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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008; or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition period
from to .
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Commission File Number
001-15063
Endocare, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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33-0618093
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(State of
incorporation)
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(I.R.S. Employer Identification
No.)
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201 Technology, Irvine, CA
(Address
of principal executive offices)
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92618
(Zip
Code)
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Registrants telephone number, including area code:
(949) 450-5400
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.001 par value
Rights
to Purchase Shares of Series A Junior Participating
Preferred Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(1) Yes
þ
No
o
(2) Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
o
No
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The aggregate market value of the common stock of the Registrant
held by non-affiliates as of June 30, 2008 was
approximately $43,542,270 (based on the last sale price for
shares of the Registrants common stock as reported on The
NASDAQ Capital Market for that date). Shares of common stock
held by each executive officer, director and holder of
10 percent or more of the outstanding common stock have
been excluded in that such persons may be deemed affiliates.
Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of management or
policies of the Registrant, or that such person is controlled by
or under common control with the Registrant.
There were 11,811,451 shares of the Registrants
common stock issued and outstanding as of February 28, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain exhibits filed with our prior registration statements,
proxy statement and
Forms 10-K,
8-K and
10-Q are
incorporated herein by reference into Part IV of this
Annual Report on
Form 10-K.
Endocare,
Inc.
Form 10-K
For the
Fiscal Year Ended December 31, 2008
TABLE OF
CONTENTS
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PART I
This Annual Report on
Form 10-K
may contain forward-looking statements that involve risks and
uncertainties. Such statements typically include, but are not
limited to, statements containing the words
believes, intends,
anticipates, expects, hopes,
estimates, should, could,
may, plans, planned and
words of similar import. Our actual results could differ
materially from any such forward-looking statements as a result
of the risks and uncertainties, including but not limited to
those set forth below in Risks Factors and in other
documents we file from time to time with the Securities and
Exchange Commission, including our Quarterly Reports on
Form 10-Q.
Any such forward-looking statements reflect our
managements opinions only as of the date of this Annual
Report on
Form 10-K,
and we undertake no obligation to revise or publicly release the
results of any revisions to these forward-looking statements.
Readers should carefully review the risk factors set forth below
in Risks Factors and in other documents we file from
time to time with the Securities and Exchange Commission,
including our Quarterly Reports on
Form 10-Q.
AutoFreeze®,
CGCtm,
Cryocare®,
Cryocare
CS®,
Cryocare
SL®,
Cryocare Surgical
System®,
CryoDisc®,
CryoGridtm,
CryoGuide®,
Direct
Access®,
Endocaretm,
FastTrac®,
Primary
Cryo®,
Integrated
Ultrasoundtm,
SmartTemptm,
Targeted Cryoablation of the Prostate
TCAP®,
TCAP®,
Tempprobe®,
Urethral
Warmertm,
R-Probetm,
V-Probe®,
Cryocare
CN2tm,
PerCryo®,
and CryoProbe
CN2tm
are our trademarks; and,
Endocare®,
Renal
Cryo®,
Salvage
Cryo®,
Focal
Cryo®,
Ice
Knifetm
and Primary
Cryo®
are our servicemarks. This Annual Report on
Form 10-K
may also include trademarks and trade names owned by other
parties, and all other trademarks and trade names mentioned in
this Annual Report on
Form 10-K
are the property of their respective owners.
Overview
Endocare is a 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
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 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.
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 F-2.
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.
Recent
Events
On November 10, 2008, Endocare and privately held Galil
Medical, Ltd. (Galil) entered into the Merger Agreement,
pursuant to which Orange Acquisition Ltd, (a newly-formed wholly
owned subsidiary of Endocare)
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will merge with and into Galil, with Galil continuing after the
merger as the surviving company and a wholly owned subsidiary of
Endocare. This merger is referred to in this Annual Report on
Form 10-K
as the Merger. The Merger will be effected via the
exchange of Endocare common stock and stock options for
Galils outstanding ordinary shares and options.
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
Endocare common stock to be deposited into the escrow (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. Subject to receipt of regulatory approvals,
including the closing of the pending investigation by the
Federal Trade Commission (the FTC), and approvals by
Endocare stockholders and Galil shareholders, we are seeking to
close the Merger in the second quarter of 2009.
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 gross proceeds to
Endocare from this financing are expected to be $16,250,000.
This financing is referred to in this Annual Report on
Form 10-K
as the Financing. 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 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. Primarily as a result of this factor, 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. We are obligated to pay a
transaction fee of $800,000 and a percentage of the Financing
proceeds (estimated to be approximately $265,000) to our
financial advisor and placement agent upon the closing of the
Merger and Financing.
Consummation of the Merger is subject to certain closing
conditions, including, among other things, approval by Endocare
stockholders and those of Galil. 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 terminates pursuant to its terms if the
Merger has not occurred on or prior to June 30, 2009,
unless the parties agree otherwise. The Merger Agreement
contains certain other termination rights for both Endocare and
Galil, including each partys right to terminate the Merger
Agreement in the event the other partys available cash
drops below $1.0 million for more than ten business days.
Upon termination of the Merger Agreement for specified breaches
and certain similar 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.
The Merger Agreement and Stock Purchase Agreement, which have
been filed as exhibits to this Annual Report on
Form 10-K,
have been included as exhibits to provide you with information
regarding the terms of the transactions described therein and
are not intended to provide any other factual information or
disclosure about Endocare, Galil or the investors in the
Financing. The representations, warranties and covenants
contained in the Merger Agreement and Stock Purchase Agreement
were made only for purposes of such agreements and as of a
specific date, were solely for the benefit of the parties to
such agreements, may be subject to limitations agreed upon by
the contracting parties,
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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. Moreover, information concerning the subject matter
of the representations and warranties may change after the dates
of the Merger Agreement and the Stock Purchase Agreement, which
subsequent information may or may not be fully reflected in
Endocares public disclosures. Investors are not
third-party beneficiaries under the Merger Agreement or the
Stock Purchase Agreement and, in light of the foregoing reasons,
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, Orange
Acquisitions, Ltd., the investors in the Financing or any of
their respective subsidiaries or affiliates. Information
regarding Endocare is provided elsewhere in this Annual Report
on
Form 10-K
and Endocares other SEC filings, which are available at
www.endocare.com and on the SECs website at
www.sec.gov.
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 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.
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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, 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.
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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.
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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
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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.
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.
|
6
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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Additional
Cryoablation Markets:
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|
|
|
|
Cryocare Surgical System A cryoablation system with
eight cryoprobe capability specially configured for
interventional radiology and oncology.
|
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
7
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.
We spent approximately $2.8 million, $2.6 million and
$2.3 million for the years ended, 2006, 2007 and 2008,
respectively, on research and development activities from
continuing operations.
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
28.8 percent, 42.1 percent and 37.0 percent of
our total revenues for each of the years ended 2006, 2007 and
2008, respectively. 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, 2006,
2007 and 2008.
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|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Cryoablation and urological products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryocare Surgical Systems
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Cryoprobes, disposables and procedures
|
|
|
94
|
%
|
|
|
93
|
%
|
|
|
94
|
%
|
Cardiac products (CryoCath)
|
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|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
* |
|
These products account for less than 15 percent of total
revenues. |
8
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
5.8 percent, 7.2 percent and 8.1 percent of our
total revenue for each of the years ended 2006, 2007 and 2008,
respectively.
We derived our revenues from continuing operations from the
following geographic regions for each of the years ended
December 31, 2006, 2007 and 2008, based on shipping
destination:
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|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
United States
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|
$
|
26,379
|
|
|
$
|
27,548
|
|
|
$
|
29,018
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
796
|
|
|
|
892
|
|
|
|
903
|
|
China
|
|
|
451
|
|
|
|
690
|
|
|
|
792
|
|
Other
|
|
|
364
|
|
|
|
557
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
1,611
|
|
|
|
2,139
|
|
|
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
27,990
|
|
|
$
|
29,687
|
|
|
$
|
31,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
9
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 December 31, 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 states inspection.
Our manufacturing facility has been subjected to Quality System
Regulation compliance inspections by the FDA most recently in
late January 2009. The inspection has been closed with the FDA.
We are certified to 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.
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
10
Class III device, a manufacturer must obtain FDA approval
of a PMA application. The PMA process requires more data,
specifically 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.
|
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.
|
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
11
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 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
12
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 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 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 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.
13
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 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.
14
Available
Information
Our website address is www.endocare.com. All filings we make
with the SEC, including our annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
and our current reports on
Form 8-K,
and any amendments thereto, are available at no charge through
links displayed on our website as soon as reasonably practicable
after they are filed or furnished to the SEC. The reference to
our website address does not constitute incorporation by
reference of the information contained on the website, and the
information contained on the website is not part of this
document.
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 $8.6 million,
$9.3 million, and $15.4 million, respectively, during
the fiscal years ended December 31, 2008, 2007, and 2006.
