions, and (iii) determined to recommend to the
Shareholders the approval of this Agreement, the Merger and the
other Transactions.
Section 4.3 No
Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by the Company
of this Agreement and each of the Ancillary Agreements to which
the Company will be a party, and the consummation of the
Transactions, do not and will not:
(i) conflict with or violate the certificate of
incorporation or bylaws or equivalent organizational documents
of the Company or any of its Subsidiaries;
(ii) conflict with or violate any Law applicable to the
Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound; or
(iii) except as set forth on
Schedule 4.3(a)(iii) of the Company Disclosure
Schedule, result in any breach of, constitute a default (or an
event that, with notice or lapse of time or both, would become a
default) under, require any consent of any Person pursuant to,
give to others any right of termination, amendment,
modification, acceleration or cancellation of, allow the
imposition of any fees or penalties, require the offering or
making of any payment or redemption, give rise to any increased,
guaranteed, accelerated or additional rights
A-28
or entitlements of any Person or otherwise adversely affect any
rights of the Company or any of its Subsidiaries under, or
result in the creation of any Encumbrance on any property, asset
or right of the Company or any of its Subsidiaries pursuant to,
any note, bond, mortgage, indenture, agreement, lease, license,
permit, franchise, instrument, obligation or other Contract to
which the Company or any of its Subsidiaries is a party or by
which any of their respective properties, assets or rights are
bound,
except, in the case of the foregoing clauses (ii) and
(iii), for any such conflicts, breaches, defaults or other
occurrences that, individually or in the aggregate, have not had
and would not reasonably be expected to have a Material Adverse
Effect on the Company.
(b) The execution, delivery and performance by the Company
of this Agreement and the consummation by the Company of the
Merger and the other Transactions do not and will not require
any filing or registration with, notification to, or
authorization, permit, consent or approval of, or other action
by or in respect of, any Governmental Authority by the Company
or any of its Subsidiaries other than (i) filing of the
Merger Certificate, (ii) notice to the Office of the Chief
Scientist of the Israeli Ministry of Industry, Trade &
Labor (OCS) and, to the extent applicable,
the MAGNET Program in the OCS (MAGNET) to the
change in ownership of the Company to be effected by the Merger
and the filing by Parent of an undertaking in customary form in
favor of the OCS and the MAGNET to comply with the applicable
Law, (iii) filings with, and approval by, the Investment
Center of the Israeli Ministry of Industry, Trade &
Labor (the Investment Center) of the change
in ownership of the Company to be effected by the Merger,
(iv) obtaining the Israeli Withholding Tax Ruling, the
Israeli Options Tax Ruling and the Israeli Escrow Tax Ruling, if
applicable, and (v) obtaining the Israeli Securities
Exemption.
(c) Subject to the provisions of Section 320 of the
Companies Law, the affirmative vote (in person or by proxy) of
(i) the holders of 75% of the Company Shares present and
voting at the general meeting of the shareholders of the Company
(voting together as a single class on an as-converted basis),
(ii) the holders of 75% of the Company Ordinary Shares at a
class meeting of such shareholders, (iii) the holders of
75% of the Preferred
A-1 Shares
of the Company at a class meeting of such shareholders, and
(iv) the holders of 75% of the Preferred
A-2 Shares
of the Company at a class meeting of such shareholders, or (in
each case) any adjournment or postponement thereof, in favor of
the approval of this Agreement, the Merger and the other
Transactions (collectively, the Company Shareholder
Approval) are the only votes or approvals of the
holders of any class or series of shares of the Company or any
of its Subsidiaries that may be necessary to approve this
Agreement, the Merger and the other Transactions. If Parent,
Merger Sub or any Person holding twenty-five percent (25%) or
more of either the voting rights or the right to appoint
directors of Parent (any such Person is described in this
paragraph as a Parent Affiliate) holds
Company Shares, then the Company Shareholder Approval shall also
include the additional requirement that a majority of the voting
power present and voting at the Company Shareholders
Meeting in person or by proxy (excluding abstentions, Parent,
Parent Affiliates, or anyone acting on their behalf, including
their family members or entities under their control) shall not
have voted against the Merger.
(d) Other than as set forth in the Companies Law, neither
the Company or any Subsidiary thereof is subject to any business
combination, control share acquisition, fair price or similar
statute that applies to the Merger or any other Transaction.
Section 4.4 Capitalization.
(a) As of the date hereof, the authorized Share Capital of
the Company consists of NIS 2,664,906, divided into 184,781,744
Ordinary Shares, 74,962,170 Preferred
A-1 Shares
and 6,746,596 Preferred
A-2 Shares.
(b) As of the date hereof, (i) 85,308,120 Company
Ordinary Shares are issued and outstanding, (ii) 74,962,166
Preferred
A-1 Shares
are issued or outstanding, (iii) 6,746,596 Preferred
A-2 Shares
are issued and outstanding, (iv) 586,258 Company Ordinary
Shares are held in the treasury of Company (included in the
outstanding), (v) 25,209,334 Company Ordinary Shares are
reserved for issuance upon exercise of Company Share Options
issued and outstanding, (vi) 74,962,166 Company Ordinary
Shares reserved for issuance upon conversion of the Preferred
A-1 Shares,
(vii) 6,746,596 Company Ordinary Shares reserved for
issuance upon conversion of the Preferred
A-2 Shares,
and (viii) 4,230,416 Company Ordinary Shares are authorized
and reserved for future issuance pursuant to the Company Option
Plans (other than Company Ordinary Shares authorized and
reserved for future issuance upon exercise of Company Share
Options issued and outstanding). Each issued and outstanding
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Company Share is, and each Company Share reserved for issuance
as specified above is, or will be, upon issuance on the terms
and conditions specified in the instruments pursuant to which it
is issuable, duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights or similar rights,
and has been, or will be, issued in compliance in all respects
with applicable Law and the Company Charter Documents.
(c) The authorized Share Capital of the Company immediately
prior to the Closing shall consist of NIS 3,950,089.28 divided
into 395,008,924 Ordinary Shares and 4 Preferred
A-1 Shares.
(d) As of immediately prior to the Closing (and following
consummation of the transactions contemplated by the Pre-Closing
Shareholders Agreement), and assuming no exercise of any
outstanding Company Share Options following the date hereof,
(i) 365,569,174 Company Ordinary Shares shall be issued and
outstanding, (ii) 25,209,334 Company Ordinary Shares shall
be reserved for issuance upon exercise of Company Share Options
issued and outstanding, and (iii) 4,230,416 Company
Ordinary Shares shall be authorized and reserved for future
issuance pursuant to the Company Option Plans (other than
Company Ordinary Shares authorized and reserved for future
issuance upon exercise of Company Share Options issued and
outstanding). Each issued and outstanding Company Share will be,
and each Company Share reserved for issuance as specified above
will be, upon issuance on the terms and conditions specified in
the instruments pursuant to which it is issuable, duly
authorized, validly issued, fully paid, nonassessable and free
of preemptive rights or similar rights, and will be issued in
compliance in all respects with applicable Law and the Company
Charter Documents.
(e) Except as set forth on Schedule 4.4(e) of
the Company Disclosure Schedule, since January 1, 2008,
(i) no Company Shares have been issued, except in
connection with the exercise of Company Share Options issued and
outstanding on such date and (ii) no options, warrants,
securities convertible into, or commitments with respect to the
issuance of, Company Ordinary Shares have been issued, granted
or made.
(f) Schedule 4.4(f) of the Company Disclosure
Schedule accurately sets forth, as of the date hereof:
(i) the name of each Person that is the record owner of any
Company Shares or any other securities or instrument relating to
the Share Capital of the Company; (ii) each such
Persons country and, if applicable, state of residence
opposite that Persons name, as set forth in the
Companys register of members or otherwise in the
Companys records; and (iii) the number of such
Company Shares or other securities or instruments so owned by
such Person and the number of Company Ordinary Shares that would
be owned by such Person assuming conversion of all the Company
Preferred Shares or any other security or instrument of the
Company (including any option, restricted stock or warrant
granted to such Person) convertible or exchangeable into or
exercisable for Company Ordinary Shares so owned by such Person
giving effect to all anti-dilution and similar adjustments, and
to the transactions contemplated by the Pre-Closing Shareholders
Agreement.
(g) Except for Company Share Options, Preferred
A-1 Shares
and Preferred
A-2 Shares
issued and outstanding on the date hereof and listed on
Schedules 4.4(f) or 4.4(h) of the Company
Disclosure Schedule, as applicable, there are no outstanding
subscriptions, options, calls, restrictions, arrangements,
rights, warrants or other Contracts, including any right of
conversion or exchange under any outstanding security,
instrument or other Contract and also including any rights plan
or other similar agreement, obligating the Company to issue,
deliver or sell, or cause to be issued, delivered or sold,
additional Company Shares or obligating the Company to grant,
extend or enter into any such Contract. There are no
obligations, contingent or otherwise, of the Company to
(i) repurchase, redeem or otherwise acquire any Company
Shares or (ii) provide material funds to, or make any
material investment in (in the form of a loan, capital
contribution or otherwise), or provide any guarantee with
respect to the obligations of, any Person. There are no
outstanding stock appreciation rights or similar derivative
securities or rights of the Company. There are no bonds,
debentures, notes or other indebtedness of the Company having
the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which
Shareholders may vote. Except as set forth on
Schedule 4.4(g) of the Company Disclosure Schedule,
there are no voting trusts, irrevocable proxies or other
Contracts to which the Company is a party or is bound with
respect to the voting of any shares of Company Share Capital.
(h) Schedule 4.4(h)(1) of the Company
Disclosure Schedule lists each outstanding Company Share Option,
the Company Plan under which such Company Share Option was
granted, the holder thereof, the number of Company Shares
issuable thereunder and the exercise price thereof and each such
holders country and, if applicable, state of residence
opposite such holders name, as set forth in the
Companys records. Except as set forth
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on Schedule 4.4(h)(2) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has
agreed to register any securities under the Securities Act, any
state securities Law or any other applicable securities Law or
granted registration rights to any Person.
(i) As of the date hereof the Company has, and as of the
Closing Date the Company will have, less than
35 Shareholders (whether individuals, corporations or other
Persons) who are residents in Israel and which are entitled to
receive shares of Parent Common Stock in accordance with the
provisions of Article II (assuming no additional
exercise of options occur). Without limiting the foregoing, from
the date hereof until and including the Closing Date, the
Company will promptly notify Parent of each exercise of any
Company Share Option.
Section 4.5 Equity
Interests.
(a) Except for the Subsidiaries listed on
Schedule 4.1(a) of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries directly or
indirectly owns any equity, partnership, membership or similar
interest in, or any interest convertible into, exercisable for
the purchase of or exchangeable for any such equity,
partnership, membership or similar interest or any Person, or is
under any current or prospective obligation to form or
participate in, provide funds to, make any loan, capital
contribution or other investment in, or assume any liability or
obligation of, any Person.
(b) Each of the issued and outstanding shares of Capital
Stock of each of the Subsidiaries of the Company listed on
Schedule 4.1(a) of the Company Disclosure Schedule
(the Subsidiary Shares) has been duly
authorized and validly issued and are fully paid and
nonassessable, have not been issued in violation of any
preemptive or similar rights and were issued in compliance in
all respects with the applicable Laws and the provisions of
their respective memorandum of association, articles of
association, certificate of incorporation, bylaws or equivalent
organizational documents, and the Company owns, directly or
indirectly, one hundred percent of all outstanding Subsidiary
Shares. There are no (i) securities convertible into or
exchangeable for shares of Capital Stock or other securities of
any Subsidiary of the Company, or (ii) subscriptions,
options, warrants, puts, calls, phantom stock rights, stock
appreciation rights, stock-based performance units, agreements,
understandings, claims or other Contracts or rights of any type
granted or entered into by the Company or any of its
Subsidiaries relating to the issuance, sale, repurchase or
transfer of any securities of any Subsidiary of the Company or
that give any Person the right to receive any economic benefit
or right similar to or derived from the economic benefits and
rights of securities of any Subsidiary of the Company.
Section 4.6 Financial
Statements; No Undisclosed Liabilities.
(a) True and complete copies of (i) the audited
consolidated balance sheet of the Company and its Subsidiaries
as of December 31, 2005, December 31, 2006 and
December 31, 2007, and the related audited consolidated
statements of income, retained earnings, shareholders
equity and changes in financial position of the Company and its
Subsidiaries for the periods covered therein, together with all
related notes and schedules thereto, accompanied by the reports
thereon of the Companys independent auditors
(collectively, the Company Annual Financial
Statements), (ii) the unaudited consolidated
balance sheet of the Company and its Subsidiaries as of
June 30, 2008, and the related consolidated statements of
income, retained earnings, shareholders equity and changes
in financial position of the Company and its Subsidiaries for
the six months and quarter then ended, together with all related
notes and schedules thereto, (iii) the unaudited
consolidated balance sheet of the Company and its Subsidiaries
as of July 31, 2008, August 31, 2008 and
September 30, 2008, and the related consolidated statements
of income, retained earnings, shareholders equity and
changes in financial position of the Company and its
Subsidiaries for the month then ended, and (iv) any
subsequent financials delivered pursuant to
Section 5.20
(collectively, the financial statements delivered pursuant to
clauses (ii) through (iv), the Company
Interim Financial Statements, and with the Company
Annual Financial Statements, the Company Financial
Statements), are attached hereto as
Schedule 4.6(a) of the Company Disclosure Schedule,
or with respect to any financial statements to be delivered
pursuant to
Section 5.20,
will be delivered to Parent pursuant thereto. Each of the
Company Financial Statements are, or in the case of the Company
Interim Financial Statements to be delivered pursuant to
Section 5.20,
when so delivered will be (i) correct and complete in all
material respects and have been prepared in accordance with the
books and records of the Company and its Subsidiaries;
(ii) have been prepared in accordance with GAAP applied on
a consistent basis throughout the periods indicated (except as
may be indicated in the notes thereto); and (iii) fairly
present, in all material respects, the consolidated financial
position, results of operations and cash flows
A-31
of the Company and its Subsidiaries as at the respective dates
thereof and for the respective periods indicated therein, except
as otherwise noted therein and subject, in the case of the
Company Interim Financial Statements, to normal and recurring
year-end adjustments that will not, individually or in the
aggregate, be material. The Company Financial Statements do not
contain any material items of a special or nonrecurring nature,
except as expressly stated therein. Except for the Subsidiaries
of the Company listed on Schedule 4.1(a) of the
Company Disclosure Schedule, no financial statements of any
other Person are required by GAAP to be consolidated in the
financial statements of the Company.
(b) Except for those liabilities that are reflected or
reserved against on the audited consolidated balance sheet of
the Company and its Subsidiaries as of December 31, 2007
(such balance sheet, together with all related notes and
schedules thereto, the Balance Sheet), and
for liabilities incurred in the ordinary course of business
consistent with past practice after such date, neither the
Company nor any of its Subsidiaries has incurred any liability
(including, without limitation, any liability derived or assumed
from any predecessor to the Companys business or assets),
whether or not required by GAAP to be reflected in a
consolidated balance sheet of the Company and its Subsidiaries
or disclosed in the notes thereto, except those liabilities and
obligations that are not, individually or in the aggregate,
material to the Company or any of its Subsidiaries and that do
not exceed $100,000 in the aggregate.
(c) The books of account and financial records of the
Company and its Subsidiaries are true and correct and have been
prepared and are maintained in accordance with sound accounting
practice.
(d) The Companys internal controls and procedures are
sufficient to ensure that the Companys financial
statements are accurate in all material respects. Without
limiting the foregoing, the Company and each of its Subsidiaries
maintains a system of internal accounting controls sufficient to
provide reasonable assurances that: (i) transactions are
executed in accordance with managements general or
specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements that are
in conformity with GAAP and to maintain accountability for
assets; (iii) access to assets is permitted only in
accordance with managements general or specific
authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to the
differences. The Company has not been advised by any independent
certified public accountant of the Company that there is a
significant deficiency or material weakness in the design or
operation of the internal controls of the Company or any of its
Subsidiaries. Notwithstanding the foregoing, Parent acknowledges
that the Companys independent certified public accountants
are not required to review the design or operation of the
internal controls of the Company or any of its Subsidiaries.
Section 4.7 Absence
of Certain Changes or Events. Since the date
of the Balance Sheet: (a) the businesses of the Company and
its Subsidiaries have been conducted, in all material respects,
only in the ordinary course of business consistent with past
practice; (b) there has not been any change, event or
development or prospective change, event or development that,
individually or in the aggregate, has had or would be reasonably
likely to have a Material Adverse Change on the Company;
(c) neither the Company nor any of its Subsidiaries has
suffered any material loss, damage, destruction or other
casualty affecting any of its material properties or assets,
whether or not covered by insurance; and (d) none of the
Company or any of its Subsidiaries has taken any action that, if
taken after the date of this Agreement, would constitute a
breach of any of the covenants set forth in
Section 5.1.
Section 4.8 Compliance
with Applicable Law; Permits.
(a) Each of the Company and its Subsidiaries is and has
been in compliance in all material respects with all Laws
applicable to it. None of the Company or any of its Subsidiaries
has received during the past seven years, nor is there any basis
for, any notice, order, complaint or other communication from
any Governmental Authority or any other Person that the Company
or any of its Subsidiaries is not and has not been in compliance
in any material respect with any Law applicable to it.
(b) Each of the Company and its Subsidiaries is in
possession of all licenses, franchises, permits, certificates,
approvals, variances, registrations, accreditations, permissions
and billing and other authorizations that are required for the
Company and its Subsidiaries to own, lease and operate its
properties and to carry on its business in all material respects
as currently conducted (the Company Permits).
Each of the Company and its Subsidiaries is and has been in
compliance in all respects with all such Company Permits, except
where the failure to so comply has not and would not reasonably
be expected to have a material detriment on the Company and its
Subsidiaries, taken as a
A-32
whole, in excess of $250,000. No suspension, cancellation,
modification, revocation or nonrenewal of any Company Permit is
pending or, to the Knowledge of the Company, threatened. The
Company and its Subsidiaries will continue to have the use and
benefit of all Company Permits following consummation of the
Transactions. No Company Permit is held in the name of any
employee, officer, director, shareholder, agent or otherwise on
behalf of the Company or any of its Subsidiaries.
Section 4.9 Litigation. Except
as set forth on Schedule 4.9 of the Company
Disclosure Schedule, there is no material Action pending or, to
the Knowledge of the Company, threatened against the Company or
any of its Subsidiaries, or any material property or asset of
the Company or any of its Subsidiaries, nor to its Knowledge is
there any event, circumstance or fact existing or that has
occurred that would reasonably be expected to result in any such
material Action. There is no Action pending or, to the Knowledge
of the Company, threatened, seeking to prevent, hinder, modify,
delay or challenge the Transactions. There is no outstanding or
pending Order or, pending or, to the Knowledge of the Company,
threatened, investigation by, any Governmental Authority
relating to the Company, any of its Subsidiaries, any of their
respective properties or assets or the Transactions. There is no
Action by the Company or any of its Subsidiaries pending, or
which the Company or any of its Subsidiaries has commenced
preparations to initiate, against any other Person.
Section 4.10 Benefit
Plans.
(a) Schedule 4.10(a) of the Company Disclosure
Schedule sets forth a true and complete list of all material
Company Plans. Company Plans means:
(i) all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended (ERISA)) and all bonus,
share or share-related promises, plans and awards (including,
share option, share purchase, or restricted stock), incentive,
commission, variable compensation, deferred compensation,
retiree medical or life insurance, welfare benefits, vacation,
leave of absence, enhanced maternity, educational assistance,
disability, permanent health insurance, fringe benefits or other
employee benefits or remuneration of any kind, funded or
unfunded, supplemental retirement, severance or other benefit
plans, programs or arrangements, and all employment,
termination, severance or other Contracts to which the Company
or any of its Subsidiaries is a party or by which their assets
are bound, with respect to which the Company or any of its
Subsidiaries has or would reasonably be expected to have any
liability or obligation or which are provided, maintained,
contributed to or sponsored by the Company or any of its
Subsidiaries (or which the Company or any of its Subsidiaries is
contractually required to provide) for the benefit of any
current or former employee, consultant, officer or director of
the Company or any of its Subsidiaries in Israel, the United
States or elsewhere; and
(ii) any Contracts between the Company or any of its
Subsidiaries and any current or prospective employee,
consultant, officer or director of the Company or any of its
Subsidiaries in Israel, the United States or elsewhere,
including any Contracts relating in any way to a sale of the
Company or any of its Subsidiaries.
(b) Except as set forth on Schedule 4.10(b) of
the Company Disclosure Schedule, each Company Plan is in
writing. The Company has made available to Parent a true and
complete copy of each material Company Plan, including all
amendments thereto; provided, however, that in the case of
Company Plans that are Contracts between the Company or any of
its Subsidiaries and any current or prospective employee,
consultant, officer or director of the Company, the Company has
made available to Parent the standard form contract, and has
made available to Parent a true and complete copy of each
material document, if any, prepared in connection with each
material Company Plan, including, if applicable, (i) a copy
of each trust or other funding arrangement, (ii) the two
most recently filed Internal Revenue Service
(IRS) Form 5500, (iii) the most
recently received IRS determination letter (or opinion letter)
for each such Company Plan, (iv) the most recently prepared
actuarial report and financial statement in connection with each
such Company Plan, (v) the form of each representative
share option agreement evidencing any outstanding Company Share
Options, (vi) all correspondence since January 1, 2005
to or from any Governmental Authority relating to any Company
Plan that alleges a violation of any Laws in any material
respect or relates to a material amendment to any such Company
Plan, and (vii) any approvals held by the Company or its
Subsidiaries that enable them to employ foreign employees or
employees from territories currently administered by
Israel. Neither the Company nor any of its Subsidiaries has any
express or implied commitment (A) to create, incur
liability with respect to or cause to exist any other employee
benefit plan, program or arrangement, (B) to enter
A-33
into any Contract to provide compensation or benefits to any
individual, or (C) to modify, change or terminate any
Company Plan, other than with respect to a modification, change
or termination required by the Israeli Tax Ordinance, ERISA, the
Code, or other applicable law to the extent applicable in each
such case. Except for Contracts set forth on
Schedule 4.18(a)(viii) of the Company Disclosure
Schedule, there are no Company Plans that are Contracts between
the Company or any of its Subsidiaries and any current or
prospective employee, consultant, officer or director of the
Company that differ in any material respect from the standard
form contract made available to Parent.
(c) Neither the Company nor any ERISA Affiliate has
sponsored, maintained, contributed to, been required to
contribute to or incurred any liability (contingent or
otherwise) with respect to: (i) a multiemployer plan within
the meaning of Section 3(37) or 4001(a)(3) of ERISA (a
Multiemployer Plan), or (ii) a single
employer pension plan within the meaning of
Section 4001(a)(15) of ERISA for which the Company or any
of its Subsidiaries could incur liability under
Section 4063 or 4064 of ERISA (a Multiple Employer
Plan). No liability under Title IV of ERISA has
been incurred by the Company, any Subsidiary or any ERISA
Affiliate that has not been satisfied in full, and no condition
exists that presents a material risk to the Company, any
Subsidiary or any ERISA Affiliate of incurring a liability under
Title IV of ERISA. No Company Plan is a pension plan
(within the meaning of Section 3(2) of ERISA) that is
subject to Title IV of ERISA. None of the Company Plans
provides for or promises on behalf of the Company retiree
medical, disability or life insurance benefits to any current or
former employee, officer or director of the Company or any of
its Subsidiaries, except for (i) coverage mandated by
applicable Law or (ii) death benefits or retirement
benefits under any employee pension benefit plan
(within the meaning of Section 3(2) of ERISA).
(d) Each Company Plan is now and always has been operated
in all material respects in accordance with its terms and the
requirements of all applicable Laws, including the Israeli Tax
Ordinance, ERISA and the Code. No Action is pending or, to the
Knowledge of the Company, threatened with respect to any Company
Plan, other than claims for benefits in the ordinary course,
that would reasonably be expected to result in any material
liability to the Company.
(e) Each Company Plan that is intended to be qualified
under Section 401(a) of the Code has received a favorable
determination letter (or opinion letter) from the IRS covering
all of the provisions applicable to the Company Plan for which
determination letters are currently available that the Company
Plan is so qualified. No fact or event has occurred since the
date of such determination letter or letters from the IRS that
would reasonably be expected to adversely affect the qualified
status of any such Company Plan.
(f) There has not been any prohibited transaction, within
the meaning of Section 406 of ERISA or Section 4975 of
the Code (for which an exemption is not available), with respect
to any Company Plan.
(g) All material contributions, premiums or payments
required to be made with respect to any Company Plan have been
timely made.
(h) With respect to Company Plans that are subject to or
governed by the Laws of any jurisdiction other than the United
States (the Non-US Plans), except as have not
and would not, individually or in the aggregate, reasonably be
expected to result in any materially liability to the Company or
any of its Subsidiaries, (i) all amounts required to be
reserved under each book reserved Non-US Plan have been so
reserved in accordance with GAAP and (ii) each Non-US Plan
required to be registered with a Governmental Authority as set
forth on Schedule 4.10(h) of the Company Disclosure
Schedule, has been so registered, has been maintained in good
standing with the appropriate Governmental Authorities, has been
maintained and operated in all respects in accordance with its
terms and is in compliance with all applicable Law.
(i) Except as set forth on Schedule 4.10(i) of
the Company Disclosure Schedule, no Company Plan exists that, as
a result of the execution of this Agreement or the consummation
of the transactions contemplated by this Agreement (whether
alone or in connection with any concurrent or subsequent
event(s)), would reasonably be expected to (i) entitle any
current or former employee, officer or director or consultant of
the Company or any of its Subsidiaries to severance pay or any
increase in severance pay upon any termination of employment or
engagement after the execution of this Agreement or otherwise
alter the termination provisions of any employment contract,
(ii) accelerate or alter the time of payment, vesting or
exercise or result in any grant, payment or funding (through a
grantor trust or otherwise) of compensation or benefits or
awards under, increase the amount payable or result in any
A-34
other material obligation pursuant to, any of the Company Plans,
(iii) limit or restrict the right of Parent or the
Surviving Company to merge, amend or terminate any of the
Company Plans or (iv) result in payments or benefits under
any of the Company Plans or otherwise that would not be
deductible under Section 280G of the Code.
(j) To the Knowledge of the Company, each Company Plan that
is a nonqualified deferred compensation plan (as defined under
Section 409A of the Code) has, since January 1, 2005,
been operated in good faith compliance with
Sections 409A(a)(2), (3), and (4) of the Code.
(k) The Company and its ERISA Affiliates do not maintain
any Company Plan which is a group health plan, as
such term is defined in Section 5000(b)(1) of the Code,
that has not been administered and operated in all material
respects in compliance with the applicable requirements of
Section 601 of ERISA, Section 4980B(b) of the Code and
the applicable provisions of the Health Insurance Portability
and Accountability Act of 1986.
Section 4.11 U.S. and
European Labor and Employment Matters.
(a) Neither the Company nor any of its Subsidiaries is a
party to or otherwise bound by any labor or collective
bargaining Contract that pertains to employees of the Company or
any of its Subsidiaries. To the Knowledge of the Company, there
are no organizing activities or collective bargaining
arrangements that could materially affect the Company or any of
its Subsidiaries pending or under discussion with any labor
organization or group of employees of the Company or any of its
Subsidiaries. There is, and during the past three (3) years
there has been, no labor dispute, strike, controversy, slowdown,
work stoppage or lockout pending or, to the Knowledge of the
Company, threatened against or affecting the Company or any of
its Subsidiaries. There are no pending or, to the Knowledge of
the Company, threatened union grievances or union representation
questions involving employees of the Company or any of its
Subsidiaries.
(b) To the Knowledge of the Company, neither the Company
nor any of its Subsidiaries has engaged or is engaging in any
unfair labor practice that has not had or would reasonably be
expected to result in any material liability to the Company or
any of its Subsidiaries. Except as set forth on
Schedule 4.11(b) of the Company Disclosure Schedule,
no unfair labor practice or labor charge or complaint, health
and safety claim, or wage and hour claim is pending or, to the
Knowledge of the Company, threatened with respect to the Company
or any of its Subsidiaries before the National Labor Relations
Board, the Equal Employment Opportunity Commission, the
Occupational Safety and Health Administration, the
U.S. Department of Labor or any other Governmental
Authority.
(c) Neither the Company nor any of its Subsidiaries is a
party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority relating to employees or
employment practices. To the Knowledge of the Company, no
current officer of the Company or any of its Subsidiaries
intends, or is expected, to terminate his employment
relationship with such entity following the consummation of the
transactions contemplated hereby.
(d) Except as set forth on Schedule 4.11(d)(1)
of the Company Disclosure Schedule, each non-Israeli employee of
the Company or any of its Subsidiaries is hired at
will, meaning that the Company or its Subsidiary or such
employee can terminate such employment, with or without cause,
at any time, without liability, except for any statutory
severance obligations under applicable Law.
Schedule 4.11(d)(1) of the Company Disclosure
Schedule sets forth the notice period (if any) applicable to any
such person. All Persons who have performed services for the
Company or its Subsidiaries in the United States or Europe have
been classified as independent contractors, and all Persons who
have performed services for the Company or its Subsidiaries in
the United States and have been classified as exempt employees
not entitled to overtime pay, have been at all times properly
classified as such in accordance with all applicable Laws,
except as has not and would not, individually or in the
aggregate, reasonably be expected to have a material detriment
on the Company and its Subsidiaries, taken as a whole, in excess
of $250,000. Except as set forth on
Schedule 4.11(d)(2) of the Company Disclosure
Schedule, there is no pending or, to the Knowledge of the
Company, threatened claim by a current or former non-Israeli
employee or non-Israeli independent contractor for compensation
or any other entitlement in connection with
his/her
employment or engagement
and/or the
termination of such employment or engagement.
(e) The pension plan operated by a third party pension
provider in respect of employees based in the United Kingdom
(the UK Pension Plan) is a personal pension
arrangement administered by a third party provider which
provides only money purchase benefits whereby the Companys
only liability is to administer employees
A-35
contributions and pay employer contributions at an agreed level
which has been disclosed to Parent. No assurance, promise or
guarantee has been made or given to any person of a particular
level or amount of benefit to be provided for or in respect of
him or her under the UK Pension Plan on death, retirement or
leaving service.
(f) Except as set forth on Schedule 4.11(f) of
the Company Disclosure Schedule, none of the Companys or
of its Subsidiaries employees who are based in European
Member States have become an employee by virtue of the operation
of the Acquired Rights Directive (or any similar or implementing
legislation in any European Member State).
Section 4.12 Israeli
Employee Matters and Benefit Plans.
(a) Solely with respect to employees and consultants of the
Company or any Subsidiary thereof who reside or work in Israel
or whose employment is otherwise subject to Israeli Law
(Israeli Employees and Israeli
Consultants, respectively):
(i) except as set forth on Schedule 4.12(a)(i)
of the Company Disclosure Schedule, neither the Company nor any
of its Subsidiaries is a member of any employers
organization and no claim or request has been made towards the
Company or any Subsidiary thereof by any employers
organization, and neither the Company nor any of its
Subsidiaries is a party or otherwise subject to any collective
bargaining Contract or arrangement, whether general or special,
with a labor union, trade union or other organization or body
involving any of its Israeli Employees, and no such collective
bargaining agreement is being negotiated by the Company or any
of its Subsidiaries;
(ii) no labor union or other representative organization
has been certified or recognized as the collective bargaining
representative of any Israeli Employee and there are no union
organizing campaigns or representation proceedings or campaigns
in process or threatened with respect to any Israeli Employee;
(iii) to Knowledge of the Company, there are no existing or
threatened labor strikes, work stoppages, organized slowdowns,
unfair labor practice charges or complaints or labor arbitration
proceedings affecting any Israeli Employee;
(iv) neither the Company nor any of its Subsidiaries has
experienced any such labor controversy within the past five
years;
(v) neither the Company nor any of its Subsidiaries has
recognized or received a demand for recognition from any
collective bargaining representative with respect to any of its
Israeli Employees;
(vi) neither the Company nor any of its Subsidiaries is
subject to, and no Israeli Employee of the Company or any of its
Subsidiaries benefits from, any extension order (tzavei
harchava) except for extension orders applicable to all
employees in Israel
and/or
companies of the same industry as the Company or any of its
Subsidiaries;
(vii) Except as set forth on
Schedule 4.12(a)(vii) of the Company Disclosure
Schedule, all of the Israeli Employees and Israeli Consultants
are at will employees or consultants subject to the
termination notice provisions included in their respective
agreements, if any, or applicable Law, and all Contracts between
the Company or any Subsidiary thereof and any of their
respective Israeli Employees, directors or Israeli Consultants
can be terminated with a written notice provided by the Company
or its Subsidiaries (as the case may be), of no more than sixty
(60) days, without giving rise to a claim for damages or
compensation (except for statutory payments);
(viii) all amounts that the Company or any Subsidiary
thereof is legally or contractually required to pay to Israeli
Employees and Israeli Consultants
and/or to
Governmental Authorities are fully accrued on the Company
Financial Statements (including any Company Financial Statements
to be delivered pursuant to
Section 5.20)
as of the date of such Company Financial Statements, and the
Company and its Subsidiaries are in compliance with the
requirements of Section 14 of the Severance Pay Law
5723-1963
(Severance Pay Law);
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(ix) there is no pending or, to the Knowledge of the
Company, threatened claim by a current or former Israeli
Employee or Israeli Consultant for compensation or any other
entitlement in connection with
his/her
employment or engagement
and/or the
termination of such employment or engagement;
(x) all amounts that the Company and its Subsidiaries are
legally or contractually required to either (A) deduct from
their respective Israeli Employees or Israeli
Consultants salaries or compensation or to transfer to
such Israeli Employees pension or provident, life
insurance, incapacity insurance, continuing education fund or
other similar funds, or (B) withhold from their respective
Israeli Employees or Israeli Consultants salaries
and benefits and to pay to any Governmental Authority as
required by the Israeli Tax Ordinance
and/or
Israeli National Insurance Law or otherwise, in either case,
have been duly deducted, transferred, withheld and paid, and
neither the Company nor any of its Subsidiaries has any
outstanding obligation to make any such deduction, transfer,
withholding or payment (other than routine payments, deductions
or withholdings to be timely made in the ordinary course of
business and consistent with past practice);
(xi) the Company and each of its Subsidiaries is in
compliance in all material respects with all applicable Laws,
Contracts and customs relating to employment, employment
practices, engagements with Israeli Consultants, wages and other
consideration, bonuses and other compensation matters and terms
and conditions of employment related to its Israeli Employees,
including (but not limited to) the Israeli Prior Notice Law
2001, the Israeli Notice to Employee (Terms of Employment) Law
2002, the Israeli Prevention of Sexual Harassment Law 1998, and
the Israeli Employment by Human Resource Contractors Law 1996;
(xii) neither the Company nor any Subsidiary thereof has
engaged any Israeli Employees
and/or
Israeli Consultants whose engagement would require special
licenses or permits, and, except as set forth on
Schedule 4.12(a)(xii) of the Company Disclosure
Schedule, there are no unwritten policies or customs of the
Company or any of its Subsidiaries which, by extension, could
entitle Israeli Employees and Israeli Consultants to benefits in
addition to what they are entitled by Law or Contract. Israeli
Consultants providing services to the Company or any of its
Subsidiaries are subject to agreements that state that there is
no employer-employee relationship between the Company or any of
its Subsidiaries, on the one hand, and an Israeli Consultant, on
the other hand; and
(xiii) except as set forth on
Schedule 4.12(a)(xiii) of the Company Disclosure
Schedule, neither the execution, delivery or performance of this
Agreement, nor the consummation of the Merger or any of the
other Transactions, will result in any payment (including any
bonus, golden parachute or severance payment) to any current or
former Israeli Employees
and/or
Israeli Consultants (whether or not under any benefit plan),
increase any Benefits payable to any such Israeli Employee or
Israeli Consultant, including, without limitation, salaries and
other compensation, directors fees, social benefits,
bonuses, commissions, profit shares, automobile, reimbursement
of expenses and benefits in kind, or result in any acceleration
of the time of payment or vesting of any such benefit.
(b) Schedule 4.12(b) of the Company Disclosure
Schedule identifies each Israeli Employee
and/or
Israeli Consultant who is not fully available to perform
work/services because of disability or other leave and sets
forth the basis of such leave and the anticipated date of return
to full service. The Company provided Parent with either a copy
of the agreements between the Company or any of its Subsidiaries
and each Israeli Employee
and/or
Israeli Consultant, or a full and accurate description of the
terms of employment or engagement of each such Israeli Employee
or Israeli Consultant, and all benefits, including, without
limitation, salaries and other compensation, directors
fees, social benefits, bonuses, commissions, profit shares,
automobile, reimbursement of expenses and benefits in kind
(Benefits) payable or which the Company or
any of its Subsidiaries is bound to provide (whether now or in
the future) to each such Israeli Employee or Israeli Consultant.
Neither the Company nor any of its Subsidiaries has adopted any
policy or custom with respect to any Benefit that would
materially change the terms of such Benefit.
Section 4.13 Title,
Sufficiency and Condition of Assets.
(a) The Company and its Subsidiaries have good and valid
title to or a valid leasehold interest in all of their assets,
including all of the assets reflected on the Balance Sheet or
acquired in the ordinary course of business since
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the date of the Balance Sheet, except those sold or otherwise
disposed of for fair value since the date of the Balance Sheet
in the ordinary course of business consistent with past
practice. The assets owned or leased by the Company or any of
its Subsidiaries constitute all of the assets necessary for the
Company and its Subsidiaries to carry on their respective
businesses as currently conducted. None of the assets owned or
leased by the Company or any of its Subsidiaries is subject to
any Encumbrance, other than (i) liens for Taxes and
assessments not yet due and payable, (ii) liens for Taxes
that the Company or any of its Subsidiaries is contesting in
good faith through appropriate proceedings,
(iii) mechanics, workmens, repairmens,
warehousemens and carriers liens arising in the
ordinary course of business of the Company or such Subsidiary
consistent with past practice and not incurred in connection
with the borrowing of money, and (iv) any such matters of
record and other Encumbrances that do not, individually or in
the aggregate, materially impair the ownership, or use and
operation of the assets to which they relate in the business of
the Company and its Subsidiaries as currently conducted, or the
transfer of such assets (collectively, Company
Permitted Encumbrances). Without limiting the
foregoing, no liens on any of the assets of the Company or any
Subsidiary thereof are registered in any registry in Israel.
(b) All tangible assets owned or leased by the Company or
its Subsidiaries have been maintained in all material respects
in accordance with generally accepted industry practice, are in
all material respects in good operating condition and repair,
ordinary wear and tear excepted, and are adequate for the uses
to which they are being put.
Section 4.14 Real
Property.
(a) Neither the Company or any of its Subsidiaries owns any
Owned Real Property.
(b) Schedule 4.14(b) of the Company Disclosure
Schedule lists the street address of each parcel of Leased Real
Property and the identity of the lessor, lessee and current
occupant (if different from lessee) of each such parcel of
Leased Real Property. The Company or its Subsidiaries have a
valid leasehold estate in all Leased Real Property, free and
clear of all Encumbrances, other than Company Permitted
Encumbrances. All leases in respect of the Leased Real Property
are in full force and effect, neither the Company nor any of its
Subsidiaries has received any written notice of a breach of
default thereunder, and to the Knowledge of the Company, no
event has occurred or circumstance or condition exists (with or
without the lapse of time or the giving of notice, or both) that
would constitute a breach or default thereunder.
(c) There are no material latent defects or material
adverse physical conditions affecting the Leased Real Property.
All plants, warehouses, distribution centers, structures and
other buildings on the Leased Real Property are adequately
maintained and are in good operating condition and repair for
the requirements of the business of the Company and its
Subsidiaries as currently conducted.
Section 4.15 Intellectual
Property.
(a) Schedule 4.15(a) of the Company Disclosure
Schedule sets forth a true and complete list of all material
Intellectual Property including registered and material
unregistered Marks, Patents and registered Copyrights, including
any pending applications to register any of the foregoing, owned
(in whole or in part) by or exclusively licensed to the Company
or any of its Subsidiaries, identifying for each whether it is
owned by or exclusively licensed to the Company or the relevant
Subsidiary. Schedule 4.15(a) of the Company
Disclosure Schedule lists the record owner of each such item of
Intellectual Property, and the jurisdiction in which each such
item of Intellectual Property has been issued or registered or
in which each such application for the issuance or registration
of such item of Intellectual Property has been filed. The
Company Intellectual Property includes all Intellectual Property
necessary and sufficient to enable the Company and each of its
Subsidiaries to conduct its business as it is currently and
proposed to be conducted. To the Knowledge of the Company, the
Company Intellectual Property Rights are valid and enforceable.
(b) No registered Mark identified on
Schedule 4.15(a) of the Company Disclosure Schedule
has been or is now involved in any opposition or cancellation
proceeding and, to the Knowledge of the Company, no such
proceeding is or has been threatened with respect to any of such
Marks. No Patent identified on Schedule 4.15(a) of
the Company Disclosure Schedule has been or is now involved in
any interference, reissue or reexamination proceeding and, to
the Knowledge of the Company, no such proceeding is or has been
threatened with respect to any of such Patents.
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(c) The Company or its Subsidiaries are the sole and
exclusive owner of all right, title and interest in and to, free
and clear of any and all liens, licenses (royalty bearing or
royalty-free), obligations or other Encumbrances to others
requiring payment to any Person or any obligation to grant any
right to any Person, of all Intellectual Property identified on
Schedule 4.15(a) of the Company Disclosure Schedule
and all other Intellectual Property used in the Companys
and its Subsidiaries businesses other than Intellectual
Property that is licensed to the Company or a Subsidiary by a
third party licensor pursuant to a written license agreement
that remains in effect. The Company and its Subsidiaries have
valid licenses to all material software and technology and all
other material Intellectual Property that is licensed to the
Company or a Subsidiary by a third party licensor and used by
the Company or its Subsidiaries in the ordinary course of
business, free and clear of all Encumbrances, except to the
extent such a failure is the result of a defect in the license
of the third party owner. Except as set forth on
Schedule 4.15(c) of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries has received any
notice or claim challenging the ownership by the Company or any
of its Subsidiaries of any of the Intellectual Property owned
(in whole or in part) by the Company or any of its Subsidiaries,
nor to the Knowledge of the Company is there a reasonable basis
for any claim that the Company or such Subsidiary does not so
own any of such Intellectual Property.
(d) Each of the Company and its Subsidiaries has taken all
reasonable steps in accordance with standard industry practices
to protect its rights in its Intellectual Property and at all
times has taken adequate security measures to protect the
secrecy, confidentiality and value of all information that
constitutes or constituted a Trade Secret of the Company or any
of its Subsidiaries and any other confidential information. To
the Knowledge of the Company, during the most recent two
(2) years, there have been no material unauthorized
disclosures of the trade secrets and non-public proprietary
information of the Company or any of its Subsidiaries to a third
party. Since December 2006, all employees and consultants
involved in research or development for the Company or any of
its Subsidiaries or who otherwise have developed or conceived of
any Intellectual Property for or on behalf of the Company or any
of its Subsidiaries have (i) executed and delivered
proprietary information, trade secret and confidentiality and
assignment agreements substantially in the Companys
standard forms and (ii) executed and delivered enforceable
Contracts that assign to the Company all such employees or
consultants rights, title and interests in any
Intellectual Property conceived, developed, authorized or
reduced to practice by such employee or consultant relating to
the business. To the Knowledge of the Company, no current
employee or consultant of the Company or any of its Subsidiaries
is in default or breach of any material term of any such
Contract with the Company or any of its Subsidiaries.
(e) All registered Marks, issued Patents and registered
Copyrights identified on Schedule 4.15(a) of the
Company Disclosure Schedule (Company Registered
IP) are valid and subsisting and, to the Knowledge of
the Company, enforceable, and neither the Company nor any of its
Subsidiaries has received any notice or claim or
cease-and-desist
letters or invitations to license patent letters or written
threats from any third party challenging the validity or
enforceability of any Company Registered IP or alleging any
misuse of Company Registered IP. Neither the Company nor any of
its Subsidiaries has taken any action or failed to take any
action that could reasonably be expected to result in the
abandonment, cancellation, forfeiture, relinquishment,
invalidation or unenforceability of any of the Company
Registered IP (including the failure to pay any filing,
examination, issuance, post registration and maintenance fees,
annuities and the like and the failure to disclose any known
material prior art in connection with the prosecution of patent
applications). All necessary registration, maintenance, renewal
and other relevant filing fees in connection with the Company
Registered IP have been paid and all necessary documents,
certificates and other relevant filings in connection with the
Company Registered IP have been timely filed with the relevant
patent, trademark, copyright or other relevant authorities in
the United States, Israel or other jurisdictions, for the
purpose of maintaining the Company Registered IP in the relevant
jurisdiction.
(f) To the Companys Knowledge, the development,
manufacture, sale, distribution or other commercial exploitation
of products, and the provision of any services, by or on behalf
of the Company or any of its Subsidiaries, and all of the other
activities or operations of the Company or any of its
Subsidiaries, have not interfered with, infringed upon,
misappropriated, violated, diluted or constituted the
unauthorized use of, any Intellectual Property of any third
party. Except as set forth on Schedule 4.15(f)(1) of
the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries has received any notice or claim or
cease-and-desist
letters or invitations to license patent letters or written
threats from any third party asserting or suggesting that any
such infringement, misappropriation, violation, dilution or
unauthorized use is or may be occurring or has or may
A-39
have occurred, nor to the Knowledge of the Company, is there a
reasonable basis therefor. Except as set forth on
Schedule 4.15(f)(2) of the Company Disclosure
Schedule, no Intellectual Property owned by or licensed to the
Company or any of its Subsidiaries is subject to any outstanding
Order or Contract restricting the use or licensing thereof by
the Company or its Subsidiaries. To the Knowledge of the
Company, no third party is misappropriating, infringing,
diluting or violating any Intellectual Property owned by or
exclusively licensed to the Company or any of its Subsidiaries
in a material manner.
(g) Except as set forth on Schedule 4.15(g) of
the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries has transferred ownership of, or granted any
exclusive license with respect to, any material Intellectual
Property. Upon the consummation of the Closing, the Surviving
Company shall succeed to all of the material Intellectual
Property rights necessary for the conduct of the Companys
and its Subsidiaries businesses as they are currently and
proposed to be conducted, and all of such rights shall be
exercisable by the Surviving Company to the same extent as by
the Company and its Subsidiaries prior to the Closing. No loss
or expiration of any of the material Intellectual Property used
by the Company or any of its Subsidiaries in the conduct of its
business is threatened, pending or reasonably foreseeable.
(h) To the Knowledge of the Company, the business of the
Company and its Subsidiaries does not constitute unfair
competition or trade practices and none of the Company or any of
its Subsidiaries has engaged and does not engage in any false or
misleading advertising or practices under the Laws of any
jurisdiction in which the Company or any of its Subsidiaries
operates or markets any of its products or services.
(i) The Company and each of its Subsidiaries maintains
policies and procedures regarding data security and privacy that
are in compliance with all applicable Laws. To the Knowledge of
the Company, there have been no security breaches relating to
violations or any security policy or any unauthorized access of
any data or information of the software or technology systems of
the Company or any of its Subsidiaries in the last two years.
Except as would not have a Material Adverse Effect on the
Company, the use and dissemination by the Company of any and all
data or information concerning individuals is in compliance with
all such privacy policies and applicable Laws, including HIPAA,
and the transactions contemplated to be consummated hereunder as
of the Closing will not violate any such privacy policies or
Laws.
Section 4.16 General
Tax Matters.
(a) Except as set forth on Schedule 4.16(a) of
the Company Disclosure Schedule, each of the Company and its
Subsidiaries has accurately prepared and properly and timely
filed (including any extensions) all material Returns required
to be filed by it under any applicable Law. Such Returns are
true, complete, accurate and correct in all material respects
and do not contain a disclosure statement under
Section 6662 of the Code or any predecessor provision or
comparable provision of state, local or foreign Law. Each of the
Company and its Subsidiaries is and has been in material
compliance with all applicable Laws pertaining to Taxes,
including all applicable Laws relating to record retention.
(b) Each of the Company and its Subsidiaries has timely
paid all Taxes (whether or not shown on any Return) it is
required to have paid except where contested in good faith by
appropriate proceedings. All Taxes of the Company and its
Subsidiaries accrued following the end of the most recent period
covered by the Company Interim Financial Statements delivered on
or prior to the date hereof have been accrued in the ordinary
course of business and do not exceed comparable amounts incurred
in similar periods in prior years (taking into account any
changes in the Companys or the applicable
Subsidiarys operating results).
(c) No claim has been made by any taxing authority in any
jurisdiction where the Company or any of its Subsidiaries does
not file Returns that it is or may be subject to Tax by that
jurisdiction. No extensions or waivers of statutes of
limitations with respect to any Returns have been given by or
requested from the Company or any of its Subsidiaries.
(d) Schedule 4.16(d) of the Company Disclosure
Schedule sets forth (i) the taxable years of the Company
and its Subsidiaries as to which the applicable statutes of
limitations on the assessment and collection of Taxes have not
expired, (ii) those years for which examinations by the
taxing authorities have been completed and (iii) those
taxable years for which examinations by taxing authorities are
presently being conducted.
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(e) Neither the Company nor any of its Subsidiaries is a
party to any Action by any taxing authority (including for this
purpose the Investment Center with respect to the Companys
status as an Approved Enterprise under the Israeli
Law for the Encouragement of Capital Investment,
5719-1959),
nor does the Company have Knowledge of any pending or threatened
Action by any taxing authority.
(f) All deficiencies asserted or assessments made against
the Company or any of its Subsidiaries as a result of any
examinations by any taxing authority have been fully paid and no
rationale underlying a claim for Taxes has been asserted
previously by any taxing authority that reasonably could be
expected to be asserted in any other period.
(g) Neither the Company nor any of its Subsidiaries is a
party to or bound by any Tax indemnity, Tax sharing or Tax
allocation Contract.
(h) Neither the Company nor any of its Subsidiaries is a
party to or bound by any closing agreement, Tax ruling or offer
in compromise with any taxing authority.
(i) Neither the Company nor any of its Subsidiaries has
been a member of an affiliated group of corporations, within the
meaning of Section 1504 of the Code, or a member of a
combined, consolidated or unitary group for state, local or
foreign Tax purposes, other than a group of which the Company is
the common parent. Neither the Company nor any of its
Subsidiaries has any liability for Taxes of any Person other
than the Company and its Subsidiaries under Treasury Regulations
Section 1.1502-6
or any corresponding provision of state, local or foreign income
Tax Law, as transferee or successor, by Contract or otherwise.
Neither the Company nor any of its Subsidiaries has participated
in an international boycott within the meaning of
Section 999 of the Code.
(j) Neither the Company nor any of its Subsidiaries has
agreed to make, or is required to make, any adjustment under
Sections 481(a) or 263A of the Code or any comparable
provision of state, local or foreign Tax Laws by reason of a
change in accounting method or otherwise. Neither the Company
nor any of its Subsidiaries has taken any action that is not in
accordance with past practice that could defer a liability for
Taxes of the Company or any Subsidiary from any taxable period
ending on or before the Closing Date to any taxable period
ending after such date. Each of the Company and its Subsidiaries
has at all times used the accrual method of accounting for
income Tax purposes.
(k) Neither the Company nor any of its Subsidiaries is a
party to any Contract or plan that has resulted or would result,
separately or in the aggregate, in connection with this
Agreement or any change of control of the Company or any of its
Subsidiaries, in the payment of any excess parachute
payments within the meaning of Section 280G of the
Code.
(l) Schedule 4.16(l) of the Company Disclosure
Schedule sets forth all foreign jurisdictions in which the
Company and or any of its Subsidiaries are subject to Tax, are
engaged in business or have a permanent establishment. Neither
the Company nor any of its Subsidiaries has entered into a gain
recognition agreement pursuant to Treas. Reg. § 1.367(a)-8.
Neither the Company nor any of its Subsidiaries has transferred
an intangible the transfer of which would be subject to the
rules of Section 367(d) of the Code.
(m) Neither the Company nor any of its Subsidiaries is a
party to any joint venture, partnership, or other arrangement or
Contract that could be treated as a partnership for federal
income tax purposes. Schedule 4.16(m) of the Company
Disclosure Schedule sets forth all elections pursuant to Treas.
Reg. § 301.7701-3 that have been made by business entities
in which the Company or any of its Subsidiaries owns an equity
interest.
(n) Neither the Company nor any of its Subsidiaries is, or
has been, a United States real property holding corporation, as
defined in Section 897(c)(2) of the Code, during the
applicable period specified in Section 897(c)(1)(A) of the
Code.
(o) Neither the Company nor any of its Subsidiaries will be
required to include any item of income in, or exclude any item
of deduction from, taxable income for any period (or any portion
thereof) ending after the Closing Date as a result of any
(i) deferred intercompany gain or any excess loss account
described in the Treasury Regulations under Section 1502 of
the Code (or any corresponding provision of state, local or
foreign Tax Law), (ii) installment sale or other open
transaction disposition made on or prior to the Closing Date, or
(iii) material prepaid amount received on or prior to the
Closing Date.
A-41
(p) Each of the Company and its Subsidiaries is in
compliance, in all material respects, with all applicable
transfer pricing requirements, except where the failure to so
comply has not and would not reasonably be expected to have a
material detriment on the Company and its Subsidiaries, taken as
a whole, in excess of $250,000. Each of the Company and its
Subsidiaries has contemporaneous documentation of, and the
Company has made available to Parent, or, in the case of each of
its Subsidiaries, has made available or caused each such
Subsidiary to make available, all transfer pricing
methodologies, including a transfer pricing analysis or study
for each material or ongoing intercompany or related party
transaction in the United States and Israel. The Company has
made available to Parent or, in the case of each of its
Subsidiaries, has made available or caused each such Subsidiary
to make available, all intercompany Contracts relating to
transfer pricing.
(q) Neither the Company nor any of its Subsidiaries has
participated in a reportable transaction, as
currently defined in Treas. Reg. § 1.6011-4(b) or
Section 6111 of the Code or any analogous provision of
state, local or foreign Law.
(r) The Company qualifies as an industrial
company according to the meaning of that term in the Law
for the Encouragement of Industry (Taxes),
5729-1969,
and the consummation of the Merger and the other Transactions
will not have any adverse effect on such qualification as an
industrial company.
(s) Schedule 4.16(s) of the Company Disclosure
Schedule lists each Tax incentive, subsidy or benefit granted to
and currently enjoyed by the Company or any of its Subsidiaries
under the Laws of the State of Israel, the period for which such
Tax incentive, subsidy or benefit applies, and the nature of
such Tax incentive. The Company and its Subsidiaries have
complied in all respects with all Israeli Laws to be entitled to
claim such incentives, subsidies or benefits. Subject to receipt
of the approval of the Investment Center and other Governmental
Authority consents required as explicitly set forth herein, the
consummation of the Merger and the other Transactions will not
in any respect adversely affect the continued qualification for
the incentives, subsidies or benefits or the terms or duration
thereof or require any recapture of any previously claimed Tax
incentive, subsidy or benefit, and no consent or approval of any
Governmental Authority is required prior to the consummation of
the Merger and the other Transactions in order to preserve the
rights of the Surviving Company or its Subsidiaries to any such
incentive, subsidy or benefit currently enjoyed by the Company
or any of its Subsidiaries under the Laws of the State of
Israel. The facilities specified on Schedule 4.16(s)
of the Company Disclosure Schedule have been granted
approved enterprises status under the Israeli Law
for the Encouragement of Capital Investment,
(5719-1959)
(the Law for the Encouragement of Capital
Investment) in the alternative tax benefits route, and
the facilities specified on Schedule 4.16(s) of the
Company Disclosure Schedule enjoy privileged
enterprise status under the Law for the Encouragement of
Capital Investment. The Company and its Subsidiaries are in
compliance in all respects with all terms and conditions
stipulated by the Law for the Encouragement of Capital
Investment, the regulations published thereunder and the
instruments of approval for the specific investments in the
approved enterprise or any Tax ruling regarding
specific investments in privileged enterprises.
(t) The Company and its shareholders are not subject to any
restrictions or limitations pursuant to Part E2 of the
Israeli Tax Ordinance or pursuant to any Tax ruling made with
reference to the provisions of Part E2 (other than any
restrictions or limitations contained in, or as a result of, the
Israeli Withholding Tax Ruling).
(u) The Company has complied in all respects with all
requirements of Section 102 of the Israeli Tax Ordinance
and the regulations promulgated thereunder, with respect to the
Company Share Options or the Company Ordinary Shares issued
pursuant to the provisions of such section, and the Company has
complied with the requirements of Section 3(i) of the
Israeli Tax Ordinance with respect to the grant of options
issued pursuant to the provisions of such section.
(v) There has been no indication from any Israeli Tax
authority that the consummation of the Merger and the other
Transactions would affect the Companys or any
Subsidiarys ability to offset for Israeli Tax purposes in
the future any and all losses accumulated by the Company or any
Subsidiary thereof as of the Closing Date.
(w) The Company and each of its Subsidiaries has not
undertaken since January 1, 2007 any transaction that will
require special reporting in accordance with the Israeli Income
Tax Regulations (Tax Planning Requiring Reporting) (Temporary
Provisions), 2006, regarding reportable Tax planning.
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Section 4.17 Environmental
Matters.
(a) Each of the Company and its Subsidiaries is and, to the
Knowledge of the Company, each of the Company, its Subsidiaries
and all Predecessor Companies have been, in material compliance
with all applicable Environmental Laws. None of the Company, any
of its Subsidiaries or any of its or their executive officers
has received during the past seven years, any communication or
complaint from a Governmental Authority or other Person alleging
that the Company or any of its Subsidiaries has or may have any
material liability under any Environmental Law or is not in
compliance with any Environmental Law nor, to the Knowledge of
the Company, is there any basis for any such communication or
complaint. Neither the Company nor any of its Subsidiaries is
subject to any Order of any Governmental Authority relating to
material liability under any Environmental Law.
(b) The Company and each of its Subsidiaries has generated,
manufactured, received, handled, used, processed, stored,
treated, released, refined, discharged, emitted, transported,
imported and disposed of all Hazardous Materials in material
compliance with all applicable Environmental Laws. There is no
pending or, to the Knowledge of the Company, threatened
investigation by any Governmental Authority, nor any pending or,
to the Knowledge of the Company, threatened Action with respect
to the Company or any of its Subsidiaries relating to Hazardous
Substances or otherwise under any Environmental Law. To the
Knowledge of the Company, no property (including soils,
groundwater, surface water, buildings or other structures)
operated or leased by the Company or any of its Subsidiaries is
contaminated with any Hazardous Substance as a result of or in
connection with the operations or activities of the Company or
any of its Subsidiaries.
(c) For purposes of this Agreement:
(i) Environmental Laws
means any Laws of any Governmental Authority relating to:
(A) releases or threatened releases of Hazardous Substances
or materials containing Hazardous Substances; (B) the
manufacture, handling, transport, use, treatment, storage or
disposal of Hazardous Substances or materials containing
Hazardous Substances; or (C) pollution or protection of the
environment, health, safety or natural resources, including the
Local Authorities (Sewerage) Law, 1962, the Water Law, 1959, the
Abatement of Nuisances Law, 1961, the Planning and Building Law,
1965, the Hazardous Substances Law, 1993, the Prevention of Sea
Pollution from Land-Based Sources Law, 1988 and the Public
Health Ordinance, 1940.
(ii) Hazardous Substances
means: (A) those substances defined in or regulated under
the Hazardous Materials Transportation Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act
(CERCLA), the Clean Water Act, the Safe
Drinking Water Act, the Atomic Energy Act, the Federal
Insecticide, Fungicide, and Rodenticide Act and the Clean Air
Act, and their state counterparts, as each may be amended from
time to time, and all regulations thereunder; (B) those
substances defined in or regulated under the Hazardous
Substances Law, 1993 as may be amended from time to time, and
all regulations thereunder; (C) petroleum and petroleum
products, including crude oil and any fractions thereof;
(D) natural gas, synthetic gas, and any mixtures thereof;
(E) polychlorinated biphenyls, asbestos and radon;
(F) any other pollutant or contaminant; and (G) any
substance, material or waste regulated by any Governmental
Authority pursuant to any Environmental Law.
Section 4.18 Material
Contracts.
(a) Except as set forth on Schedule 4.18(a) of
the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries is a party to nor are their assets or
properties bound by any Contract of the following nature (such
Contracts as are set forth or required to be set forth on
Schedule 4.18(a) of the Company Disclosure Schedule
being Company Material Contracts):
(i) any Contract pursuant to which the Company or any of
its Subsidiaries has provided funds to or made any loan, capital
contribution or other investment in, or assumed any liability or
obligation of, any Person, including take-or-pay Contracts or
keepwell agreements, or any Contract relating to or evidencing
indebtedness of the Company or any of its Subsidiaries,
including mortgages, other grants of security interests,
guarantees or notes;
(ii) any Contract for the purchase of any debt or equity
security or other ownership interest of any Person, or for the
issuance of any debt or equity security or other ownership
interest, or the conversion of any
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obligation, instrument or security into debt or equity
securities or other ownership interests of, the Company or any
of its Subsidiaries;
(iii) any lease, sublease or similar Contract under which
(A) the Company or any of its Subsidiaries is a lessor or
sublessor of real property owned by any other Person, or makes
available for use by any Person, any portion of any premises
otherwise occupied, leased or subleased by it, or (B) the
Company or any of its Subsidiaries is a lessee or sublessee of,
or holds or uses any real property owned by any other Person;
(iv) any lease, sublease or similar Contract under which
(A) the Company or any of its Subsidiaries is a lessee or
sublessee of, or holds or uses, any machinery, equipment,
vehicle or other tangible personal property owned by any Person,
or (B) the Company or any of its Subsidiaries is a lessor
or sublessor of, or makes available for use by any Person, any
tangible personal property owned or leased by it;
(v) any Contract with any customer, distributor or supplier;
(vi) any Contract with any Governmental Authority;
(vii) any Tax sharing or Tax allocation Contract;
(viii) any Contract with any Related Party of the Company
or any of its Subsidiaries;
(ix) any employment or consulting Contract;
(x) any Contract that limits, or purports to limit, the
ability of the Company or any of its Subsidiaries to compete in
any line of business or with any Person or in any geographic
area or during any period of time, or that restricts the right
of the Company and its Subsidiaries to sell to or purchase from
any Person or to hire any Person, or that grants the other party
or any third person exclusive rights (including any exclusive
license or right to use any Intellectual Property) or most
favored nation status or any type of special discount
rights;
(xi) any Contract providing for indemnification to or from
any Person, except for such indemnification provisions granted
to distributors, representatives, consultants or customers of
the Company and its Subsidiaries pursuant to the Companys
or its Subsidiaries standard Contracts with such parties;
(xii) any royalty Contract and any Contract relating in
whole or in part to any Intellectual Property;
(xiii) any joint venture or partnership, merger, asset or
stock purchase or divestiture Contract (other than Contracts for
the purchase or sale of assets in the ordinary course of
business);
(xiv) any Contract relating to settlement of any
administrative, judicial or arbitration proceedings within the
past five years;
(xv) any Contract that results in any Person holding a
power of attorney from the Company or any of its Subsidiaries
that relates to the Company, any of its Subsidiaries or any of
their respective businesses;
(xvi) any Contract, whether or not made in the ordinary
course of business that (A) involves a future or potential
liability or receivable, as the case may be, in excess of
$100,000 on an annual basis or in excess of $250,000 over the
current Contract term, or (B) has a term greater than one
year and cannot be cancelled by the Company or a Subsidiary of
the Company without penalty or further payment and without more
than 60 days notice; and
(xvii) any other Contract not referenced in the foregoing
clauses (i) through (xvi) that is material to the
business, operations, assets, financial condition, results of
operations or prospects of the Company and its Subsidiaries,
taken as a whole.
(b) (i) Each of the Company Material Contracts is
valid, binding and in full force and effect and is enforceable
against the Company or one of its Subsidiaries, and to the
Knowledge of the Company, the other parties thereto, in
accordance with its terms, except as enforcement may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium
or similar Laws affecting creditors rights generally and
by general principles of equity (regardless of whether
considered in a proceeding in equity or at Law), (ii) the
Company or one of its Subsidiaries, if applicable, has performed
all material obligations required to be performed by it under
the Company Material Contracts and it is not (with or without
the lapse of time or the giving of notice, or both) in breach or
default in any
A-44
material respect thereunder, (iii) to the Knowledge of the
Company, (A) no other party to any Company Material
Contract is (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect
thereunder, and (B) no event has occurred or circumstance
or condition exists (with or without the lapse of time or the
giving of notice, or both) that may contravene, conflict with,
or result in a violation or breach of any Company Material
Contract, result in the termination or in a right of termination
or cancellation of, or accelerate the performance required by,
or result in the triggering of any payment obligations under, or
result in the creation of any Encumbrance upon any of the assets
or properties of the Company or any of its Subsidiaries under,
or result in being declared void, voidable, or without further
binding effect, or result in any other modification of or
trigger any right or obligation under, any Company Material
Contract or provisions thereof; (iv) no party to any
Company Material Contract has given any written notice of an
alleged breach thereof or otherwise threatened such a breach;
and (v) neither the Company nor any of its Subsidiaries has
received any written notice that any party to any Company
Material Contract intends to cancel or terminate such Company
Material Contract, to renegotiate such Company Material
Contract, or to exercise or not exercise any options thereunder,
and, to the Knowledge of the Company, no such intent to cancel,
terminate, renegotiate or exercise has been otherwise threatened.
(c) Except as set forth on Schedule 4.18(c) of
the Company Disclosure Schedule, the execution and delivery by
the Company of this Agreement and the Ancillary Agreements to
which it is a party, and the consummation by the Company of the
Transactions contemplated hereby and thereby in accordance with
the terms hereof and thereof, will not violate, or conflict
with, or result in a material breach of any provision of, or
constitute a material default (or an event that, with notice or
lapse of time or both, would constitute a material breach or
default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance
required by, or result in the triggering of any payment
obligations under, or result in the creation of any Encumbrance
upon any of the assets or properties of the Company or its
Subsidiaries under, or result in being declared void, voidable,
or without further binding effect, or result in any other
modification of or trigger any right or obligation under, any
Company Material Contract or provision thereof.
(d) Except as set forth on Schedule 4.18(d) of
the Company Disclosure Schedule, no consent of any party to a
Company Material Contract is required in connection with the
execution, delivery and performance of this Agreement and the
Ancillary Agreements and the consummation of the Transactions.
(e) True, complete and accurate copies (or, as to oral
Contracts, written summaries of the terms), of the Company
Material Contracts entered into on or prior to the date hereof
have been provided or made available to Parent and true,
complete and accurate copies (or, as to oral Contracts, written
summaries of the terms) of any Company Material Contracts
entered into after the date hereof and prior to or on the
Closing Date will be provided or made available to Parent
promptly after being so entered into.
Section 4.19 Customers
and Suppliers.
(a) During the past two years, neither the Company nor any
of its Subsidiaries has received from: (i) any current or
former customer of the Company or any of its Subsidiaries any
written notice or assertion of breach, misrepresentation, breach
of warranty, design errors or malfunctions, or other failures of
the Company or one of its Subsidiaries to deliver upon any
promises or legal or contractual obligations, and no such
assertion of breach, misrepresentation, breach of warranty,
design errors or malfunctions, or other failures have been
otherwise threatened; or (ii) any current customer of the
Company or its Subsidiaries any written notice that such
customer has ceased or intends to cease or terminate its use of
the products or services of the Company or its Subsidiaries, or
reduced or intends to reduce such use, whether or not as a
result of the transactions contemplated hereby, or has sought to
change the terms for its purchases of such products and
services, and no customer has otherwise threatened such a
cessation, termination, or change in use or terms, except in
each case where such alleged breach, misrepresentation, breach
of warranty, design errors or malfunctions, or cessation,
termination or reduction has not and would not reasonably be
expected to result in the Company or its Subsidiaries incurring,
individually or in the aggregate with all other instances
thereof, any loss of revenue or other Liability by the Company
or any of its Subsidiaries in excess of $100,000.
(b) Except as set forth on Schedule 4.19(b) of
the Company Disclosure Schedule, during the past two years,
neither the Company nor any of its Subsidiaries has received
from: (i) any current or former supplier of the Company or
any of its Subsidiaries any notice or assertion of breach,
misrepresentation, breach of warranty, or other
A-45
failures of the Company or any of its Subsidiaries to deliver
upon any promises or legal or contractual obligations, nor to
the Knowledge of the Company, has any event occurred, or does
any circumstance or condition exist that, with or without the
giving of notice or lapse of time, or both, might form the basis
of any such notice or assertion; or (ii) any current
supplier of the Company or any of its Subsidiaries any notice
that such supplier has ceased or intends to cease or terminate
supplying the products or services to the Company or any of its
Subsidiaries, or reduced or intends to reduce such supply,
whether or not as a result of the transactions contemplated
hereby, or has sought to change the terms for the supply of such
products and services, other than general and customary changes
in terms in the ordinary course of business, consistent with
past practice, except in each case where such alleged breach,
misrepresentation, breach of warranty, failure to deliver, or
cessation, termination or reduction has not and would not
reasonably be expected to result in the Company or any of its
Subsidiaries incurring, individually or in the aggregate with
all other instances thereof, any additional expense or other
Liability in excess of $100,000.
Section 4.20 Warranties. The
Company has delivered to Parent complete and accurate copies of
all written warranties that are in effect with respect to the
Companys products and services and the products and
services of any of its Subsidiaries. There have not been any
material deviations from such warranties and none of the
employees or agents of the Company or any of its Subsidiaries
(i) is authorized to undertake obligations to any customer
or to other third parties which expands such warranties, or
(ii) to the Companys Knowledge has made any oral
warranty with respect to such products or services of the
Company or any of its Subsidiaries. Schedule 4.20 of
the Company Disclosure Schedule sets forth a list of all
warranty claims currently made in writing against the Company or
any of its Subsidiaries or otherwise threatened.
Section 4.21 Accounts
Receivable. Schedule 4.21 of the
Company Disclosure Schedule sets forth the accounts receivable
of the Company and its Subsidiaries (the Accounts
Receivable) as of the date of the most recent Company
Interim Financial Statements prior to the date hereof, which
schedule also sets forth the aging of each such Accounts
Receivable. Such Accounts Receivable represent valid obligations
of the obligor thereunder and arose in the ordinary course of
business of the Company or its Subsidiaries. The Accounts
Receivable of the Company and its Subsidiaries arising after the
date of the Company Interim Financial Statements represent valid
obligations of the obligor thereunder and arose in the ordinary
course of business.
Section 4.22 Accounts
Payable. Schedule 4.22 of the
Company Disclosure Schedule sets forth all accounts payable of
the Company and its Subsidiaries (the Accounts
Payable,) as of the date of the most recent Company
Interim Financial Statements prior to the date hereof which
schedule also sets forth the date incurred, creditor and amount
of each Accounts Payable. All Accounts Payable arose, and as of
the Closing will have arisen, in arms length transactions
in the ordinary course of business of the Company or its
Subsidiaries.
Section 4.23 Grants,
Incentives and Subsidies. The Company has
made available to Parent, prior to the date hereof, correct
copies of all documents evidencing all pending, outstanding and
granted grants, incentives, exemptions and subsidies from the
Government of the State of Israel or any agency thereof, or from
any other Governmental Authority, granted to the Company or any
of its Subsidiaries, including the grant of Approved Enterprise
Status from the Investment Center and grants from the OCS and
the MAGNET (collectively, Grants) and
of all letters of approval, certificates of completion, and
supplements and amendments thereto, granted to the Company or
any Subsidiary thereof, and all correspondence relating thereto.
The Company and the applicable Subsidiaries are in compliance in
all respects with the terms and conditions of all Grants which
have been approved and the Laws applicable thereto, and have
duly fulfilled in all respects all the undertakings required
thereby. Without limiting the generality of the above,
Schedule 4.23 of the Company Disclosure Schedule
includes the aggregate amounts of the Grants, and the aggregate
outstanding obligations thereunder of the Company or any of its
Subsidiaries with respect to royalties, or the outstanding
amounts to be paid by the OCS or any other relevant Governmental
Entity to the Company or any of its Subsidiaries. Assuming
compliance by Parent with any undertakings it may give with
respect to the Grants that have been approved, the Company is
not aware of any event or other set of circumstances which would
reasonably be expected to lead to the revocation or material
modification of any of the Grants that have been approved.
Section 4.24 Affiliate
Interests and Transactions.
(a) Except for ownership (of record or as a beneficial
owner) of less than one percent of the outstanding Capital Stock
or Share Capital of any Person that is publicly traded on any
national or foreign stock exchange, or
A-46
over-the-counter market, no Related Party of the Company or any
of its Subsidiaries (i) as far as the Company is aware
(without making any inquiries), owns or has, since
January 1, 2005, owned, directly or indirectly, any equity
or other financial or voting interest in any competitor,
supplier, licensor of Intellectual Property or distributor of
the Company or any of its Subsidiaries, (ii) owns or has,
since January 1, 2005, owned, directly or indirectly, or
has or has had any interest in any material property (real or
personal, tangible or intangible) that the Company or any of its
Subsidiaries uses or has used in or pertaining to the business
of the Company or any of its Subsidiaries, (iii) has or has
had since January 1, 2005, any business dealings or a
financial interest in any transaction with the Company or any of
its Subsidiaries or involving any assets or property of the
Company or any of its Subsidiaries, or has derived, received, or
was entitled to, any interest, incentive, or other form of
benefit in connection with the Companys or its
Subsidiaries business, or any of the Contracts to which
the Company or any of its Subsidiaries is a party.
(b) There are no outstanding notes payable to, accounts
receivable from or advances by the Company or any of its
Subsidiaries to, and neither the Company nor any of its
Subsidiaries is otherwise a debtor or creditor of, or has any
liability or other obligation of any nature to, any Related
Party of the Company or any of its Subsidiaries. Except as set
forth on Schedule 4.24(b) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has
incurred any outstanding obligation or liability to, or entered
into or agreed to enter into any agreement or transaction with
or for the benefit of, any Related Party of the Company or any
of its Subsidiaries, other than the Transactions.
Section 4.25 Health
Care Regulatory Compliance. Without limiting
the provisions of Section 4.8:
(a) each of the Company and its Subsidiaries has all
Company Permits necessary for the conduct of their respective
businesses and the use of their properties and assets as
presently conducted and used, and the Companys and its
Subsidiaries respective employees and agents have all
Company Permits necessary for the conduct of their professional
activities, and all such Company Permits are in full force and
effect. The Company and each of its Subsidiaries have had at all
times during the previous three years all Company Permits
necessary for the conduct of their respective businesses and the
use of their properties and assets as conducted and used at such
respective times. The Companys and its Subsidiaries
respective employees have had at all times during the previous
three years all Company Permits necessary for the conduct of
their professional activities at such respective times. Neither
the Company nor any of its Subsidiaries has received written
notice from any Governmental Authority, nor does the Company
have Knowledge, that any Company Permit is subject to
revocation, suspension, or any other disciplinary or adverse
administrative action by any Governmental Authority. No Company
Permit applicable to the Company or any of its Subsidiaries is
subject to a consent order or any other final adverse
disciplinary or administrative action, any of which is still in
force and effect. The consummation of the Merger will not cause
the revocation or cancellation of any Company Permit.
(b) Each of the Company and its Subsidiaries is in material
compliance with all Health Care Laws and the terms of all
Company Permits to the extent applicable to the Company or any
of its Subsidiaries, or any of its or their respective
businesses or operations.
(c) The Company and its Subsidiaries are in compliance with
all requirements of the FDA, or any other Governmental Authority
engaged in the regulation of the Companys or its
Subsidiaries products, including not limited to FDAs
requirements pertaining to establishment registration, product
listing, manufacturing (i.e., cGMPs/QSR,), labeling and
advertising and promotion, adverse event reporting and record
keeping and reporting requirements.
(d) Neither the Company nor any of its Subsidiaries, is
currently, or has been at any time: (i) excluded from
participation in any federal or state health care program,
including those defined in 42 U.S.C. § 1320a-7b(f),
(ii) convicted of any civil or criminal offense under any
Health Care Law, (iii) debarred or disqualified from
participation in Federal health care program or other regulated
activities for any violation or alleged violation of any Health
Care Law, (iv) listed on the General Services
Administration List of Parties Excluded from Federal Programs,
(v) debarred pursuant to the Generic Drug Enforcement Act
(21 U.S.C. §§ 301 et seq. or disqualified
as a clinical investigator pursuant to 21 CFR §
812.119 or § 312.70, or (vi) a party to or subject to,
or, to the Knowledge of the Company, threatened to be made a
party to or subject to, any Action concerning any of the matters
described in clauses (i), (ii), (iii), (iv) or (v).
A-47
(e) The products introduced into interstate commerce by the
Company and its Subsidiaries were neither adulterated nor
misbranded at the time of introduction into commerce, nor based
on the actions of the Company or any of its Subsidiaries,
adulterated or misbranded after introduction into commerce.
Section 4.26 Insurance. Schedule 4.26
of the Company Disclosure Schedule sets forth a true and
complete list of all casualty, directors and officers liability,
general liability, product liability and all other types of
insurance maintained with respect to the Company or any of its
Subsidiaries, together with the carriers, the liability limits
for each such policy and identifies which insurance policies are
occurrence or claims made and which
Person is the policy holder. All such policies are in full force
and effect and no application therefor included a material
misstatement or omission. All premiums with respect thereto have
been paid to the extent due. No notice of cancellation,
termination or reduction of coverage has been received with
respect to any such policy. Except as set forth on
Schedule 4.26 of the Company Disclosure Schedule, no
material claim currently is pending under any such policy. All
material insurable risks in respect of the business and assets
of the Company and its Subsidiaries are covered by such
insurance policies and the types and amounts of coverage
provided therein are usual and customary in the context of the
business and operations in which the Company and its
Subsidiaries are engaged. To the Knowledge of the Company, the
activities and operations of the Company and its Subsidiaries
have been conducted in a manner so as to conform in all material
respects to all applicable provisions of such insurance policies.
Section 4.27 Brokers. Except
for Piper Jaffray & Co., the fees of which will be
paid by the Company, no broker, finder or investment banker is
entitled to any brokerage, finders or other fee or
commission in connection with the Transactions based upon
arrangements made by or on behalf of the Company or any of its
Subsidiaries. The Company has furnished to Parent a complete and
correct copy of all agreements between the Company and Piper
Jaffray & Co. pursuant to which such firm would be
entitled to any payment relating to the Transactions.
Section 4.28 Company
Shareholders. To the Knowledge of the
Company, no Shareholder Beneficially Owns individually, or is a
member of a group (as defined in Section 13(d)
of the Exchange Act) that Beneficially Owns 50% or more of the
Company Share Capital and, to the Knowledge of the Company,
immediately after the Effective Time, no Shareholder will
Beneficially Own individually, or will be a member of a
group (as defined in Section 13(d) of the
Exchange Act) that Beneficially Owns 20% or more of the Parent
Common Stock.
Section 4.29 Company
Information.
(a) Any information statement or proxy statement relating
to any of the Company Shareholders Meetings, or action by
written consent in lieu thereof will, as of the date delivered
to such Shareholders and at the date of such meeting or consent,
comply with all applicable requirements of Israeli Law and the
Company Charter Documents as to the form and content thereof.
(b) None of the information supplied by the Company for
inclusion or incorporation by reference into the
Form S-4,
and which in fact is included or incorporated by reference in
the
Form S-4
will, at the time the
Form S-4
or any amendment or supplement thereto becomes effective or at
the time of sale thereunder, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were
made.
(c) None of the information supplied by the Company
expressly for inclusion in the Financing Disclosure Package, and
which in fact was included in the Financing Disclosure Package,
at the time the Financing Disclosure Package was provided,
disclosed or otherwise made available to the participants in the
Financing, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances under which they were made and none
of the information supplied by the Company expressly for
inclusion in any amendment or supplement to the Financing
Disclosure Package, whether before or after the date hereof, and
which in fact is included in any such amendment or supplement to
the Financing Disclosure Package will, as of the date provided,
disclosed or otherwise made available to the participants in the
Financing, contain any untrue statement of material fact or omit
to state any material fact necessary in order to make the
statements therein in light of the circumstances under which
they are made not misleading.
(d) None of the representations or warranties of the
Company contained in this Agreement or any Ancillary Agreement
and none of the information contained in any schedule,
certificate, or other document delivered by the
A-48
Company or that will at anytime be delivered by the Company
pursuant hereto or thereto or in connection with the
Transactions contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements
herein or therein not misleading.