As a result, at December 31, 2008 and 2007 we had an
accumulated deficit of $198.2 million and
$189.8 million, respectively. We have incurred net losses
from continuing operations of $8.4 million,
$8.9 million, and $11.1 million respectively, during
the fiscal years ended December 31, 2008, 2007 and 2006. We
had an operating cash flow deficit of $8.1 million,
$4.6 million, and $13.6 million for the years ended
December 31, 2008, 2007, and 2006. As of December 31,
2008, we had cash and cash equivalents of $2.7 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.
As a result of our recurring losses from operations and limited
capital resources, our independent registered public accounting
firms report on our financial statements as of and for the
fiscal year ended December 31, 2008 includes an explanatory
paragraph expressing substantial doubt about our ability to
continue as a going concern.
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. However, our cash needs
are not entirely predictable, and additional cash may be
required, including from our bank credit facility. Furthermore,
inclusion of a going concern qualification in the
report of our independent registered public accountants may have
a negative impact on our ability to raise additional capital and
may adversely impact our stock price. The credit facility is
currently scheduled to expire on May 27, 2009. Upon
termination of the credit facility, we may not be able to renew
our credit facility or replace the funds that are available
under the credit facility.
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 and
January 31, 2009. In connection with the extension we
executed on February 26, 2009, the bank granted us a waiver
of the noncompliance, redefined the tangible net worth
requirement and established a new lower tangible net worth
covenant for the months from February through April 2009. We are
in discussions with the lender to obtain more permanent
long-term financing although such financing may not be available
or available on terms acceptable to us.
We may not have sufficient capital to fund our ongoing
operations. In addition, in the event that our 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, 2008, our largest
customer accounted for 37% of our revenues, and as of
December 31, 2008 this customer accounted for 40.4% of our
accounts receivable. Our sales to this customer may
15
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, 2007, and 2008 we estimated that
we owed $2.8 million, $2.2 million, and
$2.2 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 currently 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 initially be subject to restrictions on
transfer. Future sales of our common stock, including shares
issued in the Financing, shares issues 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 or
necessary.
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.
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
17
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. In addition,
NASDAQ Marketplace Rule 4310(c)(4) sets a minimum per share
price of $1.00 for continued listing on the NASDAQ Capital
Market. Endocares common stock has traded below $4.00
since July 21, 2008, and below $1.00 since
November 29, 2008. 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 or
determines to delist Endocare for failure to meet the $1.00
minimum bid price for continued listing.
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 April 15, 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 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 and the purchasers in the
Financing 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, 2008, we had a domestic federal net
operating loss carryforward of approximately
$131.1 million. Companies are subject to a change of
ownership test under Section 382 of the Code that, if met,
can
18
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, 2008, 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 the Merger
If the
proposed Merger with Galil is consummated, Endocares
business could suffer materially and Endocares stock price
could decline.
Subject to receipt of regulatory approvals, including the
closing of the pending investigation by the FTC, and approvals
by Endocare stockholders and Galil shareholders, Endocare is
seeking to close the transactions in 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:
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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;
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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;
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as a result of the Merger, Endocare may assume significant known
and unknown liabilities of Galil, including liabilities with
respect to taxes; and
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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.
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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:
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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;
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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
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the effect of the Merger on the combined companys business
and prospects is not consistent with the expectations of
financial or industry analysts.
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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
19
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:
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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;
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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;
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changes generally applicable in the industries in which Endocare
and Galil operate;
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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
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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).
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If adverse changes occur but Endocare and Galil must still
complete the Merger, the combined companys operating
results and financial condition may be materially and adversely
impacted and Endocares 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 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
March 4, 2009, the amount of such bridge financing is
$1.4 million. 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. The
amounts to be repaid will include interest, which accrues at 18%
per annum compounding monthly.
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Antitrust
authorities may attempt to delay or prevent 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 FTC and Antitrust Division of the United States
Department of Justice (the DOJ), the FTC has opened
an 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 are in the process of providing
the FTC with information and materials. 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. In addition,
Endocare cannot provide any assurance that the FTCs
investigation will not delay or prevent consummation of the
Merger. 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.
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 Escrow
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
21
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 Associated with
Endocares Business, 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 Associated with
Endocares Business, 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. Subject to receipt of regulatory
approvals, including the closing of the pending investigation by
the FTC, and approvals by Endocare stockholders and Galil
shareholders, Endocare is seeking to close the transaction in
the second quarter 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
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
22
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
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 $30.1 million,
$9.9 million, $1.9 million, respectively, during the
fiscal years ended December 31, 2008, 2007 and 2006. The
loss of $30.1 million for the year ended December 31,
2008 includes a one-time non-cash charge of $16.8 million
relating to goodwill impairment. As a result, at
December 31, 2008, Galil had an accumulated deficit of
$76.2 million. Galil has incurred net losses of
$30.4 million, $9.5 million and $13.0 million,
respectively, during the fiscal years ended December 31,
2008, 2007, and 2006. Galil had an operating cash flow deficit
of $11.3 million, $3.8 million and $0.6 million
for the years ended December 31, 2008, 2007 and 2006. As of
December 31, 2008, Galil had cash and cash equivalents of
$2.5 million.
As a result of Galils recurring operating losses and
negative cash flows from operating activities, among other
matters, Galils independent registered public accounting
firms report on its financial statements as of and for the
fiscal year ended December 31, 2008 includes an explanatory
paragraph expressing substantial doubt about Galils
ability to continue as a going concern.
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
23
$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.
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. During 2008 the New Israeli
Shekel appreciated against the U.S. dollar by approximately
2%, and the Euro depreciated against the U.S. dollar by
approximately 5%. 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.
24
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
December 31, 2008, Endocare and Galil had combined cash and
cash equivalents of $5.1 million. We currently anticipate
that the cash proceeds from the Financing will provide the
combined company sufficient cash to enable it to reach positive
adjusted EBITDA. However, we can give no assurance that we will
be able to successfully integrate the acquisition of Galil and
achieve positive adjusted EBITDA, or that this will be done
without the need for additional capital.
In addition, as a result of each of Endocares and
Galils historical operating losses, among other matters,
the reports of each companys respective independent
registered public accountant on the companies financial
statements as of and for the fiscal year ended December 31,
2008 included an explanatory paragraph expressing substantial
doubt about each companys ability to continue as a going
concern.
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 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 May 27, 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
25
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. As a result of our
financial condition, we have had to forgo making investments in
research and development expenditures, and in some cases have
had to eliminate projects and reduce spending. 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 or alternative technologies 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.
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.
26
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 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
27
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.
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.
28
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;
|
|
|
|
changes in foreign regulatory requirements;
|
|
|
|
potentially negative consequences from changes in or
interpretations of tax laws;
|
|
|
|
differing labor regulations;
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|
|
differing product liability regimes;
|
|
|
|
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;
|
|
|
|
restrictions on the repatriation of funds;
|
|
|
|
political unrest and hostilities;
|
|
|
|
differing degrees of protection for intellectual
property; and
|
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|
|
difficulties in coordinating and managing foreign operations.
|
29
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 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
30
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 or improvements on such technologies
or 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. As a result of our financial
condition, we have had to forgo making investments in research
and development expenditures, and in some cases, have had to
eliminate projects and reduce spending.
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 Associated
with Endocares Business 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 Associated with
Endocares Business 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.
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|
Item 1B.
|
Unresolved
Staff Comments
|
Not Applicable
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
31
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.
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|
Item 3.
|
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 are in the process of providing the
FTC with information and materials. Endocare cannot provide any
assurance that the FTCs investigation will not delay or
prevent consummation of the Merger.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
32
PART II
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|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
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.
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High
|
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Low
|
|
|
Year Ended December 31, 2008
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|
|
|
|
|
|
First Quarter
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$
|
7.70
|
|
|
$
|
5.03
|
|
Second Quarter
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|
$
|
7.00
|
|
|
$
|
3.79
|
|
Third Quarter
|
|
$
|
4.98
|
|
|
$
|
1.16
|
|
Fourth Quarter
|
|
$
|
1.76
|
|
|
$
|
0.38
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.02
|
|
|
$
|
4.86
|
|
Second Quarter
|
|
$
|
8.85
|
|
|
$
|
5.25
|
|
Third Quarter
|
|
$
|
8.79
|
|
|
$
|
5.91
|
|
Fourth Quarter
|
|
$
|
10.00
|
|
|
$
|
6.65
|
|
Holders
As of February 28, 2009, there were 213 holders of record
of our common stock. This number was derived from our
stockholder records and does not include beneficial owners of
our common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers, and other
fiduciaries.
Dividends
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.
Recent
Sales of Unregistered Securities
None, except as previously reported in a Quarterly Report on
Form 10-Q
or Current Report on
Form 8-K.
Issuer
Purchases of Equity Securities
Not applicable.