ARTICLE V
COVENANTS
Section 5.1 Company
Conduct of Business Prior to the
Closing. Between the date of this Agreement
and the Closing Date, unless Parent shall otherwise agree in
writing (which consent shall not be unreasonably withheld,
conditioned or delayed), the business of the Company and its
Subsidiaries shall be conducted materially in the ordinary
course of business consistent with past practice; and the
Company shall, and shall cause each of its Subsidiaries to,
preserve substantially intact the business organization, use
commercially reasonable efforts to preserve substantially intact
the assets of the Company and its Subsidiaries, and to keep
available the services of the current officers and key employees
and consultants of the Company and its Subsidiaries and to
preserve the current relationships of the Company and its
Subsidiaries with customers, suppliers and other Persons with
which the Company or any of its Subsidiaries has significant
business relations. By way of amplification and not limitation,
between the date of this Agreement and the Closing Date, neither
the Company nor any of its Subsidiaries shall do, or propose to
do, directly or indirectly, any of the following without the
prior written consent of Parent (which consent shall not be
unreasonably withheld, conditioned or delayed):
(a) Except for an amendment to the articles of association
of the Company in the form attached hereto as
Exhibit B, amend or otherwise change its memorandum
of association, articles of association, certificate of
incorporation or bylaws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of or otherwise subject to
any Encumbrance (i) any shares of Company Share Capital or
the Share Capital or Capital Stock, as applicable, of any of its
Subsidiaries, or any options (including Company Share Options),
warrants, convertible securities or other rights of any kind to
acquire any such shares, or any other ownership interest in the
Company or any of its Subsidiaries, other than the issuance of
Company Ordinary Shares upon (A) exercise of Company Share
Options outstanding on the date hereof, pursuant to the terms
thereof, and (B) conversion of Company Preferred Shares
outstanding on the date hereof, pursuant to the articles of
association of the Company, or (ii) any properties or
assets of the Company or any of its Subsidiaries, other than
sales or transfers of inventory in the ordinary course of
business consistent with past practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, or
make any other payment on or with respect to any of its Share
Capital, except for dividends by any direct or indirect wholly
owned Subsidiary of the Company to the Company;
(d) reclassify, combine, split, subdivide or redeem, or
purchase or otherwise acquire, directly or indirectly, any of
its Share Capital or make any other change with respect to its
capital structure;
(e) acquire any Person or division thereof or any material
assets not in the ordinary course of business consistent with
past practice, or enter into any joint venture, strategic
alliance, exclusive dealing, noncompetition or similar Contract;
(f) adopt or recommend a plan of complete or partial
liquidation, dissolution, merger (except for the Merger),
consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its Subsidiaries, or
otherwise alter the Companys or a Subsidiarys
corporate structure;
(g) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise
become responsible for, the obligations of any Person, or make
any loans or advances, except (i) borrowings, guarantees,
endorsements or advances in the ordinary course of business
consistent with past practice, provided that any increase in an
existing credit line or other existing indebtedness greater than
$2,500,000 will be deemed not in the ordinary course of
business, and (ii) any additional financing in an amount up
to $3,000,000 (less any increase in any existing credit line or
other existing indebtedness on or after the date hereof pursuant
to clause (ii)), provided that (x) the Company will consult
with Parent on the terms of any such financing, and such
financing will be subject to customary terms for such
financings, (y) except to the
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extent such terms are contingent upon termination of this
Agreement, such borrowed funds shall not be convertible into or
exchangeable for any equity securities of the Company or its
Subsidiaries and will have no prepayment penalties, and
(z) any such additional financing under this
clause (ii) that is provided by the Shareholders or their
Affiliates will be repaid out of the proceeds of the Financing;
(h) amend, waive, modify or consent to the termination of
any Company Material Contract, or any of its rights thereunder,
or enter into any Contract that would be a Company Material
Contract, except in the ordinary course of business consistent
with past practice;
(i) authorize, or make any commitment with respect to, any
single capital expenditure that is in excess of $100,000 or
capital expenditures that are, in the aggregate, in excess of
$250,000 for the Company and its Subsidiaries taken as a whole;
(j) enter into (i) any lease of real property or any
renewals thereof, or (ii) any lease of personal property
involving a term of more than one year or rental obligation
exceeding $100,000 per year in any single case or in excess of
$250,000 in the aggregate;
(k) increase the compensation payable or to become payable
or the benefits provided to its directors, officers, employees
or consultants, except (i) for normal merit and
cost-of-living increases consistent with past practice in
salaries or wages of employees of the Company or any of its
Subsidiaries who are not directors or officers of the Company or
any of its Subsidiaries, (ii) in accordance with the terms
of the agreements with such directors, officers, employees or
consultants existing on the date hereof and listed on
Schedule 4.18(a) of the Company Disclosure Schedule,
or (iii) for any benefit package to be provided as set
forth on Schedule 4.12(a)(xiii) of the Company
Disclosure Schedule, or grant any severance or termination
payment (except for payments in accordance with agreements
existing on the date hereof and listed on
Schedule 4.18(a) of the Company Disclosure Schedule,
and statutory payments required by Israeli Law) to, or pay, loan
or advance any amount to, any director, officer, employee or
consultant of the Company or any of its Subsidiaries, or
establish, adopt, enter into or amend any Company Plan (except
where required by the terms of the Company Plan or by applicable
law) or enter into any other plan for the benefit of the
employees, directors or service providers of the Company or its
Subsidiaries;
(l) make any change in any method of accounting or
accounting practice or policy, except as required by GAAP;
(m) make, revoke or modify any Tax election, settle or
compromise any Tax liability or file any Return other than on a
basis consistent with past practice;
(n) pay, discharge or satisfy any claim or other Liability,
other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice, of
liabilities reflected or reserved against on the Balance Sheet
or subsequently incurred in the ordinary course of business
consistent with past practice;
(o) commence or settle any Action, or cancel, compromise,
waive or release any right or claim other than in the ordinary
course of business consistent with past practice;
(p) permit the lapse of any existing policy of insurance
relating to the business, assets, or directors and officers of
the Company or any of its Subsidiaries;
(q) permit the lapse of any material right relating to
Intellectual Property used in the business of the Company or any
of its Subsidiaries;
(r) knowingly take any action, or knowingly fail to take
any reasonable action, that is reasonably likely to prevent the
Merger from qualifying as a reorganization within the meaning of
Section 368(a)(2)(E) of the Code;
(s) take any action, or intentionally fail to take any
action, that is reasonably likely to result in any
representation or warranty made by the Company in this Agreement
or any Ancillary Agreement to be untrue or result in a breach of
any covenant made by the Company in this Agreement or any
Ancillary Agreement, or that has or would reasonably be expected
to have a Material Adverse Effect on the Company, except, in
every case, as may be required by applicable Law;
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(t) except for the Company Shareholder Approval, the
approval of the amendment to the Companys articles of
association as contemplated in Section 5.1(a) above
(for which the Company has received irrevocable proxies
sufficient for such approval), take any action requiring the
approval of the Company Shareholders representing at least a
majority of the holders of Company Ordinary Shares, Preferred
A-1 Shares
or Preferred
A-2 Shares; or
(u) announce an intention, enter into any formal or
informal agreement, or otherwise make a Contract to do any of
the foregoing.
Section 5.2 Parent
and Merger Sub Conduct of Business Prior to
Closing. Between the date of this Agreement
and the Closing Date, except as contemplated by this Agreement,
including the Financing, unless the Company shall otherwise
agree in writing (which consent shall not be unreasonably
withheld, conditioned or delayed), the business of Parent shall
be conducted materially in the ordinary course of business
consistent with past practice; and Parent shall preserve
substantially intact its business organization and shall use
commercially reasonable efforts to preserve substantially intact
its assets, and to keep available the services of the current
officers and key employees and consultants of Parent and to
preserve the current relationships of Parent with customers,
suppliers and other Persons with which Parent has significant
business relations. By way of amplification and not limitation,
except as contemplated by this Agreement, including the
Financing, or as set forth on Schedule 5.2, between
the date of this Agreement and the Closing Date, Parent shall
not do, or propose to do, directly or indirectly, any of the
following without the prior written consent of the Company
(which consent shall not be unreasonably withheld, conditioned
or delayed):
(a) reclassify, combine, split, subdivide or redeem, or
purchase or otherwise acquire, directly or indirectly, any of
its Capital Stock or make any other change with respect to its
capital structure;
(b) amend Parents certificate of incorporation or
bylaws, except that Parent may amend its certificate of
incorporation to provide for a reverse stock split of the Parent
Common Stock, provided that Parent consult with the Company on
the terms of any such amendment, which terms shall be reasonably
satisfactory to the Company;
(c) issue, sell, pledge, dispose of or otherwise subject to
any Encumbrance (i) any shares of Parent Capital Stock, or
any options (including Parent Stock Options), warrants,
convertible securities or other rights of any kind to acquire
any such shares, or any other ownership interest in Parent,
other than the issuance of Parent Common Stock upon exercise of
Parent Stock Options outstanding on the date hereof, pursuant to
the terms thereof, or (ii) any properties or assets of
Parent, other than sales or transfers of inventory in the
ordinary course of business consistent with past practice;
(d) acquire any Person or division thereof or any assets
not in the ordinary course of business consistent with past
practice, or enter into any joint venture, strategic alliance,
exclusive dealing, noncompetition or similar Contract;
(e) knowingly take any action, or knowingly fail to take
any reasonable action, that is reasonably likely to prevent the
Merger from qualifying as a reorganization within the meaning of
Section 368(a)(2)(E) of the Code;
(f) adopt or recommend a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of Parent, or otherwise
alter Parents corporate structure;
(g) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise
become responsible for, the obligations of any Person, or make
any loans or advances, except borrowings, guarantees,
endorsements or advances in the ordinary course of business
consistent with past practice, provided that any increase in an
existing credit line or other existing indebtedness greater than
$2,500,000 will be deemed not in the ordinary course of business;
(h) amend, waive, modify or consent to the termination of
any Parent Material Contract, or any of its rights thereunder,
or enter into any Contract that would be a Parent Material
Contract, except in the ordinary course of business consistent
with past practice;
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(i) authorize, or make any commitment with respect to, any
single capital expenditure that is in excess of $100,000 or
capital expenditures that are, in the aggregate, in excess of
$250,000 for Parent;
(j) enter into (i) any lease of real property or any
renewals thereof, or (ii) any lease of personal property
involving a term of more than one year or rental obligation
exceeding $100,000 per year in any single case or in excess of
$250,000 in the aggregate;
(k) increase the compensation payable or to become payable
or the benefits provided to its directors, officers, employees
or consultants, except for normal merit and cost-of-living
increases consistent with past practice in salaries or wages of
employees of Parent who are not directors or officers of Parent,
or grant any severance or termination payment (except in
accordance with existing agreements of Parent listed on
Schedule 3.15(a) of the Parent Disclosure Schedule)
to, or pay, loan or advance any amount to, any director,
officer, employee or consultant of Parent, or establish, adopt,
enter into or amend any existing benefit plan or enter into any
other plan for the benefit of the employees, directors or
service providers of Parent;
(l) make any change in any method of accounting or
accounting practice or policy, except as required by GAAP;
(m) permit the lapse of any material right relating to
Intellectual Property used in the business of Parent;
(n) make, revoke or modify any Tax election, settle or
compromise any Tax liability or file any Return other than on a
basis consistent with past practice;
(o) pay, discharge or satisfy any claim or other Liability,
other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice, of
liabilities reflected or reserved against on the Parent Balance
Sheet or subsequently incurred in the ordinary course of
business consistent with past practice;
(p) commence or settle any Action, or cancel, compromise,
waive or release any right or claim other than in the ordinary
course of business consistent with past practice;
(q) permit the lapse of any existing policy of insurance
relating to the business, assets, or directors and officers of
Parent;
(r) take any action, or intentionally fail to take any
action, that is reasonably likely to result in any
representation or warranty made by Parent or Merger Sub in this
Agreement or any Ancillary Agreement to be untrue or result in a
breach of any covenant made by Parent or Merger Sub in this
Agreement or any Ancillary Agreement, or that has or would
reasonably be expected to have a Material Adverse Effect on
Parent, except, in every case, as may be required by applicable
Law;
(s) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, or
make any other payment on or with respect to any of its Capital
Stock;
(t) take any action requiring the approval of Parent
Stockholders representing at least a majority of the shares of
Parent Common Stock; or
(u) announce an intention, enter into any formal or
informal agreement, or otherwise make a Contract to do any of
the foregoing.
Section 5.3 Merger
Proposal. Each of the Company and Merger Sub,
shall take the following actions within the timeframes set forth
herein; provided, however, that any such actions or the
timeframe for taking such action shall be subject to any
amendment in the applicable provisions of the Companies Law and
the regulations promulgated thereunder (and in case of an
amendment thereto, such amendment shall automatically apply so
as to amend this Section 5.3 accordingly):
(a) As promptly as practicable after the execution and
delivery of this Agreement:
(i) Each of the Company and Merger Sub shall cause a merger
proposal (in the Hebrew language) in substantially the form
attached hereto as Exhibit C (a Merger
Proposal) to be executed in accordance with
Section 316 of the Companies Law;
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(ii) The Company and Merger Sub shall each call a general
meeting and class meetings of the shareholders of the Company
and a general meeting of Merger Subs sole shareholder,
respectively for the purpose of approving the Merger and the
other Transactions; and
(iii) Within three days from the date the general meetings
have been called as aforesaid, the Company and Merger Sub shall
jointly deliver the Merger Proposals to the Israeli Companies
Registrar. Each of the Company and Merger Sub shall cause a copy
of its Merger Proposal to be delivered to its secured creditors,
if any, no later than three days after the date on which such
Merger Proposal is delivered to the Israeli Companies Registrar
and shall promptly inform its respective non-secured creditors,
if any, of such Merger Proposal and its contents in accordance
with Section 318 of the Companies Law and the regulations
promulgated thereunder.
(b) Promptly after the Company and Merger Sub shall have
complied with the provisions of Section 5.3(a) and
with subsections (i), (ii) and (iii) of this
Section 5.3(b), but in any event not later than
three days following the date on which such notice was sent to
the creditors, each of the Company and Merger Sub shall inform
the Israeli Companies Registrar, in accordance with
Section 317(b) of the Companies Law, that notice was
submitted to their respective secured and non-secured creditors
in accordance with Section 318 of the Companies Law and the
regulations promulgated thereunder. The procedure of making
notices in accordance with the provisions of
Section 5.3(a) shall be as follows. Each of the
Company and, if applicable, Merger Sub, shall:
(i) Publish a notice to its creditors, stating that a
Merger Proposal has been submitted to the Israeli Companies
Registrar and that the creditors may review the Merger Proposal
at the offices of the Israeli Companies Registrar, the
Companys registered offices or Merger Subs
registered offices, as applicable, and at such other locations
as the Company or Merger Sub, as applicable, may determine, in
(A) two daily Hebrew newspapers circulated in Israel, on
the day that the Merger Proposal is submitted to the Israeli
Companies Registrar, (B) a newspaper circulated in the
United States, not later than three Business Days (as defined in
the applicable regulations promulgated under the Companies Law)
following the day on which the Merger Proposal was submitted to
the Israeli Companies Registrar, and (C) if required, in
such other manner as may be required by any applicable Law;
(ii) Within four Business Days (as defined in the
applicable regulations promulgated under the Companies Law) from
the date of submitting the Merger Proposals to the Israeli
Companies Registrar send a notice, by registered mail, to all of
the Substantial Creditors (as such term is defined
in the regulations promulgated under the Companies Law), in
which it shall state that a Merger Proposal was submitted to the
Israeli Companies Registrar and that such Substantial Creditors
may review the Merger Proposal at such additional locations, as
specified in the notice referred to in
Section 5.3(b)(i); and
(iii) Send to the Company employees committee
or display in a prominent place at the Company premises, a copy
of the notice published in a daily Hebrew newspaper (as referred
to in Section 5.3(b)(i)(A)), no later than three
Business Days (as defined in the applicable regulations
promulgated under the Companies Law) following the day on which
the Merger Proposal has been submitted to the Israeli Companies
Registrar.
Section 5.4 Company
Shareholders Approval. The Company will take,
in accordance with applicable Law and the Company Charter
Documents, all action necessary to convene a general meeting of
the Shareholders and separate meetings of the holders of each
class or series of Company Shares (each, a
Company Shareholders Meeting) as
promptly as practicable, but in no event later than 40 days
after the date the
Form S-4
is declared effective by the SEC, to consider and vote for the
approval of this Agreement, the Merger and the other
Transactions. The Board of Directors of the Company shall
recommend such approval (the
Recommendation) subject to the notice
requirements of the Companies Law and the rules and regulations
promulgated thereunder and the Company Charter Documents. The
Company shall call, notice, convene, hold and conduct the
Company Shareholders Meetings in compliance with
applicable Laws including the Companies Law and the Company
Charter Documents. Subject to the provisions of
Section 320(c) of the Companies Law, the approval of the
Merger requires the Company Shareholder Approval. The quorum
required for the general meeting of the Shareholders is
(i) one Shareholder, and (ii) one or more Shareholders
holding together at least 50% of the then issued and
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outstanding share capital of the Company (determined on as
converted basis), and (ii) shareholder(s) holding at least
a majority of the Preferred
A-1 Shares
and Preferred
A-2 Shares,
in each case present in person or by proxy; the quorum required
for the class meeting of the holders of the Company Ordinary
Shares is one or more Shareholders, present in person or by
proxy, holding at least 50% of the issued and outstanding
Company Ordinary Shares; the quorum required for the class
meeting of the holders of the Preferred
A-1 Shares
of the Company is one or more Shareholders, present in person or
by proxy, holding at least 50% of the issued and outstanding
Preferred
A-1 Shares
of the Company; and the quorum required for the class meeting of
the holders of the Preferred
A-2 Shares
of the Company is one or more Shareholders, present in person or
by proxy, holding at least 50% of the issued and outstanding
Preferred
A-2 Shares
of the Company. If, as of the time for which such Company
Shareholders Meeting is originally scheduled (as set forth
in the notice for the Company Shareholders Meeting), the
number of Company Shares present at the Company
Shareholders Meeting (either in person or by proxy) is
insufficient to constitute the required quorum necessary to
conduct the business of such Company Shareholders Meeting,
the Company may adjourn or postpone such Company
Shareholders Meeting; provided, that in each case,
the adjourned or postponed meeting is held no more than seven
days after the originally scheduled meeting. The Company shall
include the Recommendation in any materials sent to the
Shareholders in connection with the Company Shareholders
Meetings. Not later than three days after the date of such
approval, the Company, in coordination with Parent, shall (in
accordance with Section 317(b) of the Companies Law and the
regulations thereunder) inform the Israeli Companies Registrar
of such approval.
Section 5.5 Counsel
Access to Information. Subject to the terms
of the Confidentiality Agreement and applicable Law, from the
date hereof until the Closing Date, each of the Company and
Parent shall, and each shall cause its Subsidiaries, if any, to,
afford to outside counsel of the other party complete access
(including for inspection, interview, and copying, as
applicable) to documents, data, employees, officers, or other
information as the other party may reasonably request and that
are relevant to any potential or actual filings, investigations
or other inquiries relating to the Merger or the other
Transactions.
Section 5.6 Filings;
Other Actions; Notification.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company and Parent shall cooperate with each
other and use, and shall cause their respective Subsidiaries and
Affiliates to use, their respective commercially reasonable
efforts to (A) take or cause to be taken all actions, and
(B) do or cause to be done all things, reasonably
necessary, proper or advisable on their part under this
Agreement and applicable Law to consummate and make effective
the Merger and the other Transactions as soon as practicable,
including (i) obtaining all necessary actions, consents and
approvals from Governmental Authorities (including the
Investment Center), or other Persons necessary in connection
with the consummation of the Transactions and the making of all
necessary registrations, filings and taking all reasonable steps
as may be necessary to obtain an approval from, or to avoid an
Action by, any Governmental Authority or other Persons necessary
in connection with the consummation of the Merger and the other
Transactions (including notifying the OCS and the MAGNET of the
Merger and the other Transactions), (ii) defending any
lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation
of the Merger and the other Transactions in accordance with the
terms of this Agreement, including seeking to have any stay or
temporary restraining order entered by any Governmental
Authority vacated or reversed, (iii) the execution and
delivery of any additional instruments necessary to consummate
the Merger and the other Transactions in accordance with the
terms of this Agreement and to fully carry out the purposes of
this Agreement, and (iv) the execution by Parent or its
Affiliates of an undertaking in customary form in favor of the
OCS and the MAGNET to comply with the applicable Law, if
required.
(b) In furtherance and not in limitation of the foregoing,
each party hereto agrees to make all appropriate filings with
any applicable Governmental Authority or other third party from
which the consents set forth on Schedule 6.1(c) are
required to be obtained by it (which for such purpose, with
respect to Contracts, Parent shall obtain all consents for
Contracts to which it is a party or to which it is subject and
the Company shall obtain consents for all Contracts to which it
or any Subsidiary of the Company is a party or to which the
Company or any such Subsidiary is subject) as promptly as
practicable, and to supply as promptly as practicable any
additional information and documentary material that may be
reasonably required with respect to such filings and use its
commercially reasonable efforts to take, or cause to be taken,
all other actions consistent with this Section 5.6
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necessary to cause the expiration or termination of the
applicable waiting periods with respect to such filings
(including any extensions thereof), if any, as soon as
practicable.
(c) Subject to applicable Law and the instructions of any
Governmental Authority, each of the Company and Parent shall
keep the other reasonably apprised of the status of matters
relating to completion of the Merger and the other Transactions,
including promptly furnishing the other with copies of all
notices or other communications received by Parent or the
Company, as the case may be, or any of their Subsidiaries from
any third party including any Governmental Authority with
respect to the Merger or the other Transactions. Neither the
Company nor Parent shall permit any of its officers or any other
representatives to participate in any meeting with any
Governmental Authority in respect of any filings, investigation
or other inquiry relating to the Merger or the other
Transactions unless it consults with the other party in advance
and shall, to the extent permitted by such Governmental
Authority, give the other party the opportunity to attend and
participate thereat.
(d) Without limiting the foregoing, Parent and the Company
shall, and shall cause their respective Subsidiaries and each of
their respective officers, employees and independent auditors
to, cooperate in connection with the arrangement of the
Financing, including without limitation, reasonable
participation in meetings and the provision of information
relating to or in connection with the Financing reasonably
requested by the Company or Parent, as the case may be.
(e) In the event that Parent shall request the consent of
the Company pursuant to Section 9(b) of the Financing
Agreement to bring any Action against any purchaser listed on
Schedule I to such agreement, the Company may,
notwithstanding anything contained in Section 5.6(a)
give or withhold such consent, in its sole discretion.
(f) Notwithstanding anything in this Agreement, in no event
shall Parent or the Company be required to take or agree to
undertake any action, including entering into any consent
decree, hold separate order or other arrangement, that would
require the divestiture, license or other transfer of any assets
of Parent, the Company or the Surviving Company or any of their
respective Affiliates. In addition, in no event shall Parent be
required to take or agree to undertake any action, including
entering into any consent decree, hold separate order or other
arrangement, that would limit Parents freedom of action
with respect to, or its ability to consolidate and control, the
Surviving Company and its Subsidiaries or any of their assets or
businesses or any of Parents or its Affiliates other
assets or businesses.
Section 5.7 Israeli
Tax Rulings.
(a) As soon as reasonably practicable after the execution
of this Agreement, the Company shall cause its Israeli counsel
or Israeli consultants to prepare and file with the Israeli Tax
Authority one or more applications, or, in the case of
applications that have previously been filed, to continue to use
its best efforts to diligently pursue in good faith the receipt
from the Israeli Tax Authority of one or more rulings that:
(i) (A) Provides for a full exemption to Parent, the
Exchange Agent, the Surviving Company and its or their agents
from withholding requirements as a result of a deferral of
Israeli income tax pursuant to Section 104H of the Israeli
Tax Ordinance, or (B) to the extent that such payers are
not fully exempt from withholding as a result of (A) above,
that either: (x) exempts Parent, the Exchange Agent, the
Surviving Company and its or their agents from any obligation to
withhold Israeli Tax at source from any consideration payable or
otherwise deliverable pursuant to this Agreement, or clarifies
that no such obligation exists; or (y) clearly instructs
Parent, the Exchange Agent, the Surviving Company and their
agents how and when such withholding at source is to be
performed, and in particular, with respect to the classes or
categories of former holders of Company Shares from which Tax is
to be withheld (if any), and the rate or rates of withholding to
be applied (collectively, the Israeli Withholding
Tax Ruling), provided that no withholding or a reduced
rate of withholding, as applicable, under Israeli Tax Law will
be made from any consideration payable hereunder to a
Shareholder to the extent that such Shareholder has provided
Parent, prior to the time such payment is made, with an
appropriate unequivocal exemption from withholding of Israeli
Tax issued by the Israeli Tax Authority confirming that no
withholding of Israeli Tax is required with respect to the
particular Shareholder in question.
(ii) Are in form and substance reasonably satisfactory to
Parent and the Company, confirming that that the assumption of
Company Share Options (whether vested or unvested) under
Section 2.10 will not result in a requirement for an
immediate Israeli tax payment and that the statutory trust
period under Section 102 of the
A-55
Israeli Tax Ordinance for any Company Share Options that are
assumed by Parent will continue uninterrupted from the original
date of grant of such Company Share Option and will not
recommence as a result of the the Merger and the other
Transactions; which ruling may be subject to customary
conditions regularly associated with such a ruling (the
Israeli Options Tax Ruling).
(iii) If applicable, provides that payments out of the
Indemnity Escrow Fund shall not be subject to Israeli Tax until
actually received by the Persons entitled thereto, subject to
the terms and periods set forth in such ruling (the
Israeli Escrow Tax Ruling, and together with
Israeli Options Tax Ruling and the Israeli Withholding Tax
Ruling, the Israeli Tax Rulings).
(b) Parent shall, and shall instruct its representatives
and advisors to, reasonably cooperate with the Company and its
Israeli counsel, consultants, representatives and other advisors
with respect to the preparation and filing of such applications
and in the preparation of any written or oral submissions that
may be necessary, proper or advisable to obtain the Israeli Tax
Rulings. Subject to the terms and conditions hereof, the Company
shall use its commercially reasonable efforts to promptly take,
or cause to be taken, all action and to do, or cause to be done,
all things necessary, proper or advisable under applicable Law
to obtain the Israeli Tax Rulings, as promptly as practicable;
provided that the Company shall not be required to make any
material payment (excluding to the ITA) or to post any material
security or bond in connection with obtaining such rulings. The
Company, its representatives and advisors shall not make any
application to, or conduct any negotiation with, the Israeli Tax
Authorities with respect to any matter relating to the subject
matter of the Israeli Tax Rulings without prior consultation
with Parent, and will enable Parents representatives and
advisors to participate in all discussions and meetings relating
thereto. Parent shall reasonably cooperate with the Company and
its Israeli counsel, consultants, representatives and other
advisors in the course of such participation and to the extent
reasonably necessary to enable the Company to obtain the Israeli
Tax Rulings. To the extent that Parents representative and
advisors elect not to participate in any meeting or discussion,
the Companys representatives and advisors shall provide a
prompt and full report of the discussions held. In any event,
the final text of the Israeli Tax Rulings shall in all
circumstances reasonably satisfactory to the Company and Parent.
Section 5.8 Israeli
Securities Exemption. As promptly as
practicable after the date hereof, Parent shall cause its
Israeli counsel to prepare and file with the Israeli Security
Authority an application for an exemption from the requirements
of the Israeli Securities Law
5728-1968
(the Israeli Securities Law) concerning
the publication of a prospectus in respect of the conversion of
the Company Share Options into options to purchase Parent Common
Stock in accordance with the provisions of
Section 2.10 hereof, pursuant to Section 15D of
the Israeli Securities Law (the Israeli Securities
Exemption). The Company shall cooperate and cause its
Representatives to cooperate with all reasonable requests of
Parent in connection with the preparation and filing of such
application and in the preparation of any written or oral
submissions that may be necessary, proper or advisable to obtain
the Israeli Securities Exemption. Subject to the terms and
conditions hereof, Parent shall use commercially reasonable
efforts to (A) promptly take, or cause to be taken, all
action and (B) do, or cause to be done, all things
necessary, proper or advisable, under applicable Law to obtain
the Israeli Securities Exemption, as promptly as practicable.
Parent, its representatives and advisors shall not make any
application to, or conduct any negotiation with, the Israeli
Security Authority with respect to any matter relating to the
subject matter of the Israeli Securities Exemption without prior
consultation with the Company, and to the extent possible will
enable Companys representatives and advisors to
participate in all discussions and meetings relating thereto. To
the extent that the Companys representatives and advisors
elect not to participate in any meeting or discussion,
Parents representatives and advisors shall provide to the
Company a prompt update of the discussions held. In any event,
the Israeli Securities Exemption shall in all circumstances be
reasonably satisfactory to the Company and Parent.
Section 5.9 Public
Filings; Regulatory Matters; Parent Stockholder Approval;
Financing Disclosure Package.
(a) As promptly as reasonably practicable following the
date hereof, Parent shall prepare and file with the SEC a proxy
statement relating to the Parent Stockholder Approval (the
Proxy Statement), and the
Form S-4.
The Proxy Statement will be included in and will constitute a
part of the
Form S-4.
Each of Parent and the Company shall use its commercially
reasonable efforts to have the Proxy Statement cleared by the
SEC and the
Form S-4
declared effective by the SEC as soon after such filing as
practicable and Parent shall use its commercially reasonable
efforts to keep the
Form S-4
effective as long as is necessary to consummate the Merger and
the other Transactions. Parent
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shall, as promptly as practicable after receipt thereof, provide
the Company with copies of any written comments, and advise the
Company of any oral comments, with respect to the Proxy
Statement or
Form S-4
received from the SEC. The Company shall cooperate and Parent
shall provide the Company with a reasonable opportunity to
review and comment on the Proxy Statement and the
Form S-4,
and any amendment or supplement to the Proxy Statement and the
Form S-4,
prior to filing such with the SEC and will provide the Company
with a copy of all such filings made with the SEC.
Notwithstanding any other provision herein to the contrary, no
amendment or supplement to the Proxy Statement or the
Form S-4
shall be made without notice by Parent to the Company or without
giving the Company a reasonable opportunity to review and
comment on such amendment or supplement. Parent will use its
commercially reasonable efforts to cause the prospectus
contained in the
Form S-4
and the Proxy Statement to be mailed to the holders of Parent
Common Stock and the Company will use commercially reasonable
efforts to cause the prospectus contained in the
Form S-4
to be mailed to the Shareholders, in each case, as promptly as
practicable after the
Form S-4
is declared effective under the Securities Act. If, at any time
prior to the Effective Time, any information relating to Parent
or the Company, or any of their respective Affiliates, or their
respective officers or directors, is discovered by Parent or the
Company, as applicable, and such information should be set forth
in an amendment or supplement to the
Form S-4
or the Proxy Statement so that such documents would not include
any misstatement of a material fact or omit to state any
material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading,
the party discovering such information shall promptly notify the
other party and, to the extent required by Law, an appropriate
amendment or supplement describing such information shall be
promptly filed with the SEC and disseminated to the Parent
Stockholders and to the Shareholders.
(b) Parent shall duly take all lawful action to call, give
notice of, convene and hold the Parent Stockholders
Meeting as promptly as practicable, but in no event later than
40 days after the date the
Form S-4
is declared effective by the SEC, to consider and vote for the
approval pursuant to this Agreement of the issuance of shares of
Parent Common Stock in connection with the Merger and the other
Transactions. Subject to Section 5.11, the Board of
Directors of Parent shall recommend such approval (the
Parent Recommendation) and shall take
all lawful action, consistent with its fiduciary duties, to
solicit the Parent Stockholder Approval.
(c) Each party will fully comply with all securities and
other Laws applicable to such party, including such Laws as are
applicable in order to legally and validly consummate the
Transactions.
(d) If, at any time prior to the Effective Time, any
information relating to Parent or the Company, or any of their
respective Affiliates, or their respective officers or
directors, is discovered by Parent or the Company, as
applicable, and such information should be set forth in an
amendment or supplement to the Financing Disclosure Package so
that the Financing Disclosure Package would not include any
misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the
party discovering such information shall promptly notify the
other party and, to the extent reasonably deemed necessary or
advisable by the Company or Parent, an appropriate amendment or
supplement describing such information shall be promptly
disseminated to the participants in the Financing.
Section 5.10 Access
to Information. Subject to the terms of the
Confidentiality Agreement and applicable Law, from the date
hereof until the Closing Date, each of the Company and Parent
shall, and each shall cause its Subsidiaries, if any, to, afford
to the officers, directors, principals, employees, advisors,
auditors, agents, bankers and other representatives
(collectively, Representatives) of the other
party complete access (including for inspection and copying) at
all reasonable times to its Representatives, properties,
offices, plants and other facilities, books and records, and
shall furnish to the other party such financial, operating and
other data and information as the other party may reasonably
request.
Section 5.11 Exclusivity;
No Change in Recommendation.
(a) Except as set forth in this Section 5.11,
until the earlier of (i) the termination of this Agreement,
and (ii) the Effective Time, Parent and the Company shall
not, nor shall either of them authorize or permit any of their
Subsidiaries or any of their or their Subsidiaries
Affiliates or Representatives to directly or indirectly:
(i) solicit, initiate, encourage or take any other action
designed to facilitate any inquiries or the making of any
proposal or offer that constitutes, or could reasonably be
expected to lead to, any Acquisition Proposal,
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including without limitation (A) approving any transaction
under Section 203 of the Delaware General Corporation Law
(DGCL) or any similar Israeli Laws,
(B) approving any Person becoming an interested
stockholder under Section 203 of the DGCL or any
similar Israeli Laws, and (C) amending or granting any
waiver or release under any standstill or similar agreement with
respect to any of Parents Capital Stock or the
Companys Share Capital, respectively; or
(ii) enter into, continue or otherwise participate in any
discussions or negotiations regarding, furnish to any Person any
information with respect to, assist or participate in any effort
or attempt by any Person with respect to, or otherwise cooperate
in any way with, any Acquisition Proposal.
Notwithstanding the foregoing, if at any time prior to the
Parent Stockholder Approval Parent receives a written
Acquisition Proposal from any Person or group (as
defined in Section 13(d) of the Exchange Act) that did not
result from the breach by Parent of this
Section 5.11(a), (i) Parent may contact such
Person or group to clarify the terms and conditions thereof and
(ii) if the Board of Directors of Parent, or any committee
thereof, determines in good faith, after consultation with
outside legal counsel and a nationally recognized financial
advisor, that such Acquisition Proposal constitutes or could
reasonably be expected to lead to a Superior Proposal, then
Parent and its Representatives may, subject to compliance with
Section 5.11(c), (A) furnish information with
respect to Parent to the Person making such Acquisition Proposal
and its Representatives pursuant to a customary confidentiality
agreement not less restrictive of the other party than the
Confidentiality Agreement, and (B) participate in
discussions or negotiations with such Person and its
Representatives regarding any Superior Proposal. Without
limiting the foregoing, it is agreed that any violation of the
restrictions set forth in this Section 5.11(a) or
the taking of any actions inconsistent with the restrictions set
forth in this Section 5.11(a) by any Representative
of Parent shall be deemed a breach of this
Section 5.11(a) by Parent.
(b) Neither the Board of Directors of Parent, nor the Board
of Directors of the Company, nor any committee thereof shall:
(i) except as set forth in this Section 5.11,
withdraw or modify, or publicly (or in a manner designed to
become public) propose to withdraw or modify, in a manner
adverse to the other party, its approval or recommendation with
respect to the Merger and the other Transactions;
(ii) cause or permit Parent or the Company, as applicable,
to enter into any letter of intent, memorandum of understanding,
agreement in principle, acquisition agreement, merger agreement
or similar agreement constituting or relating to any Acquisition
Proposal (other than, with respect to Parent, a confidentiality
agreement referred to in Section 5.11(a) entered
into in the circumstances referred to in
Section 5.11(a)); or
(iii) adopt, approve or recommend, or propose to adopt,
approve or recommend, any Acquisition Proposal.
Notwithstanding the foregoing, the Board of Directors of Parent
may withdraw or modify its recommendation with respect to the
Merger and the other Transactions if the Board determines in
good faith after consultation with outside counsel that its
fiduciary obligations require it to do so, but only at a time
that is prior to the Parent Stockholder Approval and after two
Business Days following receipt by the Company of written notice
advising it that the Board of Directors of Parent desires to
withdraw or modify the recommendation and, if such withdrawal is
due to the existence of an Acquisition Proposal, specifying the
material terms and conditions of such Acquisition Proposal and
identifying the Person making such Acquisition Proposal.
Notwithstanding the foregoing, nothing in this
Section 5.11 shall be deemed to (A) permit
Parent to take any action described in clauses (ii) or
(iii) of the first sentence of this
Section 5.11(b), (B) affect any obligation of
Parent under this Agreement, other than as set forth in
Section 5.11, or (C) limit Parents
obligation to call, give notice of, convene and hold the Parent
Stockholders Meeting, regardless of whether the Board of
Directors of Parent has withdrawn or modified its
recommendation. Provided further that nothing in this
Section 5.11 shall be deemed to prevent Parent or
its Board of Directors from taking or disclosing to the Parent
Stockholders a position contemplated by
Rule 14d-9
and 14e-2(a)
under the Exchange Act (or any similar communication to
stockholders in connection with the making or amendment of a
tender officer or exchange offer) or from making any other
disclosure to stockholders required by Law with regard to an
Acquisition Proposal, including by virtue of the Board of
Directors fiduciary duties.
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(c) Notwithstanding Section 5.11(a), each party
shall immediately advise the other party orally, with written
confirmation to follow promptly (and in any event within
24 hours), of any Acquisition Proposal or any request for
nonpublic information in connection with any Acquisition
Proposal, or of any inquiry with respect to, or that could
reasonably be expected to lead to, any Acquisition Proposal, the
material terms and conditions of any such Acquisition Proposal
or inquiry and the identity of the Person making any such
Acquisition Proposal or inquiry. Parent shall not provide any
information to or participate in discussions or negotiations
with the Person making any Superior Proposal until after it has
first notified the Company of such Acquisition Proposal as
required by the preceding sentence. The Company shall not
provide any information to or participate in discussions or
negotiations with any such Person under any circumstances. Each
party shall (i) keep the other party fully informed, on a
current basis, of the status and details (including any change
to the terms) of any such Acquisition Proposal or inquiry,
(ii) provide to the other party as soon as practicable
after receipt or delivery thereof copies of all correspondence
and other written material sent or provided to such party from
any third party in connection with any Acquisition Proposal or
sent or provided by Parent to any third party in connection with
any Superior Proposal, and (iii) if the Company shall make
a counterproposal to amend the terms of this Agreement, which
the Board of Directors of Parent, or any committee thereof, in
good faith determines would cause the Superior Proposal to cease
to be such, Parent shall consider and cause its financial and
legal advisors to negotiate on its behalf in good faith with
respect to the terms of such counterproposal. Contemporaneously
with providing any information to a third party in connection
with any such Superior Proposal or inquiry, Parent shall furnish
a copy of such information to the Company.
(d) Each of Parent and the Company shall, and shall cause
its Subsidiaries and its and their Representatives and
Affiliates to, cease immediately all discussions and
negotiations regarding any proposal that constitutes, or could
reasonably be expected to lead to, an Acquisition Proposal.
(e) For purposes of this Agreement, the following terms
shall have the following meanings:
(i) Acquisition Proposal
means any offer or proposal or related offers or proposals for,
or any indication of interest in, any of the following (other
than the Merger) by any Person or group (as defined
in Section 13(d) of the Exchange Act): (i) any direct
or indirect acquisition or purchase of (A) 5% or more of
the Companys Capital Stock or the Capital Stock of any of
its Subsidiaries or (B) 15% or more of Parents
Capital Stock, (ii) any acquisition, license or purchase of
assets (other than inventory to be sold in the ordinary course
of business consistent with past practice) of Parent, or the
Company or any of its Subsidiaries, (iii) any merger,
consolidation or other business combination relating to Parent,
or the Company or any of its Subsidiaries or (iv) any other
transaction that would inhibit, or materially interfere with or
delay the consummation of the Transactions contemplated in this
Agreement and the Ancillary Agreements.
(ii) Superior Proposal
means, with respect to Parent, any unsolicited, bona fide
written Acquisition Proposal on terms that the Board of
Directors of Parent determines in its good faith judgment to be
(A) materially more favorable to the Parent Stockholders
than the Merger and the other Transactions, taking into account
all the terms and conditions of such proposal (including any
written counterproposal by the Company to amend the terms of
this Agreement in response to such Acquisition Proposal or
otherwise) and after consultation with outside legal counsel and
a nationally recognized financial advisor, and
(B) reasonably capable of being completed on the terms
proposed, taking into account all financial, regulatory, legal
and other aspects of such proposal; provided, however, that no
Acquisition Proposal shall be deemed to be a Superior Proposal
if any financing required to consummate the Acquisition Proposal
is not fully and irrevocably committed.
Section 5.12 Notification
of Certain Matters; Supplements to Disclosure Schedule.
(a) Parent and Merger Sub, on the one hand, and the
Company, on the other, shall give prompt written notice to the
other party of (i) the occurrence or non-occurrence of any
change, condition or event the occurrence or non-occurrence of
which would render any representation or warranty of Parent or
Merger Sub or the Company, as applicable, contained in this
Agreement or any Ancillary Agreement, if made on or immediately
following the date of such change, condition or event,
materially untrue or inaccurate, (ii) the occurrence of any
change, condition or event that has had or is reasonably likely
to have a Material Adverse Effect on Parent, the Company or the
Surviving Company, as applicable, (iii) any failure of
Parent, Merger Sub, the Company, any of the Companys
Subsidiaries,
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or any other Affiliate of Parent or the Company, as applicable,
to comply with or satisfy any covenant or agreement to be
complied with or satisfied by it hereunder or any change,
condition or event that would otherwise result in the
nonfulfillment of any of the conditions to Parents and
Merger Subs or the Companys obligations hereunder,
(iv) any notice or other communication from any
Governmental Authority in connection with the Merger or the
other Transactions or from any Person alleging that the consent
of such Person is or may be required in connection with the
consummation of the Transactions, (v) any Action pending
or, as applicable, to the Knowledge of any party, threatened
against a party or the parties relating to the Transactions, or
(vi) any failure of Parent and its Subsidiaries, taken
together, or the Company and its Subsidiaries, taken together,
to have an unrestricted cash balance of at least $1,000,000;
provided, however, that the delivery of any notice
pursuant to this Section 5.12(a) shall not
(A) cure any breach of, or non-compliance with, any other
provision of this Agreement or (B) limit the remedies
available to the non-breaching party.
(b) Parent, Merger Sub and the Company, as applicable,
shall supplement the information set forth on the Parent
Disclosure Schedule and the Company Disclosure Schedule,
respectively, with respect to any matter hereafter arising that,
if existing or occurring at or prior to the date of this
Agreement, would have been required to be set forth or described
in the Parent Disclosure Schedule or the Company Disclosure
Schedule, as applicable, or that is necessary to correct any
information in the Parent Disclosure Schedule or the Company
Disclosure Schedule, as applicable, or in any representation or
warranty of Parent, Merger Sub or the Company that has been
rendered inaccurate thereby, promptly following discovery
thereof. No such supplement shall be deemed to cure any breach
of any representation or warranty made in this Agreement or any
Ancillary Agreement or have any effect for purposes of
determining the satisfaction of the conditions set forth in
Sections 6.2 and 6.3, the compliance by
Parent or the Company with any covenant set forth herein or the
indemnification provided for in Article VII, except
to the extent that such supplement discloses an event,
circumstance or fact existing or that has occurred that,
individually or together with any other supplemental disclosures
added to the Parent Disclosure Schedule or Company Disclosure
Schedule, as applicable, after the delivery thereof concurrently
with the execution of this Agreement, has not and would not
reasonably be expected to result in, Parent or the Company, as
applicable, incurring any Liability (including any loss or other
economic detriment) in excess of $250,000, or any other material
obligation (a Permitted Supplement).