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|
Item 6.
|
Selected
Consolidated Financial Data
|
Not applicable.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
Item 1 Business,
Item 1A Risk Factors, and
Item 8 Financial Statements and
Supplementary Data, as well as our consolidated financial
statements and related notes contained elsewhere in this Annual
Report on
Form 10-K.
This discussion contains forward-
33
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 Annual Report on
Form 10-K,
including above under Risks Factors in Item 1A
of this Annual Report on
Form 10-K.
In addition, there are factors not described in this Annual
Report on
Form 10-K
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 Annual Report on
Form 10-K
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 is used in the
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 Orange Acquisition Ltd, (a
newly-formed 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.
The Merger will be effected via the exchange of Endocare common
stock and stock options for Galils outstanding ordinary
shares and options.
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
Endocare common stock to be deposited into the escrow (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. Subject to receipt of regulatory approvals,
including the closing of the pending investigation by the FTC,
and approvals by Endocare stockholders and Galil shareholders,
we are seeking to close the Merger in the second quarter of 2009.
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 gross 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 attributing ownership to Galils
shareholders of the Escrow Shares, Endocare stockholders will
own approximately 38.5% of
34
Endocares outstanding common stock and the former
shareholders of Galil will own approximately 61.5% of
Endocares outstanding common stock. Primarily as a result
of this factor, 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. We are obligated to pay a
transaction fee of $800,000 and a percentage of the Financing
proceeds (estimated to be approximately $265,000) to our
financial advisor and placement agent upon the closing of the
Merger and Financing.
Consummation of the Merger is subject to certain closing
conditions, including, among other things, approval by Endocare
stockholders and those of Galil. 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 terminates pursuant to its terms if the
Merger has not occurred on or prior to June 30, 2009,
unless the parties agree otherwise. The Merger Agreement
contains certain other termination rights for both Endocare and
Galil, including each partys right to terminate the Merger
Agreement in the event the other partys available cash
drops below $1.0 million for more than ten business days.
Upon termination of the Merger Agreement for specified breaches
and certain similar 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.
The Merger Agreement and Stock Purchase Agreement, which have
been filed as exhibits to this Annual Report on
Form 10-K,
have been included as exhibits to provide you with information
regarding the terms of the transactions described therein and
are not intended to provide any other factual information or
disclosure about Endocare, Galil or the investors in the
Financing. The representations, warranties and covenants
contained in the Merger Agreement and Stock Purchase Agreement
were made only for purposes of such agreements and as of a
specific date, were solely for the benefit of the parties to
such agreements, 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. Moreover, information concerning the
subject matter of the representations and warranties may change
after the dates of the Merger Agreement and the Stock Purchase
Agreement, which subsequent information may or may not be fully
reflected in Endocares public disclosures. Investors are
not third-party beneficiaries under the Merger Agreement or the
Stock Purchase Agreement and, in light of the foregoing reasons,
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, Orange
Acquisitions, Ltd., the investors in the Financing or any of
their respective subsidiaries or affiliates. Information
regarding Endocare is provided elsewhere in this Annual Report
on
Form 10-K
and Endocares other SEC filings, which are available at
www.endocare.com and on the SECs website at
www.sec.gov.
Strategy
and Key Metrics
Our strategy is to strengthen cryoablations 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 improve the penetration of
cryoablation, which we have historically measured in terms of
the estimated number of domestic cryoablation procedures
performed with our Cryocare Surgical System,
35
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
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.
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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Three Months Ended December 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Estimated domestic cryoablation procedures
|
|
|
7,802
|
|
|
|
9,373
|
|
|
|
9,358
|
|
|
|
2,269
|
|
|
|
2,236
|
|
Number of cryoprobes sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Straight probes
|
|
|
33,598
|
|
|
|
38,909
|
|
|
|
37,029
|
|
|
|
9,057
|
|
|
|
9,012
|
|
Right-angle probes
|
|
|
4,590
|
|
|
|
6,308
|
|
|
|
8,113
|
|
|
|
1,671
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
38,188
|
|
|
|
45,217
|
|
|
|
45,142
|
|
|
|
10,728
|
|
|
|
11,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
36
Results
of Operations
Revenues and cost of revenues from continuing operations related
to the following products and services for the three-year period
ended December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
13,948
|
|
|
$
|
21,157
|
|
|
$
|
22,864
|
|
Cryocare Surgical Systems
|
|
|
1,096
|
|
|
|
1,573
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,044
|
|
|
|
22,730
|
|
|
|
24,375
|
|
Cryoablation procedure fees
|
|
|
12,298
|
|
|
|
6,418
|
|
|
|
6,693
|
|
Cardiac royalties
|
|
|
604
|
|
|
|
386
|
|
|
|
511
|
|
Other
|
|
|
44
|
|
|
|
153
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,990
|
|
|
$
|
29,687
|
|
|
$
|
31,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
11,541
|
|
|
$
|
9,006
|
|
|
$
|
9,408
|
|
Cryocare Surgical Systems
|
|
|
802
|
|
|
|
774
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
$
|
9,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 collectibility 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 debt, and litigation losses less
amounts recoverable under our insurance policies. Litigation
reserves and insurance
37
recoveries are recorded when such amounts are probable and can
be reasonably estimated. In the 2008 period, general and
administrative expenses also included certain costs related to
our pending merger with Galil.
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 December 31, 2008,
there was $0.9 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 0.7 years less any stock options
forfeited prior to vesting. Unrecognized compensation for
restricted stock units was $1.7 million as of
December 31, 2008 (assuming that all service and
performance conditions will be met) and will be recognized over
a weighted average period of 0.9 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
years ended December 31, 2008, 2007 and 2006 was
$1.2 million, $3.9 million, and $2.8 million
respectively. The expense for 2008 is 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.
Costs, expenses, gains and losses from continuing operations for
the three-year period ended December 31, 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
$
|
9,935
|
|
Research and development
|
|
|
2,781
|
|
|
|
2,555
|
|
|
|
2,346
|
|
Selling and marketing
|
|
|
15,195
|
|
|
|
14,855
|
|
|
|
14,619
|
|
General and administrative
|
|
|
13,107
|
|
|
|
12,506
|
|
|
|
13,078
|
|
Gain on recovery of note receivable
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Investment impairment
|
|
|
|
|
|
|
|
|
|
|
918
|
|
Gain on legal settlement
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
43,426
|
|
|
$
|
39,019
|
|
|
$
|
40,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
$
|
452
|
|
|
$
|
391
|
|
|
$
|
168
|
|
Interest expense related to common stock warrants
|
|
$
|
3,716
|
|
|
$
|
|
|
|
$
|
|
|
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products
|
|
$
|
22,864
|
|
|
$
|
21,157
|
|
|
$
|
1,707
|
|
|
|
8.1
|
%
|
Cryocare Surgical Systems
|
|
|
1,511
|
|
|
|
1,573
|
|
|
|
(62
|
)
|
|
|
(3.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,375
|
|
|
|
22,730
|
|
|
|
1,645
|
|
|
|
7.2
|
%
|
Cryoablation procedure fees
|
|
|
6,693
|
|
|
|
6,418
|
|
|
|
275
|
|
|
|
4.3
|
%
|
Cardiac royalties
|
|
|
511
|
|
|
|
386
|
|
|
|
125
|
|
|
|
32.4
|
%
|
Other
|
|
|
(17
|
)
|
|
|
153
|
|
|
|
(170
|
)
|
|
|
(111.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,562
|
|
|
$
|
29,687
|
|
|
$
|
1,875
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of cryoprobes sold during the year ended
December 31, 2008 decreased by approximately
0.2 percent to 45,142 compared to 45,217 probes sold during
this same period in 2007. The reduction in revenue was offset by
higher average sales prices of probes sold and used in
procedures, which increased 7.2 percent during the year
ended December 31, 2008 compared to this same period in
2007. This is primarily the result of migration of
38
sales to higher priced probes and secondarily to certain
increases implemented in the second quarter. Sales of straight
probes, which are typically, although not always, used in
prostate cancer procedures decreased 4.8 percent and
right-angle probes, which are typically used in procedures other
than prostate cancer procedures, increased 28.6 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 year ended
December 31, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
|
(Dollars in thousands)
|
|
Cost of revenues
|
|
$
|
9,935
|
|
|
$
|
9,780
|
|
|
$
|
155
|
|
Percent of revenues
|
|
|
31.5
|
%
|
|
|
32.9
|
%
|
|
|
|
|
Costs of revenues increased as a result of an increase in the
provision for excess and obsolete inventory of $0.3 million
offset by a decrease in salary and stock compensation expense of
$0.1 million.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
20,149
|
|
|
$
|
18,569
|
|
|
$
|
1,580
|
|
Cryocare surgical systems
|
|
|
984
|
|
|
|
799
|
|
|
|
185
|
|
Cardiac royalties and other
|
|
|
494
|
|
|
|
539
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,627
|
|
|
$
|
19,907
|
|
|
$
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
Percentage Point
|
|
|
2008
|
|
2007
|
|
Change
|
|
|
(Percent of revenues)
|
|
Cryoablation disposable products and procedure fees
|
|
|
63.8
|
%
|
|
|
62.6
|
%
|
|
|
1.2
|
%
|
Cryocare surgical systems
|
|
|
3.1
|
%
|
|
|
2.7
|
%
|
|
|
0.4
|
%
|
Cardiac royalties and other
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.5
|
%
|
|
|
67.1
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have continued to reduce manufacturing costs for our