Section 5.13 Takeover
Statutes. If any state takeover statute or
similar Law shall become applicable to the Transactions, Parent,
Merger Sub or the Company, as applicable, and each such
partys respective Board of Directors shall grant such
approvals and take such actions as are necessary so that the
Transactions may be consummated as promptly as practicable on
the terms contemplated hereby and otherwise act to eliminate the
effects of such statute or similar Law on the Transactions.
Section 5.14 Share
Option Plans. At or before the Effective
Time, the Company shall, to the extent necessary, cause to be
effected, in a manner reasonably satisfactory to Parent,
amendments to the Company Plans and any other documents
governing the Company Share Options to give effect to the
provisions of Section 2.10.
Section 5.15 Director
and Officer Indemnification.
(a) Prior to the Effective Time the Company may purchase a
tail policy under the Companys existing
directors and officers insurance policy which
(i) has an effective term of seven years from the Effective
Time, (ii) covers those Persons who are currently covered
by the Companys directors and officers
insurance policy in effect as of the date hereof for actions and
omissions occurring on or prior to the Effective Time, and
(iii) contains terms and conditions that are no less
favorable, in the aggregate, to the insured than those of the
Companys directors and officers insurance
policy in effect as of the date hereof. For a period of seven
years from the Closing Date, Parent shall use its commercially
reasonable efforts to cause the Surviving Company to maintain
such tail policy, provided that no additional amounts shall be
payable by the Surviving Company thereunder.
(b) During the period commencing as of the Effective Time
and ending on the seventh anniversary of the Effective Time, to
the fullest extent permitted by applicable Law, the Surviving
Company shall, and shall cause its Subsidiaries to, and Parent
shall cause the Surviving Company and its Subsidiaries to,
fulfill and honor in all respects the obligations of the Company
and its Subsidiaries to the current officers and directors of
the Company or any of its Subsidiaries and each other Person who
is or was a director or officer of the Company or any of its
Subsidiaries at or at any time prior to the Effective Time (the
D&O Indemnified Parties), pursuant to
all rights to
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any indemnification and exculpation from liabilities for acts or
omissions contained in the Company Charter Documents (as in
effect on the date of this Agreement) or available under
applicable Law. If the Surviving Company shall be liquidated and
dissolved by Parent or any of its successors or assigns, or
consolidates with or merges into any other Person and shall not
be the continuing or surviving entity of such consolidation or
merger, proper provisions shall be made so that the continuing
or surviving entity and its successors and assigns shall assume
the obligations set forth in this Section 5.15(b).
(c) The provisions of this Section 5.15 shall
survive the Effective Time and are intended to be for the
benefit of, and shall be enforceable by, each D&O
Indemnified Party and his or her heirs and representatives.
Section 5.16 Directors. The
Board of Directors of Parent will take all actions reasonably
necessary such that, effective immediately following the
Effective Time (i) the Board of Directors of Parent shall
be composed of the individuals set forth on
Schedule 5.16(i), and (ii) the composition of
the committees of the Board of Directors of Parent shall be as
set forth on Schedule 5.16(ii), provided that the
appointment of such directors to the Board of Directors of
Parent shall be approved by the Nominating and Corporate
Governance Committee of Parent in accordance with applicable Law
and subject to Parents reasonable governance standards
regarding service as a director on the Board of Directors of
Parent. If Parents Nominating and Corporate Governance
Committee fails to approve one or more of the directors that are
current directors of the Company, or any of such directors is
unwilling or unable to serve, within five Business Days of
notice thereof, the Company may propose one or more alternate
directors from the Board of Directors of the Company who so
qualify until four of them are so approved.
Section 5.17 Control
of the Other Partys Business. Nothing
contained in this Agreement or in any Ancillary Agreement will
give Parent, directly or indirectly, the right to control or
direct the operations of the Company or its Subsidiaries prior
to the Effective Time, or will give the Company or its
Subsidiaries, directly or indirectly, the right to control or
direct the operations of Parent prior to the Effective Time.
Prior to the Effective Time, each of Parent and the Company will
exercise, consistent with the terms and conditions of this
Agreement, complete control and supervision over its and its
Subsidiaries respective operations.
Section 5.18 Confidentiality. Each
of the parties shall hold, and shall cause its Representatives
to hold, in confidence all documents and information furnished
to it by or on behalf of any other party to this Agreement in
connection with the transactions contemplated hereby pursuant to
the terms of the confidentiality agreement dated as of
August 4, 2008, between Parent and the Company (as amended
from time to time, the Confidentiality
Agreement), which shall continue in full force and
effect in accordance with its terms.
Section 5.19 Exemption
from Liability Under
Section 16(b). Provided that each
Company Insider timely delivers to Parent the Section 16
Information, the Board of Directors of Parent, or a committee of
Non-Employee Directors thereof (as such term is defined for
purposes of
Rule 16b-3(d)
under the Exchange Act), will adopt a resolution providing that
the receipt by Company Insiders of Parent Common Stock in
exchange for Company Shares pursuant to the Merger contemplated
by this Agreement, to the extent such securities are listed in
the Section 16 Information, is intended to be exempt from
short-swing profit liability pursuant to Section 16(b)
under the Exchange Act. For purposes of this Agreement,
(a) Section 16 Information will mean for
each Company Insider, the number of Company Shares (including
Company Shares subject to vesting restrictions) held by such
Company Insider and expected to be exchanged for Parent Common
Stock in the Merger, and the number and description of Company
Share Options held by such Company Insider and expected to be
converted into Parent Stock Options in connection with the
Merger and (b) Company Insiders will mean those
officers and directors of the Company, who after the Effective
Time will become officers and directors of Parent pursuant to
the terms hereof and subject to the reporting requirements of
Section 16(a) of the Exchange Act and who are listed in the
Section 16 Information.
Section 5.20 Financial
Statements. Between the date hereof and the
Closing, (i) the Company shall deliver to Parent true and
complete copies of the consolidated balance sheet and related
consolidated statements of operations, retained earnings and
cash flows for the Company and its Subsidiaries as of each month
end, fiscal quarter-end or year-end occurring during such
period, and (ii) Parent shall deliver to the Company true
and complete copies of the consolidated balance sheet and
related consolidated statements of operations, retained earnings
and cash flows for Parent as of each month end, fiscal
quarter-end or year-end occurring during such period. Each party
shall prepare and deliver such financial statements to the other
as promptly as practicable, and, in any event, within
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20 days after the end of each month in the case of monthly
financial statements, and within three days after receipt of
approval of the Board of Directors in the case of quarterly or
year-end financial statements.
Section 5.21 Public
Announcements. The initial press release
relating to the execution by the parties of this Agreement shall
be in the form approved by Parent and the Company. Thereafter
until the Closing Date, no party shall make any public
announcement with respect to this Agreement or the Transactions
except as permitted by this Section 5.21. Parent and
the Company may make further public announcements, provided that
it shall, to the extent practicable, first consult with the
other party prior to issuing any press release, public statement
or any other public announcement by such party regarding this
Agreement, the Merger, the Ancillary Agreements or the other
Transactions, and shall provide one another with the opportunity
to review and comment upon such press release, public statement
or other public announcement, and shall not issue any such press
release or make any such public statement or announcement prior
to such consultation, except as may be required by applicable
Law.
Section 5.22 Reorganization
Matters. Parent and the Surviving Company
shall, and shall cause their respective Affiliates to:
(a) take, all reasonable actions following the Closing in
order to cause the Merger, including the delivery of all Parent
Common Stock to the holders of Company Shares under
Section 2.12, to qualify as a reorganization within
the meaning of Section 368(a)(2)(E) of the Code, and
(b) report all transactions under this Agreement and the
Ancillary Agreements in accordance with their characterizations
herein, in each case, unless otherwise required by law.
Section 5.23 Parent
Corporate Compliance Program. The Company
shall ensure that on or before the Closing Date any Contracts to
which the Company or any of its Subsidiaries is a party comply
with Parents Corporate Compliance Program, including,
without limitation, the Code of Conduct attached thereto.
Section 5.24 Transfer
Taxes. Unless otherwise agreed between Parent
and the Company, Parent and the Company shall each be
responsible for the payment of one-half of any transfer, sales,
use, stamp, conveyance, value added, recording, registration,
documentary, filing and any other similar Taxes and
administrative fees (including, without limitation, notary fees)
arising in connection with the consummation of the transactions
contemplated by this Agreement whether levied on Parent, the
Company or any of their respective Affiliates (Transfer
Taxes). For the avoidance of doubt, this
Section 5.24 only applies to Transfer Taxes and does
not relate to other Taxes, such as taxes of the Shareholders
based on income, gains, receipts, gross profits or other similar
Taxes that are not Transfer Taxes. The Merger Consideration will
be exclusive of any Transfer Taxes.
ARTICLE VI
CONDITIONS
TO CLOSING
Section 6.1 General
Conditions. The respective obligations of
each party to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment, at or prior to
the Closing, of each of the following conditions, any of which
may, to the extent permitted by applicable Law, be waived in
writing by any party in its sole discretion (provided,
that such waiver shall only be effective as to the obligations
of such party):
(a) No Governmental
Investigation. No Governmental Authority
shall be in the process of (i) investigating or
(ii) conducting proceedings regarding this Agreement, the
Ancillary Agreements or the Transactions which make it
reasonably possible, in Parents
and/or the
Companys reasonable determination, that as a result of
such investigation or proceedings, an Order, including but not
limited to any injunction, will be issued, promulgated, enforced
or entered by a Governmental Authority that would enjoin,
materially restrain or condition, or make illegal or otherwise
prohibit the consummation of the Merger and the other
Transactions.
(b) No Injunction or
Prohibition. No Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any Law
or Order that is then in effect and that enjoins, materially
restrains or conditions, or makes illegal or otherwise prohibits
the consummation of the Merger and the other Transactions
contemplated by this Agreement or the Ancillary Agreements.
(c) Governmental Consents. The
Governmental Authority and other third party consents listed on
Schedule 6.1(c) shall have been obtained or the
applicable waiting periods shall have expired or been terminated.
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(d) Israeli Statutory Waiting
Periods. At least 50 days shall have
elapsed after the filing of the Merger Proposals with the
Israeli Companies Registrar and at least 30 days shall have
elapsed after receipt of the Company Shareholder Approval and
the approval of the Merger by the sole shareholder of Merger Sub.
(e) No Issuance of a Prospectus in
Israel. No prospectus shall, in Parents
reasonable judgment, be required to be filed in Israel for the
issuance of shares of Parent Common Stock in connection with the
Merger, the Financing and the other Transactions.
(f) Company Shareholder
Approval. The Company Shareholder Approval
shall have been obtained in accordance with applicable Law and
the Company Charter Documents.
(g) Parent Stockholder
Approval. Parent Stockholder Approval shall
have been validly obtained under the certificate of
incorporation and bylaws of Parent.
(h) Form S-4. The
Form S-4
shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the
Form S-4
shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the SEC.
(i) Merger Certificate. The Merger
Certificate shall have been issued by the Israeli Companies
Registrar.
(j) No Litigation. No Action shall
have been commenced or threatened by or before any Governmental
Authority that the Board of Directors of Parent or the Board of
Directors of the Company determines in good faith, after
consultation with outside legal counsel, is reasonably likely to
(i) require divestiture or license of any material assets
of Parent as a result of the transactions contemplated by this
Agreement or the divestiture or license of any material assets
of the Surviving Company or any of their respective
Subsidiaries, (ii) prohibit or impose material limitations
on Parents ownership or operation of all or a material
portion of its or the Surviving Companys business or
assets (or those of any of their Subsidiaries) or
(iii) impose material limitations on the ability of Parent
or any of its Subsidiaries, or render Parent or any of its
Subsidiaries unable, effectively to control the business, assets
or operations of the Surviving Company or its Subsidiaries in
any material respect.
(k) Israeli Withholding Tax
Ruling. The Israeli Withholding Tax Ruling
shall have been received, satisfying all of the conditions
described in Section 5.7(a)(i) hereof; provided,
however, this condition shall be deemed to be satisfied if a
withholding tax ruling satisfying all of the conditions
described in Section 5.7(a) hereof has been offered
by the Israeli Tax Authority on terms and subject to conditions
which are customary and standard under the circumstances.
(l) Israeli Escrow Tax Ruling. The
Israeli Escrow Tax Ruling, if applicable, shall have been
received, satisfying all of the conditions described in
Section 5.7; provided, however, this
condition shall be deemed to be satisfied if an escrow tax
ruling satisfying all of the conditions described in
Section 5.7(a)(iii) hereof has been offered by the
Israeli Tax Authority on terms and subject to conditions which
are customary and standard under the circumstances.
(m) Israeli Securities
Exemption. The Israeli Securities Exemption
shall have been received, satisfying all of the conditions
described in Section 5.8.
(n) Investment Center
Approvals. The Investment Centers
approval to the change in ownership of the Company to be
effected by the Merger, shall have been received.
(o) Financing. The Financing, in
all material respects consistent with the Financing Agreement,
shall close concurrent with the Closing of the Merger.
Section 6.2 Conditions
to Obligations of the Company. The
obligations of the Company to consummate the transactions
contemplated by this Agreement shall be subject to the
fulfillment, at or prior to the Closing, of each of the
following conditions, any of which may be waived in writing by
the Company in its sole discretion:
(a) Representations, Warranties and
Covenants. (i) Each of the
representations and warranties of Parent and Merger Sub set
forth in this Agreement qualified as to materiality or Material
Adverse Effect shall
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be true and correct, and those not so qualified shall each be
true and correct in all material respects, as of the date of
this Agreement and as of the Closing Date (without giving effect
to any amendment or supplement to the Parent Disclosure Schedule
after the date hereof, other than a Permitted Supplement),
except to the extent such representations and warranties speak
as of an earlier date, in which case such representation or
warranty shall be true and correct as of such earlier date;
(ii) Parent and Merger Sub shall have performed, in all
material respects, all obligations and agreements and complied
with all covenants and conditions required by this Agreement or
any Ancillary Agreement to be performed or complied with by it
prior to or at the Closing; and (iii) the Company shall
have received from Parent a certificate to the effect set forth
in the foregoing clauses (i) and (ii), signed by a duly
authorized officer thereof.
(b) Ancillary Agreements. Each of
the Ancillary Agreements shall have been duly authorized,
executed and delivered by each of the other parties thereto
(other than the Company), and the Company shall have received an
executed counterpart of each of the Ancillary Agreements, signed
by each party thereto (other than the Company), including a
counterpart of the Escrow Agreement signed by the Escrow Agent.
(c) Opinion of Parent Counsel. The
Company shall have received an opinion of counsel to Parent in
the form attached hereto as Exhibit D.
(d) Tax Opinion. The Company shall
have received an opinion from its tax counsel to the effect that
(i) the Merger qualifies as a reorganization under
Section 368(a)(2)(E) of the Code, and (ii) no material
gain or loss will be recognized by Parent or the Company as a
result of the Merger.
(e) No Material Adverse
Change. There shall not have occurred any
change, event or development or prospective change, event or
development that, individually or in the aggregate, has had or
is reasonably likely to have a Material Adverse Change on Parent.
(f) Resignations and
Appointments. The Company shall have received
copies of the letters of resignation from the applicable
directors of Parent effective as of the Closing, and the
directors that are the current directors of the Company shall
have been duly appointed to the Board of Directors of Parent
effective as of the Closing pursuant to the provisions of
Section 5.16.
Section 6.3 Conditions
to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the
transactions contemplated by this Agreement shall be subject to
the fulfillment, at or prior to the Closing, of each of the
following conditions, any of which may be waived in writing by
Parent in its sole discretion:
(a) Representations, Warranties and
Covenants. (i) Each of the
representations and warranties of the Company set forth in this
Agreement qualified as to materiality or Material Adverse Effect
shall be true and correct, and those not so qualified shall each
be true and correct in all material respects, as of the date of
this Agreement and as of the Closing Date (without giving effect
to any amendment or supplement to the Company Disclosure
Schedule after the date hereof, other than a Permitted
Supplement), except to the extent such representations and
warranties speak as of an earlier date, in which case such
representation or warranty shall be true and correct as of such
earlier date; (ii) the Company shall have performed, in all
material respects, all obligations and agreements and complied
with all covenants and conditions required by this Agreement or
any Ancillary Agreement to be performed or complied with by it
prior to or at the Closing; and (iii) Parent shall have
received from the Company a certificate to the effect set forth
in the foregoing clauses (i) and (ii), signed by a duly
authorized officer thereof.
(b) Ancillary Agreements. Each of
the Ancillary Agreements shall have been duly authorized,
executed and delivered by each of the other parties thereto,
other than Parent and Merger Sub, and Parent shall have received
an executed counterpart of each of the Ancillary Agreements,
signed by each party thereto, other than Parent or Merger Sub,
including a counterpart of the Escrow Agreement signed by the
Escrow Agent.
(c) Opinion of Company
Counsel. Parent shall have received an
opinion of counsel to the Company in the form attached hereto as
Exhibit E.
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(d) Tax Opinion. Parent shall have
received an opinion from its tax counsel to the effect that
(i) the Merger qualifies as a reorganization under
Section 368(a)(2)(E) of the Code, and (ii) no material
gain or loss will be recognized by Parent or the Company as a
result of the Merger.
(e) Resignations. Parent shall
have received letters of resignation from the directors of the
Company and each of its Subsidiaries.
(f) No Material Adverse
Change. There shall not have occurred any
change, event or development or prospective change, event or
development that, individually or in the aggregate, has had or
is reasonably likely to have a Material Adverse Change on the
Company.
ARTICLE VII
SURVIVAL;
INDEMNIFICATION; REMEDIES
Section 7.1 Survival
of Representations and Warranties and Covenants.
(a) The representations and warranties of the Company made
in this Agreement shall survive for the Escrow Period. The right
to indemnification, reimbursement or other remedy based upon
such representations and warranties shall not be affected by any
investigation conducted with respect to, or Knowledge acquired
(or capable of being acquired) at any time, whether before or
after the execution and delivery of this Agreement or the
Closing Date.
(b) The covenants and agreements of the parties contained
in this Agreement shall survive the Closing indefinitely, except
as expressly provided otherwise herein.
Section 7.2 Indemnification
and Other Rights.
(a) If the Closing occurs, to the extent and solely out of
the Indemnity Escrow Fund, Parent and its Affiliates (including
the Surviving Company following the Closing), each of their
respective officers, directors, employees, stockholders, agents,
representatives, and each of their respective successors and
assigns (the Parent Indemnified Parties)
shall be indemnified and held harmless, reimbursed and made
whole from and against any losses or other Liability (including
reasonable legal and expert fees and expenses incurred in
investigation or defense (including any appeal) of any of the
same, or in asserting, preserving or enforcing its rights
hereunder) actually incurred, accrued or claims suffered by any
such indemnified party (collectively Damages)
to the extent arising from or in connection with any of the
following:
(i) any breach or inaccuracy of any representation or
warranty of the Company contained in this Agreement or in any
Ancillary Agreement (without giving effect to any supplement to
the Company Disclosure Schedule after the date hereof);
(ii) any breach of any covenant of the Company prior to the
Closing contained in this Agreement; and
(iii) (A) any and all Taxes of the Company and its
Subsidiaries with respect to (x) taxable periods ending on
or before the Closing Date or (y) any taxable period that
commences before and ends after the Closing Date to the extent
attributable to the period prior to Closing as determined
pursuant to Section 7.2(c) of this Agreement, and
(B) reasonable costs and expenses incurred by the Surviving
Company in connection with compliance matters relating to Taxes
covered by this Section 7.2(a)(iii), including costs
and expenses relating to disputes with taxing authorities.
(b) Any payments made pursuant to this
Article VII shall be treated for all purposes as an
adjustment to the Merger Consideration.
(c) For the sole purpose of appropriately apportioning any
Taxes relating to a period that includes (but that would not end
on) the Closing Date, the portion of such Tax that is
attributable to the Company for the part of such taxable period
that ends on the Closing Date shall be (i) in the case of
any Taxes other than Taxes based upon income or receipts, the
amount of such for the entire Tax period multiplied by a
fraction the numerator of which is the number of calendar days
in the Tax period ending on the Closing Date and the denominator
of which is the number of calendar days in the entire Tax
period, and (ii) in the case of any Taxes based upon or
related to income or
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receipts, the amount which would be payable if the relevant Tax
period ended as of the close of business on the Closing Date.
For purposes of Section 7.2(c)(ii), any exemption,
deduction, credit or other that is calculated on an annual basis
shall be allocated pro rata per calendar day between the period
ending on the Closing Date and the period beginning the day
after the Closing Date.
(d) For purposes of this Agreement, Damages shall include,
but not be limited to, actual or consequential damages arising
from, and the amount by which the value of the Company is
determined by a nationally recognized accounting firm, appraisal
firm or investment bank to be less than it would have been but
for, any breach or inaccuracy of the representations and
warranties or the failure by the Company to fulfill its
obligations hereunder. There shall be no right of contribution
for any indemnifying Shareholder from the Surviving Company or
Parent with respect to any Damages claimed by any Parent
Indemnified Party, and in no event shall any indemnifying
Shareholder be entitled to require that any claim be made or
brought against any other Person, including the Surviving
Company.
(e) Any Damages subject to indemnification hereunder shall
be (i) calculated after giving effect to any available tax
benefit relating to such Damages that can be utilized within the
next twelve (12) months after incurrence of such Damages
(net of any additional taxes payable in respect of the
indemnification payment), (ii) net of any amount
specifically accrued or reserved for with respect to such
Damages in the Financial Statements (and to the extent accrued
or reserved for in Financial Statements delivered after the date
hereof, so accrued or reserved in the ordinary course,
consistent with prior practice), and (iii) net of any
third-party insurance proceeds which have been recovered by the
Parent Indemnified Parties in connection with the facts giving
rise to the right of indemnification (net of any increases in
premiums related to the applicable claim for Damages); provided
that if such insurance proceeds are recovered after the Parent
Indemnified Parties have been indemnified, such recovered amount
shall be promptly refunded by the Parent Indemnified Parties to
the Indemnity Escrow Fund (not to exceed the amount paid out of
the Escrow Fund with respect to the applicable claim for
Damages), and provided further that the Parent Indemnified
Parties shall exercise commercially reasonable efforts to
recover any third-party insurance proceeds prior to pressing any
claim for indemnification under this Article VII.
Section 7.3 Time
Limitations. Any liability for
indemnification with respect to any representation or warranty
of the Company contained in this Agreement, and any other
liability for indemnification pursuant to
Section 7.2 hereof, shall terminate at
5:00 p.m. California time on the last day of the
Escrow Period unless on or before such time, Parent provides
notice in writing pursuant to Section 7.6 or
Section 7.7 of a claim for Damages against the
Indemnity Escrow Fund specifying the factual basis of that claim
in reasonable detail to the extent then known by Parent. In the
event Parent provides such notice, Parent shall continue to have
the right to recover from the Indemnity Escrow Fund, and to all
other rights and remedies under this Agreement, with respect to
the matter or matters to which such claim relates until such
claim has been finally resolved and payment made, if any.
Section 7.4 Other
Limitations.
(a) The Parent Indemnified Parties may not recover any
Damages pursuant to Section 7.2 unless and until
collectively they have incurred, accrued or suffered Damages in
excess of $250,000 in the aggregate (the Basket
Amount), after which, such Parent Indemnified Parties
shall be entitled to recover all such Damages, including Damages
in the Basket Amount. Notwithstanding the foregoing, the Parent
Indemnified Parties shall be entitled to recover for, and the
Basket Amount shall not apply as a threshold to, any and all
claims or payments made with respect to (i) any Damages
incurred pursuant to Section 7.2(a)(iii) hereof, or
(ii) any Damages incurred as a result of Shareholder Fraud.
(b) For the purpose of quantifying the Damages recoverable
by any Parent Indemnified Party under this
Article VII only (but not for determining whether
any representation or warranty has been breached or is
inaccurate), any representation or warranty given or made by the
Company that is qualified in scope as to materiality (including
a Material Adverse Effect on the Company) shall be deemed to be
made or given without such qualifications.
(c) Nothing herein shall limit, or be deemed to limit, the
rights of Parent against (i) any Major Shareholder under
the Company Shareholder Agreements, or (ii) any Shareholder
arising under the letter of transmittal delivered by such
Shareholder as described in Section 2.12(a).
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(d) Notwithstanding any other provision of this Agreement
or applicable Law, no party shall be liable to any other for any
punitive damages.
Section 7.5 Value
Used for Indemnity. For purposes of
determining the number of shares of Parent Common Stock payable
to Parent for any Damages pursuant to this
Article VII, the per share value of Parent Common
Stock held in the Indemnity Escrow Fund shall be deemed to be
the arithmetic average closing sale price of the Parent Common
Stock on the Nasdaq ( as reported by The Wall Street Journal
for the ten full Nasdaq trading days ending one trading day
immediately preceding the date that the shares are delivered by
the Escrow Agent pursuant to a claim, notwithstanding any
subsequent increase or decrease in the trading price of shares
of Parent Common Stock on the Nasdaq (or the Over-the-Counter
Bulletin Board or other securities market or exchange on
which the Parent Common Stock is then quoted); provided,
however, that, if, at any time during such ten day period,
the outstanding shares of Parent Common Stock have been changed
into a different number of shares or a different class by reason
of any stock dividend, subdivision, reclassification,
recapitalization, split, combination, exchange of shares, or
similar event, then the per share value of the Indemnity Escrow
Shares during such ten day period shall be correspondingly
adjusted to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination, exchange
of shares or similar event.
Section 7.6 Procedures
Relating to Indemnification Involving Third Party Claims.
(a) Any Parent Indemnified Party shall notify the Escrow
Agent and the Shareholders Representative prior to the
termination of the Escrow Period in writing, and in reasonable
detail, of any claim or demand made against such Parent
Indemnified Party by any Person not a party to this Agreement,
including any third party asserting a Tax claim, which claim or
demand arises under this Agreement, and in respect of which such
Parent Indemnified Party seeks indemnification under
Section 7.2 (a Third Party
Claim). Thereafter, until such Damages have been
determined, such Parent Indemnified Party shall promptly deliver
to the Escrow Agent and the Shareholders Representative
(i) after such Parent Indemnified Partys receipt
thereof, copies of all notices and documents (including court
papers) received by the Parent Indemnified Party relating to the
Third Party Claim, and (ii) after such Parent Indemnified
Partys delivery or filing thereof, copies of all notices
and documents (including court papers) delivered to such third
party or filed with any court or arbitrator by the Parent
Indemnified Party, in each case relating to the Third Party
Claim.
(b) In addition to any other Damages, the Parent
Indemnified Party shall be reimbursed for the reasonable fees
and expenses of counsel employed by the Parent Indemnified Party
in connection with a Third Party Claim.
(c) The Parent Indemnified Party may not settle, compromise
or discharge any Third Party Claim as to which a claim may be
made against the Shareholders or the Escrow Fund without the
prior written consent of the Shareholders Representative (which
consent shall not be unreasonably withheld, conditioned or
delayed, if either (i) Parent reasonably determines that
the shares of Parent Common Stock remaining in the Escrow
Indemnity Fund (after deducting the shares reasonably
anticipated to be payable upon resolution of all then unresolved
or unpaid pending claims) are not or would not reasonably be
expected to be adequate to compensate the Parent Indemnified
Party in the event that the settlement, compromise or discharge
were not approved, or (ii) Parent reasonably concludes that
such Third Party Claim will result or would reasonably be
expected to result in shared liability).
Section 7.7 Other
Claims. A claim by any Parent Indemnified
Party for indemnification under Section 7.2 not
involving a Third Party Claim may be asserted by written notice
prior to the termination of the Escrow Period to the Escrow
Agent and the Shareholders Representative that states with
reasonable specificity the description of such claim and the
amounts in dispute to the extent then known (each such written
notice, a Dispute). Thereafter, the
Shareholders Representative and the Parent Indemnified
Party shall work in good faith to resolve such Dispute for a
period not to exceed 20 days from the date notice was
received setting forth the amount claimed. If the parties are
unable to resolve such Dispute within 20 days after notice
is received, then either party may submit such Dispute to
arbitration pursuant to Section 9.3 of this
Agreement.
Section 7.8 Recovery
in the Case of Strict Liability or
Negligence. NO CLAIM FOR DAMAGES BY A PARENT
INDEMNIFIED PARTY UNDER SECTION 7.2 SHALL BE
UNENFORCEABLE SOLELY BECAUSE SUCH DAMAGES ARE BASED ON PAST,
PRESENT OR FUTURE ACTS, CLAIMS OR LEGAL REQUIREMENTS (INCLUDING
ANY ENVIRONMENTAL LAW OR PRODUCTS LIABILITY LAW), AND
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REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON FROM WHOM
INDEMNIFICATION OR OTHER RECOVERY IS SOUGHT) ALLEGES OR PROVES
THE CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE
PERSON SEEKING SUCH INDEMNIFICATION OR OTHER RECOVERY, OR THE
SOLE OR CONCURRENT STRICT LIABILITY IMPOSED ON THE PERSON
SEEKING SUCH INDEMNIFICATION OR OTHER RECOVERY.
Section 7.9 Sole
and Exclusive Remedy if the Closing Occurs.
(a) Should the Closing occur, (i) the sole and
exclusive remedies of Parent and Merger Sub with respect to
claims under or otherwise relating to this Agreement, whether
such claims be in contract, tort or otherwise, shall be the
remedies provided in this Article VII, and
(ii) the sole and exclusive remedies of the Shareholders
with respect to claims under or otherwise relating to this
Agreement and any Ancillary Agreements shall be the remedies
afforded to such Shareholders by the securities Laws applicable
to each such Shareholder by virtue of their receipt of Parent
Common Stock in connection with the Merger, and no Shareholder
will be entitled to any remedies under any other theory,
including breach of contract or tort. Except as set forth
herein, Parent, Merger Sub and the Company hereby waive, from
and after the Closing, any and all other remedies which may be
available at law or equity for any breach or inaccuracy or
alleged breach or inaccuracy of the representations and
warranties of the Company and of Parent and Merger Sub
hereunder, whether such claims be in contract, tort or
otherwise. If the Closing does not occur, the sole and exclusive
remedy of the parties shall be as set forth in
Section 8.5, and the provisions of this
Article VII shall be inapplicable.
(b) Nothing in this Article VII will limit the
rights of the Shareholders to seek any remedies with respect to
Fraud by Parent or Merger Sub, or Parent or Merger Sub to seek
any remedies with respect to any Shareholder Fraud in connection
herewith or the transactions contemplated hereby (including
limiting the time such claims can be made, or making such claims
subject to any deductibles set forth herein).
(c) For the avoidance of doubt, the concept of
indemnity as used in this Article VII is
intended to include claims between or among the parties to this
Agreement and not involving any third party, as well as Third
Party Claims.
ARTICLE VIII
TERMINATION
Section 8.1 Termination
by Mutual Consent. This Agreement may be
terminated and the transactions contemplated hereby may be
abandoned at any time prior to the Closing Date, by mutual
written consent of the Company and Parent.
Section 8.2 Termination
by Parent or the Company. This Agreement may
be terminated and the transactions contemplated hereby may be
abandoned at any time prior to the Closing Date, by either
Parent or the Company if any Order permanently restraining,
enjoining or otherwise prohibiting the Merger or the other
transactions contemplated hereby shall be entered and such Order
is or shall have become nonappealable, provided that
(i) the party seeking to terminate this Agreement shall
have complied with its obligations under Section 5.6
with respect to the removal or lifting of such Order, and
(ii) the noncompliance with this Agreement by the party
seeking to terminate this Agreement shall not have been the
proximate cause of the issuance of the Order.
Section 8.3 Termination
by the Company. This Agreement may be
terminated and the transactions contemplated hereby may be
abandoned at any time prior to the Closing Date, by the Company
if:
(a) (i) the Closing shall not have been consummated on
or before June 30, 2009 (the
Termination Date), or
(ii) any of the conditions set forth in
Section 6.1 or 6.2 shall have become
incapable of fulfillment;
provided, however, that the right to terminate this
Agreement pursuant to this subsection (a) shall not be
available to the Company if the Company has breached in any
material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the failure
referenced in this subsection (a);
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(b) there has been a material breach by Parent or Merger
Sub of any representation, warranty, covenant or agreement of
Parent or Merger Sub contained in this Agreement that is not
curable or, if curable, is not cured prior to the earlier of
(i) 30 days after written notice of such breach is
given by the Company to Parent and (ii) the Termination
Date;
(c) (i) the Board of Directors of Parent has failed to
give in the Proxy Statement its recommendation to the approval
pursuant to this Agreement of the issuance of shares of Parent
Common Stock in connection with the Merger and the transactions
contemplated hereby or has withdrawn or modified such
recommendation,
(ii) after the receipt by Parent of an Acquisition
Proposal, the Company requests in writing that the Board of
Directors of Parent reconfirm its recommendation of the approval
pursuant to this Agreement of the issuance of shares of Parent
Common Stock in connection with the Merger and the transactions
contemplated hereby and the Board of Directors of Parent fails
to do so within five Business Days after its receipt of the
Companys request,
(iii) the Board of Directors of Parent, or any committee
thereof, has approved or recommended to the Parent Stockholders
an Acquisition Proposal,
(iv) a tender offer or exchange offer for outstanding
shares of Parent Common Stock is commenced (other than by the
Company or an Affiliate of the Company), and the Board of
Directors of Parent (or any committee thereof) recommends that
the Parent Stockholders tender their shares in such tender or
exchange offer or, within 10 Business Days after the
commencement of such tender offer or exchange offer, the Board
of Directors of Parent fails to recommend against acceptance of
such offer, provided, however, that any disclosure by the
Board of Directors of Parent to stop, look and
listen or similar communication of the type contemplated
by
Rule 14d-9(f)
under the Exchange Act shall not result in a right of the
Company to terminate under this provision, or
(v) Parent has breached its obligations under
Section 5.9(b) or Section 5.11;
(d) In the event that Parent has provided the notice
required under Section 5.12(a)(vi) and has not
increased the unrestricted cash balance of Parent and its
Subsidiaries, taken together, to $1,000,000 or more within ten
Business Days after the first written notice of such failure is
given by Parent to the Company (or the next Business Day, for
any subsequent notices); or
(e) Ten days after the written notice described below in
Section 8.3(e)(iii) is provided, if on such tenth
day, the conditions in Section 6.1(o) remain
unsatisfied because no other Purchasers have agreed to purchase
the shares in the Financing of the Purchaser in default, as
described in clause (iv), and:
(i) All of the conditions in Section 6.1
(except for such conditions as may, by their terms, only be
satisfied at the Closing or on the Closing Date and except for
Section 6.1(o)) and in Section 6.2
(except for such conditions as may, by their terms, only be
satisfied at the Closing or on the Closing Date) have been
satisfied or waived,
(ii) the Purchasers identified on Schedule I of the
Financing Agreement are prepared to immediately purchase their
respective shares issuable in the Financing as set forth on each
such Purchasers signature page to the Financing Agreement,
(iii) the Company provides written notice to Parent stating
its belief that the terms of clauses (i) and
(ii) above have been satisfied, and
(iv) one or more of the Purchasers identified on
Schedule II of the Financing Agreement have
(A) breached its or their obligations under
Section 1(a) of the Financing Agreement, (B) as
determined by Parent in good faith, if any Purchaser does not
confirm in writing, upon reasonable notice and request from
Parent, that such Purchaser will satisfy its obligations under
Section 1(a) of the Financing Agreement on the Closing
Date, or (C) shall provide notice to Parent that it will
not satisfy its obligations under Section 1(a) of the
Financing Agreement on the Closing Date.
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Section 8.4 Termination
by Parent. This Agreement may be
terminated and the transactions contemplated hereby may be
abandoned at any time prior to the Closing Date by Parent if:
(a) (i) the Closing shall not have been consummated on
or before the Termination Date, or
(ii) any of the conditions set forth in
Section 6.1 or Section 6.3 shall have
become incapable of fulfillment;
provided, however, that the right to terminate this
Agreement pursuant to this subsection (a) shall not be
available to Parent if Parent or Merger Sub has breached in any
material respect its obligations under this Agreement in any
manner that shall have proximately contributed to the failure
referred to in this subsection (a);
(b) there has been a material breach of any representation,
warranty, covenant or agreement of the Company contained in this
Agreement that is not curable or, if curable, is not cured prior
to the earlier of (i) 30 days after written notice of
such breach is given by Parent to the Company, and (ii) the
Termination Date;
(c) (i) the Board of Directors of the Company has
failed to give its recommendation to the approval of the Merger
and the other Transactions in the proxy statement for the
Company Shareholders Meeting or has withdrawn or modified
its recommendation of the Merger and the other Transactions,
(ii) after the receipt by the Company of an Acquisition
Proposal, Parent requests in writing that the Board of Directors
of the Company reconfirm its recommendation of the Merger and
the other Transactions and the Board of Directors of the Company
fails to do so within five Business Days after its receipt of
Parents request,
(iii) the Board of Directors of the Company, or any
committee thereof, has approved or recommended to the
Shareholders an Acquisition Proposal,
(iv) a tender offer or exchange offer for outstanding
shares of Company Shares is commenced (other than by Parent or
an Affiliate of Parent), and the Board of Directors of the
Company (or any committee thereof) recommends that the
Shareholders tender their shares in such tender or exchange
offer or, within 10 Business Days after the commencement of such
tender offer or exchange offer, the Board of Directors of the
Company fails to recommend against acceptance of such offer;
provided, however, that any disclosure by the Board of
Directors of the Company to stop, look and listen or
similar communication of the type contemplated by
Rule 14d-9(f)
under the Exchange Act shall not result in a right of Parent to
terminate under this provision, or
(v) the Company has breached its obligations under
Section 5.5 or Section 5.11.
(d) In the event that the Company has provided the notice
required under Section 5.12(a)(vi) and has not
increased the unrestricted cash balance of the Company and its
Subsidiaries, taken together, to $1,000,000 or more within ten
Business Days after the first written notice of such failure is
given by the Company to Parent (or the next Business Day, for
any subsequent notices).
(e) Ten days after the written notice described below in
Section 8.4(e)(iii) is provided, if on such tenth
day, the conditions in Section 6.1(o) remain
unsatisfied because no other Purchasers have agreed to purchase
the shares in the Financing of the Purchaser in default, as
described in clause (iv), and
(i) All of the conditions in Section 6.1
(except for such conditions as may, by their terms, only be
satisfied at the Closing or on the Closing Date and except for
Section 6.1(o)) and in Section 6.3
(except for such conditions as may, by their terms, only be
satisfied at the Closing or on the Closing Date) have been
satisfied or waived,
(ii) the Purchasers identified on Schedule II of the
Financing Agreement are prepared to immediately purchase their
respective shares issuable in the Financing as set forth on each
such Purchasers signature page to the Financing Agreement,
(iii) Parent provides written notice to the Company stating
its belief that the terms of clauses (i) and
(ii) above have been satisfied, and
(iv) one or more of the Purchasers identified on
Schedule I of the Financing Agreement have
(A) breached its or their obligations under
Section 1(a) of the Financing Agreement, (B) as
determined by
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the Company in good faith, if any Purchaser does not confirm in
writing, upon reasonable notice and request from the Company,
that such Purchaser will satisfy its obligations under
Section 1(a) of the Financing Agreement on the Closing
Date, or (C) shall provide notice to the Company that it
will not satisfy its obligations under Section 1(a) of the
Financing Agreement on the Closing Date.
Section 8.5 Fees
and Expenses.
(a) Except as otherwise provided in this
Section 8.5, all fees and expenses incurred in
connection with this Agreement, the Merger and the other
transactions contemplated hereby shall be paid by the party
incurring such fees or expenses, whether or not the Merger is
consummated.
(b) In the event that:
(i) Parent terminates this Agreement pursuant to
Section 8.4(b) as a result of a willful and
deliberate breach by the Company of its representations,
warranties or covenants, arising from an act or omission of the
Company (with the knowledge of an executive officer or director
of the Company) that (i) such executive officer or director
knew, or (ii) a reasonable person with knowledge of
(A) the facts and circumstances of this Agreement,
(B) such Person so acting or not acting, and (C) such
act or omission, would know, such act or omission constitutes a
breach or would reasonably be expected to result in a breach
(but this provision shall not be triggered by a willful and
deliberate act or omission alone, that would not reasonably be
expected to be a breach of the Companys representations,
warranties or covenants and was not known by the Company to be a
breach of its representations, warranties or covenants), and
provided that, at the time Parent terminates this Agreement, the
Company is not entitled to terminate this Agreement pursuant to
Section 8.3(b);
(ii) Parent terminates this Agreement pursuant to
Section 8.4(c); or
(iii) Parent terminates this Agreement pursuant to
Section 8.4(e) and the Company is not entitled to
terminate this Agreement pursuant to Section 8.3(b);
then, in any such case, the Company shall pay to Parent a
termination fee of $900,000 (the Company Termination
Fee) plus an amount equal to the Parent
Transaction Expenses accrued through the date of such
termination.