cryoablation disposable products and surgical systems, while
increasing efficiencies in production. In addition, gross
margins were negatively affected during the year ended
December 31, 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.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Research and development expenses
|
|
$
|
2,346
|
|
|
$
|
2,555
|
|
|
$
|
(209
|
)
|
|
|
(8.2
|
)%
|
Percent of total revenues
|
|
|
7.4
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
39
The decrease was primarily attributable to a reduction in the
bonus expense of $0.1 million and stock-based compensation
expense of $0.1 million. Expenses related to clinical
studies for the year ended December 31, 2008 have remained
consistent with the same period of 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Selling and marketing expenses
|
|
$
|
14,619
|
|
|
$
|
14,855
|
|
|
$
|
(236
|
)
|
|
|
(1.6
|
)%
|
Percent of total revenues
|
|
|
46.3
|
%
|
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
The decrease in selling and marketing expenses primarily related
to reductions in incentive compensation of $0.4 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
$0.7 million was offset by a $0.4 million increase in
consulting expenses related to further development and
enhancement of a database of cryoablation patients and treatment
outcomes which we support and maintain as well as a
$0.1 million increase in fees for trade shows. Included in
selling and marketing expenses for the years ended
December 31, 2008 and 2007 were $0.5 million and
$0.7 million, respectively, in non-cash stock-based
compensation expenses related to stock options, deferred stock
units and restricted stock units.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
General and administrative expenses
|
|
$
|
13,078
|
|
|
$
|
12,506
|
|
|
$
|
572
|
|
|
|
4.6
|
%
|
Percent of total revenues
|
|
|
41.4
|
%
|
|
|
42.1
|
%
|
|
|
|
|
|
|
|
|
The change in 2008 is primarily due to reductions in stock-based
compensation of $2.1 million, incentive compensation of
$1.0 million and board of directors fees of
$0.3 million. Offsetting the total decrease of
$3.4 million was an increase in legal expenses of
$0.8 million as a result of us having exhausted all
remaining insurance coverage for indemnification matters
relating to our former executives, legal and financial advisory
expense related to the pending merger with Galil of
$2.4 million and an increase in sales and use tax expenses
of $0.3 million as a result of the settlement of
liabilities related to previous years that did not recur in the
2008 period. The provision for bad debts in 2008 was also higher
by $0.4 million due to a favorable change in estimate
during 2007 regarding the expected collections of a note
receivable we received in connection with our 2006 sale of Timm
Medical.
Of the $4.0 million in legal expenses in 2008 (net of
insurance recoveries), $1.8 million related to the legal
proceedings of our former CEO and former CFO and
$1.7 million related to legal expenses incurred from
evaluating potential strategic opportunities, including the
merger with Galil. These expenditures were recorded as general
and administrative expenses as incurred since the transaction is
not expected to occur until the second quarter of 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
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.
Total stock-based compensation expense included in general and
administrative expenses related to stock options, deferred stock
units and restricted stock units for the years ended
December 31, 2008 and 2007 was $0.6 million and
$3.0 million, respectively. The reduction in stock-based
compensation was due to a cumulative adjustment to reverse
$1.3 million in expenses related to equity awards that are
no longer expected to vest,
40
$0.8 million of stock based compensation that became fully
vested during 2007 and therefore did not recur in 2008 and
$0.3 million reduction in employee deferred stock units
issued for compensation.
Gain
on Recovery of Note Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Gain on recovery of note receivable
|
|
$
|
(750
|
)
|
|
$
|
|
|
|
$
|
(750
|
)
|
|
|
(100
|
)%
|
Percent of total revenues
|
|
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2008 we received $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 and the payment
was recorded as a gain on recovery when received.
Investment
impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Investment impairment
|
|
$
|
918
|
|
|
$
|
|
|
|
$
|
918
|
|
|
|
100
|
%
|
Percent of total revenues
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2008 we recorded an impairment charge
of $0.9 million, which was equivalent to the carrying value
of our investment in a privately held medical device company.
The impairment charge was recorded upon us determining that the
fair value of our investment had declined below our carrying
value and our belief that the impairment was
other-than-temporary. See Note 11
Collaborative and Other Agreements in the
notes to our consolidated financial statements for further
discussion.
Litigation
Settlement, Net of Related Legal Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Litigation settlement, net of related legal expenses
|
|
$
|
|
|
|
$
|
(677
|
)
|
|
$
|
677
|
|
|
|
100
|
%
|
Percent of total revenues
|
|
|
|
%
|
|
|
(2.2
|
)%
|
|
|
|
|
|
|
|
|
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 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 (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Interest income, net
|
|
$
|
168
|
|
|
$
|
391
|
|
|
$
|
(223
|
)
|
|
|
(57.0
|
)%
|
Percent of total revenues
|
|
|
0.5
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
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 a
lower average balance on the line of credit and lower interest
rate for the year ended
41
December 31, 2008 compared to the same period in 2007.
Interest income also decreased due to lower cash balances in
2008 resulting from cash used to fund operations.
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Net loss
|
|
$
|
(8,416
|
)
|
|
$
|
(8,941
|
)
|
|
$
|
525
|
|
|
|
5.9
|
%
|
Percent of total revenues
|
|
|
(26.7
|
)%
|
|
|
(30.1
|
)%
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2008 was $0.71 per
basic and diluted share on 11.9 million weighted average
shares outstanding, compared to a net loss of $0.80 per basic
and diluted share on 11.1 million weighted average shares
outstanding during the same period in 2007.
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.
42
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,
|
|
|
|
|
|
|
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
|
|
Percentage
|
|
|
December 31,
|
|
Point
|
|
|
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
43
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 years 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 the 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.
Litigation
Settlement, Net of Related Legal Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
Litigation settlement, net of related legal expenses
|
|
$
|
(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
44
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 of total revenues
|
|
|
1.3
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Interest income (expense), 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 the 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 of 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 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 of 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.
45
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 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.
Off
Balance Sheet Financing
Other than lease commitments, legal contingencies incurred in
the normal course of business, obligations under royalty and
joint technology development arrangements and employment
contracts, we do not have any off-balance sheet arrangements as
defined in Item 303(a)(4) of
Regulation S-K.
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.
Liquidity
and Capital Resources
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of December 31, 2008,
we had cash and cash equivalents of $2.7 million. We do not
expect to reach positive adjusted Earnings Before Income Tax,
Depreciation and Amortization (EBITDA) on 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
$2.2 million. The amount was fully accrued as of
December 31, 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 year ended December 31, 2008, we incurred
$2.4 million of expenses in relation to potential strategic
transactions, including the Merger. We will incur an estimated
$1.1 million in additional transaction related expenses in
2009 to complete the Merger and Financing. At closing, we will
pay total transaction fees of approximately $1 million from
the Financing proceeds to our investment banker. Merger related
expenditures are recorded as general and administrative expenses
as incurred since the Merger will be completed in 2009 and these
costs are required to be expensed under Statement of Financial
Accounting Standards (SFAS) No. 141(R), Business
Combinations. In addition, we anticipate significant cash
expenditures in connection with post-closing integration
46
activities. 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 have historically financed our operations and growth through
borrowings and equity financings. In the short term, we expect
to use existing cash reserves, working capital through the sale
of our products and our credit facility to fund operations until
we complete the Merger. If the Merger and Financing are
consummated, the proceeds of the Financing will be used to
finance the operations, integration costs and other cash flow
needs of the combined company. The gross proceeds to Endocare of
the Financing are expected to be approximately
$16.25 million. We believe that the proceeds from the
Financing along with expected expense reductions from
eliminating duplicate or redundant facilities, infrastructure
and functions will be adequate to enable the post-merger
combined company to ultimately reach positive adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA).
The closing of the Financing is subject to the concurrent
closing of the Merger and certain other conditions including the
sale of shares in the Financing with a minimum aggregate
purchase price of $12,000,000.
Our cash needs are not entirely predictable. 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 borrowing conditions are met.
In 2008, we borrowed an additional $1.0 million under our
credit facility, bringing the total amount currently outstanding
under the credit facility to $1.9 million. As of
December 31, 2008, there was $2.1 million available
for additional borrowing under the credit facility. On
February 26, 2009 the credit facility was extended to
expire on May 27, 2009.
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 and
January 31, 2009. In connection with the extension we
executed on February 26, 2009, the lender granted us a
waiver of the noncompliance, redefined the tangible net worth
requirement and established a new lower tangible net worth
covenant for the months from February through April 2009. We are
in discussions with the lender to obtain more permanent
long-term financing although such financing may not be available
or available on terms acceptable to us.
There is no assurance that the Merger and Financing will occur
and we cannot guarantee that we will be able to obtain permanent
long-term financing or the availability of these capital
resources or that they will be sufficient to fund our ongoing
operations to the point where we can 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.
Our continuing losses, cashflow deficits and obligations along
with the contingencies in our funding sources, together raise
substantial doubt about our ability to continue as a going
concern. As a result, our independent registered public
accounting firms report on our financial statements as of
and for the fiscal year ended December 31, 2008 includes an
explanatory statement expressing substantial doubt about our
ability to continue as a going concern. The 2008 consolidated
financial statements included in this
Form S-4
have been prepared assuming that we will continue as a going
concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification
of assets or amounts and classification of liabilities that may
result from the outcome of this uncertainty.
47
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
Form S-4.
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.
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
48
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 SFAS No. 157, Fair Value
Measurements, and FASB Staff Accounting Position (FSP)
FAS 115-1
and
FAS 124-1,
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 shares if they are publicly traded 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.
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, 2008 we have
established a full valuation allowance of $4.7 million
against our deferred tax assets due to our history of operating
losses. 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. We account for our stock-based
compensation under the provisions of SFAS No. 123R,
Share-Based Payments. SFAS No. 123R requires
companies to recognize in the financial statements the cost of
employee services received in exchange for awards of equity
instruments based on the
49
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 the instruments to be accounted for as liabilities.
Inflation
The impact of inflation on our business has not been significant
to date.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income
we receive from our invested cash without significantly
increasing the risk of loss. Our financial instruments include
cash, cash equivalents, accounts and notes receivable, minority
investments, accounts payable, accrued liabilities, and a line
of credit. Our policy is not to enter into derivative financial
instruments. In addition, we do not enter into any futures or
forward contracts and therefore, we do not have significant
market risk exposure with respect to commodity prices.
As of December 31, 2008, $2.0 million of our cash is
invested in a money market mutual fund (the Citi Institutional
Liquid Reserves) that includes in its investment portfolio
commercial paper, time deposits, certificates of deposits, bank
notes, corporate bonds and notes and U.S. government agency
securities. 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 of
January 31, 2009, 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 $1.00, representing 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 funds at any time without restriction.
Effective September 2008, the federal government provided a
temporary guarantee through April 30, 2009 on all publicly
traded or regulated money market mutual funds that elect to
participate in the program. The guarantee may be extended
through September 18, 2009 at the discretion of the
U.S. Treasury Department. We will continue to monitor the
value of the fund periodically for potential indicators of
impairment.
Although we transact our business in U.S. dollars, future
fluctuations in the value of the U.S. dollar may affect the
price competitiveness of our products. However, we do not
believe that we currently have any significant direct foreign
currency exchange rate risk and have not hedged exposures
denominated in foreign currencies or any other derivative
financial instruments.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our financial statements and schedule, as listed under
Item 15, appear in a separate section of this Annual Report
on
Form 10-K
beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
Not applicable.
50
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and
Procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in our reports pursuant to the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and that such information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As required by
Rule 13a-15(b)
of the Securities Exchange Act of 1934, as amended, we carried
out an evaluation, under the supervision and with the
participation of our management, including our chief executive
officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the
foregoing, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures
were effective at a reasonable assurance level.
(b) Managements Annual Report on Internal Control
Over Financial Reporting. Management of the
company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.
Based on our assessment and those criteria, management believes
that the Company maintained effective internal control over
financial reporting as of December 31, 2008.
The Companys independent registered public accounting firm
has issued an attestation report on the Companys internal
control over financial reporting. That report appears below in
this Item 9A.
(c) Changes in Internal Controls. There
was no change in our internal control over financial reporting
during our fourth fiscal quarter for 2008 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Endocare, Inc.
We have audited Endocare Inc.s (the Companys)
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Endocare, Inc.s management is
responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in the
accompanying Managements Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Endocare, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Endocare, Inc. as of
December 31, 2008 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, 2008 and our report dated March 6, 2009
expressed an unqualified opinion thereon that included an
explanatory paragraph regarding Endocares ability to
continue as a going concern.
Los Angeles, California
March 6, 2009
52
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
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 and Interim Chairman of the Board
|
Eric S. Kentor
|
|
|
49
|
|
|
Director
|
Terrence A. Noonan(2)
|
|
|
71
|
|
|
Director
|
Thomas R. Testman(3)
|
|
|
72
|
|
|
Director
|
|
|
|
(1) |
|
All ages are as of December 31, 2008. |
|
(2) |
|
Mr. Noonan took a leave of absence from our board of directors
for health reasons beginning on March 19, 2009. |
|
(3) |
|
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 and was named Interim Chairman of the Board in March 2009.
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. Mr. Goldsmith currently
serves as Chairman of the Board of Directors of Apria Healthcare
Group, Inc. 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
53
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. From October 2008 to March 2009 Mr.
Noonan served as our Interim Chief Executive Officer, President
and Chairman. 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 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).
Executive
Officers
Endocares executive officers are as follows:
|
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|
|
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|
Name
|
|
Age(1)
|
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Position with Endocare
|
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Michael R. Rodriguez(2)
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|
41
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|
|
Senior Vice President, Finance and Chief Financial Officer
|
Clint B. Davis(2)
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36
|
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Senior Vice President, Legal Affairs, General Counsel and
Secretary
|
|
|
|
(1) |
|
All ages are as of December 31, 2008. |
|
(2) |
|
Messrs. Rodriguez and Davis were designated by our board of
directors as co-principal executive officers on March 19,
2009, following the resignation for health reasons of Mr. Noonan
from the positions of Interim Chief Executive Officer and
President. |
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.
54
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.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires our executive officers and directors, and generally
persons who own more than 10% of a registered class of our
equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission, or SEC.
Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all
Section 16(a) reports they file. Based solely upon the
copies of Section 16(a) reports which we received from such
persons or written representations from them regarding their
transactions in our common stock, we believe that, during the
period from January 1, 2008 through December 31, 2008,
all Section 16(a) filing requirements applicable to our
executive officers, directors and greater than 10% beneficial
owners were met in a timely manner.
Financial
Code of Ethics
We have adopted a financial code of ethics that applies to all
of our employees. This financial code of ethics constitutes a
code of ethics, as defined in SEC
Regulation S-K
Item 406(b). A copy of our current financial code of ethics
is available on our website www.endocare.com under the
menu item entitled On Endocare Corporate
Governance Documents. If we make any amendments to our
financial code of ethics, other than technical, administrative
or other non-substantive amendments, or grant any waivers,
including implicit waivers, from a provision of our financial
code of ethics to our principal executive officer, principal
financial officer, principal accounting officer or controller,
or persons performing similar functions, then we will disclose
the nature of the amendment or waiver, its effective date and to
whom it applies on our website www.endocare.com under the
menu item entitled On Endocare Corporate
Governance Documents or in a report on
Form 8-K
filed with the SEC.
Audit
Committee
Our board of directors has established a standing Audit
Committee to assist the Board in overseeing the integrity of our
financial statements, our compliance with legal and regulatory
requirements, the independent auditors qualifications and
independence and the performance of our internal and independent
auditors. The current Chairman of the Audit Committee is
Mr. Testman and the other current members of the Audit
Committee are Messrs. Goldsmith and Kentor. Our board of
directors has determined that Mr. Testman is an audit
committee financial expert, as defined in SEC
Regulation S-K
Item 407.