(c) In the event of a termination by Parent pursuant to
Section 8.4(b) other than a termination in
connection with which Parent is entitled to receive the Company
Termination Fee pursuant to Section 8.5(b), and
provided that, at the time Parent terminates this Agreement, the
Company is not entitled to terminate this Agreement pursuant to
Section 8.3(b); the Company shall pay to Parent an
amount equal to the Parent Transaction Expenses accrued through
the date of such termination.
(d) In the event of a termination of this Agreement,
Parents rights under Section 8.5(b) or
(c), if any, shall be the sole and exclusive remedy of
Parent and its Affiliates against the Company, the Shareholders
or any former, current or future director, officer, general or
limited partner, stockholder, member, manager, controlling
person, Affiliate, employee or agent of any of the foregoing (or
any of their successors or assigns) (collectively, the
Company Parties) for any loss or damage
suffered as a result of a breach or failure to perform hereunder
or under the Financing Agreement or otherwise in connection with
this Agreement or the Financing Agreement, and upon payment of
such amount, if any, and if none, upon termination of this
Agreement, none of the Company or any other Company Parties
shall have any further liability or obligation to Parent or
Merger Sub arising out of or relating to this Agreement or the
transactions contemplated hereby except as set forth in
Section 8.7.
(e) In the event that:
(i) the Company terminates this Agreement pursuant to
Section 8.3(b) as a result of a willful and
deliberate breach by Parent or Merger Sub of such partys
representations, warranties or covenants, arising from an act or
omission of Parent or Merger Sub (with the knowledge of an
executive officer or director of Parent or Merger Sub, as
applicable) that (i) such executive officer or director
knew, or (ii) a reasonable person with knowledge of
(A) the facts and circumstances of this Agreement,
(B) such Person so acting or not acting, and (C) such
act or omission, would know, such act or omission constitutes a
breach or would reasonably be expected to result in a breach
(but this provision shall not be triggered by a willful and
deliberate act or
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omission alone, that would not reasonably be expected to be a
breach of Parents or Merger Subs representations,
warranties or covenants and was not known by Parent or Merger
Sub to be a breach of its representations, warranties or
covenants), and provided that, at the time the Company
terminates this Agreement, Parent is not entitled to terminate
this Agreement pursuant to Section 8.4(b);
(ii) the Company terminates this Agreement pursuant to
Section 8.3(c); or
(iii) the Company terminates this Agreement pursuant to
Section 8.3(e) and Parent is not entitled to
terminate this Agreement pursuant to Section 8.4(b);
then, in either such case, Parent shall pay to the Company a
termination fee of $900,000 (the Parent Termination
Fee) plus the amount of Company Transaction
Expenses accrued through the date of such termination.
(f) In the event of a termination of this Agreement by the
Company pursuant to Section 8.3(b) other than a
termination in connection with which the Company is entitled to
receive the Parent Termination Fee pursuant to
Section 8.5(e), and provided that, at the time the
Company terminates this Agreement, Parent is not entitled to
terminate this Agreement pursuant to Section 8.4(b);
Parent shall pay to the Company an amount equal to the Company
Transaction Expenses accrued through the date of such
termination.
(g) In the event of a termination of this Agreement, the
Companys rights under Section 8.5(e) or
(f), if any, shall be the sole and exclusive remedy of
the Company, the Shareholders and their respective Affiliates
against Parent, Merger Sub, the Parent Stockholders and any
former, current or future director, officer, general or limited
partner, stockholder, member, manager, controlling person,
Affiliate, employee or agent of any of the foregoing (or any of
their successors or permitted assignees) (collectively, the
Parent Parties) for any loss or damage
suffered as a result of a breach or failure to perform hereunder
or under the Financing Agreement or otherwise in connection with
this Agreement or the Financing Agreement, and upon payment of
such amount, if any, and if none, upon termination of this
Agreement, none of Parent, Merger Sub or any other Parent
Parties shall have any further liability or obligation arising
out of or relating to this Agreement or the transactions
contemplated hereby except as set forth in
Section 8.7.
(h) Payment of the Company Termination Fee, Parent
Transaction Expenses, Parent Termination Fee or Company
Transaction Expenses, if and as applicable, shall be made by
wire transfer of same day funds to the account or accounts
designated by Parent or the Company, as applicable, not later
than two Business Days after any termination of this Agreement
resulting in amounts being owed pursuant to this
Section 8.5.
(i) Each of Parent, Merger Sub and the Company acknowledges
that the agreements contained in this Section 8.5
are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Parent and Merger
Sub, on the one hand, and the Company, on the other, would not
enter into this Agreement. Accordingly, if Parent or the Company
(the Defaulting Party) fails promptly to pay
the Company Termination Fee, Parent Transaction Expenses, Parent
Termination Fee or Company Transaction Expenses, as applicable,
and, in order to obtain such payment, the other party commences
a suit that results in a judgment against the Defaulting Party
for such termination fee, the Defaulting Party shall pay to the
other party interest on such termination fee or expense payment
from and including the date payment that the termination fee or
expense payment was originally due to but excluding the date of
actual payment at an interest rate of 10% per annum.
(j) None of Parent or any of its Affiliates or the Company,
the Shareholders or any of their respective Affiliates shall be
entitled to seek, under any circumstances in connection with any
termination of this Agreement, any (i) equitable relief or
equitable remedies of any kind whatsoever, including, without
limitation, specific performance, or (ii) money damages or
any other recovery, judgment or damages or any kind, including
consequential, indirect or punitive damages, other than as
expressly set forth in this Section 8.5.
Section 8.6 Circumstances
Relating to Specific Performance. The parties
agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed by the
other parties in accordance with their respective terms or were
otherwise breached. Accordingly, each party shall be entitled to
specific performance of the terms hereof or other equitable
relief, including an injunction or injunctions to prevent
breaches or threatened breaches of this Agreement and to enforce
specifically the terms and provisions of this
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Agreement in any court of the United States, any state therein
having jurisdiction or in the State of Israel, this being in
addition to any other remedy to which such party is entitled at
law or in equity; provided, that after termination of this
Agreement pursuant to this Article VIII, the parties
shall only be entitled to specific performance and injunctive
relief with respect to those provisions that expressly survive
such termination as set forth in Section 8.7; and,
provided further, that in no event shall this
Section 8.6 entitle Parent or Merger Sub to require
the Company, or entitle the Company to require Parent or Merger
Sub, to bring any Action against any Purchaser to the Financing
Agreement, in such capacity as a Purchaser thereunder. In
connection with any such Action for specific performance or
other equitable relief, each party hereby further waives
(i) any defense in any Action for specific performance that
a remedy at law would be adequate and (ii) any requirement
under any Law to post security as a prerequisite to obtaining
equitable relief.
Section 8.7 Effect
of Termination. If this Agreement is
terminated, all obligations of the parties under this Agreement
will terminate, without any Liability on the part of any party
hereto to any Person in respect hereof or the transactions
contemplated hereby, and no party shall have any claim against
another (and no Person shall have any rights against such
party), whether under contract, tort or otherwise, except that
Section 5.19, this Article VIII and
Article IX hereof, the Confidentiality Agreement and
any Ancillary Agreement entered into prior to termination of
this Agreement with respect to any breaches occurring prior to
any termination of this Agreement, will survive. The remedies
set forth in this Article VIII are the sole and
exclusive remedies of the parties if this Agreement is
terminated.
ARTICLE IX
GENERAL
PROVISIONS
Section 9.1 Nonsurvival
of Representations and Warranties. The
respective representations and warranties of Parent and the
Merger Sub made in this Agreement shall expire with and be
terminated and extinguished upon, the Effective Time. This
Section 9.1 shall have no effect upon any other
obligations of the parties hereto, whether to be performed
before or after the consummation of the Merger.
Section 9.2 Amendment
and Modification. This Agreement may be
amended, modified or supplemented by the parties by action taken
or authorized by their respective Boards of Directors at any
time prior to the Closing Date (notwithstanding any Parent
Stockholder or Shareholder approval); provided, however,
that after the Company Shareholder Approval and the Parent
Stockholder Approval have been obtained, no amendment shall be
made which pursuant to applicable Law requires further approval
by such Shareholders or Parent Stockholders (as the case may be)
without such further approval. This Agreement may not be
amended, modified or supplemented in any manner, whether by
course of conduct or otherwise, except by an instrument in
writing specifically designated as an amendment hereto, signed
on behalf of each of the parties.
Section 9.3
Settlement of Disputes. Any
dispute, controversy or claim relating to or arising under, out
of or in connection with this Agreement shall be determined by
arbitration in accordance with the following:
(a) Any party to an unresolved dispute, controversy or
claim may file a written demand for arbitration pursuant to this
Section 9.3 with JAMS in New York City and shall
simultaneously send a copy of such demand to the other party or
parties to such dispute;
(b) Arbitration proceedings under this
Section 9.3 shall be conducted in accordance with
the JAMS Comprehensive Arbitration Rules and Procedures, or, if
applicable, the Streamlined Arbitration Rules and Procedures,
except that all decisions and awards rendered shall be
accompanied by a written opinion setting forth the rationale for
such decisions and awards.
(c) Venue for all evidentiary hearings conducted in such
proceedings shall be in New York City, at a location determined
by the arbitrator.
(d) Arbitration proceedings under this
Section 9.3 shall be conducted before one impartial
arbitrator who shall be a retired or former district court or
appellate court judge of a United States District Court or
United States Court of Appeals selected through the procedures
of the American Arbitration Association. On all matters, the
decisions and awards of the arbitrator shall be binding.
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(e) To the extent practicable, the arbitration proceedings
under this Section 9.3 shall be conducted in such
manner as will enable completion within ninety days after the
filing of the demand for arbitration.
(f) The arbitrator shall be authorized to award
attorneys fees, expenses and costs of arbitration to the
substantially prevailing party, in the arbitrators
discretion. Unless and except to the extent so awarded, the
costs of arbitration shall be shared equally by the parties, and
each party shall bear the fees and expenses of its own attorney.
Punitive damages shall not be allowed by the arbitrator. The
award may be enforced in such manner as allowed by law.
Section 9.4 Extension;
Waiver. To the extent permitted by
applicable Law, at any time prior to the Effective Time, the
Company, on the one hand, and Parent (on behalf of itself and
Merger Sub), on the other, by action taken or authorized by
their respective Boards of Directors, may (a) extend the
time for the performance of any of the obligations or other acts
of the other party, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or
any Ancillary Document of the other party, and (c) waive
compliance with any of the agreements or conditions contained in
this Agreement or any Ancillary Document, except that, after the
Company Shareholder Approval and the Parent Stockholder Approval
have been obtained, there may not be, without further approval
of the Shareholders or Parent Stockholders (as the case may be),
any extension or waiver of this Agreement or any portion hereof
that reduces the amount or changes the form of the consideration
to be delivered to the Shareholders under this Agreement, other
than as contemplated by this Agreement. Any agreement on the
part of a party to any such extension or waiver will be valid
only if set forth in a written instrument signed on behalf of
such party. No failure or delay of any party in exercising any
right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power,
or any abandonment or discontinuance of steps to enforce such
right or power, or any course of conduct, preclude any other or
further exercise thereof or the exercise of any other right or
power. The rights and remedies of the parties hereunder are
cumulative and, except as expressly set forth herein, are not
exclusive of any rights or remedies that they would otherwise
have hereunder or under applicable Law.
Section 9.5 Notices. All
notices and other communications hereunder shall be in writing
and shall be deemed duly given (a) on the date of delivery
if delivered personally, or if by facsimile, upon written
confirmation of receipt by facsimile, email or otherwise
(provided such delivery is during regular business hours, and if
not, then on the next Business Day), (b) on the first
Business Day following the date of dispatch if delivered
utilizing a
next-day
service by a recognized
next-day
courier or (c) on the earlier of confirmed receipt or the
fifth Business Day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage
prepaid. All notices hereunder shall be delivered to the
addresses set forth below, or pursuant to such other
instructions as may be designated in writing by the party to
receive such notice:
(i) if to Parent, Merger Sub or the Surviving Company, to:
Endocare, Inc.
201 Technology Drive
Irvine, CA 92618
Attention: Clint B. Davis
Facsimile:
(949) 450-5310
Email: cdavis@endocare.com
with a copy (which shall not constitute notice) to:
Gibson, Dunn & Crutcher LLP
3161 Michelson Drive, Suite 1200
Irvine, CA 92612
Attention: Michelle A. Hodges
Facsimile:
(949) 475-4703
Email: mhodges@gibsondunn.com
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(ii) if to Company, to:
Galil Medical Ltd.
Tavor Building 1
Industrial Park
P.O. Box 224
Yokneam 20692
Israel
Attn: President
Facsimile:
972-4-959-1077
with a copy (which shall not constitute notice) to:
Arnold & Porter LLP
399 Park Avenue
New York, NY 10022
Attention: Steven Tepper
Facsimile:
(212) 715-1399
Email: Steven.Tepper@aporter.com
(iii) if to the Shareholder Representative, to:
Thomas, McNerney Representative, LLC
c/o Thomas,
McNerney & Partners
One Stamford Plaza
263 Tresser Blvd., 16th Floor
Stamford, Connecticut 06901
Attention: James E. Thomas
Facsimile:
(203) 978-2005
Email: jthomas@tm-partners.com
with a copy (which shall not constitute notice) to:
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, NY 10019
Attention: Gordon Caplan
Facsimile:
(212) 728-8266
Email: GCaplan@willkie.com
Raved, Magriso, Benkel, Lahav & Col
37. Shaul Hamelech Blvd.
P.O. Box 33242
Tel Aviv 64928, Israel
Attention: Einat Weidberg, Adv.
Facsimile: +972 3-6060266
Email: einat_w@rmblaw.co.il
Section 9.6 Interpretation.
(a) When a reference is made in this Agreement to a
Section, Article or Exhibit such reference shall be to a
Section, Article or Exhibit of this Agreement unless otherwise
indicated. The table of contents and headings contained in this
Agreement or in any Exhibit are for convenience of reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as
the circumstances require. Any capitalized terms used in any
Exhibit but not otherwise
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defined therein shall have the meaning as defined in this
Agreement. All Exhibits annexed hereto or referred to herein are
hereby incorporated in and made a part of this Agreement as if
set forth herein.
(b) Unless the context clearly requires otherwise, the word
including and words of similar import when used in
this Agreement will mean including, without
limitation, and or is not exclusive and shall
mean and/or.
(c) For purposes of this Agreement, commercially
reasonable efforts will not be deemed to require a Person
to undertake extraordinary or unreasonable measures, including
the payment of amounts in excess of normal and usual filing fees
and processing fees.
Section 9.7 Exclusivity
of Representations and Warranties. None of
the Company, Parent, Merger Sub nor their respective
representatives has made any representation or warranty of any
kind or nature whatsoever, oral or written, express or implied,
relating to the Company or its Subsidiaries, Parent or its
Subsidiaries (including, but not limited to, any relating to
financial condition, results of operations, prospects, assets or
liabilities, or valuations), except as expressly set forth in
this Agreement, and each party hereby disclaims any such other
representations or warranties.
Section 9.8 Entire
Agreement. This Agreement (including the
Exhibits and Schedules hereto), the Ancillary Agreements and the
Confidentiality Agreement constitute the entire agreement, and
supersede all prior written agreements, arrangements,
communications and understandings and all prior and
contemporaneous oral agreements, arrangements, communications
and understandings among the parties with respect to the subject
matter hereof. Notwithstanding any oral agreement or course of
action of the parties or their Representatives to the contrary,
no party to this Agreement shall be under any legal obligation
to enter into or complete the transactions contemplated hereby
unless and until this Agreement shall have been executed and
delivered by each of the parties.
Section 9.9 No
Third-Party Beneficiaries. Except as provided
in Section 5.16 and Section 7.2, nothing in this
Agreement, express or implied, is intended to or shall confer
upon any Person, including employees of the Company, other than
the parties and their respective successors and permitted
assigns any legal or equitable right, benefit or remedy of any
nature under or by reason of this Agreement.
Section 9.10 Governing
Law. This Agreement and all disputes or
controversies arising out of or relating to this Agreement or
the Transactions contemplated hereby shall be governed by, and
construed in accordance with, the internal laws of the State of
Delaware, without regard to the laws of any other jurisdiction
that might be applied because of the conflicts of laws
principles of the State of Delaware.
Section 9.11 Submission
to Jurisdiction. Each of the parties
irrevocably agrees that any legal Action or proceeding arising
out of or relating to this Agreement, that is not subject to
arbitration pursuant to Section 9.3, brought by any
other party or its successors or assigns shall be brought and
determined in any appropriate State or federal court in the
State of Delaware, and each of the parties hereby irrevocably
submits to the exclusive jurisdiction of the aforesaid courts
for itself and with respect to its property, generally and
unconditionally, with regard to any such Action arising out of
or relating to this Agreement and the transactions contemplated
hereby. If any such dispute, claim or controversy arises at the
same time and relates to the same or similar facts, claims or
events as any one or more other disputes, claims or
controversies, such disputes, claims or controversies, shall, to
the extent practicable, be combined in one Action under this
Section 9.11. If any dispute, claim or controversy
arising out of or relating to this Agreement and one or more
Ancillary Agreements arises at the same time and relates to the
same or similar facts, claims or events as a dispute, claim or
controversy relating to or arising out of this Agreement, such
disputes, claims or controversies shall, to the extent not
otherwise subject to arbitration pursuant to
Section 9.3 and to the extent practicable, be
combined in one Action under this Section 9.11. Each
of the parties agrees not to commence any Action relating
hereto, that is not subject to arbitration pursuant to
Section 9.3, except in the courts described above in
the State of Delaware, other than Actions in any court of
competent jurisdiction to enforce any judgment, decree or award
rendered by any such court in the State of Delaware as described
herein. Each of the parties further agrees that notice as
provided herein shall constitute sufficient service of process
and the parties further waive any argument that such service is
insufficient.
Section 9.12 Assignment;
Successors. Neither this Agreement nor any of
the rights, interests or obligations under this Agreement may be
assigned or delegated, in whole or in part, by operation of Law
or otherwise, by any party without the prior written consent of
Parent (in the case of an assignment by the Company) or the
Company (in
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the case of an assignment by Parent or Merger Sub), and any such
assignment without such prior written consent shall be null and
void. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
Section 9.13 Currency. All
references to dollars or $ in this
Agreement or any Ancillary Agreement refer to United States
dollars. All references to NIS in this Agreement or
any Ancillary Agreement refer to New Israeli Shekel.
Section 9.14 Severability. The
invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, each of which shall remain in
full force and effect and in lieu of such invalid or
unenforceable provision there shall be automatically added as
part of this Agreement a valid and enforceable provision as
similar in terms to the invalid or unenforceable provision as
possible, provided that this Agreement as amended,
(i) reflects the intent of the parties hereto, and
(ii) does not change the bargained for consideration or
benefits to be received by each party hereto.
Section 9.15 Waiver
of Jury Trial. EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 9.16 Counterparts. This
Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same instrument and shall
become effective when one or more counterparts have been signed
by each of the parties and delivered to the other parties.
Section 9.17 Facsimile
Signature. This Agreement may be executed by
facsimile signature and a facsimile signature or other
electronically transmitted signature shall constitute an
original for all purposes.
Section 9.18 Time
of Essence. Time is of the essence with
regard to all dates and time periods set forth or referred to in
this Agreement.
Section 9.19 No
Presumption Against Drafting Party. Each of
Parent, Merger Sub and the Company acknowledges that each party
to this Agreement has been represented by counsel in connection
with this Agreement and the transactions contemplated by this
Agreement. Accordingly, any Law that would require
interpretation of any claimed ambiguities in this Agreement
against the drafting party has no application and is expressly
waived.
Section 9.20 Disclosure. Notwithstanding
anything to the contrary contained in the Disclosure Schedules
or in this Agreement, the information and disclosures contained
in any section of the Disclosure Schedule shall be deemed to be
disclosed and incorporated by reference in any other section of
the Disclosure Schedule as though fully set forth in such
section of the Disclosure Schedule to the extent that the
applicability of such information and disclosure is reasonably
apparent on its face.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective
officers thereunto duly authorized.
ENDOCARE, INC.
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By:
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/s/ Michael
R. Rodriguez
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Name: Michael R. Rodriguez
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Title:
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Senior Vice President, Finance and Chief Financial Officer
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ORANGE ACQUISITIONS LTD.
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By:
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/s/ Michael
R. Rodriguez
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Name: Michael R. Rodriguez
GALIL MEDICAL LTD.
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By:
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/s/ Martin
J. Emerson
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Name: Martin J. Emerson
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Title:
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President and Chief Executive Officer
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Name: Karen Sarid
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Title:
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Chief Financial Officer
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[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
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Annex B
STOCK
PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this
Agreement) dated as of November 10, 2008
(the Effective Date), is executed by and
among Endocare, Inc., a Delaware corporation (the
Company), and the parties set forth on the
signature pages hereto (each a Purchaser and
collectively, the Purchasers).
WHEREAS, concurrently herewith, the Company is entering into an
Agreement and Plan of Merger (the Merger
Agreement), by and among the Company, Galil Medical
Ltd., an Israeli corporation (Galil), and
Orange Acquisitions Ltd., an Israeli corporation and wholly
owned subsidiary of the Company (Merger Sub),
which provides for the merger of Merger Sub with and into Galil,
with Galil surviving such merger as a wholly-owned subsidiary of
the Company, all subject to and in accordance with the
provisions set forth in the Merger Agreement (the
Merger).
WHEREAS, simultaneously with the closing of the Merger, the
Purchasers desire to purchase and the Company desires to sell in
the aggregate 16,250,000 shares (the
Shares) of common stock of the Company, par
value $.001 per share (Common Stock), at a
price per share of $1.00 (the Per Share Purchase
Price) for an aggregate purchase price of $16,250,000.
WHEREAS, concurrently herewith, each of the Purchasers on
Schedule I is executing and delivering to the
Company its Voting Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises contained herein, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, hereby agree
as follows:
1. Purchase and Sale of Stock.
Subject to the terms and conditions of this Agreement:
(a) Each Purchaser agrees to purchase, severally and not
jointly, from the Company on the Closing Date (as such term is
defined below), in cash, the number of Shares set forth adjacent
to such Purchasers name under the heading Share
Allocation on the signature page of such Purchaser hereto
(such amount as it applies to each Purchaser, the Share
Allocation) at the Per Share Purchase Price,
representing an aggregate purchase price set forth adjacent to
such Purchasers name under the heading Purchase
Price on the signature page hereto (such amount as it
applies to each Purchaser, the Purchase
Price).
(b) The Company agrees to issue, sell and convey to each
Purchaser such Purchasers Share Allocation, in each case,
in exchange for the payment by such Purchaser of such
Purchasers Purchase Price.
2. The Closing.
(a) The closing of the purchase and sale of the Shares (the
Closing) shall, subject to the satisfaction
or waiver of the conditions set forth in Section 7,
take place at the offices of Gibson, Dunn & Crutcher
LLP, 3161 Michelson Drive, Irvine, CA 92612, simultaneously with
the closing of the Merger as contemplated by the Merger
Agreement. The day on which the Closing takes place is referred
to as the Closing Date.
(b) At the Closing, subject to the terms and conditions of
this Agreement, (i) each Purchaser shall (A) deliver
such Purchasers Purchase Price by wire transfer to an
account designated by the Company, and (B) deliver to the
Company the Registration Rights Agreement in the form of
Exhibit A hereto (the Registration Rights
Agreement), dated as of the Closing Date and duly
executed by such Purchaser, and (ii) the Company shall
deliver or cause to be delivered to each Purchaser (A) a
certificate registered in the name of such Purchaser
representing a number of Shares equal to such Purchasers
Share Allocation or shall provide to the Companys transfer
agent, Computershare Trust Company, N.A. (together with any
successor thereto, the Transfer Agent),
irrevocable instructions to issue and deliver via overnight
courier to each Purchaser a certificate representing such
Shares, free and clear of any legends except those set forth in
Section 4(h), (B) an opinion of counsel to the
Company in the form of Exhibit B hereto and dated as
of the Closing Date, and (C) a copy of the Registration
Rights Agreement, dated as of the Closing Date and duly executed
by the Company.
B-1
(c) (i) In the event that any Purchaser (A) has
breached its obligations under Section 1(a),
(B) does not confirm in writing, upon reasonable notice and
request from the Company, that such Purchaser will satisfy its
obligations under Section 1(a) on the Closing Date
as determined by the Company in good faith, or (C) shall
provide notice to the Company that it will not satisfy its
obligations under Section 1(a) on the Closing Date
(each, a Defaulting Purchaser), all of such
Purchasers Share Allocation (a Defaulted Share
Allocation) will instead be offered by the Company, at
the same Per Share Purchase Price, to the other Purchasers who
are not Defaulting Purchasers (Non-Defaulting
Purchasers), ratably in accordance with their
respective Percentage Allocations.
(ii) Percentage Allocation for each
Non-Defaulting Purchaser shall mean the Share Allocation for
such Non-Defaulting Purchaser divided by the aggregate Share
Allocations for all Non-Defaulting Purchasers.
(iii) The Company shall make any offer of a Defaulted Share
Allocation to the Non-Defaulting Purchasers within three
business days of receiving notice from a Defaulting Purchaser
that it will not satisfy its obligations under
Section 1(a), but in no event later than the Closing
Date. The Non-Defaulting Purchasers shall have three business
days, but in no event later than the Closing Date, to notify the
Company that it shall accept some or all of its pro rata share
of the Defaulted Share Allocation (each such Non-Defaulting
Purchaser, an Electing Offeree).
(iv) Each Electing Offeree electing to purchase all of its
pro rata share of the Defaulted Share Allocation (Fully
Electing Offerees) shall have a right of
oversubscription with respect to such portion of the Defaulted
Share Allocation not purchased by the other Non-Defaulting
Purchasers, which oversubscription rights shall be applied among
the Fully Electing Offerees who exercise such rights ratably in
accordance with their respective Percentage Allocations until
all of the Defaulted Share Allocation has been subscribed for.
Percentage Allocation for each Fully Electing
Offeree for purposes of the allocation of the oversubscription
rights in this clause (iv) shall mean the Percentage
Allocation for such Fully Electing Offeree divided by the
aggregate Share Allocations for all Fully Electing Offerees.
(v) The Company agrees to issue, sell and convey to each
Electing Offeree (if any) on the Closing Date such Electing
Offerees portion of a Defaulted Share Allocation, as
determined herein, in each case, in exchange for the payment by
such Purchaser of the purchase price (calculated based on the
Per Share Purchase Price) in respect of such portion of the
Defaulted Share Allocation, and the Company and Electing
Offerees shall comply with the applicable Closing requirements
set forth in Section 2(b) in respect of any
Defaulted Share Allocation.
(vi) To the extent that the Non-Defaulting Purchasers do
not purchase all of the Defaulted Share Allocation in accordance
with the foregoing procedures, then the Company has the right to
offer and sell any remaining unsold Defaulted Share Allocation
to any other Person or Persons who qualify as Qualified
Institutional Buyers or Institutional Accredited Investors
(each, an Additional Purchaser). All
Purchasers acknowledge and agree that the Agreement shall be
amended to reflect any purchase of the Defaulted Share
Allocation as set forth in this Section, including adding any
Additional Purchaser as a party to the Agreement.
(d) (i) Notwithstanding the foregoing, no Purchaser
shall be entitled to purchase additional Shares pursuant to
Section 2(c), if as a result of such purchase of
additional Shares, such Purchaser and its Affiliates will own,
directly or indirectly, in excess of 35% of the outstanding
shares of Common Stock immediately after the effective time of
the Merger and issuance to such Purchaser of the Merger
consideration to which it is entitled and after taking into
account the Shares issued pursuant to this Agreement. In
addition, each Purchaser represents, warrants and covenants to
the Company that such Purchaser (A)(1) does not own, directly or
indirectly, as of the date hereof, and (2) during the
Standstill Period (as defined below) will not own, directly or
indirectly, in each case, individually or together with its
Affiliates, more than 35% of the then outstanding shares of
Common Stock, and (B)(1) is not, and none of its Affiliates are,
as of the date hereof, and (2) during the Standstill Period
will not, and none of its Affiliates will, in each case, be a
party to any express legally binding agreement with any
non-affiliated Purchaser of such Purchaser with respect to the
voting, acquisition or disposition of any shares of Common Stock
representing more than 35% of the then outstanding shares of
Common Stock, other than the Merger Agreement
and/or the
Financing Agreements or any agreements or documents to be
entered into in connection therewith.
(ii) Notwithstanding anything in this Section 2(d)
to the contrary, if (A) from the date hereof, and prior
to the effective time of the Merger, any unaffiliated third
party commences or makes an offer for the Company or any equity
securities of the Company, by tender offer, merger, stock
purchase or any other change of control proposal of
B-2
any nature constituting a Superior Proposal, or (B) during
the Standstill Period, at any other time, any unaffiliated third
party commences or makes a tender offer for any or all of the
shares of Common Stock (each a Qualified Third Party
Offer), each Purchaser (independently
and/or
together with any other Purchaser) and any of its Affiliates
shall be permitted to make, and this Section 2(d)
will not apply to, a competing offer to acquire any Common Stock
with respect to (A), and a tender offer with respect to (B)
(each a Competing Offer), subject to and in
accordance with the following:
(A) the Competing Offer is made prior to the withdrawal or
termination of the Qualified Third Party Offer; and
(B) if the Competing Offer is formally withdrawn or
terminated before the Purchaser acquires Common Stock pursuant
to the Competing Offer, the rights under this
Section 2(d)(ii) shall terminate and such Purchaser
and any of its Affiliates shall continue to be subject to the
requirements in Section 2(d)(i) unless and until
another Qualified Third Party Offer is made or commenced.
(iii) For the avoidance of doubt, the filing of any
statement or document with any governmental authority, including
without limitation, a Schedule 13D or amendment thereto by
any Purchaser or any of its Affiliates (and/or any group of
Purchasers) disclosing the existence of a group for
Section 13(d) purposes, solely by itself, will not
constitute a breach of the covenant in
Section 2(d)(i).
(iv) Notwithstanding anything to the contrary, the
restrictions in this Section 2(d) shall not restrict
or relate to any legally binding agreement between or among the
Affiliates of a Purchaser with respect to the voting,
acquisition or disposition of the shares of Common Stock
and/or any
such arrangements among any Purchasers contemplated by the
Merger Agreement
and/or the
Financing Agreement including any agreements entered into in
connection therewith.
(v) The restrictions in this Section 2(d) shall
survive the Closing Date and shall expire and be of no force and
effect on and after the first anniversary of the Companys
annual stockholders meeting for 2009 (the period from the date
hereof to such first anniversary, the Standstill
Period). Notwithstanding anything to the contrary, the
Standstill Period shall expire no later than June 30, 2010.
The restrictions in this Section 2(d) shall
immediately terminate and be of no further force or effect upon
termination of this Agreement.
(vi) Notwithstanding the foregoing, nothing in this
Section 2.1(d) shall apply to any portfolio company
of any Purchaser with respect to which such Purchaser is not the
party exercising control (as defined as over 50% voting or
dispositive control) over the decision to purchase shares of
Common Stock or to vote such Common Stock.
(e) Notwithstanding Section 1(c) or any other
provision of this Agreement, the obligations of the Purchasers
are several and no Purchaser shall be responsible for the breach
or violation of any other Purchaser, including without
limitation, for any other Purchasers failure to purchase
its Share Allocation as required, even if a Purchaser becomes an
Electing Offeree in respect of a Defaulted Share Allocation, and
in no event shall a Purchaser be relieved of its obligations to
the Company under this Agreement, including
Section 1(a). power and authority to own, lease and
operate its properties and to carry on its business as it is now
being conducted and (ii) duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes
such qualification or licensing necessary, except for any such
failures to be so qualified or licensed and in good standing as
that, individually or in the aggregate, have not had and would
not reasonably be expected to have a Material Adverse Effect on
the Company. Merger Sub is a company duly organized, validly
existing and in good standing under the laws of the State of
Israel. The Company owns, beneficially and of record, all of the
outstanding capital stock of Urohealth B.V., a company duly
organized, validly existing and in good standing under the laws
of The Netherlands. Urohealth B.V. is an inactive subsidiary
which does not currently conduct any business activities. Except
for Merger Sub and Urohealth B.V. (collectively, the
Company Subsidiaries), the Company does not
have any Subsidiaries. For purposes of this Agreement, the term
Material Adverse Effect on the Company means one or
more events, occurrences, conditions or circumstances (whether
or not covered by insurance) which, individually or in the
aggregate, result in a material adverse effect on or change in
(i) the business, operations, assets, Liabilities,
condition (financial or otherwise), prospects, or results of
operations of the Company, taken as a whole with the
B-3
Company Subsidiaries, or (ii) the ability of the Company to
timely (A) perform its material obligations under this
Agreement, or (B) consummate the transactions contemplated
in this Agreement.
(b) Authorization;
Enforcement. The Company has the full
corporate power and authority to (i) execute and deliver
this Agreement, the Registration Rights Agreement and all
certificates delivered by the Company in connection herewith and
therewith (collectively, the Transaction
Documents) and to perform its obligations hereunder
and thereunder, and (ii) issue the Shares in accordance
with the terms of this Agreement. The execution and delivery by
the Company of this Agreement and the other Transaction
Documents and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by the
Companys board of directors and no other corporate
proceedings on the part of the Company are necessary to
authorize the execution, delivery and performance of this
Agreement and the other Transaction Documents or to consummate
the transactions contemplated hereby and thereby, except the
approval by the Companys stockholders of the issuance of
(i) the Common Stock in the Merger and the transactions
contemplated in the Merger Agreement, and (ii) the Shares
pursuant to this Agreement (the Stockholder
Approval). This Agreement has been, and each of the
other Transaction Documents upon the Closing Date will be, duly
executed and delivered by the Company. This Agreement
constitutes, and each of the other Transaction Documents upon
the Closing Date will constitute, a valid and binding obligation
of the Company enforceable against the Company in accordance
with its respective terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting
creditors rights generally and subject to equitable
principles of general application.
(c) No Conflicts. The execution,
delivery and performance by the Company of this Agreement and
the other Transaction Documents and the consummation of the
transactions contemplated hereby and thereby will not:
(i) conflict with or violate the certificate of
incorporation or bylaws of the Company or the articles of
association or equivalent constituent documents of the Company
Subsidiaries (collectively, the Governing
Documents);
(ii) conflict with or violate any Law applicable to the
Company or the Company Subsidiaries or by which any property or
asset of the Company or the Company Subsidiaries is
bound; or
(iii) except as set forth in Schedule 3(c)
hereto, result in any breach of, constitute a default (or an
event that, with notice or lapse of time or both, would become a
default) under, require any consent of any Person pursuant to,
give to others any right of termination, amendment,
modification, acceleration or cancellation of, allow the
imposition of any fees or penalties, require the offering or
making of any payment or redemption, give rise to any increased,
guaranteed, accelerated or additional rights or entitlements of
any Person or otherwise adversely affect any rights of the
Company or the Company Subsidiaries under, or result in the
creation of any Encumbrance on any property, asset or right of
the Company or the Company Subsidiaries pursuant to, any note,
bond, mortgage, indenture, agreement, lease, license, permit,
franchise, instrument, obligation or other contract or agreement
(each, a Contract) to which the Company or
any Company Subsidiary is a party or by which any of their
respective properties or assets are bound;
except, in the case of clauses (ii) and (iii), for any such
conflicts, breaches, defaults or lack of consents that,
individually or in the aggregate, have not had and would not
reasonably be expected to have a Material Adverse Effect on the
Company.
(d) Consents; Approvals. Other
than the Stockholder Approval and notice filings pursuant to
applicable state securities laws, the Company is not required to
obtain any consent, authorization or approval of, or make any
filing or registration with, any court or governmental or
regulatory or administrative authority, including the SEC, in
order for the Company to execute, deliver and perform any of its
obligations under this Agreement or the other Transaction
Documents or in order to consummate any of the transactions
contemplated hereby and thereby, except those consents,
authorizations, approvals, filings and registrations
contemplated by Section 6(c) hereof and the
Registration Rights Agreement, which shall be obtained or made
as contemplated thereby.
(e) Capitalization; Issuance of
Shares. The authorized capital stock of the
Company consists of 51,000,000 shares (the Company
Capital Stock), divided into 50,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock, par
value $0.001 per share (the Preferred Stock).
As of the date hereof,
B-4
(i) 11,811,451 shares of Common Stock are issued and
outstanding, (ii) no shares of Preferred Stock are issued
or outstanding, (iii) 2,270,723 shares of Common Stock
are issuable upon exercise or payout of currently outstanding
stock options and restricted stock units previously granted
under the Companys stock option plans;
(iv) 78,363 shares of Common Stock are issuable upon
exercise of deferred stock units under the Companys
Employee Deferred Stock Unit Program;
(v) 165,981 shares of Common Stock are issuable upon
payout of deferred stock units under the Companys
Non-Employee Director Deferred Stock Unit Program;
(vi) 474,437 shares of Common Stock remain available
for future awards under the Companys 2004 Stock Incentive
Plan; (vii) 606,292 shares of Common Stock remain
available for future awards under the Companys Employee
Deferred Stock Unit Program; (viii) 234,019 shares of
Common Stock remain available for future awards under the
Companys Non-Employee Director Deferred Stock Unit
Program; (ix) 689,113 shares of Common Stock are
issuable upon exercise of currently outstanding Series A
Warrants; (x) 694,637 shares of Common Stock are
issuable upon exercise of currently outstanding Series B
Warrants; and (xi) 250,000 shares of Preferred Stock
have been designated as Series A Junior Participating
Preferred Stock, par value $0.001 per share, and are
reserved for issuance upon exercise of preferred share purchase
rights issued pursuant to the Rights Agreement, dated as of
March 31, 1999, between the Company and U.S. Stock
Transfer Corporation (as amended from time to time). Each issued
and outstanding share of Company Capital Stock is, and each
share of Company Capital Stock to be issued pursuant to the
terms hereof, upon issuance on the terms and conditions
specified in this Agreement will be, duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights
or similar rights, and has been, or will be, issued in
compliance in all respects with applicable Law and the
Companys bylaws and certificate of incorporation. No
Person has any right of first refusal, preemptive right, right
of participation, or any similar right to participate in the
transactions contemplated by this Agreement or the other
Transaction Documents. Except as set forth in
Schedule 3(e), the issuance and sale of the Shares
will not obligate the Company to issue shares of Common Stock or
other securities to any Person (other than the Purchasers) and
will not result in any right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price
under any of such securities. The holders of the Shares shall be
entitled to all of the rights accorded to a holder of Common
Stock by virtue of holding Common Stock.
Except for the items described in the paragraph above and under
this Agreement and the Merger Agreement, as of the date hereof,
there are no outstanding subscriptions, options, calls,
contracts, commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security,
instrument or other Contract and also including any rights plan
or other similar agreement, obligating the Company to issue,
deliver or sell, or cause to be issued, delivered or sold,
additional shares of Company Capital Stock or obligating the
Company to grant, extend or enter into any such Contract or
commitment. As of the date hereof, there are no obligations,
contingent or otherwise, of the Company to (i) repurchase,
redeem or otherwise acquire any shares of Company Capital Stock
or (ii) provide material funds to, or make any material
investment in (in the form of a loan, capital contribution or
otherwise), or provide any guarantee with respect to the
obligations of, any Person. There are no outstanding stock
appreciation rights or similar derivative securities or rights
of the Company. There are no bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or
convertible into, or exchangeable for, securities having the
right to vote) on any matters on which stockholders of the
Company may vote. There are no voting trusts, irrevocable
proxies or other Contracts to which the Company is a party or is
bound with respect to the voting of any shares of Company
Capital Stock.
(f) Public Filings. The Company
has filed all material forms, reports and documents required to
be filed with the SEC since January 1, 2007 (collectively,
the Company SEC Reports), each of which
complied at the time of filing in all material respects with all
applicable requirements of the Securities Act of 1933, as
amended (the Securities Act) and the
Securities Exchange Act of 1934, as amended (the
Exchange Act). None of the Company SEC
Reports contained when filed any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein in
light of the circumstances under which they were made not
misleading, except to the extent superseded by a subsequently
filed Company SEC Report prior to the date hereof. The
(a) audited consolidated balance sheet of the Company as of
December 31, 2005, December 31, 2006 and
December 31, 2007, and the related audited consolidated
statements of income, retained earnings, shareholders
equity and changes in financial position of the Company for the
periods covered therein, together with all related notes and
schedules thereto, accompanied by the reports thereon of the
Companys independent auditors, (b) unaudited
consolidated balance sheet of the Company as of June 30,
2008, and the related
B-5
consolidated statements of income, retained earnings,
shareholders equity and changes in financial position of
the Company for the six months and quarter then ended, together
with all related notes and schedules thereto filed with the
Company SEC Reports, and (c) unaudited consolidated balance
sheet of the Company as of September 30, 2008, and the
related consolidated statements of income, retained earnings,
shareholders equity and changes in financial position of
the Company for the quarter ended September 30, 2008
(collectively, the Company Financial
Statements) are (i) correct and complete in all
material respects and have been prepared in accordance with the
books and records of the Company; (ii) have been prepared
in accordance with GAAP applied on a consistent basis throughout
the periods indicated (except as may be indicated in the notes
thereto); and (iii) fairly present, in all material
respects, the consolidated financial position, results of
operations and cash flows of the Company and its Subsidiaries as
at the respective dates thereof and for the respective periods
indicated therein, except as otherwise noted therein and
subject, in the case of interim financial statements, to normal
and recurring year-end adjustments that will not, individually
or in the aggregate, be material. The Company Financial
Statements do not contain any material items of a special or
nonrecurring nature, except as expressly stated therein. Except
for those liabilities that are reflected or reserved against on
the audited consolidated balance sheet of the Company as of
December 31, 2007 (such balance sheet, together with all
related notes and schedules thereto, the Company
Balance Sheet), and for liabilities incurred in the
ordinary course of business consistent with past practice after
such date, the Company has not incurred any liability required
by GAAP to be reflected in a consolidated balance sheet of the
Company or disclosed in the notes thereto, except those
liabilities and obligations that are not, individually or in the
aggregate, material to the Company.
(g) Absence of Certain Changes or
Events. Since the date of the Company Balance
Sheet: (i) the business of the Company has been conducted,
in all material respects, only in the ordinary course of
business consistent with past practice; (ii) there has not
been any change, event or development or prospective change,
event or development that, individually or in the aggregate, has
had or would be reasonably likely to have a Material Adverse
Change on the Company; (iii) the Company has not suffered
any material loss, damage, destruction or other casualty
affecting any of its material properties or assets, whether or
not covered by insurance; and (iv) the Company has not
taken any action that, if taken after the date of this
Agreement, would constitute a breach of any of the
Companys covenants set forth in Section 6.
(h) Litigation. Except as set
forth on Schedule 3(h) hereto, there is no material
claim, action, suit, inquiry, proceeding, audit or investigation
by or before any governmental authority, or any arbitration,
mediation or other similar proceeding (each, an
Action) or, to the Knowledge of the Company,
threatened or pending against the Company or any of the Company
Subsidiaries, or any material property or asset of the Company
or any of the Company Subsidiaries, nor to the Companys
Knowledge is there any event, circumstance or fact existing or
that has occurred that would reasonably be expected to result in
a material Action. There is no Action pending or, to the
Knowledge of the Company, threatened seeking to prevent, hinder,
modify, delay or challenge the transactions contemplated by this
Agreement or the other Transaction Documents. There is no
outstanding or pending Order, or to the Knowledge of the
Company, threatened investigation by, any Governmental Authority
relating to the Company or any of the Company Subsidiaries, any
of its properties or assets or the transactions contemplated by
this Agreement or the other Transaction Documents. There is no
Action by the Company or any of the Company Subsidiaries
pending, or which the Company or any of the Company Subsidiaries
has commenced preparations to initiate, against any other Person.
(i) Compliance with Applicable
Law. Each of the Company and the Company
Subsidiaries is and has been in compliance in all material
respects with all Laws applicable to it. The Company has not
received during the past seven years, nor is there any basis
for, any notice, order, complaint or other communication from
any Governmental Authority or any other Person that the Company
or either of the Company Subsidiaries is not and has not been in
compliance in any material respect with any Law applicable to
it. Except in each case which would not have or reasonably be
expected to result in, individually or in the aggregate, a
Material Adverse Effect on the Company, neither the Company nor
any of the Company Subsidiaries is in violation of any term of
any Governing Document.
(j) Integration. Assuming that the
Purchasers representations in Section 4 are
true and correct, to the Companys Knowledge, no
circumstance exists which requires the offering of the Shares by
the Company to the Purchasers to be integrated with prior,
contemporaneous or ongoing offerings of the Company for purposes
of the
B-6
Securities Act, or, except in connection with the
Form S-4
to be filed in connection with the issuance of Common Stock in
the Merger, the rules and regulations of the Nasdaq relating to
shareholder approval requirements.
(k) Investment Company. Neither
the Company nor any Company Subsidiary is, and, after giving
effect to the issuance of the Shares, will not be required to
register as, an investment company within the
meaning of such term under the Investment Company Act of 1940,
as amended.
(l) Private Placement. Assuming
the accuracy of the representations made by the Purchasers in
Section 4 of this Agreement, no registration under
the Securities Act is required for the offer and sale of the
Shares by the Company to the Purchasers as contemplated by this
Agreement.
(m) No General
Solicitation. Neither the Company, nor any of
its affiliates, nor any Person acting on its or their behalf,
has engaged in any form of general solicitation or general
advertising (within the meaning of Rule 502 under the
Securities Act) in connection with the offer or sale of the
Shares.
(n) Broker Fees. Other than
Oppenheimer & Co. Inc. (the Placement
Agent), whose fees will be paid by the Company, no
broker, finder or investment banker is entitled to any
brokerage, finders or other fee or commission in
connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. No
Purchaser shall have any obligation with respect to any such
fees or any claims made by or on behalf of any such persons that
any such fees are due.
(o) Application of Anti-takeover
Protections. The Company has taken all
necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill,
shareholder rights agreements or other similar anti-takeover
provision under the Companys certificate of incorporation
or bylaws or any applicable state laws that is or could become
applicable to each Purchasers purchase of its Share
Allocation.
(p) No Other Representations. The
Company acknowledges that the Purchasers make no other
representations or warranties with respect to the purchase and
sale of the Shares except for those specifically set forth in
Section 4 and that the Purchasers have not made any
promises to or agreements with the Company not specifically
provided in this Agreement and the other Transaction Documents.
4. Representations of the
Purchasers. Each Purchaser severally and not
jointly hereby represents and warrants to the Company and the
Placement Agent as follows:
(a) Such Purchaser is a qualified institutional
buyer within the meaning of Rule 144A under the
Securities Act or an accredited investor within the
meaning of Rule 501 of Regulation D under the
Securities Act.
(b) Such Purchaser has the requisite power and authority to
enter into and perform its obligations under this Agreement and
the other Transaction Documents to which it is or will be a
party. The execution and delivery by such Purchaser of this
Agreement and the other Transaction Documents to which such
Purchaser is or will be a party have been duly authorized by
such Purchaser and no further consent or authorization is
required of such Purchaser in connection therewith. This
Agreement has been, and each of the other Transaction Documents
to which such Purchaser will be a party, upon the Closing Date
will be, duly executed and delivered by such Purchaser. This
Agreement constitutes, and each of the other Transaction
Documents to which such Purchaser is or will be a party, upon
the Closing Date will constitute, a valid and binding obligation
of such Purchaser enforceable against such Purchaser in
accordance with its respective terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors rights generally and subject to equitable
principles of general application.
(c) Such Purchaser understands that the Shares are
restricted securities under the federal securities
laws inasmuch as the Shares are being acquired from the Company
in a transaction not involving a public offering and that under
the Securities Act and the applicable regulations thereunder the
Shares may be resold without registration under the Securities
Act only in certain limited circumstances. In this regard, such
Purchaser represents that it is familiar with Rule 144
promulgated under the Securities Act (including any successor
rule or similar rule then in place,
Rule 144) and understands the resale
limitations imposed thereby and by the other requirements of the
Securities Act, the Exchange Act, and the rules and regulations
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promulgated thereunder and under any state securities laws
(collectively, the Securities Laws),
including, without limitation, Section 16 of the Exchange
Act if applicable to such Purchaser. Such Purchaser acknowledges
and agrees that the Company has no obligation to register the
Shares for resale except as set forth in the Registration Rights
Agreement.
(d) Such Purchaser is acquiring the Shares for investment
for such Purchasers own account, not as a nominee or
agent, and not with a view to the resale or distribution of any
part thereof in violation of the Securities Act. Such Purchaser
does not have any contract, undertaking, agreement,
understanding or arrangement with any Person, including any
underwriters or broker-dealers, to sell, transfer or grant
participations to such Person or to any third party, with
respect to any of the Shares. Such Purchaser has not been formed
for the specific purpose of acquiring the Shares.
(e) Such Purchaser is not purchasing the Shares as a result
of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine or similar
media or broadcast over the Internet, television or radio or
presented at any seminar, meeting or conference whose attendees
have been invited by any general solicitation or general
advertising.
(f) Such Purchaser is a sophisticated investor and
acknowledges that it can bear the economic risk of its
investment in the Shares, and has such knowledge and experience
in financial and business matters that it is capable of
evaluating the merits and risks of its investment in the Shares.
Such Purchaser has: (i) received, carefully reviewed and
acknowledges its understanding of (A) the representations
relating to the Company contained in this Agreement,
(B) the investment considerations set forth on
Exhibit C, and (C) the documents set forth on
Exhibit D and Exhibit E; and
(ii) has been given the opportunity to ask the Company all
questions and receive answers concerning the terms and
conditions of this offering and to obtain any additional
information that is necessary to verify the accuracy of the
information furnished hereunder or relevant to its investment in
the Shares and any such questions have been answered to such
Purchasers satisfaction. SUCH PURCHASER ACKNOWLEDGES
THAT AN INVESTMENT IN THE COMPANY AND THE SHARES INVOLVES A HIGH
DEGREE OF RISK.
(g) Such Purchaser has received certain projections,
including projected statements of revenue growth, adjusted
EBITDA, synergies and cost savings for the Company after the
Merger. Such Purchaser acknowledges that there are uncertainties
inherent in attempting to make such estimates, projections and
other forecasts and plans, that such Purchaser is familiar with
such uncertainties and that such Purchaser is taking full
responsibility for making its own evaluation of the adequacy and
accuracy of all estimates, projections and other forecasts and
plans so furnished to it (including the reasonableness of any
assumptions underlying such estimates, projections and forecasts
to the extent provided to such Purchaser). Accordingly, such
Purchaser acknowledges that the Company makes no representation
or warranty with respect to, and disclaims any obligation to
update, such estimates, projections and other forecasts and
plans (including the reasonableness of the assumptions
underlying such estimates, projections and forecasts to the
extent provided to such Purchaser).
(h) Such Purchaser understands that (i) the Shares
have not been, and will not be, registered under the Securities
Act, by reason of a specific exemption from the registration
provisions of the Securities Act, which depends upon, among
other things, the bona fide nature of the investment intent and
the accuracy of such Purchasers representations as
expressed herein, and (ii) the Shares cannot be resold
unless they are registered under the Act or unless an exemption
from registration is available. Such Purchaser understands that
any certificates representing the Shares shall bear the
following legend, in addition to any legend required by state
Blue Sky laws:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE
IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING
SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH
RULE 144 PROMULGATED UNDER THE SECURITIES ACT, OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
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EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT.
(i) If the Purchaser is not a United States person (as
defined by Section 7701(a)(30) of the Internal Revenue Code
of 1986, as amended), such Purchaser hereby represents that it
has satisfied itself as to the full observance of the laws of
its jurisdiction in connection with any invitation to subscribe
for the Shares or any use of this Agreement, including
(i) the legal requirements within its jurisdiction for the
purchase of the Shares, (ii) any foreign exchange
requirements applicable to such purchase, (iii) any
governmental or other consents that may need to be obtained, and
(iv) the income tax and other tax consequences, if any,
that may be relevant to the purchase, holding, redemption, sale
or transfer of the Shares. The Purchasers subscription and
payment for and continued beneficial ownership of the Shares
will not violate any applicable securities or other laws of the
Purchasers jurisdiction.
(j) If the Purchaser is an individual, then the Purchaser
resides in the state or province identified in the address of
the Purchaser set forth in the signature page hereto. If the
Purchaser is a partnership, corporation, limited liability
company or other entity, then the office or offices of the
Purchaser in which its principal place of business is identified
in the address or addresses of the Purchaser set forth in the
signature page hereto.
(k) Such Purchaser acknowledges that the Company makes no
other representations or warranties with respect to the purchase
and sale of the Shares except for those specifically set forth
in Section 3 of this Agreement and that the Company
has not made any promises to or agreements with such Purchaser
not specifically provided in this Agreement and the other
Transaction Documents, including any representations related to
the Shares or the future value thereof.
5. Lock Up. Each Purchaser
hereby covenants and agrees that such Purchaser shall not
engage, directly or indirectly, in any Prohibited Transaction
(as such term is defined below) with respect to the Shares for a
period of six months from and after the Closing Date; provided
that the foregoing covenant shall cease to apply and shall no
longer be effective upon the happening of any of the following
events (in each case other than any events associated with the
Merger) after the Closing Date: (a) the occurrence or
public announcement by the Company of a Change in Control,
(b) the issuance of new capital stock for public sale by
the Company in a primary offering, or (c) the Company
entering into, or publicly announcing its intention to enter
into, any transaction or series of transactions with any Person
or Persons other than the Purchasers whereby the Company agrees
to sell or transfer any capital stock of the Company, any
security directly or indirectly convertible or exchangeable
for any such capital stock or any option or right to acquire any
of the foregoing, which in the aggregate after the date hereof
constitutes or allows the holder(s) thereof to acquire 5% or
more of the outstanding capital stock of the Company as of the
Closing Date; and in connection with which any Person(s)
acquiring or holding such securities are not subject to a
lock-up on
terms at least as restrictive upon such holders as those set
forth in this Section 5 at all times while this
Section 5 is applicable to the Purchasers;
provided, however, that subsections (b) and
(c) shall not apply to the shares of Common Stock issued in
the Merger or issuances pursuant to any stockholder-approved
equity compensation plans or arrangements (or to the
Companys existing deferred stock unit programs) the
purpose of which is to compensate the Companys employees
or non-employee directors and not in any material respect to
raise capital or any issuances upon exercise of warrants to
purchase shares of Common Stock outstanding on the date hereof.
For purposes of this Agreement, the term Prohibited
Transaction for any Purchaser means a transfer or
assignment of the Shares or any interest therein, including any
of the following transactions, and any agreement or other
arrangement with respect to any such transactions;
provided, however, that a Prohibited Transaction
shall not include the tendering of Shares by Purchasers in a
publicly announced tender offer: (A) any sale; (B) any
grant of any option; (C) any transfer of the economic risk
of ownership; (D) any transfer of voting or dispositive
power; (E) any pledge; (F) any short sale, whether or
not against the box; (G) any establishment of any put
equivalent position (as defined in
Rule 16a-1(h)
under the Exchange Act); (H) any grant of any other right
with respect to any of the Shares or with respect to any
security that includes, relates to or derives any significant
part of its value from any of the Shares;
and/or
(I) any hedging transaction; except, in each case, any
transfer to any affiliate of the Purchaser (including its
partners or members), provided that in each case such Person(s)
agrees to be bound by the provisions of this
Section 5. For purposes of this Agreement, the
term Change in Control means the occurrence
after the Closing Date of any of the following in one or a
series of related transactions: (i) an acquisition by any
Person or group (as described in
Rule 13d-5(b)(1)
under the Exchange Act) of 40% or more of the voting rights or
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equity interests in the Company; (ii) a replacement of more
than one-half of the members of the Companys board of
directors that is not approved by those individuals who are
members of the board of directors at the Effective Time (or
other directors previously approved by such individuals);
(iii) a sale of substantially all or more than one-half of
the assets of the Company and its Subsidiaries, taken as a
whole, in a transaction or series of related transactions;
(iv) a merger or consolidation that results in more than
50% of the combined voting power of the then outstanding Company
Capital Stock changing ownership (whether or not approved by the
Board); (v) the consummation of a recapitalization,
reorganization or other transaction involving the Company or any
Subsidiary that constitutes or results in a transfer of a
majority of the voting rights or equity interests in the
Company; (vi) consummation of a
Rule 13e-3
transaction as defined in
Rule 13e-3
under the Exchange Act, or (vii) consummation of a publicly
announced tender offer for a majority of any class of the
Companys outstanding securities (other than an issuer
tender offer not for cash or to employees of the Company and, in
each case, not to effectuate a going private transaction).
6. Other Agreements of the Parties.
(a) The Company shall use its commercially reasonable
efforts to continue the listing and trading of its Common Stock
on the Nasdaq or another national securities exchange or the
Over-the-Counter Bulletin Board (the
OTCBB) and shall use its commercially
reasonable efforts to comply in all respects with the applicable
reporting, filing, shareholder approval and other obligations
under the rules and regulations of the Nasdaq, such other
national securities exchange or the OTCBB, as applicable, in
each case, until the earlier of the first anniversary of the
Closing Date and the time at which the Purchasers no longer own
any of the Shares.
(b) Until the earlier of the first anniversary of the
Closing Date and the time at which the Purchasers no longer own
any of the Shares, the Company covenants to use commercially
reasonable efforts to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all
reports required to be filed by the Company pursuant to the
Exchange Act, or if the Company is not required to file reports
pursuant to securities Laws during such period, the Company will
prepare and furnish to the Purchasers and make publicly
available in accordance with Rule 144(c) such information
as is required for the Purchasers to sell the Shares under
Rule 144.
(c) Except for: (i) a press release to be issued on
the Effective Date disclosing the transactions contemplated by
this Agreement and the other Transaction Documents and the
Merger, and (ii) a
Form 8-K
to be filed with the SEC describing the material terms of the
transactions contemplated by this Agreement and the other
Transaction Documents and the Merger and attaching the relevant
Transaction Documents as exhibits, and any filings made in
connection with the Merger, the Company shall not issue any
press release or any other public statement with respect to the
transactions contemplated by this Agreement and the other
Transaction Documents, except as required by Law or the stock
exchange on which the Companys Common Stock is listed or
traded, in which case, to the extent practicable, the Company
shall provide the Purchasers with prior notice of such
disclosure. No Purchaser shall issue any press release or any
other public statement with respect to the transactions
contemplated by this Agreement and the other Transaction
Documents, except (i) as required by Law, in which case
such Purchaser shall provide the Company with prior notice of
such disclosure, or (ii) for the issuance of any press
release or other public statement that (x) discloses only
that information with respect to the transactions contemplated
hereby and the Merger as has been previously disclosed with
respect to such transactions by the Company, in which case such
Purchaser shall provide the Company with notice of such
disclosure, prior to the first disclosure thereof (and may
thereafter repeat such disclosure previously notified to
Company), or (y) is approved in advance by the Company,
such approval not to be unreasonably withheld, conditioned or
delayed.
(d) Certificates evidencing the Shares shall not be
required to contain any legend (including the legend set forth
in Section 4(h)): (i) following a sale of the
Shares pursuant to an effective registration statement, or
(ii) following a sale of the Shares pursuant to
Rule 144 (assuming the transferor is not an affiliate of
the Company, and the Company receives evidence of such status,
such as customary representation letters provided by the
Purchasers, reasonably satisfactory to the Company). Following
such time as any legends (including those set forth in
Section 4(h)) are no longer required to be placed on
certificates representing Shares, the Company will, no later
than three business days following the delivery by the Purchaser
to the Transfer Agent of a certificate representing Shares
containing such legends, deliver or cause to be delivered to the
Purchaser or its transferee, as applicable, a
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certificate representing such Shares that is free from all
legends. The Company may not make any notation on its records or
give instructions to the Transfer Agent that expand the
restrictions on transfer set forth in Section 4.
(e) The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security
(as defined in Section 2(a)(1) of the Securities Act) that
would be integrated with the offer or sale of the Shares for
purposes of the Securities Act, or, except in connection with
the
Form S-4
to be filed in connection with the issuance of Common Stock in
the Merger, the rules and regulations of the Nasdaq relating to
shareholder approval requirements.
7. Conditions to the Closing.
(a) General Conditions to
Closing. The respective obligations of each
party to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment, at or prior to
the Closing, of each of the following conditions, any of which
may, to the extent permitted by applicable Law, be waived in
writing by any party in its sole discretion (provided,
that such waiver shall only be effective as to the obligations
of such party):
(i) No Injunction. No statute,
rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or enforced by any
court or governmental authority of competent jurisdiction which
prohibits or makes illegal the consummation of the transactions
contemplated by this Agreement.
(ii) Consummation of Merger. The
Merger shall have closed concurrent with or immediately prior to
the Closing.
(iii) Stockholder Approval. If
required under Rule 4350(i) of the Nasdaq Marketplace
Rules, the Company shall have received the Stockholder Approval.
(b) Conditions Precedent to the Obligation of the
Company. The obligation hereunder of the
Company to issue and sell the Shares as to each individual
Purchaser shall be subject to the fulfillment at or prior to the
Closing, of each of the following conditions, any of which may,
to the extent permitted by applicable Law, be waived in writing
by the Company in its sole discretion:
(i) Accuracy of the Purchasers Representations
and Warranties. The representations and
warranties of the Purchaser shall be true and correct in all
material respects as of the date hereof and as of the Closing
Date as though made at that time, except for representations and
warranties that are expressly made as of a particular date,
which shall be true and correct in all material respects as of
such date.
(ii) Performance by the
Purchaser. The Purchaser shall have
performed, satisfied and complied in all material respects with
all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such
Purchaser at or prior to the Closing Date.
(iii) Purchasers
Certificate. On the Closing Date, the
Purchaser shall have delivered to the Company a certificate
signed by such Purchaser, if such Purchaser is an individual, or
an executive officer on behalf of such Purchaser, if such
Purchaser is an entity, dated as of the Closing Date, confirming
the accuracy of such Purchasers representations,
warranties and performance of its covenants as of the Closing
Date.
(iv) Delivery of Purchase
Price. The Purchase Price relating to the
Purchasers Share Allocation shall have been delivered to
the Company on the Closing Date as set forth in
Section 2(b).
(v) Minimum Purchase. The
Purchasers, including Electing Offerees (if any) and Additional
Purchasers, shall have purchased Shares with an aggregate
Purchase Price of $12 million at the Closing.
(c) Conditions Precedent to the Obligation of the
Purchasers. The obligation hereunder of each
of the Purchasers to purchase the Shares and consummate the
transactions contemplated by this Agreement shall be subject to
the fulfillment at or prior to the Closing, of each of the
following conditions, any of which may, to the extent permitted
by applicable Law, be waived in writing by the Purchaser (as to
itself only) in its sole discretion:
(i) Accuracy of the Companys Representations
and Warranties. The representations and
warranties of the Company in this Agreement shall be, in the
aggregate, true and correct in all material respects, as of the
Closing Date, except for representations and warranties that are
qualified by Material Adverse Effect, which
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shall be true and correct in all respects, or speak as of a
particular date, which shall be true and correct in all material
respects as of such date.
(ii) Performance by the
Company. The Company shall have performed,
satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement
to be performed, satisfied or complied with by the Company at or
prior to the Closing Date.
(iii) No Suspension, Etc. Trading
in the Common Stock shall not be suspended as of the Closing
Date by the SEC or the Nasdaq (or if then traded on another
national securities exchange or the OTCBB, then such securities
exchange or the OTCBB).
(iv) Shares. At the Closing, the
Company shall have delivered to the Purchaser a certificate
representing such Purchasers Share Allocation (in such
denominations as such Purchaser may request) or shall have
issued an irrevocable letter of instruction to the Transfer
Agent to issue such Purchasers Share Allocation.
(v) Opinion of Counsel. The
Purchaser shall have received an opinion of counsel to the
Company in the form of Exhibit B hereto and dated as
of the Closing Date.
(vi) Officers
Certificate. On the Closing Date, the Company
shall have delivered to the Purchaser a certificate signed by an
executive officer on behalf of the Company, dated as of the
Closing Date, to the effect set forth in
Section 7(c)(i) and (ii).
(vii) Registration Rights
Agreement. The Registration Rights Agreement,
dated as of the Closing Date, shall have been duly executed and
delivered to the Purchaser by the Company.
8. Termination.
(a) This Agreement may be terminated at any time prior to
the Closing as follows:
(i) by mutual written consent of the Company and Purchasers
that are committed to purchase (excluding any Purchaser that has
defaulted in its purchase obligations under this Agreement) 75%
of the Shares;
(ii) automatically upon termination of the Merger Agreement
or if the Closing of the transactions contemplated hereby shall
have not been consummated on or before August 30, 2009;
(iii) by the Company or any Purchaser if there shall be any
Law in effect that makes consummation of the transactions
contemplated by this Agreement illegal or if consummation of the
transactions contemplated hereby would violate any nonappealable
final Order of any Governmental Authority of competent
jurisdiction;
(iv) by the Company if any condition to the Companys
obligations hereunder becomes incapable of fulfillment; or
(v) by any Purchaser if any condition to such
Purchasers obligations hereunder becomes incapable of
fulfillment.
(b) Notwithstanding Sections 8(a)(iv) and
(v), a party who is or whose affiliate is in material
breach of or has failed to observe or perform any of its
obligations or representations and warranties hereunder and such
failure is a cause of such conditions to be incapable of
fulfillment shall not have the right to terminate this Agreement
pursuant to Sections 8(a)(iv) through (v).
(c) The termination of this Agreement shall be effectuated
by the delivery of written notice of such termination by the
party terminating this Agreement to each other party, except for
a termination pursuant to Section 8(a)(ii) upon a
termination of the Merger Agreement, which shall be effective
immediately upon termination of the Merger Agreement. If this
Agreement terminates, it shall have no further force or effect,
except as provided in Section 8(d).
(d) If this Agreement is terminated in accordance with
Section 8(a) and the transactions contemplated
hereby are not consummated, this Agreement shall be of no
further force and effect, without any liability on the part of
any party hereto, except for this Section 8(d) and
Section 9, which shall survive termination of this
Agreement. Nothing herein shall relieve any party to this
Agreement of liability for a knowing and willful breach of any
representation, warranty, agreement, covenant or other provision
of this Agreement prior to the date of termination.
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9. Miscellaneous.
(a) No Obligation to Consummate
Merger. Each of the Purchasers hereby
acknowledges and agrees that notwithstanding anything contained
in this Agreement, the Company shall have no obligation under
this Agreement to consummate the Merger or take any actions in
connection therewith. Each of the Purchasers further
acknowledges and agrees that the Company shall have no liability
or other obligation to any Purchaser whatsoever in the event
that this Agreement is terminated as a result of the termination
of the Merger Agreement for any reason, or other failure to
consummate the Merger.
(b) No Obligation/Ability to Bring
Action. Unless (i) the Company and Galil
mutually agree that all conditions in Section 6.1 of the
Merger Agreement (except for such conditions as may, by their
terms, only be satisfied at the Closing or on the Closing Date
and except for Section 6.1(o)), in Section 6.2
of the Merger Agreement (except for such conditions as may, by
their terms, only be satisfied at the Closing or on the Closing
Date) and in Section 6.3 of the Merger Agreement (except
for such conditions as may, by their terms, only be satisfied at
the Closing or on the Closing Date) have either been satisfied
or waived by the appropriate party, (ii) the Company
believes, in good faith, that one or more Purchasers who are
listed on Schedule I has breached its obligations
under Section 1(a) and 2(b) of this Agreement, and
(iii) the Non-Defaulting Purchasers or Additional
Purchasers fail to purchase all of such Defaulting
Purchasers Defaulted Share Allocation and all other
defaulting Purchasers Share Allocation, the Company shall
not be entitled to bring any claim, action, suit, or other
judicial proceeding against any Purchaser listed on
Schedule I prior to the Closing. Notwithstanding
anything in this Agreement to the contrary, in no event shall
Galil be required to bring an Action against any Person,
including any Purchaser, to cause such Person to satisfy its
obligations hereunder or seek any other remedy in connection
with such Persons failure to satisfy its obligations
hereunder. Further, notwithstanding anything in this Agreement
to the contrary, the liability of any Purchaser under this
Agreement shall not exceed (x) for any Purchaser listed on
Schedule I, such Purchasers proportionate
share (equal to such Purchasers Share Allocation divided
by the aggregate Share Allocations of all defaulting Purchasers
listed on Schedule I (as reasonably determined by
board of directors of the Company)) of the total of the Company
Termination Fee and Parent Transaction Expenses accrued through
the date of termination of the Merger Agreement (both as defined
in Section 8.5(e) of the Merger Agreement), to the extent
such fees have not been paid by Galil, and (y) for any
Purchaser listed on Schedule II, such
Purchasers proportionate share (equal to such
Purchasers Share Allocation divided by the aggregate Share
Allocations of all Defaulting Purchasers listed on
Schedule II) of the total of the Parent Termination
Fee and Company Transaction Expenses accrued through the date of
termination of the Merger Agreement (both as defined in
Section 8.5(b) of the Merger Agreement), to the extent such
fees have been paid by the Company. Payment of the amounts set
forth in the preceding sentence (Damages)
shall be the sole and exclusive remedy of the Company against
any Purchaser arising from a breach of its pre-Closing covenants
under this Agreement, including those contained in
Section 1(a) and Section 2(b) and in no event shall
the Company be entitled to specific performance or any other
remedy, at law or in equity. The Company acknowledges and agrees
that its right to monetary damages in the amount of the Damages
shall be in lieu of all other remedies for a breach by any
Purchaser of its pre-Closing covenants under this Agreement,
including those contained in Section 1(a) and
Section 2(b).
(c) Survival of Representations and
Warranties. If the Closing occurs, the
representations, warranties, agreements and covenants contained
in this Agreement and the other Transaction Documents shall
survive the Closing Date and the delivery of the Shares.
(d) Fees and Expenses. Except as
set forth in Section 9(e), each of the parties shall
pay the fees and expenses of its advisors, counsel, accountants
and other experts, if any, and all other expenses, incurred by
such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement and the other
Transaction Documents.
(e) Attorneys Fees. If any
action at law or in equity (including arbitration) is necessary
to enforce or interpret the terms of this Agreement or other
Transaction Documents, then the prevailing party shall be
entitled to reasonable attorneys fees, costs and necessary
disbursements in addition to any other relief to which such
party may be entitled, provided that any such fees and expenses
incurred in connection with a claim, action, suit or proceeding
brought by the Company against any Purchaser, as contemplated by
Section 9(b), shall be paid solely by the nonprevailing
party or parties in such proceeding.
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(f) Notices. All notices and other
communications hereunder shall be in writing and shall be deemed
duly given (i) on the date of delivery if delivered
personally, or if by facsimile, upon written confirmation of
receipt by facsimile, email or otherwise (provided such delivery
is during regular business hours, and if not, then on the next
Business Day), (ii) on the first Business Day following the
date of dispatch if delivered utilizing a
next-day
service by a nationally recognized
next-day
courier or (iii) on the earlier of confirmed receipt or the
fifth Business Day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage
prepaid. All notices hereunder shall be delivered to the
addresses set forth below, or pursuant to such other
instructions as may be designated in writing by the party to
receive such notice:
(i) if to the Company:
Endocare, Inc.
201 Technology Drive
Irvine, CA 92618
Attention: Clint B. Davis
Facsimile:
(949) 450-5310
Email: cdavis@endocare.com
with a copy (which shall not constitute notice) to:
Gibson, Dunn & Crutcher LLP
3161 Michelson Drive, Suite 1200
Irvine, CA 92612
Attention: Michelle A. Hodges
Facsimile:
(949) 475-4703
Email: mhodges@gibsondunn.com
(ii) if to any Purchaser:
At the address of such Purchaser set forth on the signature page
hereto.
with a copy (which shall not constitute notice) to:
Willkie, Farr & Gallagher LLP
787 7th Avenue
New York, NY 10019
Attention: Gordon Caplan
Facsimile:
(212) 728-9266
Email: gcaplan@willkie.com
(g) Entire Agreement. This
Agreement and the Registration Rights Agreement constitute the
entire agreement between the parties with respect to the subject
matter hereof, and supersede all prior written agreements,
arrangements, communications and understandings and all prior
and contemporaneous oral agreements, arrangements,
communications and understandings among the parties with respect
to the subject matter hereof. No party shall be liable or bound
to any other party in any manner by any representations,
warranties or covenants except as expressly set forth in this
Agreement.
(h) No Third Party
Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted
successors and assigns and is not for the benefit of, nor may
any provision hereof be enforced by, any other Person, except
that the Placement Agent is an intended third party beneficiary
with respect to the representations and warranties made by
(i) the Company in Section 3 and (ii) the
Purchasers in Section 4.
(i) Amendment; Waiver. Any term of
this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively),
only by an express written consent signed by the Company and
Purchasers that own, or have committed to purchase (excluding
any Purchaser that has defaulted in its purchase obligations
under this Agreement), 75% of the Shares (excluding any Shares
of any Purchaser that has defaulted in its purchase obligations
under this Agreement), provided, however, that any
amendment or waiver that adversely affects the rights of any
Purchaser or Purchasers in a manner that is different than the
effect on the rights of the other Purchasers shall require the
express written consent of such affected adversely Purchaser or
Purchasers. No waiver by any party of any default with respect
to
B-14
any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall
any delay or omission of any party to exercise any right
hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
(j) Successors and Assigns. This
Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The Company
may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of Purchasers that
have committed to purchase (excluding any Purchaser that has
defaulted in its purchase obligations under this Agreement), 75%
of the Shares (excluding any Shares of any Purchaser that has
defaulted in its purchase obligations under this Agreement). No
Purchaser may assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Company and
the other Purchasers, except to an affiliate of such Purchaser
who agrees to be bound by the terms of, and executes a
counterpart to, this Agreement. Any attempted assignment by a
Purchaser in violation of this Agreement shall render such
Purchaser a Defaulting Purchaser under this Agreement.
(k) Independent Nature of Purchasers
Obligations and Rights. The obligations of
each Purchaser under this Agreement and other Transaction
Documents are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any
way for the performance or non-performance of the obligations of
any other Purchaser under this Agreement or any Transaction
Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting
in concert or as a group with respect to such obligations or the
transactions contemplated by this Agreement and other
Transaction Documents. Each Purchaser shall be entitled to
independently protect and enforce its rights including, without
limitation, the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary
for any other Purchaser to be joined as an additional party in
any proceeding for such purpose.
(l) Governing Law;
Arbitration. This Agreement shall be governed
by and construed under the laws of the State of Delaware without
regard to any conflict of laws principles that would require the
application of the laws of any other jurisdiction. Each of the
parties irrevocably agrees that in the event of the bringing of
any legal Action arising out of or relating to this Agreement or
the transactions contemplated hereby brought by any other party
or its successors or assigns, then the sole forum for resolving
such dispute shall be any appropriate State or federal court in
the State of Delaware, and each of the parties hereby
irrevocably submits to the exclusive jurisdiction of the
aforesaid courts for itself and with respect to its property,
generally and unconditionally, with regard to any such Action
arising out of or relating to this Agreement and the
transactions contemplated hereby. Notwithstanding the foregoing,
the parties agree that any dispute, claim or controversy arising
out of or relating to this Agreement or the breach, termination,
enforcement, interpretation or validity thereof, that arises at
the same time and relates to the same or similar facts, claims
or events as any one or more disputes, claims or controversies
arising out of or relating to the Merger Agreement, shall, to
the extent practicable, be combined in one arbitration
proceeding under Section 9.3 of the Merger Agreement, and
in such event, the provisions of such section governing dispute
resolution shall supersede any provisions relating to such
matters in this Agreement. Each of the parties further agrees
that notice as provided herein shall constitute sufficient
service of process and the parties further waive any argument
that such service is insufficient.
(m) Severability. The invalidity
or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of
this Agreement, each of which shall remain in full force and
effect and in lieu of such invalid or unenforceable provision
there shall be automatically added as part of this Agreement a
valid and enforceable provision as similar in terms to the
invalid or unenforceable provision as possible, provided that
this Agreement as amended, (i) reflects the intent of the
parties hereto, and (ii) does not change the bargained for
consideration or benefits to be received by each party hereto.
(n) Headings. The article, section
and subsection headings in this Agreement are for convenience
only and shall not constitute a part of this Agreement for any
other purpose and shall not be deemed to limit or affect any of
the provisions hereof.
(o) Defined Terms. Terms used
herein that are not defined herein shall have the meanings set
forth in the Merger Agreement.
B-15
(p) Counterparts. This Agreement
may be executed in two or more counterparts, each of which shall
be deemed an original but all of which together shall constitute
one and the same instrument.
(q) Drafting. Each party
acknowledges that such party to this Agreement has been
represented by counsel in connection with this Agreement and the
transactions contemplated by this Agreement. Accordingly, any
Law that would require interpretation of any claimed ambiguities
in this Agreement against the drafting party has no application
and is expressly waived.
[SIGNATURE
PAGES FOLLOW]
B-16
IN WITNESS WHEREOF, the parties hereby execute and
deliver this Stock Purchase Agreement as of the date first
written above.
ENDOCARE, INC.
|
|
|
|
By:
|
/s/ Michael
R. Rodriguez
|
Name: Michael R. Rodriguez
|
|
|
|
Title:
|
Senior Vice President, Finance and
|
Chief Financial Officer
[Signature
Page to Stock Purchase Agreement]
B-17
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated: Nov. 10, 2008
2. Subscription Amount: $550,000
3. Purchase Price: $1.00 per share
4. Share
Allocation:
|
|
|
|
|
|
Richard B. Emmett
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
22-3848480
Taxpayer
Identification or
Social Security Number
|
|
Taxpayer
Identification or
Social Security Number of Joint Purchaser (if any)
|
|
|
|
Vertical Fund II, LP
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
25 DeForest Ave
Number
and Street
|
|
|
|
|
|
Summit NJ 07901
City,
State Zip
Code
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|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-18
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated: Nov. 10, 2008
2. Subscription Amount: $2,200,000
3. Purchase Price: $1.00 per share
4. Share
Allocation:
|
|
|
|
|
|
Richard B. Emmett
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
11-2953861
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
|
|
|
Vertical Fund I, LP
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
25 DeForest Ave
Number
and Street
|
|
|
|
|
|
Summit, NJ 07901
City,
State Zip
Code
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|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-19
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
TMP
Nominee II, LLC
1. Dated:
,
2008
2. Subscription Amount: $39,283
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
James E. Thomas
Signature
of Subscriber [Manager]
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
|
|
|
TMP Nominee II, LLC
Name
(please print as name will appear
on stock certificate)
|
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Address of principal place of business:
|
|
|
|
|
|
Number
and Street
|
|
|
|
|
|
City,
State Zip
Code
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|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-20
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
TMP
Nominee LLC
1. Dated:
,
2008
2. Subscription Amount: $78,042
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
James E. Thomas
Signature
of Subscriber [Manager]
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
|
|
|
TMP Nominee LLC
Name
(please print as name will appear
on stock certificate)
|
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|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
Number
and Street
|
|
|
|
|
|
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-21
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
,
2008
2. Subscription Amount: $13,349
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
By its General Partner
Thomas, McNerney & Partners LLC
|
|
|
|
|
|
James E. Thomas
Signature
of Subscriber [Manager]
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
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|
TMP Associates II, LP
Name
(please print as name will appear
on stock certificate)
|
|
|
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|
Address of principal place of business:
|
|
|
|
|
|
Number
and Street
|
|
|
|
|
|
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-22
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
TMP
Associates, LP
1. Dated:
,
2008
2. Subscription Amount: $7,979
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
By its General Partner
Thomas, McNerney & Partners LLC
|
|
|
|
|
|
James E. Thomas
Signature
of Subscriber [Manager]
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
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|
TMP Associates, LP
Name
(please print as name will appear
on stock certificate)
|
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|
Address of principal place of business:
|
|
|
|
|
|
Number
and Street
|
|
|
|
|
|
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-23
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
Thomas,
McNerney & Partners, LP
1. Dated:
,
2008
2. Subscription Amount: $2,100,039
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
By its General Partner
Thomas, McNerney & Partners LLC
|
|
|
|
|
|
James E. Thomas
Signature
of Subscriber [Manager]
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
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|
|
Thomas, McNerney & Partners, LP
Name
(please print as name will appear
on stock certificate)
|
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|
Address of principal place of business:
|
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|
|
263 Tresser Blvd., Suite 1600
Number
and Street
|
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|
|
|
|
Stanford, CT 06901
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-24
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
Thomas,
McNerney & Partners II, LP
1. Dated: ,
2008
2. Subscription Amount: $3,761,308
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
By its General Partner
Thomas, McNerney & Partners LLC
|
|
|
|
|
|
James
E. Thomas
Signature
of Subscriber [Manager]
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social Security
Number of Joint Purchaser (if any)
|
|
|
|
Thomas, McNerney & Partners II, LP
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
263 Tresser Blvd., Suite 1600
Number
and Street
|
|
|
|
|
|
Stanford, CT 06901
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
B-25
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
,
2008
2. Subscription Amount: $550,000
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
[Illegible]
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social
Security Number of Joint Purchaser (if any)
|
|
|
|
Discount Investment Corporation Ltd
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
3 Azrieli Center
Triangular Tower,
44th Floor
Number
and Street
|
|
|
|
|
|
Tel Aviv 67023, Israel
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-26
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated: Nov. 10, 2008
2. Subscription Amount: $200,000
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
Berman & Co. Trading & Investments Ltd.
|
|
|
|
|
|
[Illegible]
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social Security
Number of Joint Purchaser (if any)
|
|
|
|
Berman & Co. Trading & Investments Ltd.
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
58 Stricker St.
Number
and Street
|
|
|
|
|
|
Tel Aviv Israel 62003
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-27
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
2. Subscription Amount: $700,000
3. Purchase Price:
$
4. Share Allocation:
|
|
|
|
|
|
RDC Rafael Development Corporation Ltd.
|
|
|
|
|
|
[Illegible]
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social Security Number of Joint Purchaser (if
any)
|
|
|
|
RDC Rafael Development Corporation Ltd.
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
[Illegible]
Number
and Street
|
|
|
|
|
|
Israel 20692
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-28
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
2. Subscription Amount: $550,000
3. Purchase Price:
$
4. Share Allocation:
|
|
|
|
|
|
Elron Electronic Industries Ltd.
|
|
|
|
|
|
[Illegible]
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or Social
Security Number
|
|
Taxpayer
Identification or Social Security Number of Joint Purchaser (if
any)
|
|
|
|
Elron Electronic Industries Ltd.