55
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Item 11.
|
Executive
Compensation
|
2008
SUMMARY COMPENSATION TABLE
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Non-Equity
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Stock
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Option
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Incentive Plan
|
|
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All Other
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|
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Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
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Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
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($)
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|
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($)
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($)
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($)
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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
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
25,233
|
(3)
|
|
|
None
|
|
|
$
|
100
|
(4)
|
|
$
|
86,871
|
|
Former Interim CEO & President(2)
|
|
|
2007
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Michael R. Rodriguez,
|
|
|
2008
|
|
|
$
|
230,196
|
|
|
|
None
|
|
|
$
|
12,500
|
(5)
|
|
$
|
92,193
|
(6)
|
|
$
|
40,514
|
(11)
|
|
$
|
13,494
|
(12)
|
|
$
|
388,897
|
|
SVP, Finance & CFO
|
|
|
2007
|
|
|
$
|
223,445
|
|
|
|
None
|
|
|
$
|
90,875
|
(8)
|
|
$
|
121,450
|
(9)
|
|
$
|
110,830
|
(13)
|
|
$
|
11,535
|
(12)
|
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$
|
558,135
|
|
Clint B. Davis,
|
|
|
2008
|
|
|
$
|
244,843
|
|
|
|
None
|
|
|
$
|
12,500
|
(5)
|
|
$
|
151,194
|
(6)
|
|
$
|
43,092
|
(14)
|
|
$
|
10,798
|
(15)
|
|
$
|
462,427
|
|
SVP, Legal Affairs & General Counsel
|
|
|
2007
|
|
|
$
|
238,000
|
|
|
|
None
|
|
|
$
|
88,160
|
(8)
|
|
$
|
117,733
|
(9)
|
|
$
|
118,048
|
(16)
|
|
$
|
9,071
|
(15)
|
|
$
|
571,012
|
|
Craig T. Davenport,
|
|
|
2008
|
|
|
$
|
358,744
|
|
|
|
None
|
|
|
|
None
|
|
|
$
|
95,851
|
(6)
|
|
|
None
|
|
|
$
|
8,729
|
(7)
|
|
$
|
463,324
|
|
Former CEO & President(2)
|
|
|
2007
|
|
|
$
|
390,000
|
|
|
|
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. On
March 19, 2009 Mr. Noonan resigned from the positions of
Interim Chief Executive Officer and Interim President for health
reasons. 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, 2008. |
|
(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, 2008. |
|
(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, 2008. |
|
(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, 2008. |
|
(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 |
56
|
|
|
|
|
assumptions made in the SFAS No. 123R valuation, see
Notes 3 and 8 to the financial statements for the year
ended December 31, 2008. |
|
(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 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, 2008. |
|
(11) |
|
Consists of cash incentive compensation earned during 2008 under
our 2008 MICP, based on the aggregate achievement percentage of
44%. |
|
(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, 2008. |
|
(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, 2008. |
|
(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, 2008. |
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.
|
|
|
|
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
vested in equal monthly installments over the first five months
of Mr. Noonans service.
|
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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
|
57
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|
|
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 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.
|
|
|
|
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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Plan
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Equity
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Awards:
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Incentive
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Market or
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Equity
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Plan
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Payout
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Incentive
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Awards:
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Value of
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Plan Awards:
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Market
|
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Number of
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Unearned
|
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Number of
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Number of
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Number of
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|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Unearned
|
|
|
Shares,
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
Shares or
|
|
|
Shares, Units
|
|
|
Units or
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of
|
|
|
Units of
|
|
|
or Other
|
|
|
Other
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Stock That
|
|
|
Stock That
|
|
|
Rights That
|
|
|
Rights That
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Options
|
|
|
Price
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
(#)
|
|
|
($)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
|
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. |
58
|
|
|
(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. |
|
(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. 44% of these DSUs became
vested in the first quarter of 2009 based on performance under
the 2008 MICP. |
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
59
failure to perform any act in bad faith and to the detriment of
Endocare or a related entity; (ii) dishonesty, intentional
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.
60
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and
|
|
|
|
|
|
|
|
|
|
Benefits Upon
|
|
|
|
|
|
|
|
|
|
Termination by
|
|
|
|
|
|
|
|
|
|
Endocare Without
|
|
|
|
|
|
|
|
|
|
Cause or by the
|
|
|
|
|
|
Payments and Benefits
|
|
|
|
Employee with Good
|
|
|
Change in Control
|
|
|
for Change in Control
|
|
|
|
Reason (Other than
|
|
|
Payments and
|
|
|
Followed by
|
|
|
|
in Connection with
|
|
|
Benefits
|
|
|
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.
61
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.
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
|
|
|
|
|
|
|
|
|
|
Cause or by the
|
|
|
|
|
|
Payments and Benefits
|
|
|
|
Employee with Good
|
|
|
Change in Control
|
|
|
for Change in Control
|
|
|
|
Reason (Other than
|
|
|
Payments and
|
|
|
Followed by
|
|
|
|
in Connection with
|
|
|
Benefits
|
|
|
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. |
62
|
|
|
(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
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
63
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.
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, 2007, 56,801 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
64
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 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.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Beneficial
Ownership of Endocare Stock
The following table sets forth information known to us with
respect to the beneficial ownership of Endocares common
stock as of March 11, 2009, 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.
|
65
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 March 11,
2009 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 of
|
|
Name and Address
|
|
Ownership(1)
|
|
|
Total
|
|
|
DIRECTORS AND EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
John R. Daniels, M.D.(2)
|
|
|
103,563
|
|
|
|
*
|
|
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)
|
|
|
128,439
|
|
|
|
*
|
|
Clint B. Davis(8)
|
|
|
110,513
|
|
|
|
*
|
|
All current directors and executive officers as a group
(7 persons)(9)
|
|
|
494,852
|
|
|
|
4.2
|
%
|
FORMER EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
|
Craig T. Davenport(10)
|
|
|
83,526
|
|
|
|
3.7
|
%
|
STOCKHOLDERS OWNING MORE THAN 5% OF ENDOCARES STOCK
|
|
|
|
|
|
|
|
|
Frazier Healthcare V, L.P.(11)
Two Union Square, 601 Union Street, Suite 3200
Seattle, Washington 98101
|
|
|
1,721,915
|
|
|
|
14.6
|
%
|
State of Wisconsin Investment Board(12)
P.O. Box 7842
Madison, Wisconsin 53707
|
|
|
1,101,832
|
|
|
|
9.3
|
%
|
Black River Asset Management LLC and affiliates(13)
12700 Whitewater Drive
Minnetonka, Minnesota 55343
|
|
|
983,937
|
|
|
|
8.3
|
%
|
Goldman Capital Management Inc.(14)
320 Park Avenue
New York, New York 10022
|
|
|
773,920
|
|
|
|
6.6
|
%
|
|
|
|
* |
|
Represents beneficial ownership of less than 1% of the class of
securities. |
|
(1) |
|
As of March 11, 2009, 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 March 11, 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. |
|
(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 |
66
|
|
|
|
|
250 shares held by Aaron Goldsmith,
Mr. Goldsmiths son. Also includes 23,334 shares
subject to options that are exercisable within 60 days
after March 11, 2009. |
|
(4) |
|
Consists of 4,666 outstanding shares and 23,334 shares
subject to options that are exercisable within 60 days
after March 11, 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. |
|
(5) |
|
Consists of 66,668 shares subject to options that are
exercisable within 60 days after March 11, 2009. |
|
(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
March 11, 2009. |
|
(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 March 11, 2009. |
|
(8) |
|
Consists of (i) 4,728 outstanding shares and
(ii) 64,236 shares subject to options that are
exercisable within 60 days after March 11, 2009. |
|
(9) |
|
Consists of (i) 57,189 outstanding shares,
(ii) 336,742 shares subject to options exercisable
within 60 days after March 11, 2009 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 filed with the
SEC on January 30, 2009. The Schedule 13G indicates
that the State of Wisconsin Investment Board has sole
dispositive and voting power over all 1,101,832 shares. |
|
(13) |
|
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. |
|
(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. |
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
|
|
|
|
Number of
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Securities to be
|
|
|
|
|
|
Under Equity
|
|
|
|
Issued Upon
|
|
|
Weighted Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in Column
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
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
|
|
67
|
|
|
(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 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.
Changes
in Control
Other than the Merger and the Financing, Endocare is not aware
of any arrangements the operation of which may at a subsequent
date result in a change in control of the registrant.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
We have no related party transactions to report.
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:
|
|
|
|
|
the aggregate amount involved will or may be expected to exceed
$100,000 in any calendar year;
|
|
|
|
Endocare is a participant; and
|
|
|
|
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.
68
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).
Our board of directors has determined that each director other
than Mr. Noonan is independent, as defined in
the NASDAQ listing standards.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The following table shows the fees paid or accrued by us for the
audit and other services provided by Ernst & Young LLP
during 2008 and 2007. In accordance with its charter, our Audit
Committee pre-approves all audit and non-audit services provided
by our independent auditor to ensure that our independent
auditor is not engaged to perform the specific non-audit
services proscribed by law or regulation. Under its charter, our
Audit Committee may delegate pre-approval authority to a member
of the Audit Committee, and the decisions of any Audit Committee
member to whom pre-approval authority is delegated must be
presented to the full audit committee at its next-scheduled
meeting. Our Audit Committee has considered whether the
provision of non-audit services is compatible with maintaining
the independence of our independent auditor and has concluded
that it is.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Audit Fees, including our annual audits, review of our quarterly
reports on
Form 10-Q,
audit of internal controls over financial reporting and filings
with the SEC
|
|
$
|
763,942
|
|
|
$
|
651,300
|
|
Audit-Related Fees
|
|
$
|
110,000
|
(1)
|
|
|
|
|
Tax Fees
|
|
|
|
|
|
|
|
|
All Other Fees
|
|
$
|
|
(2)
|
|
$
|
1,500
|
(2)
|
Totals
|
|
$
|
873,942
|
|
|
$
|
652,800
|
|
|
|
|
(1) |
|
Consists of tax and financial due diligence related to the Galil
Merger. |
|
(2) |
|
Consists of subscription fee for use of EY Online, an online
accounting reference service provided by Ernst & Young
LLP. |
None of the services related to audit-related fees, tax fees and
all other fees described above were approved by our Audit
Committee pursuant to the waiver of pre-approval provisions set
forth in the applicable rules of the SEC.
69
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements:
The Consolidated Financial Statements of the Company are
included in a separate section of this Annual Report on
Form 10-K
commencing on the pages referenced below:
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements of the Company:
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6 to F-37
|
|
|
|
(2)
|
Financial
Statement Schedules:
|
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 2006, 2007 and 2008 is
included in the Consolidated Financial Statements at
page F-38.
All other schedules have been omitted because they are not
applicable, not required or the information is included in the
consolidated financial statements or the notes thereto.
A list of exhibits to this
Form 10-K
is found in the Exhibit Index immediately following the
Schedule II of this
Form 10-K,
which is hereby incorporated by reference herein.
Supplemental
Information
We have not sent an annual report or proxy materials to our
stockholders as of the date of this Annual Report on
Form 10-K.
We intend to provide our stockholders with an annual report and
proxy materials after the filing of this Annual Report on
Form 10-K,
and we will furnish the annual report to the SEC at that time.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
|
|
|
|
|
Endocare, Inc.
|
|
|
|
|
|
|
|
|
|
Date: March 30, 2009
|
|
By: /s/ Michael
R. Rodriguez
Michael
R. Rodriguez
Senior Vice President, Finance
and Chief Financial Officer
|
POWER OF
ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Michael R. Rodriguez and
Clint B. Davis, and each or any one of them, his true and lawful
attorney-in-fact and agent, with full power of substitution, for
him and in his name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on
Form 10-K,
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the SEC, granting unto
said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
R. Rodriguez
Michael
R. Rodriguez
|
|
Senior Vice President, Finance and Chief Financial Officer
(co-principal executive officer and principal financial and
accounting officer)
|
|
March 30, 2009
|
|
|
|
|
|
/s/ Clint
B. Davis
Clint
B. Davis
|
|
Senior Vice President, Legal Affairs, General Counsel and
Secretary (co-principal executive officer)
|
|
March 30, 2009
|
|
|
|
|
|
/s/ John
R. Daniels, M.D.
John
R. Daniels, M.D.
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
/s/ David
L. Goldsmith
David
L. Goldsmith
|
|
Director and Interim Chairman of the Board
|
|
March 30, 2009
|
|
|
|
|
|
/s/ Eric
S. Kentor
Eric
S. Kentor
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
/s/ Terrence
A. Noonan
Terrence
A. Noonan
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
/s/ Thomas
R. Testman
Thomas
R. Testman
|
|
Director
|
|
March 30, 2009
|
71
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, 2007 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2008. 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, 2007 and 2008, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2008, 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.
The accompanying financial statements have been prepared
assuming that Endocare, Inc. will continue as a going concern.
As more fully described in Note 2, Endocare, Inc. has
incurred recurring operating losses and cash flow deficits. In
addition, Endocare, Inc. did not comply with a loan covenant at
December 31, 2008 and January 31, 2009. These
conditions raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans
in regard to these matters also are described in Note 2.
The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
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)
No. 00-19-02,
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, 2008, 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 6, 2009 expressed an unqualified
opinion thereon.
Los Angeles, California
March 6, 2009
F-1
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Product sales
|
|
$
|
15,044
|
|
|
$
|
22,730
|
|
|
$
|
24,375
|
|
Service revenues
|
|
|
12,298
|
|
|
|
6,418
|
|
|
|
6,693
|
|
Other
|
|
|
648
|
|
|
|
539
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,990
|
|
|
|
29,687
|
|
|
|
31,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
12,343
|
|
|
|
9,780
|
|
|
|
9,935
|
|
Research and development
|
|
|
2,781
|
|
|
|
2,555
|
|
|
|
2,346
|
|
Selling and marketing
|
|
|
15,195
|
|
|
|
14,855
|
|
|
|
14,619
|
|
General and administrative
|
|
|
13,107
|
|
|
|
12,506
|
|
|
|
13,078
|
|
Gain on recovery of note receivable
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Investment impairment
|
|
|
|
|
|
|
|
|
|
|
918
|
|
Litigation settlement, net of related legal expenses
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
43,426
|
|
|
|
39,019
|
|
|
|
40,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,436
|
)
|
|
|
(9,332
|
)
|
|
|
(8,584
|
)
|
Interest income, net
|
|
|
452
|
|
|
|
391
|
|
|
|
168
|
|
Interest expense related to common stock warrants
|
|
|
3,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes
|
|
|
(11,268
|
)
|
|
|
(8,941
|
)
|
|
|
(8,416
|
)
|
Tax benefit on continuing operations
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(11,076
|
)
|
|
|
(8,941
|
)
|
|
|
(8,416
|
)
|
Income from discontinued operations, net of taxes
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,765
|
)
|
|
$
|
(8,941
|
)
|
|
$
|
(8,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.10
|
)
|
|
$
|
(0.80
|
)
|
|
$
|
(0.71
|
)
|
Discontinued operations
|
|
$
|
0.03
|
|
|
$
|
|
|
|
$
|
|
|
Weighted-average shares of common stock outstanding
|
|
|
10,084
|
|
|
|
11,122
|
|
|
|
11,902
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-2
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,712
|
|
|
$
|
2,685
|
|
Accounts receivable less allowances for doubtful accounts and
sales returns of $90 and $146 at December 31, 2007 and
2008, respectively
|
|
|
3,530
|
|
|
|
5,076
|
|
Inventories, net
|
|
|
3,022
|
|
|
|
2,559
|
|
Prepaid expenses and other current assets
|
|
|
2,081
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,345
|
|
|
|
10,838
|
|
Property and equipment, net
|
|
|
850
|
|
|
|
628
|
|
Intangibles, net
|
|
|
3,077
|
|
|
|
2,576
|
|
Investments and other assets
|
|
|
989
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,261
|
|
|
$
|
14,117
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,194
|
|
|
$
|
3,638
|
|
Accrued compensation
|
|
|
3,895
|
|
|
|
1,955
|
|
Other accrued liabilities
|
|
|
3,034
|
|
|
|
3,007
|
|
Loan payable
|
|
|
880
|
|
|
|
1,880
|
|
Obligations under capital lease, current portion
|
|
|
28
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,031
|
|
|
|
10,506
|
|
Deferred compensation
|
|
|
227
|
|
|
|
77
|
|
Obligations under capital lease less current portion
|
|
|
84
|
|
|
|
62
|
|
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; 11,761,562 and 11,811,451 issued and outstanding at
December 31, 2007 and 2008, respectively
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
200,663
|
|
|
|
201,632
|
|
Accumulated deficit
|
|
|
(189,756
|
)
|
|
|
(198,172
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
10,919
|
|
|
|
3,472
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
21,261
|
|
|
$
|
14,117
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-3
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,416
|
)
|
|
|
(8,416
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,185
|
|
|
|
|
|
|
|
1,185
|
|
Issuance of shares, net of shares withheld for payroll tax on
stock issuance
|
|
|
51
|
|
|
|
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
(202
|
)
|
Shares cancelled
|
|
|
(2
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
11,811
|
|
|
$
|
12
|
|
|
$
|
201,632
|
|
|
$
|
(198,172
|
)
|
|
$
|
3,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-4
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,765
|
)
|
|
$
|
(8,941
|
)
|
|
$
|
(8,416
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on recovery of note receivable
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Inventory reserve
|
|
|
197
|
|
|
|
(8
|
)
|
|
|
330
|
|
Investment impairment
|
|
|
|
|
|
|
|
|
|
|
918
|
|
Depreciation and amortization
|
|
|
1,576
|
|
|
|
1,126
|
|
|
|
995
|
|
Reserve for uncollectible notes
|
|
|
695
|
|
|
|
|
|
|
|
|
|
Gain on divestitures, net
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
2,845
|
|
|
|
3,901
|
|
|
|
1,185
|
|
Loss on sale of placement units and other fixed assets
|
|
|
47
|
|
|
|
52
|
|
|
|
54
|
|
Extinguishment of payroll tax liabilities
|
|
|
(891
|
)
|
|
|
(121
|
)
|
|
|
|
|
Interest expense on common stock warrants
|
|
|
(3,716
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects from
divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(407
|
)
|
|
|
632
|
|
|
|
(1,546
|
)
|
Inventories
|
|
|
(85
|
)
|
|
|
(985
|
)
|
|
|
(100
|
)
|
Prepaid expenses and other current assets
|
|
|
(83
|
)
|
|
|
291
|
|
|
|
(42
|
)
|
Accounts payable
|
|
|
(1,409
|
)
|
|
|
(1,199
|
)
|
|
|
1,444
|
|
Accrued compensation
|
|
|
281
|
|
|
|
1,217
|
|
|
|
(2,090
|
)
|
Other accrued liabilities
|
|
|
(1,364
|
)
|
|
|
(560
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(13,603
|
)
|
|
|
(4,595
|
)
|
|
|
(8,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection of notes receivable
|
|
|
|
|
|
|
|
|
|
|
2,351
|
|
Purchases of property and equipment
|
|
|
(158
|
)
|
|
|
(109
|
)
|
|
|
(93
|
)
|
Proceeds from divestitures
|
|
|
7,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
7,322
|
|
|
|
(109
|
)
|
|
|
2,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under capital lease obligation
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
Stock options and warrants exercised
|
|
|
108
|
|
|
|
1,125
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
250
|
|
|
|
13,450
|
|
|
|
1,000
|
|
Payments on line of credit
|
|
|
(250
|
)
|
|
|
(12,570
|
)
|
|
|
|
|
Payroll tax on issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(202
|
)
|
Proceeds from sale of stock and warrants, net
|
|
|
(92
|
)
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
16
|
|
|
|
10,605
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(6,265
|
)
|
|
|
5,901
|
|
|
|
(5,027
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
8,108
|
|
|
|
1,811
|
|
|
|
7,712
|
|
Less: Cash of discontinued operations
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,811
|
|
|
$
|
7,712
|
|
|
$
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of inventory to property and equipment for placement at
customer sites
|
|
$
|
587
|
|
|
$
|
334
|
|
|
$
|
350
|
|
Transfer of Cryocare Surgical Systems from property and
equipment to inventory for sale
|
|
|
470
|
|
|
|
103
|
|
|
|
117
|
|
Capital lease obligation
|
|
|
|
|
|
|
112
|
|
|
|
|
|
Adoption of FSP EITF No 00-19-2
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in additional paid-in capital
|
|
|
|
|
|
|
5,680
|
|
|
|
|
|
Reduction of retained earnings
|
|
|
|
|
|
|
(4,373
|
)
|
|
|
|
|
Reduction of common stock warrant liability
|
|
|
|
|
|
|
(1,307
|
)
|
|
|
|
|
Other supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
19
|
|
|
$
|
151
|
|
|
$
|
79
|
|
Income taxes paid
|
|
$
|
55
|
|
|
$
|
69
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements
F-5
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.