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
3 Azrieli Center
42nd
Floor, Triangular Bldg
Number
and Street
|
|
|
|
|
|
Tel Aviv Israel 67023
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-29
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
2. Subscription Amount: $750,000
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
[Illegible],
Managing Director
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
98-0372426
Taxpayer
Identification or
Social Security Number
|
|
Taxpayer
Identification or
Social Security Number of Joint Purchaser (if any)
|
|
|
|
Investor Group L.P.
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
Canada Court, Upland Road
Number
and Street
|
|
|
|
|
|
St. Peter Port, Guernsey GY1 3BQ
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-30
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
2. Subscription Amount: $1,750,000
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
[Illegible]
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or
Social Security Number
|
|
Taxpayer
Identification or Social Security
Number of Joint Purchaser (if any)
|
|
|
|
Investor Growth Capital Limited
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
Canada Court, Upland Road
Number
and Street
|
|
|
|
|
|
St. Peter Port, Guernsey GY1 3BQ
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-31
SIGNATURE
PAGE
The Purchaser hereby subscribes for such number of Shares as
shall equal the Share Allocation as set forth below and agrees
to be bound by the terms and conditions of this Agreement.
PURCHASER
1. Dated:
2. Subscription Amount: $3,000,000
3. Purchase Price:
$
4. Share
Allocation:
|
|
|
|
|
|
Frazier Healthcare V, L.P.
By: FHM V, LP, Its General Partner
By: FHM V, LLC
|
|
|
|
|
|
[Illegible]
Signature
of Subscriber
(and title, if applicable)
|
|
Signature
of Joint Purchaser
(if any)
|
|
|
|
Taxpayer
Identification or
Social Security Number
|
|
Taxpayer
Identification or Social Security
Number of Joint Purchaser (if any)
|
|
|
|
Frazier Healthcare V, L.P.
Name
(please print as name will appear
on stock certificate)
|
|
|
|
|
|
Address of principal place of business:
|
|
|
|
|
|
Two Union Square, Suite 3200
Number
and Street
|
|
|
|
|
|
Seattle, WA 98101
City,
State Zip
Code
|
|
|
ACCEPTED BY:
Endocare, Inc.
Name:
Dated:
B-32
ENDOCARE,
INC.
2009 STOCK INCENTIVE PLAN
1. Purpose
The purpose of the Endocare, Inc. 2009 Stock Incentive Plan (the
Plan) is to enable Endocare, Inc. and its
subsidiaries to attract, retain and motivate is non-employee
directors, officers, employees and service providers, in each
case who are selected to be Participants, and to further align
the interests of such persons with those of Company stockholders
by providing for or increasing the proprietary interest of such
persons in the Company. The Plan provides for the grant of
Incentive and Nonqualified Stock Options, Stock Appreciation
Rights, Restricted Stock and Restricted Stock Units, any of
which may be performance-based, and for Incentive Bonuses, which
may be paid in cash or stock or a combination thereof, as
determined by the Administrator.
2. Definitions
As used in the Plan, the following terms shall have the meanings
set forth below:
(a) Administrator means the
Administrator of the Plan in accordance with Section 18.
(b) Affiliate and
Associate shall have the respective meanings
ascribed to such terms in
Rule 12b-2
promulgated under the Exchange Act.
(c) Assumed means that pursuant to a
Corporate Transaction either (i) the Award is expressly
affirmed by the Company or (ii) the contractual obligations
represented by the Award are expressly assumed (and not simply
by operation of law) by the successor entity or its Parent in
connection with the Corporate Transaction with equitable
adjustments to the number and type of securities of the
successor entity or its Parent subject to the Award and the
exercise or purchase price thereof.
(d) Award means an Incentive Stock
Option, Nonqualified Stock Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit or Incentive Bonus
granted to a Participant pursuant to the provisions of the Plan,
any of which the Administrator may structure to qualify in whole
or in part as a Performance Award.
(e) Award Agreement means a written
agreement or other instrument as may be approved from time to
time by the Administrator implementing the grant of each Award.
An Agreement may be in the form of an agreement to be executed
by both the Participant and the Company (or an authorized
representative of the Company) or certificates, notices or
similar instruments as approved by the Administrator.
(f) Board means the board of directors
of the Company.
(g) Cause means (unless otherwise
expressly provided in the Award Agreement or another contract,
including an employment agreement) a termination of service
based upon, in the determination of the Administrator, the
Participants: (i) performance of any act or failure
to perform any act in bad faith and to the detriment of the
Company or a Related Entity; (ii) dishonesty, intentional
misconduct or material breach of any agreement with the Company
or a Related Entity; or (iii) commission of a crime
involving dishonesty, breach of trust, or physical or emotional
harm to any person.
(h) Change in Control means a change in
ownership or control of the Company effected through either of
the following transactions:
(i) the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by
the Company or by a Company-sponsored employee benefit plan or
by a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company) of beneficial
ownership (within the meaning of
Rule 13d-3
of the Exchange Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the
Companys outstanding securities pursuant to a tender or
exchange offer made directly to the Companys stockholders
which a majority of
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the Continuing Directors who are not Affiliates or Associates of
the offeror do not recommend such stockholders accept, or
(ii) a change in the composition of the Board over a period
of thirty-six (36) months or less such that a majority of
the Board members (rounded up to the next whole number) ceases,
by reason of one or more contested elections for Board
membership, to be comprised of individuals who are Continuing
Directors.
(i) Code means the Internal Revenue Code
of 1986, as amended from time to time, and the rulings and
regulations issues thereunder.
(j) Common Stock means the
Companys common stock, par value $.001, Companys
common stock, par value $.001.
(k) Company means Endocare, Inc., a
Delaware corporation, or any successor corporation that adopts
the Plan in connection with a Corporate Transaction.
(l) Continuing Directors means members
of the Board who either (i) have been Board members
continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less
than
thirty-six
(36) months and were elected or nominated for election as
Board members by at least a majority of the Board members
described in clause (i) who were still in office at the
time such election or nomination was approved by the Board.
(m) Corporate Transaction means any of
the following transactions, provided, however, that the
Administrator shall determine under parts (iv) and
(v) whether multiple transactions are related, and its
determination shall be final, binding and conclusive:
(i) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal
purpose of which is to change the state in which the Company is
incorporated;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company;
(iii) the complete liquidation or dissolution of the
Company;
(iv) any reverse merger or series of related transactions
culminating in a reverse merger (including, but not limited to,
a tender offer followed by a reverse merger) in which the
Company is the surviving entity but (A) the shares of
Common Stock outstanding immediately prior to such merger are
converted or exchanged by virtue of the merger into other
property, whether in the form of securities, cash or otherwise,
or (B) in which securities possessing more than forty
percent (40%) of the total combined voting power of the
Companys outstanding securities are transferred to a
person or persons different from those who held such securities
immediately prior to such merger or the initial transaction
culminating in such merger, but excluding any such transaction
or series of related transactions that the Administrator
determines shall not be a Corporate Transaction; or
(v) acquisition in a single or series of related
transactions by any person or related group of persons (other
than the Company or by a Company-sponsored employee benefit
plan) of beneficial ownership (within the meaning of
Rule 13d-3
of the Exchange Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the
Companys outstanding securities but excluding any such
transaction or series of related transactions that the
Administrator determines shall not be a Corporate Transaction.
(n) Exchange Act means the Securities
Exchange Act of 1934, as amended.
(o) Disability means as defined under
the long-term disability policy of the Company or the Related
Entity to which the Participant provides services regardless of
whether the Participant is covered by such policy. If the
Company or the Related Entity to which the Participant provides
service does not have a
long-term
disability plan in place, Disability means that a
Participant is unable to carry out the responsibilities and
functions of the position held by the Participant by reason of
any medically determinable physical or mental impairment for a
period of not less than ninety (90) consecutive days. A
Participant will not be
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considered to have incurred a Disability unless he or she
furnishes proof of such impairment sufficient to satisfy the
Administrator in its discretion.
(p) Fair Market Value means, as of any
date, the closing sales price per share at which the Shares are
sold on the NASDAQ Capital Market , or, if no Shares are traded
on the NASDAQ Capital Market on the date in question, then for
the next preceding date for which Shares are traded on the
NASDAQ Capital Market or, if the Shares are at any time no
longer traded on the NASDAQ Capital Market, the closing sales
price per share at which the Shares are sold on such other
exchange, listing, quotation or similar service, or, if no such
closing sales price is available, such other method, consistent
with Section 409A of the Code, as the Administrator may
determine.
(q) Incentive Bonus means a bonus
opportunity awarded under Section 9 pursuant to which a
Participant may become entitled to receive an amount based on
satisfaction of such performance criteria as are specified in
the Award Agreement.
(r) Incentive Stock Option means a stock
option that is intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code.
(s) Nonemployee Director means each
person who is, or is elected to be, a member of the Board and
who is not an employee of the Company or any Subsidiary.
(t) Nonqualified Stock Option means a
stock option that is not intended to qualify as an
incentive stock option within the meaning of
Section 422 of the Code.
(u) Option means an Incentive Stock
Option
and/or a
Nonqualified Stock Option granted pursuant to Section 6 of
the Plan.
(v) Parent means a parent
corporation, whether now or hereafter existing, as defined
in Section 424(e) of the Code.
(w) Participant means any individual
described in Section 3 to whom Awards have been granted
from time to time by the Administrator and any authorized
transferee of such individual.
(x) Performance Award means an Award,
the grant, issuance, retention, vesting or settlement of which
is subject to satisfaction of one or more Qualifying Performance
Criteria established pursuant to Section 13.
(y) Prior Plans means the Companys
2004 Stock Incentive Plan, 1995 Stock Plan and
1995 Director Option Plan.
(z) Qualifying Performance Criteria has
the meaning set forth in Section 13(b).
(aa) Related Entity means any Parent or
Subsidiary of the Company and any business, corporation,
partnership, limited liability company or other entity in which
the Company or a Parent or a Subsidiary of the Company holds a
substantial ownership interest, directly or indirectly.
(bb) Replaced means that pursuant to a
Corporate Transaction the Award is replaced with a comparable
stock award or a cash incentive program of the Company, the
successor entity (if applicable) or Parent of either of them,
which generally preserves the compensation element of such Award
existing at the time of the Corporate Transaction.
(cc) Restricted Stock means Shares
granted pursuant to Section 8 of the Plan.
(dd) Restricted Stock Unit means an
Award granted to a Participant pursuant to Section 8
pursuant to which Shares or cash in lieu thereof may be issued
in the future.
(ee) Share means a share of the Common
Stock, subject to adjustment as provided in Section 12.
(ff) Stock Appreciation Right means a
right granted pursuant to Section 7 of the Plan that
entitles the Participant to receive, in cash or Shares or a
combination thereof, as determined by the Administrator, value
equal to or otherwise based on the excess of (i) the market
price of a specified number of Shares at the time of exercise
over (ii) the exercise price of the right, as established
by the Administrator on the date of grant.
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(gg) Subsidiary means any corporation
(other than the Company) in an unbroken chain of corporations
beginning with the Company where each of the corporations in the
unbroken chain other than the last corporation owns stock
possessing at least 50 percent or more of the total
combined voting power of all classes of stock in one of the
other corporations in the chain, and if specifically determined
by the Administrator in the context other than with respect to
Incentive Stock Options, may include an entity in which the
Company has a significant ownership interest or that is directly
or indirectly controlled by the Company.
(hh) Termination of Employment means
ceasing to serve as a full-time employee of the Company and its
Subsidiaries or, with respect to a Nonemployee Director or other
service provider, ceasing to serve as such for the Company.
Unless the terms of an Award Agreement provide otherwise, a
Termination of Employment shall not be considered to have
occurred in the case of (i) any approved leave of absence,
(ii) transfers among the Company, any Related Entity, or
any successor, in any capacity of employee, Nonemployee Director
or other service provider, or (iii) any change in status as
long as the individual remains in the service of the Company or
a Related Entity in any capacity of employee, Nonemployee
Director or other service provider. An approved leave of absence
shall include sick leave, military leave, or any other
authorized personal leave. For purposes of each Incentive Stock
Option, if such leave exceeds ninety (90) days, and
reemployment upon expiration of such leave is not guaranteed by
statute or contract, then the Incentive Stock Option shall be
treated as a Nonqualified Stock Option on the day three
(3) months and one (1) day following the expiration of
such ninety (90) day period. The Administrator shall
determine whether any corporate transaction, such as a sale or
spin-off of a division or subsidiary that employs a Participant,
shall be deemed to result in a Termination of Employment with
the Company and its Subsidiaries for purposes of any affected
Participants Options, and the Administrators
decision shall be final and binding.
3. Eligibility
Any person who is a current or prospective officer or employee
of the Company or of any Subsidiary shall be eligible for
selection by the Administrator for the grant of Awards
hereunder. In addition, Nonemployee Directors and any other
service providers who have been retained to provide consulting,
advisory or other services to the Company or to any Subsidiary
shall be eligible for the grant of Awards hereunder as
determined by the Administrator. Options intending to qualify as
Incentive Stock Options may only be granted to employees of the
Company or any Subsidiary within the meaning of the Code, as
selected by the Administrator.
4. Effective Date and Termination of Plan
This Plan was adopted by the Board as of
January [ ], 2009 (the Effective
Date), subject to approval by the Companys
stockholders. All Awards granted under this Plan are subject to,
and may not be exercised before, the approval of this Plan by
the affirmative vote of the holders of a majority of the
outstanding Shares present, or represented by proxy, and
entitled to vote, at a meeting of the Companys
stockholders or by written consent in accordance with the laws
of the State of Delaware; provided that if such approval by the
stockholders of the Company does not occur within one year of
the date that this Plan was adopted by the Board, all Awards
previously granted under this Plan shall be void. The Plan shall
remain available for the grant of Awards until the tenth (10th)
anniversary of the Effective Date. Notwithstanding the
foregoing, the Plan may be terminated at such earlier time as
the Board may determine. Termination of the Plan will not affect
the rights and obligations of the Participants and the Company
arising under Awards theretofore granted and then in effect.
5. Shares Subject to the Plan and to
Awards
(a) Aggregate Limits. The aggregate
number of Shares issuable pursuant to all Awards shall not
exceed 5,000,000, plus any Shares subject to outstanding awards
under the Prior Plans that on or after the Effective Date cease
for any reason to be subject to such awards (other than by
reason of exercise or settlement of the awards to the extent
they are exercised for or settled in vested and nonforfeitable
shares); provided that any Shares granted as Options or Stock
Appreciation Rights shall be counted against this limit on a
one-for-one
basis and any Shares granted as Awards other than Options or
Stock Appreciation Rights shall be counted against this limit as
1.5 Shares for every one (1) Share subject to such
Award. The aggregate number of Shares available for grant under
this Plan and the number of Shares subject to outstanding Awards
shall be subject to adjustment as provided in Section 12.
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The Shares issued pursuant to Awards granted under this Plan may
be shares that are authorized and unissued or shares that were
reacquired by the Company, including shares purchased in the
open market.
(b) Issuance of Shares. For purposes of
Section 5(a), the aggregate number of Shares issued under
this Plan at any time shall equal only the number of Shares
actually issued upon exercise or settlement of an Award.
Notwithstanding the foregoing, Shares subject to an Award under
the Plan may not again be made available for issuance under the
Plan if such Shares are: (i) Shares that were subject to a
stock-settled Stock Appreciation Right and were not issued upon
the net settlement or net exercise of such Stock Appreciation
Right, (ii) Shares used to pay the exercise price of an
Option, (iii) Shares delivered to or withheld by the
Company to pay the withholding taxes related an Award, or
(iv) Shares repurchased on the open market with the
proceeds of an Option exercise. Shares subject to Awards that
have been canceled, expired, forfeited or otherwise not issued
under an Award and Shares subject to Awards settled in cash
shall not count as Shares issued under this Plan. Any Shares
that again become available for grant pursuant to
Section 5(a) or this Section 5(b) shall be added back
as one (1) Share if such shares were subject to Options or
Stock Appreciation Rights granted under the Plan or options or
stock appreciation rights granted under a Prior Plan, and as
1.5 Shares if such shares were subject to Awards other than
Options or Stock Appreciation Rights granted under the Plan or
subject to awards other than options or stock appreciation
rights granted under a Prior Plan.
(c) Tax Code Limits. The aggregate number
of Shares subject to Awards granted under this Plan during any
calendar year to any one Participant shall not exceed 1,500,000;
provided, however, that in the calendar year in which the
Participant first commences service with the Company, the
maximum number of shares subject to Awards granted to the
Participant may be up to two hundred percent (200%) of the
number of shares set forth in the foregoing limit, in each case,
which limits shall be calculated and adjusted pursuant to
Section 12 only to the extent that such calculation or
adjustment will not affect the status of any Award intended to
qualify as performance-based compensation under
Section 162(m) of the Code but which number shall not count
any tandem SARs (as defined in Section 7). The
aggregate number of Shares that may be issued pursuant to the
exercise of Incentive Stock Options granted under this Plan
shall not exceed 5,000,000, which number shall be calculated and
adjusted pursuant to Section 12 only to the extent that
such calculation or adjustment will not affect the status of any
option intended to qualify as an Incentive Stock Option under
Section 422 of the Code. The maximum cash amount payable
pursuant to that portion of an Incentive Bonus granted in any
calendar year to any Participant under this Plan that is
intended to satisfy the requirements for performance-based
compensation under Section 162(m) of the Code shall
not exceed $3,000,000.
6. Options
(a) Option Awards. Options may be granted
at any time and from time to time prior to the termination of
the Plan to Participants as determined by the Administrator. No
Participant shall have any rights as a stockholder with respect
to any Shares subject to Option hereunder until said Shares have
been issued. Each Option shall be evidenced by an Award
Agreement. Options granted pursuant to the Plan need not be
identical but each Option must contain and be subject to the
terms and conditions set forth below.
(b) Price. The Administrator will
establish the exercise price per Share under each Option, which,
in no event will be less than the Fair Market Value of the
Shares on the date of grant; provided, however, that the
exercise price per Share with respect to an Option that is
granted in connection with a merger or other acquisition as a
substitute or replacement award for options held by optionees of
the acquired entity may be less than the Fair Market Value of
the Shares on the date such Option is granted if such exercise
price is based on a formula set forth in the terms of the
options held by such optionees or in the terms of the agreement
providing for such merger or other acquisition. The exercise
price of any Option may be paid in Shares, cash or a combination
thereof, as determined by the Administrator, including an
irrevocable commitment by a broker to pay over such amount from
a sale of the Shares issuable under an Option, the delivery of
previously owned Shares and withholding of Shares otherwise
deliverable upon exercise.
(c) No Repricing Without Stockholder
Approval. Other than in connection with a change
in the Companys capitalization (as described in
Section 12) the exercise price of an Option may not be
reduced without stockholder approval (including canceling
previously awarded Options in exchange for other Awards or
Options or Stock Appreciation Rights with an exercise price that
is less than the exercise price of the original Award).
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(d) Provisions Applicable to Options. The
date on which Options become exercisable shall be determined at
the sole discretion of the Administrator and set forth in an
Award Agreement. Unless provided otherwise in the applicable
Award Agreement, to the extent that the Administrator determines
that an approved leave of absence or employment on a less than
full-time basis is not a Termination of Employment, the vesting
period
and/or
exercisability of an Option shall be adjusted by the
Administrator during or to reflect the effects of any period
during which the Participant is on an approved leave of absence
or is employed on a less than full-time basis.
(e) Term of Options and Termination of
Employment: The Administrator shall establish the
term of each Option, which in no case shall exceed a period of
ten (10) years from the date of grant. Unless an Option
earlier expires upon the expiration date established pursuant to
the foregoing sentence, upon the termination of the
Participants employment, his or her rights to exercise an
Option then held shall be only as follows, unless the
Administrator specifies otherwise (such as in an Award
Agreement):
(i) Death. Upon the death of a
Participant while in the employ of the Company or any Subsidiary
or while serving as a member of the Board, the
Participants Options then held shall be exercisable by his
or her estate, heir or beneficiary at any time during the twelve
(12) month period commencing on the date of termination
(but in no event later than the expiration date of the term of
such Option as set forth in the Award Agreement), but only to
the extent of the number of Shares as to which such Options were
exercisable as of the date of such Termination of Employment.
Any and all of the deceased Participants Options that are
not exercised during the twelve (12) months commencing on
the date of termination shall terminate as of the end of such
twelve (12) month period.
If a Participant should die following his or her Termination of
Employment with the Company and its Subsidiaries at a time when
an Option granted under this Plan remains outstanding and
exercisable, such Option shall be exercisable by his or her
estate, heir or beneficiary at any time during the twelve
(12) month period commencing on the date of death (but in
no event later than the expiration date of the term of such
Option as set forth in the Award Agreement), but only to the
extent of the number of Shares as to which such Option was
exercisable as of the date of such termination. Any and all of
the deceased Participants Options that are not exercised
during the twelve (12) months commencing on the date of
death shall terminate as of the end of such twelve
(12) month period. A Participants estate shall mean
his or her legal representative or other person who so acquires
the right to exercise the Option by bequest or inheritance or by
reason of the death of the Participant.
(ii) Disability. Upon Termination of
Employment as a result of the Participants Disability, the
Participants Options then held shall be exercisable at any
time during the twelve (12) month period commencing on the
date of termination (but in no event later than the expiration
date of the term of such Option as set forth in the Award
Agreement), but only to the extent of the number of Shares as to
which such Options were exercisable as of the date of such
Termination of Employment. Any and all of the Participants
Options that are not exercised during the twelve
(12) months commencing on the date of termination shall
terminate as of the end of such twelve (12) month period.
(iii) Other Reasons. Upon the date of a
termination of a Participants employment for any reason
other than those stated above in Sections 6(e)(i) and
(e)(ii) or as described in Section 15, (A) to the
extent that any Option is not exercisable as of such termination
date, such portion of the Option shall remain unexercisable and
shall terminate as of such date, and (B) to the extent that
any Option is exercisable as of such termination date, such
portion of the Option shall expire on the earlier of
(1) thirty (30) days following such date and
(2) the expiration date of such Option as set forth in the
Award Agreement.
(iv) Extension if Exercise Prevented by
Law. Notwithstanding the foregoing, if the
exercise of an Option within the applicable time periods set
forth in this Section 6(e) is prevented by the provisions
of Section 16 below, the Award shall remain exercisable
until one (1) month after the date the Participant is
notified by the Company that the Award is exercisable, but in
any event no later than the expiration of the term of such
Option as set forth in the Award Agreement.
(f) Incentive Stock
Options. Notwithstanding anything to the contrary
in this Section 6, in the case of the grant of an Option
intending to qualify as an Incentive Stock Option: (i) if
the Participant owns stock possessing
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more than 10 percent of the combined voting power of all
classes of stock of the Company (a 10%
Shareholder), the exercise price of such Option must
be at least 110 percent of the Fair Market Value of the
Shares on the date of grant and the Option must expire within a
period of not more than five (5) years from the date of
grant, and (ii) Termination of Employment will occur when
the person to whom an Award was granted ceases to be an employee
(as determined in accordance with Section 3401(c) of the
Code and the regulations promulgated thereunder) of the Company
and its Subsidiaries. Notwithstanding anything in this
Section 6 to the contrary, options designated as Incentive
Stock Options shall not be eligible for treatment under the Code
as Incentive Stock Options (and will be deemed to be
Nonqualified Stock Options) to the extent that either
(A) the aggregate Fair Market Value of Shares (determined
as of the time of grant) with respect to which such Options are
exercisable for the first time by the Participant during any
calendar year (under all plans of the Company and any
Subsidiary) exceeds $100,000, taking Options into account in the
order in which they were granted, or (B) such Options
otherwise remain exercisable but are not exercised within three
(3) months of Termination of Employment (or such other
period of time provided in Section 422 of the Code).
7. Stock Appreciation Rights
Stock Appreciation Rights may be granted to Participants from
time to time either in tandem with or as a component of other
Awards granted under the Plan (tandem SARs)
or not in conjunction with other Awards (freestanding
SARs) and may, but need not, relate to a specific
Option granted under Section 6. The provisions of Stock
Appreciation Rights need not be the same with respect to each
grant or each recipient. Any Stock Appreciation Right granted in
tandem with an Award may be granted at the same time such Award
is granted or at any time thereafter before exercise or
expiration of such Award. All freestanding SARs shall be granted
subject to the same terms and conditions applicable to Options
as set forth in Section 6 and all tandem SARs shall have
the same exercise price, vesting, exercisability, forfeiture and
termination provisions as the Award to which they relate.
Subject to the provisions of Section 6 and the immediately
preceding sentence, the Administrator may impose such other
conditions or restrictions on any Stock Appreciation Right as it
shall deem appropriate. Stock Appreciation Rights may be settled
in Shares, cash or a combination thereof, as determined by the
Administrator and set forth in the applicable Award Agreement.
Other than in connection with a change in the Companys
capitalization (as described in Section 12) the
exercise price of Stock Appreciation Rights may not be reduced
without stockholder approval (including canceling previously
awarded Stock Appreciation Rights and regranting them with a
lower exercise price).
8. Restricted Stock and Restricted Stock Units
(a) Restricted Stock and Restricted Stock Unit
Awards. Restricted Stock and Restricted Stock
Units may be granted at any time and from time to time prior to
the termination of the Plan to Participants as determined by the
Administrator. Restricted Stock is an award or issuance of
Shares the grant, issuance, retention, vesting
and/or
transferability of which is subject during specified periods of
time to such conditions (including continued employment or
performance conditions) and terms as the Administrator deems
appropriate. Restricted Stock Units are Awards denominated in
units of Shares under which the issuance of Shares is subject to
such conditions (including continued employment or performance
conditions) and terms as the Administrator deems appropriate.
Each grant of Restricted Stock and Restricted Stock Units shall
be evidenced by an Award Agreement. Unless determined otherwise
by the Administrator, each Restricted Stock Unit will be equal
to one Share and will entitle a Participant to either the
issuance of Shares or payment of an amount of cash determined
with reference to the value of Shares. To the extent determined
by the Administrator, Restricted Stock and Restricted Stock
Units may be satisfied or settled in Shares, cash or a
combination thereof. Restricted Stock and Restricted Stock Units
granted pursuant to the Plan need not be identical but each
grant of Restricted Stock and Restricted Stock Units must
contain and be subject to the terms and conditions set forth
below.
(b) Contents of Agreement. Each Award
Agreement shall contain provisions regarding (i) the number
of Shares or Restricted Stock Units subject to such Award or a
formula for determining such number, (ii) the purchase
price of the Shares, if any, and the means of payment,
(iii) the performance criteria, if any, and level of
achievement versus these criteria that shall determine the
number of Shares or Restricted Stock Units granted, issued,
retainable
and/or
vested, (iv) such terms and conditions on the grant,
issuance, vesting
and/or
forfeiture of the Shares or Restricted Stock Units as may be
determined from time to time by the Administrator, (v) the
term of the
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performance period, if any, as to which performance will be
measured for determining the number of such Shares or Restricted
Stock Units, and (vi) restrictions on the transferability
of the Shares or Restricted Stock Units. Shares issued under a
Restricted Stock Award may be issued in the name of the
Participant and held by the Participant or held by the Company,
in each case as the Administrator may provide.
(c) Vesting and Performance Criteria. The
grant, issuance, retention, vesting
and/or
settlement of shares of Restricted Stock and Restricted Stock
Units will occur when and in such installments as the
Administrator determines or under criteria the Administrator
establishes, which may include Qualifying Performance Criteria.
Notwithstanding anything in this Plan to the contrary, the
performance criteria for any Restricted Stock or Restricted
Stock Unit that is intended to satisfy the requirements for
performance-based compensation under
Section 162(m) of the Code will be a measure based on one
or more Qualifying Performance Criteria selected by the
Administrator and specified when the Award is granted. The
Administrator shall certify the extent to which any Qualifying
Performance Criteria has been satisfied, and the amount payable
as a result thereof, prior to vesting
and/or
settlement (as applicable) of any Restricted Stock or Restricted
Stock Unit that is intended to satisfy the requirements for
performance-based compensation under
Section 162(m) of the Code.
(d) Discretionary Adjustments and
Limits. Subject to the limits imposed under
Section 162(m) of the Code for Awards that are intended to
qualify as performance-based compensation,
notwithstanding the satisfaction of any performance goals, the
number of Shares granted, issued, retainable
and/or
vested under an Award of Restricted Stock or Restricted Stock
Units on account of either financial performance or personal
performance evaluations may, to the extent specified in the
Award Agreement, be reduced, but not increased, by the
Administrator on the basis of such further considerations as the
Administrator shall determine.
(e) Voting Rights. Unless otherwise
determined by the Administrator, Participants holding shares of
Restricted Stock granted hereunder may exercise full voting
rights with respect to those shares during the period of
restriction. Participants shall have no voting rights with
respect to Shares underlying Restricted Stock Units unless and
until such Shares are reflected as issued and outstanding shares
on the Companys stock ledger.
(f) Dividends and
Distributions. Participants in whose name
Restricted Stock is granted shall be entitled to receive all
dividends and other distributions paid with respect to those
Shares, unless determined otherwise by the Administrator. The
Administrator will determine whether any such dividends or
distributions will be automatically reinvested in additional
shares of Restricted Stock and subject to the same restrictions
on transferability as the Restricted Stock with respect to which
they were distributed or whether such dividends or distributions
will be paid in cash. Shares underlying Restricted Stock Units
shall be entitled to dividends or dividend equivalents only to
the extent provided by the Administrator.
9. Incentive Bonuses
(a) General. Each Incentive Bonus Award
will confer upon the Participant the opportunity to earn a
future payment tied to the level of achievement with respect to
one or more performance criteria established for a performance
period specified by the Administrator.
(b) Incentive Bonus Document. The terms
of any Incentive Bonus will be set forth in an Award Agreement.
Each Award Agreement evidencing an Incentive Bonus shall contain
provisions regarding (i) the target and maximum amount
payable to the Participant as an Incentive Bonus, (ii) the
performance criteria and level of achievement versus these
criteria that shall determine the amount of such payment,
(iii) the term of the performance period as to which
performance shall be measured for determining the amount of any
payment, (iv) the timing of any payment earned by virtue of
performance, (v) restrictions on the alienation or transfer
of the Incentive Bonus prior to actual payment,
(vi) forfeiture provisions and (vii) such further
terms and conditions, in each case not inconsistent with this
Plan as may be determined from time to time by the Administrator.
(c) Performance Criteria. The
Administrator shall establish the performance criteria and level
of achievement versus these criteria that shall determine the
target and maximum amount payable under an Incentive Bonus,
which criteria may be based on financial performance
and/or
personal performance evaluations. Notwithstanding anything to
the contrary herein, the performance criteria for any portion of
an Incentive Bonus that is intended by the Administrator to
satisfy the requirements for performance-based
compensation under Section 162(m) of the Code shall
be a measure based on one or more Qualifying Performance
Criteria (as defined
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in Section 13(b)) selected by the Administrator and
specified at the time the Incentive Bonus is granted. The
Administrator shall certify the extent to which any Qualifying
Performance Criteria has been satisfied, and the amount payable
as a result thereof, prior to payment of any Incentive Bonus
that is intended to satisfy the requirements for
performance-based compensation under
Section 162(m) of the Code.
(d) Timing and Form of Payment. The
Administrator shall determine the timing of payment of any
Incentive Bonus. Payment of the amount due under an Incentive
Bonus may be made in cash or in Shares, as determined by the
Administrator. The Administrator may provide for or, subject to
such terms and conditions as the Administrator may specify, may
permit a Participant to elect for the payment of any Incentive
Bonus to be deferred to a specified date or event.
(e) Discretionary
Adjustments. Notwithstanding satisfaction of any
performance goals, the amount paid under an Incentive Bonus on
account of either financial performance or personal performance
evaluations may, to the extent specified in the Award Agreement,
be reduced, but not increased, by the Administrator on the basis
of such further considerations as the Administrator shall
determine.
10. Deferral of Gains
The Administrator may, in an Award Agreement or otherwise,
provide for the deferred delivery of Shares upon settlement,
vesting or other events with respect to Restricted Stock or
Restricted Stock Units, or in payment or satisfaction of an
Incentive Bonus. Notwithstanding anything herein to the
contrary, in no event will any deferral of the delivery of
Shares or any other payment with respect to any Award be allowed
if the Administrator determines, in its sole discretion, that
the deferral would result in the imposition of the additional
tax under Section 409A(a)(1)(B) of the Code. No Award shall
provide for deferral of compensation that does not comply with
Section 409A of the Code, unless the Board, at the time of
grant, specifically provides that the Award is not intended to
comply with Section 409A of the Code. The Company shall
have no liability to a Participant, or any other party, if an
Award that is intended to be exempt from, or compliant with,
Section 409A of the Code is not so exempt or compliant or
for any action taken by the Board.
11. Conditions and Restrictions Upon Securities
Subject to Awards
The Administrator may provide that the Shares issued upon
exercise of an Option or Stock Appreciation Right or otherwise
subject to or issued under an Award shall be subject to such
further agreements, restrictions, conditions or limitations as
the Administrator in its discretion may specify prior to the
exercise of such Option or Stock Appreciation Right or the
grant, vesting or settlement of such Award, including without
limitation, conditions on vesting or transferability, forfeiture
or repurchase provisions and method of payment for the Shares
issued upon exercise, vesting or settlement of such Award
(including the actual or constructive surrender of Shares
already owned by the Participant) or payment of taxes arising in
connection with an Award. Without limiting the foregoing, such
restrictions may address the timing and manner of any resales by
the Participant or other subsequent transfers by the Participant
of any Shares issued under an Award, including without
limitation (i) restrictions under an insider trading policy
or pursuant to applicable law, (ii) restrictions designed
to delay
and/or
coordinate the timing and manner of sales by Participant and
holders of other Company equity compensation arrangements,
(iii) restrictions as to the use of a specified brokerage
firm for such resales or other transfers and
(iv) provisions requiring Shares to be sold on the open
market or to the Company in order to satisfy tax withholding or
other obligations.
12. Adjustment of and Changes in the Stock
Subject to any required action by the stockholders of the
Company, the number of Shares covered by each outstanding Award,
and the number of Shares which have been authorized for issuance
under the Plan but as to which no Awards have yet been granted
or which have been returned to the Plan, the exercise or
purchase price of each such outstanding Award, the maximum
number of Shares with respect to which Awards may be granted to
any Participant in any calendar year, as well as any other terms
that the Administrator determines require adjustment shall be
equitably adjusted for (i) any increase or decrease in the
number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of
the Shares, or similar transaction affecting the Shares,
(ii) any other increase or decrease in the number of issued
Shares effected without receipt of consideration by the Company,
or (iii) as the Administrator may determine in its
discretion, any other transaction with respect to Common Stock
including a corporate merger, consolidation, acquisition of
property or stock,
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separation (including a spin-off or other distribution of stock
or property), reorganization, liquidation (whether partial or
complete) or any similar transaction; provided, however that
conversion of any convertible securities of the Company shall
not be deemed to have been effected without receipt of
consideration. Such adjustment shall be made by the
Administrator and its determination shall be final, binding and
conclusive. Except as the Administrator determines, no issuance
by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and
no adjustment by reason hereof shall be made with respect to,
the number or price of Shares subject to an Award.
No right to purchase fractional shares shall result from any
adjustment in Awards pursuant to this Section 12. In case
of any such adjustment, the Shares subject to the Award shall be
rounded down to the nearest whole share. The Company shall
notify Participants holding Awards subject to any adjustments
pursuant to this Section 12 of such adjustment, but
(whether or not notice is given) such adjustment shall be
effective and binding for all purposes of the Plan.
13. Qualifying Performance-Based Compensation
(a) General. The Administrator may
establish performance criteria and level of achievement versus
such criteria that shall determine the number of Shares to be
granted, retained, vested, issued or issuable under or in
settlement of or the amount payable pursuant to an Award, which
criteria may be based on Qualifying Performance Criteria or
other standards of financial performance
and/or
personal performance evaluations. In addition, the Administrator
may specify that an Award or a portion of an Award is intended
to satisfy the requirements for performance-based
compensation under Section 162(m) of the Code,
provided that the performance criteria for such Award or portion
of an Award that is intended by the Administrator to satisfy the
requirements for performance-based compensation
under Section 162(m) of the Code shall be a measure based
on one or more Qualifying Performance Criteria selected by the
Administrator and specified at the time the Award is granted.
The Administrator shall certify the extent to which any
Qualifying Performance Criteria has been satisfied, and the
amount payable as a result thereof, prior to payment, settlement
or vesting of any Award that is intended to satisfy the
requirements for performance-based compensation
under Section 162(m) of the Code. Notwithstanding
satisfaction of any performance goals, the number of Shares
issued under or the amount paid under an award may, to the
extent specified in the Award Agreement, be reduced, but not
increased, by the Administrator on the basis of such further
considerations as the Administrator in its sole discretion shall
determine.
(b) Qualifying Performance Criteria. For
purposes of this Plan, the term Qualifying Performance
Criteria shall mean any one or more of the following
performance criteria, or derivations of such performance
criteria, either individually, alternatively or in any
combination, applied to either the Company as a whole or to a
business unit or Subsidiary, either individually, alternatively
or in any combination, and measured either annually or
cumulatively over a period of years, on an absolute basis or
relative to a pre-established target, to previous years
results or to a designated comparison group, in each case as
specified by the Administrator: (1) cash flow (before or
after dividends), (2) earnings per share (including
earnings before any one or more of interest, taxes, depreciation
and amortization), (3) stock price, (4) return on
equity, (5) total stockholder return, (6) return on
capital (including return on total capital or return on invested
capital), (7) return on inventory, assets or net assets,
(8) market capitalization, (9) economic value added,
(10) debt leverage (debt to capital, debt to equity or
other leverage criteria), (11) revenue, (12) income or
net income, (13) operating income, or net operating income,
(14) operating profit or net operating profit,
(15) operating, gross or pretax margin, (16) return on
operating revenue, (17) cash from operations,
(18) operating ratio, (19) operating revenue,
(20) market share, (21) SG&A ratio,
(22) borrowing capacity and other liquidity criteria,
(23) inventory turnover, increase or reduction,
(24) income from joint ventures, (25) interest
coverage, (26) shareholders equity or book value per
share, (27) overhead or other cost reduction,
(28) brand recognition/acceptance, (29) product launch
targets, (30) customer service, (31) customer or
employee satisfaction, (32) product development or release
schedules or new product innovation, or (33) the sales of
assets or subsidiaries. To the extent consistent with
Section 162(m) of the Code, the Administrator may
appropriately adjust any evaluation of performance under a
Qualifying Performance Criteria to (i) eliminate the
effects of charges for restructurings, discontinued operations,
extraordinary items and all items of gain, loss or expense
determined to be extraordinary or unusual in nature or related
to the disposal of a segment of a business or related to a
change in accounting principle all as determined in accordance
with standards established by opinion No. 30 of the
Accounting Principles Board (APA Opinion No. 30) or
other applicable or successor accounting provisions, as
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well as the cumulative effect of accounting changes, in each
case as determined in accordance with generally accepted
accounting principles or identified in the Companys
financial statements or notes to the financial statements,
and/or
(ii) exclude any of the following events that occurs during
a performance period: (A) asset write-downs,
(B) litigation, claims, judgments or settlements,
(C) the effect of changes in tax law or other such laws or
provisions affecting reported results, (D) accruals for
reorganization and restructuring programs and (E) accruals
of any amounts for payment under this Plan or any other
compensation arrangement maintained by the Company.
14. Transferability
Each Award may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated by a Participant other than
by will or the laws of descent and distribution, and each Option
or Stock Appreciation Right shall be exercisable only by the
Participant during his or her lifetime. Notwithstanding the
foregoing, to the extent permitted by the Administrator, a
Participant may transfer an Award (other than an Incentive Stock
Option) to any family member of the Participant (as
such term is defined in Section 1(a)(5) of the General
Instructions to
Form S-8
under the Securities Act of 1933, as amended
(Form S-8)),
to trusts solely for the benefit of such family members and to
partnerships in which such family members
and/or
trusts are the only partners; provided that, (i) as a
condition thereof, the transferor and the transferee must
execute a written agreement containing such terms as specified
by the Administrator, and (ii) the transfer is pursuant to
a gift or a domestic relations order to the extent permitted
under the General Instructions to
Form S-8.
Except to the extent specified otherwise in the agreement the
Administrator provides for the Participant and transferee to
execute, all vesting, exercisability and forfeiture provisions
that are conditioned on the Participants continued
employment or service shall continue to be determined with
reference to the Participants employment or service (and
not to the status of the transferee) after any transfer of an
Award pursuant to this Section 14, and the responsibility
to pay any taxes in connection with an Award shall remain with
the Participant notwithstanding any transfer other than by will
or intestate succession. Notwithstanding the foregoing, the
Participant may designate one or more beneficiaries of the
Participants Award in the event of the Participants
death on a beneficiary designation form provided by the
Administrator.
15. Corporate Transactions and Changes in
Control
(a) General. The Administrator may
provide, either at the time an Award is granted or thereafter,
that a Corporation Transaction or Change in Control shall have
such effect as specified by the Administrator, or no effect, as
the Administrator in its discretion may provide.
(b) Termination of Award to Extent Not Assumed in
Corporate Transaction. Effective upon the
consummation of a Corporate Transaction, all outstanding Awards
under the Plan shall terminate. However, all such Awards shall
not terminate to the extent they are Assumed in connection with
the Corporate Transaction. In addition, in lieu of such
termination, the Administrator may provide for the conversion of
any outstanding Award, or portion thereof, into a right to
receive cash or other property upon or following the
consummation of the Corporate Transaction in an amount equal to
the value of the consideration to be received by holders of
Shares in connection with such transaction for one Share, less
the per share purchase or exercise price of such Award, if any,
multiplied by the number of Shares subject to such Award, or a
portion thereof.
(c) Acceleration of Award Upon Corporate Transaction or
Change in Control.
(i) Corporate Transaction. Except as
provided otherwise in an Award Agreement, in the event of a
Corporate Transaction and:
(A) for the portion of each Award that is Assumed or
Replaced, then such Award (if Assumed), the replacement Award
(if Replaced), or the cash incentive (if Replaced) program
automatically shall become fully vested, exercisable and payable
and be released from any repurchase or forfeiture rights for all
of the Shares at the time represented by such Assumed or
Replaced portion of the Award, immediately upon termination of
the Participants Termination of Employment if such
Participants Termination of Employment occurs by reason of
a termination without Cause within twelve (12) months after
the Corporate Transaction; and
(B) for the portion of each Award that is neither Assumed
nor Replaced, such portion of the Award shall automatically
become fully vested and exercisable and be released from any
repurchase or forfeiture
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rights for all of the Shares at the time represented by such
portion of the Award, immediately prior to the specified
effective date of such Corporate Transaction, provided that the
Participant has not experienced a Termination of Employment
prior to such date. The portion of the Award that is not Assumed
shall terminate under this Section 15 to the extent not
exercised prior to the consummation of such Corporate
Transaction.
(ii) Change in Control. Except as
provided otherwise in an Award Agreement, following a Change in
Control (other than a Change in Control which also is a
Corporate Transaction) and upon the Participants
Termination of Employment for any reason other than Cause within
twelve (12) months after a Change in Control, each Award of
such Participant which is at the time outstanding under this
Plan automatically shall become fully vested and exercisable and
be released from any repurchase or forfeiture rights,
immediately upon such Termination of Employment.
16. Compliance with Laws and Regulations
This Plan, the grant, issuance, vesting, exercise and settlement
of Awards thereunder, and the obligation of the Company to sell,
issue or deliver Shares under such Awards, shall be subject to
all applicable foreign, federal, state and local laws, rules and
regulations, stock exchange rules and regulations, and to such
approvals by any governmental or regulatory agency as may be
required. The Company shall not be required to register in a
Participants name or deliver any Shares prior to the
completion of any registration or qualification of such shares
under any foreign, federal, state or local law or any ruling or
regulation of any government body which the Administrator shall
determine to be necessary or advisable. To the extent the
Company is unable to or the Administrator deems it infeasible to
obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Companys counsel to be
necessary to the lawful issuance and sale of any Shares
hereunder, the Company and its Subsidiaries shall be relieved of
any liability with respect to the failure to issue or sell such
Shares as to which such requisite authority shall not have been
obtained. No Option shall be exercisable and no Shares shall be
issued
and/or
transferable under any other Award unless a registration
statement with respect to the Shares underlying such Award is
effective and current or the Company has determined that such
registration is unnecessary.
The Administrator may modify the provisions of the Plan or adopt
rules or procedures relating to the operation and administration
of the Plan to accommodate the specific requirements of local
laws and procedures or to recognize differences in local law,
currency or tax policy. The Administrator may also impose
conditions on the grant, issuance, exercise, vesting, settlement
or retention of Awards in order to comply with such foreign law
and/or to
minimize the Companys obligations with respect to tax
equalization for Participants employed outside their home
country. Without limiting the generality of the foregoing, the
Administrator is specifically authorized to adopt rules and
procedures regarding the conversion of local currency, data
privacy security, payroll tax, withholding procedures and
handling of stock certificates which vary with local
requirements. The Administrator may also adopt sub-plans
applicable to particular Subsidiaries or locations. The rules of
such sub-plans may take precedence over other provisions of this
Plan, with the exception of Sections 5 and 19, but unless
otherwise superseded by the terms of such sub-plan, the
provisions of this Plan shall govern the operation of such
sub-plan. The Administrator shall not be required to obtain the
approval of stockholders prior to the adoption, amendment or
termination of any sub-plan unless required by applicable law
(including the law of the foreign jurisdiction in which
Participants participating in the sub-plan are located) or the
NASDAQ Capital Market listing requirements.
17. Withholding
To the extent required by applicable federal, state, local or
foreign law, a Participant shall be required to satisfy, in a
manner satisfactory to the Company, any withholding tax
obligations that arise by reason of an Option exercise,
disposition of Shares issued under an Incentive Stock Option,
the vesting of or settlement of an Award, an election pursuant
to Section 83(b) of the Code or otherwise with respect to
an Award. To the extent a Participant makes an election under
Section 83(b) of the Code, within ten days of filing such
election with the Internal Revenue Service, the Participant must
notify the Company in writing of such election. The Company and
its Subsidiaries shall not be required to issue Shares, make any
payment or to recognize the transfer or disposition of Shares
until all such obligations are satisfied. The Administrator may
provide for or permit these obligations to be satisfied through
the mandatory or elective sale of Shares
and/or by
having the Company withhold a portion of the Shares that
otherwise would be issued to him or her upon exercise of the
Option or the vesting or settlement of an Award, or by tendering
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Shares previously acquired. To the extent a Participant makes an
election under Section 83(b) of the Code, within ten days
of filing such election with the Internal Revenue Service, the
Participant must notify the Company in writing of such election.
18. Administration of the Plan
(a) Administrator of the Plan. The Plan
shall be administered by the Administrator who shall be the
Compensation Committee of the Board or, in the absence of a
Compensation Committee, the Board itself. Any power of the
Administrator may also be exercised by the Board, except to the
extent that the grant or exercise of such authority would cause
any Award or transaction to become subject to (or lose an
exemption under) the short-swing profit recovery provisions of
Section 16 of the Securities Exchange Act of 1934 or cause
an Award designated as a Performance Award not to qualify for
treatment as performance-based compensation under
Section 162(m) of the Code. To the extent that any
permitted action taken by the Board conflicts with action taken
by the Administrator, the Board action shall control. The
Compensation Committee may by resolution authorize one or more
officers of the Company to perform any or all things that the
Administrator is authorized and empowered to do or perform under
the Plan, and for all purposes under this Plan, such officer or
officers shall be treated as the Administrator; provided,
however, that the resolution so authorizing such officer or
officers shall specify the total number of Awards (if any) such
officer or officers may award pursuant to such delegated
authority, and any such Award shall be subject to the form of
Award Agreement theretofore approved by the Compensation
Committee. No such officer shall designate himself or herself as
a recipient of any Awards granted under authority delegated to
such officer. The Compensation Committee hereby designates the
Secretary of the Company and the head of the Companys
human resource function to assist the Administrator in the
administration of the Plan and execute agreements evidencing
Awards made under this Plan or other documents entered into
under this Plan on behalf of the Administrator or the Company.
In addition, the Compensation Committee may delegate any or all
aspects of the day-to-day administration of the Plan to one or
more officers or employees of the Company or any Subsidiary,
and/or to
one or more agents.
(b) Powers of Administrator. Subject to
the express provisions of this Plan, the Administrator shall be
authorized and empowered to do all things that it determines to
be necessary or appropriate in connection with the
administration of this Plan, including, without limitation:
(i) to prescribe, amend and rescind rules and regulations
relating to this Plan and to define terms not otherwise defined
herein; (ii) to determine which persons are Participants,
to which of such Participants, if any, Awards shall be granted
hereunder and the timing of any such Awards; (iii) to grant
Awards to Participants and determine the terms and conditions
thereof, including the number of Shares subject to Awards and
the exercise or purchase price of such Shares and the
circumstances under which Awards become exercisable or vested or
are forfeited or expire, which terms may but need not be
conditioned upon the passage of time, continued employment, the
satisfaction of performance criteria, the occurrence of certain
events (including a Change in Control), or other factors;
(iv) to establish and verify the extent of satisfaction of
any performance goals or other conditions applicable to the
grant, issuance, exercisability, vesting
and/or
ability to retain any Award; (v) to prescribe and amend the
terms of the agreements or other documents evidencing Awards
made under this Plan (which need not be identical) and the terms
of or form of any document or notice required to be delivered to
the Company by Participants under this Plan; (vi) to
determine the extent to which adjustments are required pursuant
to Section 12; (vii) to interpret and construe this
Plan, any rules and regulations under this Plan and the terms
and conditions of any Award granted hereunder, and to make
exceptions to any such provisions if the Administrator, in good
faith, determines that it is necessary to do so in light of
extraordinary circumstances and for the benefit of the Company;
(viii) to approve corrections in the documentation or
administration of any Award; and (ix) to make all other
determinations deemed necessary or advisable for the
administration of this Plan. The Administrator may, in its sole
and absolute discretion, without amendment to the Plan, waive or
amend the operation of Plan provisions respecting exercise after
termination of employment or service to the Company or an
Affiliate and, except as otherwise provided herein, adjust any
of the terms of any Award. The Administrator may also
(A) accelerate the date on which any Award granted under
the Plan becomes exercisable or (B) accelerate the vesting
date or waive or adjust any condition imposed hereunder with
respect to the vesting or exercisability of an Award, provided
that the Administrator, in good faith, determines that such
acceleration, waiver or other adjustment is necessary or
desirable in light of extraordinary circumstances.
Notwithstanding anything in the Plan to the contrary, no Award
outstanding under the Plan may be repriced, regranted through
cancellation, including
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cancellation in exchange for other Awards or Options or Stock
Appreciation Rights with an exercise price that is less than the
exercise price of the original Award, or otherwise amended to
reduce the exercise price applicable thereto (other than with
respect to adjustments made in connection with a transaction or
other change in the Companys capitalization as described
in Section 12) without the approval of the
Companys stockholders.
(c) Determinations by the
Administrator. All decisions, determinations and
interpretations by the Administrator regarding the Plan, any
rules and regulations under the Plan and the terms and
conditions of or operation of any Award granted hereunder, shall
be final and binding on all Participants, beneficiaries, heirs,
assigns or other persons holding or claiming rights under the
Plan or any Award. The Administrator shall consider such factors
as it deems relevant, in its sole and absolute discretion, to
making such decisions, determinations and interpretations
including, without limitation, the recommendations or advice of
any officer or other employee of the Company and such attorneys,
consultants and accountants as it may select.
(d) Subsidiary Awards. In the case of a
grant of an Award to any Participant employed by a Subsidiary,
such grant may, if the Administrator so directs, be implemented
by the Company issuing any subject Shares to the Subsidiary, for
such lawful consideration as the Administrator may determine,
upon the condition or understanding that the Subsidiary will
transfer the Shares to the Participant in accordance with the
terms of the Award specified by the Administrator pursuant to
the provisions of the Plan. Notwithstanding any other provision
hereof, such Award may be issued by and in the name of the
Subsidiary and shall be deemed granted on such date as the
Administrator shall determine.
(e) Indemnification. In addition to such
other rights of indemnification as they may have as members of
the Board or as officers or employees of the Company or a
Related Entity, members of the Board and any officers or
employees of the Company or a Related Entity to whom authority
to act for the Board, the Administrator or the Company is
delegated shall be defended and indemnified by the Company to
the extent permitted by law on an after-tax basis against all
reasonable expenses, including attorneys fees, actually
and necessarily incurred in connection with the defense of any
claim, investigation, action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them
may be a party by reason of any action taken or failure to act
under or in connection with the Plan, or any Award granted
hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by the Company) or
paid by them in satisfaction of a judgment in any such claim,
investigation, action, suit or proceeding, except in relation to
matters as to which it shall be adjudged in such claim,
investigation, action, suit or proceeding that such person is
liable for gross negligence, bad faith or intentional
misconduct; provided, however, that within thirty (30) days
after the institution of such claim, investigation, action, suit
or proceeding, such person shall offer to the Company, in
writing, the opportunity at the Companys expense to defend
the same.
19. Amendment of the Plan or Awards
The Board may amend, alter or discontinue this Plan and the
Administrator may amend, or alter any agreement or other
document evidencing an Award made under this Plan but, except as
provided pursuant to the provisions of Section 12, no such
amendment shall, without the approval of the stockholders of the
Company, amend the Plan in any manner requiring stockholder
approval by law or under the NASDAQ Capital Market listing
requirements.
No amendment or alteration to the Plan or an Award or Award
Agreement shall be made which would impair the rights of the
holder of an Award, without such holders consent, provided
that no such consent shall be required if the Administrator
determines in its sole discretion that such amendment or
alteration either is required or advisable in order for the
Company, the Plan or the Award to satisfy any law or regulation
or to meet the requirements of or avoid adverse financial
accounting consequences under any accounting standard.
20. No Liability of Company
The Company and any Subsidiary or affiliate which is in
existence or hereafter comes into existence shall not be liable
to a Participant or any other person as to: (i) the
non-issuance or sale of Shares as to which the Company has been
unable to obtain from any regulatory body having jurisdiction
the authority deemed by the Companys counsel to be
necessary to the lawful issuance and sale of any Shares
hereunder; and (ii) any tax consequence expected, but not
realized, by any Participant or other person due to the receipt,
exercise or settlement of any Award granted hereunder.
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21. Non-Exclusivity of Plan
Neither the adoption of this Plan by the Board nor the
submission of this Plan to the stockholders of the Company for
approval shall be construed as creating any limitations on the
power of the Board or the Administrator to adopt such other
incentive arrangements as either may deem desirable, including
without limitation, the granting of restricted stock or stock
options otherwise than under this Plan or an arrangement not
intended to qualify under Code Section 162(m), and such
arrangements may be either generally applicable or applicable
only in specific cases.
22. Governing Law
This Plan and any agreements or other documents hereunder shall
be interpreted and construed in accordance with the laws of the
Delaware and applicable federal law. Any reference in this Plan
or in the agreement or other document evidencing any Awards to a
provision of law or to a rule or regulation shall be deemed to
include any successor law, rule or regulation of similar effect
or applicability.
23. No Right to Employment, Reelection or
Continued Service
Nothing in this Plan or an Award Agreement shall interfere with
or limit in any way the right of the Company, its Subsidiaries
and/or its
affiliates to terminate any Participants employment,
service on the Board or service for the Company at any time or
for any reason not prohibited by law, nor shall this Plan or an
Award itself confer upon any Participant any right to continue
his or her employment or service for any specified period of
time. Neither an Award nor any benefits arising under this Plan
shall constitute an employment contract with the Company, any
Subsidiary
and/or its
affiliates. Subject to Sections 4 and 19, this Plan and the
benefits hereunder may be terminated at any time in the sole and
exclusive discretion of the Board without giving rise to any
liability on the part of the Company, its Subsidiaries
and/or its
affiliates.
24. Unfunded Plan
The Plan is intended to be an unfunded plan. Participants are
and shall at all times be general creditors of the Company with
respect to their Awards. If the Administrator or the Company
chooses to set aside funds in a trust or otherwise for the
payment of Awards under the Plan, such funds shall at all times
be subject to the claims of the creditors of the Company in the
event of its bankruptcy or insolvency.
C-15
Annex D
CERTIFICATE
OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
ENDOCARE, INC.,
a Delaware corporation
It is hereby certified that:
1. The name of the corporation is Endocare, Inc. (the
Corporation).
2. Article IV of the Restated Certificate of
Incorporation of the Corporation shall be amended and restated
in its entirety to read as follows:
The total number of shares of stock which the Corporation shall
have authority to issue is 76,000,000 shares, consisting of
75,000,000 shares of Common Stock having a par value of
$0.001 per share (Common Stock) and
1,000,000 shares of Preferred Stock having a par value of
$0.001 per share (Preferred Stock).
The Board of Directors is expressly authorized to provide for
the issuance of all or any shares of Preferred Stock in one or
more classes or series, and to fix for each such class or series
such voting powers, full or limited, or no voting powers, and
such distinctive designations, preferences and relative,
participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by
the Board of Directors providing for the issuance of such class
or series and as may be permitted by the General Corporation
Law. Such authorization shall include, without limitation, the
authority to provide that any such class or series may be:
(a) subject to redemption at such time or times and at such
price or prices; (b) entitled to receive dividends (which
may be cumulative or non-cumulative) at such rates, on such
conditions, and at such times, and payable in preference to, or
in such relation to, the dividends payable on any other class or
classes or any other series; (c) entitled to such rights
upon the dissolution of, or upon any distribution of the assets
of, the Corporation; or (d) convertible into, or
exchangeable for, shares of any other class or classes of stock,
or of any other series of the same or any other class or classes
of stock, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments; all as may be
stated in such resolution or resolutions.
3. The amendment of the Restated Certificate of
Incorporation herein certified has been duly adopted in
accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
D-1
IN WITNESS WHEREOF, this Certificate of Amendment has
been duly executed by a duly authorized officer of the
Corporation on the day
of ,
2009.
ENDOCARE, INC.
Name:
Title:
D-2
Annex E
[LETTERHEAD
OF OPPENHEIMER & CO. INC.]
November 10,
2008
The Board of Directors
Endocare, Inc.
201 Technology Drive
Irvine, California 92618
Members of the Board:
You have asked Oppenheimer & Co. Inc.
(Oppenheimer) to render a written opinion
(Opinion) to the Board of Directors of Endocare,
Inc. (Endocare) as to the fairness, from a financial
point of view, to Endocare of the Aggregate Exchange Ratio (as
defined below) provided for in the Agreement and Plan of Merger,
dated as of November 10, 2008 (the Merger
Agreement), among Endocare, its wholly owned subsidiary,
Orange Acquisitions Ltd. (Merger Sub), and Galil
Medical Ltd. (Galil). The Merger Agreement provides
for, among other things, the merger of Merger Sub with and into
Galil (the Merger), pursuant to which Endocare will
acquire all of the fully diluted share capital of Galil in
exchange for an aggregate number of shares of the common stock,
par value $0.001 per share, of Endocare (Endocare Common
Stock) equal to 0.923077 (the Aggregate Exchange
Ratio) multiplied by the total number of shares of
Endocare Common Stock outstanding at the effective time of the
Merger without giving effect to the Merger or the private
placement of Endocare Common Stock anticipated to occur
concurrently with the consummation of the Merger (the
Financing). A portion of the Endocare Common Stock
to be issued in the Merger will be subject to an escrow
arrangement as more fully described in the Merger Agreement and
related form of escrow agreement attached as an exhibit thereto.
In arriving at our Opinion, we:
(a) reviewed the Merger Agreement;
(b) reviewed audited financial statements of Endocare and
Galil for fiscal years ended December 31, 2005,
December 31, 2006 and December 31, 2007 and unaudited
financial statements of Endocare and Galil for the nine months
ended September 30, 2008;
(c) reviewed financial forecasts and estimates relating to
Endocare and Galil for fiscal years ending 2008 through 2010
prepared by the managements of Endocare and Galil and estimates
as to potential synergies and strategic benefits anticipated by
the managements of Endocare and Galil to result from the Merger;
(d) held discussions with the senior managements of
Endocare and Galil with respect to the businesses and prospects
of Endocare and Galil;
(e) reviewed historical market prices of Endocare Common
Stock;
(f) reviewed and analyzed certain publicly available
financial data for companies that we deemed relevant in
evaluating Endocare and Galil;
(g) reviewed and analyzed certain publicly available
information for transactions that we deemed relevant in
evaluating the Merger;
(h) reviewed and analyzed the relative contributions of
Endocare and Galil to selected operational metrics of the
combined company using historical financial data of Endocare and
Galil and financial forecasts and estimates relating to Endocare
and Galil prepared by the managements of Endocare and Galil;
(i) reviewed certain potential pro forma financial effects
of the Merger on Endocare based on financial forecasts and
estimates relating to Endocare and Galil prepared by the
managements of Endocare and Galil and estimates as to potential
synergies and strategic benefits anticipated by the managements
of Endocare and Galil to result from the Merger;
E-1
The Board of Directors
Endocare, Inc.
November 10, 2008
Page 2
(j) reviewed other public information concerning
Endocare; and
(k) performed such other analyses, reviewed such other
information and considered such other factors as we deemed
appropriate.
In rendering our Opinion, we relied upon and assumed, without
independent verification or investigation, the accuracy and
completeness of all of the financial and other information
provided to or discussed with us by Endocare, Galil and their
respective employees, representatives and affiliates or
otherwise reviewed by us. We have been advised that financial
forecasts relating to Endocare and Galil beyond the fiscal year
ending 2010 have not been prepared by the managements of
Endocare and Galil and, accordingly, we have not undertaken an
analysis of the future financial performance of Endocare and
Galil beyond such periods. With respect to the financial
forecasts and estimates relating to Endocare and Galil utilized
in our analyses (including estimates as to potential synergies
and strategic benefits anticipated by the managements of
Endocare and Galil to result from the Merger), we have been
advised and, at the direction of the managements of Endocare and
Galil and with the consent of Endocare, have assumed, without
independent verification or investigation, that such forecasts
and estimates were reasonably prepared on bases reflecting the
best available information, estimates and judgments of the
managements of Endocare and Galil, as the case may be, as to the
future financial condition and operating results of Endocare and
Galil and such synergies and strategic benefits and that the
financial results reflected in such forecasts and estimates
(including estimates as to potential synergies and strategic
benefits) will be achieved at the times and in the amounts
projected. We have relied, at the direction of Endocare, without
independent verification or investigation, on the assessments of
the management of Endocare as to (i) the existing and
future products, technology and intellectual property of
Endocare and Galil and the risks associated with such products,
technology and intellectual property and (ii) the ability
of Endocare to integrate the businesses of Endocare and Galil
and to retain key customers and suppliers of Endocare and Galil.
We have assumed, with the consent of Endocare, that the Merger
will qualify for federal income tax purposes as a reorganization
under Section 368(a) of the Internal Revenue Code of 1986,
as amended. We also have assumed, with the consent of Endocare,
that the Merger and related transactions, including the
Financing, will be consummated in accordance with their
respective terms without waiver, modification or amendment of
any material term, condition or agreement and in compliance with
all applicable laws and other requirements and that, in the
course of obtaining the necessary regulatory or third party
approvals, consents and releases with respect to the Merger or
any related transaction, no delay, limitation, restriction or
condition will be imposed that would have an adverse effect on
Endocare, Galil or the Merger (including the contemplated
benefits to Endocare of the Merger). We have neither made nor
obtained any independent evaluations or appraisals of the assets
or liabilities, contingent or otherwise, of Endocare or Galil.
Our Opinion, as set forth herein, relates to the relative values
of Endocare and Galil. We are not expressing any opinion as to
the underlying valuation, future performance or long-term
viability of Endocare or Galil, the actual value of Endocare
Common Stock when issued or the price at which Endocare Common
Stock will trade at any time. We express no view as to, and our
Opinion does not address, any terms or other aspects or
implications of the Merger (other than the Aggregate Exchange
Ratio to the extent expressly specified herein) or any related
transaction or any aspect or implication of any other agreement,
arrangement or understanding entered into in connection with the
Merger or otherwise, including, without limitation, the form or
structure of the Merger or any terms or other aspects or
implications of the Financing. In addition, we express no view
as to, and our Opinion does not address, the fairness of the
amount or nature of, or any other aspect relating to, the
compensation to be received by any individual officers,
directors or employees of any parties to the Merger, or any
class of such persons, relative to the Aggregate Exchange Ratio.
We also express no view as to, and our Opinion does not address,
the underlying business decision of Endocare to effect the
Merger or any related transaction nor does our Opinion address
the relative merits of the Merger or any related transaction as
compared to any alternative business strategies that might exist
for Endocare or the effect of any other transaction in which
Endocare might engage. Our Opinion is necessarily based on the
information available to us and general economic, financial and
stock market conditions and circumstances as they
E-2
The Board of Directors
Endocare, Inc.
November 10, 2008
Page 3
exist and can be evaluated by us on the date hereof. As you are
aware, the credit, financial and stock markets are experiencing
unusual volatility and we express no opinion or view as to the
potential effects, if any, of such volatility on Endocare, Galil
or the proposed Merger. It should be understood that, although
subsequent developments may affect this Opinion, we do not have
any obligation to update, revise or reaffirm the Opinion.
The issuance of this Opinion was approved by an authorized
committee of Oppenheimer. As part of our investment banking
business, we are regularly engaged in valuations of businesses
and securities in connection with acquisitions and mergers,
underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We have acted as financial advisor to Endocare in connection
with the Merger and will receive a fee for our services, a
portion of which was payable upon our engagement by Endocare, a
portion of which will be payable upon delivery of this Opinion
and a significant portion of which is contingent upon
consummation of the Merger. As you are aware, we are acting as a
placement agent in connection with the Financing, for which we
expect to receive compensation. In the ordinary course of
business, we and our affiliates may actively trade securities of
Endocare for our and our affiliates own accounts and for
the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
Based upon and subject to the foregoing, and such other factors
as we deemed relevant, it is our opinion that, as of the date
hereof, the Aggregate Exchange Ratio provided for in the Merger
Agreement is fair, from a financial point of view, to Endocare.
This Opinion is for the use of the Board of Directors of
Endocare in its evaluation of the Merger and does not constitute
a recommendation to any stockholder as to how such stockholder
should vote or act with respect to any matters relating to the
Merger or any related transaction.
Very truly yours,
/s/ Oppenheimer &
Co. Inc.
OPPENHEIMER & CO. INC.
E-3
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 20.
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Indemnification
of Directors and Officers.
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Section 145 of the Delaware General Corporation Law
provides that a Delaware corporation may indemnify any person
against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by any such person
in connection with a threatened, pending or completed action,
suit or proceeding in which he is involved by reason of the fact
that he is or was a director, officer, employee or agent of such
corporation, provided that (i) he acted in good faith and
in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, and (ii) with respect to
any criminal action or proceeding, he had no reasonable cause to
believe his conduct was unlawful. If the action or suit is by or
in the name of the corporation, the corporation may indemnify
such person against expenses actually and reasonably incurred by
him in connection with the defense or settlement of such action
or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in
respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation, unless
and only to the extent that the Delaware Court of Chancery or
the court in which the action or suit is brought determines upon
application that, despite the adjudication of liability but in
view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as
the court deems proper.
As permitted by Section 102 of the Delaware General
Corporation Law, Endocare has adopted provisions in its Restated
Certificate of Incorporation, as amended, that limit or
eliminate the personal liability of its directors for monetary
damages for a breach of their fiduciary duty as a director. A
director will not be personally liable to Endocare or its
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability for:
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any breach of the directors duty of loyalty to Endocare or
its stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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any act related to unlawful stock repurchases, redemptions or
other distributions or payment of dividends; or
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any transaction from which the director derived an improper
personal benefit.
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These limitations of liability do not affect the availability of
equitable remedies such as injunctive relief or rescission.
As permitted by Section 145 of the Delaware General
Corporation Law, Endocares amended and restated bylaws
provide that:
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Endocare shall indemnify its directors and executive officers to
the fullest extent permitted by the Delaware General Corporation
Law, subject to limited exceptions;
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Endocare shall have the power to indemnify its other officers,
employees and agents to the fullest extent permitted by the
Delaware General Corporation Law;
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Endocare shall advance expenses to its directors and executive
officers in connection with a legal proceeding upon receipt of
an undertaking by or on behalf of such person to repay such
amount if it shall be determined that such person is not
entitled to be identified by Endocare, subject to other limited
exceptions; and
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the rights provided in its amended and restated bylaws are not
exclusive.
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Endocare has entered into indemnification agreements with each
of its directors, as well as with certain officers, employees
and consultants. These indemnification agreements provide that
Endocare holds harmless and indemnifies each such director,
officer, employee and consultant to the fullest extent
authorized or permitted by law. In addition, subject to certain
conditions, these indemnification agreements provide for payment
of expenses (including attorneys fees) actually and
reasonably incurred in connection with any threatened, pending
or completed proceeding to which the indemnified director,
officer or employee is, was or at any time becomes a party, or
is threatened to be made a party, by reason of the fact that he
or she is, was or at any time becomes a director, officer,
employee or agent of Endocare, or is or was serving or at any
time serves at the request of Endocare
II-1
as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise. In addition, Endocare has purchased
policies of directors and officers liability
insurance, which insure Endocares directors and officers
against the cost of defense, settlement or payment of a judgment
in certain circumstances.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers or persons controlling Endocare pursuant to the
foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
See the Exhibit Index attached to this registration
statement and incorporated herein by reference.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate
offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities
registered hereunder through use of a proxy statement/prospectus
which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
proxy statement/prospectus will contain the information called
for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the
applicable form.
(2) That every proxy statement/prospectus (i) that is
filed pursuant to paragraph (b)(1) immediately preceding, or
(ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective
amendment shall be deemed to be a
II-2
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To respond to requests for information that is
incorporated by reference into the proxy statement/ prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(4) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers or controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California on
January 22, 2009.
ENDOCARE, INC.
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By:
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/s/ Terrence
A. Noonan
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Terrence A. Noonan
Chairman, Interim Chief Executive
Officer & Interim President
POWER OF
ATTORNEY
We, the undersigned directors and officers of Endocare, Inc., do
hereby constitute and appoint Terry Noonan and Michael
Rodriguez, or either of them, our true and lawful
attorneys-in-fact and agents, each with full power to sign for
us or any of us in our names and in any and all capacities, any
and all amendments (including post-effective amendments) to this
Registration Statement, or any related registration statement
that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto and other documents required in
connection therewith, and each of them with full power to do any
and all acts and things in our names and in any and all
capacities, which such attorneys-in-fact and agents, or any of
them, may deem necessary or advisable to enable Endocare, Inc.
to comply with the Securities Act of 1933, as amended, and any
rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this Registration
Statement; and we hereby do ratify and confirm all that the such
attorneys-in-fact and agents, or either of them, shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Terrence
A. Noonan
Terrence
A. Noonan
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Chairman, Interim Chief Executive Officer
& Interim President
(Principal Executive Officer)
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January 22, 2009
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/s/ Michael
R. Rodriguez
Michael
R. Rodriguez
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Senior Vice President, Finance &
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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January 22, 2009
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/s/ John
R. Daniels, M.D.
John
R. Daniels, M.D.
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Director
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January 22, 2009
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/s/ David
L. Goldsmith
David
L. Goldsmith
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Director
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January 22, 2009
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/s/ Eric
S. Kentor
Eric
S. Kentor
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Director
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January 22, 2009
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/s/ Thomas
R. Testman
Thomas
R. Testman
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Director
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January 22, 2009
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II-4
EXHIBIT INDEX
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2
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.1(1)
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Stock Purchase Agreement, dated as of January 13, 2006, by and
among Plethora Solutions Holdings plc, Endocare and Timm Medical
Technologies, Inc. The schedules and other attachments to this
exhibit were omitted. Endocare agrees to furnish a copy of any
omitted schedules or attachments to the Securities and Exchange
Commission upon request.
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2
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.2(2)
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$1,425,000 Secured Convertible Promissory Note, dated as of
February 10, 2006, from Plethora Solutions Holdings plc to
Endocare.
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2
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.3(3)
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Agreement and Plan of Merger, dated as of November 10, 2008, by
and among Endocare, Orange Acquisitions Ltd. and Galil Medical
Ltd.
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3
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.1(4)
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Restated Certificate of Incorporation.
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3
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.2(4)
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Certificate of Amendment of Restated Certificate of
Incorporation of Endocare.
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3
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.3(5)
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Amended and Restated Bylaws of Endocare.
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3
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.4(6)
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Amendment No. 1 to Amended and Restated Bylaws of Endocare.
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3
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.2(4)
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Certificate of Designation of Series A Junior Participating
Preferred Stock of Endocare.
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4
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.1(7)
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Form of Stock Certificate.
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4
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.2(8)
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Form of Series A Warrant.
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4
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.3(8)
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Form of Series B Warrant.
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4
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.4(9)
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Rights Agreement, dated as of March 31, 1999, between Endocare
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.
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4
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.5(10)
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Amendment No. 1 to Rights Agreement, dated as of September 24,
2005, between Endocare and U.S. Stock Transfer Corporation.
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5
|
.1
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|
Opinion of Gibson, Dunn & Crutcher LLP regarding legality
of securities.
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8
|
.1
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|
Opinion of Gibson, Dunn & Crutcher LLP regarding tax
matters.
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10
|
.1(11)
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Lease Agreement, dated as of November 26, 2001, by and between
Endocare and The Irvine Company.
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10
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.2(11)
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Form of Indemnification Agreement by and between Endocare and
its directors.
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10
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.3(11)
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Form of Indemnification Agreement by and between Endocare and
its executive officers.
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10
|
.4(12)
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1995 Director Option Plan (as amended and restated through
March 2, 1999).
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10
|
.5(13)
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1995 Stock Plan (as amended and restated through December 30,
2003).
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10
|
.6(14)
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Employment Agreement, dated as of December 15, 2003, by and
between Endocare and Craig T. Davenport.
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10
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.7(15)
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Employment Agreement, dated as of August 11, 2004, by and
between Endocare and Michael R. Rodriguez.
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10
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.8(16)
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2004 Stock Incentive Plan.
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10
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.9(17)
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2004 Non-Employee Director Option Program under 2004 Stock
Incentive Plan.
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10
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.10(17)
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Form of Award Agreement Under 2004 Stock Incentive Plan.
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10
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.11(18)
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Confidential Settlement Agreement and Release, dated as of
February 18, 2005, by and between Endocare and Great American
E&S Insurance Company.
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10
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.12(8)
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Purchase Agreement, dated as of March 10, 2005, by and between
Endocare and the Investors (as defined therein).
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10
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.13(8)
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Registration Rights Agreement, dated as of March 10, 2005, by
and between Endocare and the Investors (as defined therein).
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10
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.14(19)
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First Amendment to Employment Agreement with Craig T. Davenport,
dated as of April 28, 2005.
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10
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.15(2)
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Loan and Security Agreement, dated as of October 26, 2005, by
and among Endocare, Timm Medical Technologies, Inc. and
Silicon Valley Bank.
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10
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.16(2)
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Commercialization Agreement, dated as of November 8, 2005, by
and between Endocare and CryoDynamics, LLC.
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10
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.17(20)
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Employment Agreement, dated as of January 17, 2006, by and
between Endocare and Clint B. Davis.
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10
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.18(21)
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Amendment to Loan Documents, dated as of April 24, 2006, by and
between Endocare and Silicon Valley Bank.
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10
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.19(22)
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Amendment to Loan Documents, dated as of February 10, 2006,
between Endocare, Timm Medical Technologies, Inc. and Silicon
Valley Bank.
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10
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.20(23)
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Employee Deferred Stock Unit Program, effective as of May 18,
2006.
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10
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.21(23)
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Non-Employee Director Deferred Stock Unit Program, effective as
of May 18, 2006.
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10
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.22(24)
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First Amendment to Lease, dated as of May 19, 2006, between
Endocare and The Irvine Company.
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10
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.23(24)*
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Customer Quote, dated as of January 9, 2006, to Advanced Medical
Partners, Inc.
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10
|
.24(24)*
|
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Amended and Restated Endocare Service Agreement, dated as of
January 9, 2006, between Endocare and Advanced Medical Partners,
Inc.
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10
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.25(25)
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Common Stock Purchase Agreement, dated as of October 25, 2006,
by and between Endocare and Fusion Capital Fund II, LLC.
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10
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.26(25)
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Registration Rights Agreement, dated as of October 25, 2006, by
and between Endocare and Fusion Capital Fund II, LLC.
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10
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.27(26)
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Non-Prosecution Agreement, dated as of July 18, 2006, by and
between Endocare and the Department of Justice.
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10
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.28(26)
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Consent to Entry of Judgment, dated as of July 14, 2006, in
favor of the Securities and Exchange Commission.
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10
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.29(27)
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Form of Retention Agreement.
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10
|
.30(28)
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Amendment to Loan Documents, dated as of December 22, 2006, by
and between Endocare, Inc. and Silicon Valley Bank.
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10
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.31(29)
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Standard Form of RSU Agreement under 2004 Stock Incentive Plan.
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10
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.32(29)
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Form of RSU Agreement used for Mr. Davenport under 2004 Stock
Incentive Plan.
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10
|
.33(29)
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Summary Description of 2007 MICP.
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10
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.34(30)
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Amendment to Loan Documents, dated as of February 23, 2007, by
and between Endocare and Silicon Valley Bank.
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10
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.35(31)
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Common Stock Subscription Agreement, dated as of May 24, 2007,
by and between Endocare and Frazier Healthcare V, L.P.
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10
|
.36(31)
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Registration Rights Agreement, dated as of May 25, 2007, by and
between Endocare and Frazier Healthcare V, L.P.
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10
|
.37(32)
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First Amendment to Employee Deferred Stock Unit Program, dated
August 6, 2007.
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10
|
.38(32)
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First Amendment to Non-Employee Director Deferred Stock Unit
Program, dated August 6, 2007.
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10
|
.39(33)
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Memorandum of Understanding, dated September 11, 2007, between
Endocare and KPMG LLP.
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10
|
.40(34)
|
|
Description of Non-Employee Director Compensation, as amended on
December 20, 2007.
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10
|
.41(34)
|
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Non-Employee Director RSU Program.
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10
|
.42(34)
|
|
Form of RSU Agreement under Non-Employee Director RSU Program.
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10
|
.43(35)
|
|
Amendment to Loan Documents, dated as of February 8, 2008, by
and between Endocare and Silicon Valley Bank.
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10
|
.44(36)
|
|
Third Amendment to Employment Agreement, dated February 28,
2008, between Craig T. Davenport and Endocare.
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10
|
.45(36)
|
|
Summary Description of 2008 MICP.
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10
|
.46(3)
|
|
Stock Purchase Agreement, dated as of November 10, 2008, by and
among Endocare, Inc. and the Purchasers set forth on the
Signature Pages thereto.
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10
|
.47(3)
|
|
Form of Voting Agreement between Endocare and certain
shareholders of Galil Medical Ltd.
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21
|
.1(37)
|
|
Subsidiaries of Endocare.
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23
|
.1
|
|
Consent of Ernst & Young LLP Independent Registered Public
Accounting Firm to Endocare.
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23
|
.2
|
|
Consent of Kost Forer Gabbay & Kasierer Independent
Registered Public Accounting Firm to Galil.
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23
|
.3
|
|
Consent of Kost Forer Gabbay & Kasierer Independent
Auditors to Acquired Cryo Business.
|
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|
|
23
|
.4
|
|
Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.1 and Exhibit 8.1 hereto).
|
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|
|
|
|
24
|
.1
|
|
Power of Attorney (included on the signature page to this
registration statement).
|
|
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|
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|
|
99
|
.1
|
|
Consent of Oppenheimer & Co. Inc.
|
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99
|
.2
|
|
Form of Proxy Card to be mailed to stockholders of Endocare,
Inc.
|
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|
|
|
Management contract or compensatory plan or arrangement. |
|
* |
|
Certain confidential portions of this exhibit were omitted and
provided separately to the SEC pursuant to a request for
confidential treatment. |
|
(1) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on January 18, 2006. |
|
(2) |
|
Previously filed as an exhibit to Endocares Form 10-K
filed on March 16, 2006. |
|
(3) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on November 12, 2008. |
|
(4) |
|
Previously filed as an exhibit to Endocares Registration
Statement on Form S-3 filed on September 20, 2001. |
|
(5) |
|
Previously filed as an exhibit to Endocares Form 10-K
filed on March 16, 2004. |
|
(6) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on March 5, 2008. |
|
(7) |
|
Previously filed as an exhibit to Endocares Form 10-K for
the year ended December 31, 1995. |
|
(8) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on March 16, 2005. |
|
(9) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on June 3, 1999. |
|
(10) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on June 28, 2005. |
|
(11) |
|
Previously filed as an exhibit to Endocares Form 10-K
filed on March 29, 2002. |
|
(12) |
|
Previously filed as an exhibit to Endocares Registration
Statement on Form S-8 filed on June 2, 1999. |
|
(13) |
|
Previously filed as an appendix to Endocares Definitive
Proxy Statement filed on December 3, 2003. |
|
(14) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on December 16, 2003. |
|
(15) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on August 12, 2004. |
|
(16) |
|
Previously filed as an appendix to Endocares Definitive
Proxy Statement filed on August 6, 2004. |
|
(17) |
|
Previously filed as an exhibit to Endocares Form 10-K
filed on March 16, 2005. |
|
(18) |
|
Previously filed as an exhibit to Endocares Form 10-Q
filed on May 10, 2005. |
|
(19) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on May 3, 2005. |
|
(20) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on January 12, 2006. |
|
(21) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on April 25, 2006. |
|
(22) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on May 10, 2006. |
|
(23) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on May 22, 2006. |
|
(24) |
|
Previously filed as an exhibit to Endocares Form 10-Q
filed on August 8, 2006. |
|
(25) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on October 30, 2006. |
|
|
|
(26) |
|
Previously filed as an exhibit to Endocares Form 10-Q
filed on November 9, 2006. |
|
(27) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on December 13, 2006. |
|
(28) |
|
Previously filed as an exhibit to Endocares Form 10-Q
filed on December 22, 2006. |
|
(29) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on February 27, 2007. |
|
(30) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on February 28, 2007. |
|
(31) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on May 29, 2007. |
|
(32) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on August 8, 2007. |
|
(33) |
|
Previously filed as an exhibit to Endocares Form 10-Q
filed on November 6, 2007. |
|
(34) |
|
Previously filed as an exhibit to Endocares Form 10-K
filed on March 17, 2008. |
|
(35) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on February 11, 2008. |
|
(36) |
|
Previously filed as an exhibit to Endocares Form 8-K filed
on March 5, 2008. |
|
(37) |
|
Not applicable because Endocare does not have any subsidiaries
that constitute significant subsidiaries under Rule
1-02(w) of Regulation S-X. |