Proposed
Merger and Financing
On November 10, 2008, Endocare and Galil Medical, Ltd.
(Galil), a privately held Israeli cryoablation company, entered
into an Agreement and Plan of Merger (the Merger Agreement).
Under the Merger Agreement, Orange Acquisitions Ltd., a newly
formed wholly owned subsidiary of Endocare in Israel, will merge
with and into Galil (the Merger), with Galil continuing after
the Merger as the surviving company and a wholly owned
subsidiary of Endocare. 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.
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 and Endocare will assume the outstanding stock
options of Galil. 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
shares to be deposited into the escrow account (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. The Merger is subject to customary closing
conditions, and subject to receipt of regulatory approvals,
including the closing of the pending investigation by the FTC,
and approvals by Endocare stockholders and Galil shareholders,
we are seeking to close the Merger in the second quarter of 2009.
The Merger Agreement terminates pursuant to its terms if the
Merger has not occurred on or prior to June 30, 2009,
unless the parties agree otherwise. The Merger Agreement
contains certain other termination rights for both Endocare and
Galil, including each partys right to terminate the Merger
Agreement in the event the other partys available cash
drops below $1.0 million for more than ten business days.
Upon termination of the Merger Agreement for specified breaches
and certain similar circumstances, either party may be required
to pay the other party a termination fee of $900,000 and to
reimburse such party for expenses incurred in connection with
the Merger, up to a maximum of $850,000. In addition, upon a
termination of the Merger Agreement that does not trigger an
obligation of a party to pay a termination fee in some
circumstances, a party may nonetheless be required to reimburse
the other party for expenses incurred in connection with the
Merger, up to a maximum of $850,000.
F-6
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Financing). The offering gross
proceeds to Endocare from the Financing are expected to be
$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 in the Financing with a
minimum aggregate purchase price of $12 million and that
Endocares common stock remains listed on the NASDAQ
Capital Market or the Over-The-Counter Bulletin Board. The
issuance of common shares pursuant to the Merger Agreement and
the Purchase Agreement is also subject to approval by our
stockholders.
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 our outstanding common stock and the shareholders of
Galil will own approximately 61.5% of our 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. We are obligated to pay a transaction fee of $800,000 and
a percentage of the Financing proceeds (estimated to be
approximately $265,000) to our investment banker upon the
closing of the Merger and Financing. The Merger will be
accounted for under the Statement of Financial Accounting
Standards (SFAS) No. 141(R), Business Combination.
Purchase consideration will be measured based on the fair value
of equity instruments exchanged on the closing date.
Consideration paid in excess of net tangible and intangible
assets acquired will be recorded as goodwill. If the purchase
consideration is less than the fair value of the net assets
acquired, the difference will be recorded as a gain on the
acquisition date.
We anticipate that the Merger will enhance shareholder value and
solidify the long-term prospects of our cryoablation technology
in the market place. Combining the two companies enhances our
competitive position by providing complementary geographic
markets resulting in larger global reach, a greater customer
base, a complementary technology and patent portfolio as well as
greater financial resources for promoting cryoablation demand
and awareness against more established treatment options and for
developing new applications for our proprietary technologies.
Through consolidation of duplicate facilities, functions and
overhead, Endocare and Galil also expect to achieve greater
economies of scale and near-term and long-term savings by
eliminating duplicative manufacturing, selling, marketing and
administrative costs, redundant regulatory programs and the
costs for separate clinical trials and studies. However, there
is no assurance that the operations of the two companies will be
successfully integrated or that the anticipated growth and
savings will be realized.
|
|
2.
|
Recent
Operating Results and Liquidity
|
Since inception, we have incurred losses from operations and
have reported negative cash flows. As of December 31, 2008,
we had cash and cash equivalents of $2.7 million,
$1.9 million of the cash balance is borrowed under our line
of credit and is payable on a current basis. Net cash used in
operations were $13.6 million, $4.6 million and
$8.1 million in 2006, 2007 and 2008, respectively. We do
not expect to reach positive adjusted Earnings Before Income
Tax, Depreciation and Amortization (EBITDA) on an
annual basis in 2009, both as a stand-alone company and as a
combined company after the proposed Merger discussed in
Note 1, 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. In
addition to working capital needs for our operations and growth
initiatives, we have also incurred significant expenditures
under indemnification obligations for our former officers and
directors through the third quarter of 2008 and have large
outstanding state and local tax liabilities as described below.
In addition, we have incurred legal, accounting and other fees
related to the proposed Merger and Financing.
F-7
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We expect to use existing cash reserves, working capital through
the sale of our products and the proceeds from borrowings on our
line of credit to fund our operations until we complete the
Merger and Financing. We believe the net proceeds from the
Financing combined with expected expense reductions from
eliminating duplicate or redundant facilities, infrastructure
and functions will be adequate to enable the post-merger
combined company to reach positive adjusted EBITDA.
Through December 31, 2008 we have incurred significant
payments under our indemnification agreements with certain
former officers and directors. These costs, net of insurance
recoveries, totaled $0.5 million, $0.8 million and
$1.8 million, in 2006, 2007 and 2008, respectively. As
discussed under Note 12 Commitments
and Contingencies, our obligations to indemnify our
former CFO and former CEO were terminated in August and October
2008, respectively.
We continue to 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, 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 year ended December 31, 2008, we incurred
$2.4 million in relation to potential strategic
transactions including the proposed Merger. We estimate that
$1.1 million in additional legal and accounting expenses
will be incurred in 2009 to complete the Merger and Financing
and we will pay total transaction fees currently estimated at
approximately $1 million from the Financing proceeds to our
investment banker at closing. Expenditures related to the Merger
are recorded as general and administrative expenses as incurred
since the Merger is not expected to occur until 2009, and these
costs are required to be expensed under Statement of Financial
Accounting Standards (SFAS) No. 141(R), Business
Combinations. Fees related to the Financing and share
issuance will be recorded as a reduction of paid in capital.
Consummation of the Merger is expected to continue to require a
significant use of cash including post-closing integration
costs, or, if the Merger is not consummated, any continued
exploration of other strategic alternatives.
We have historically financed our operations and growth through
borrowings and equity financings. Our cash needs are not
entirely predictable. If the Merger and Financing are
consummated, the net proceeds of the Financing will be used to
finance the operations, costs of integration and cash flow needs
of the combined company. The expected gross proceeds to Endocare
of the proposed Financing are expected to be approximately
$16.3 million. The closing of the Financing is subject to
the concurrent closing of the proposed Merger and certain other
conditions including the sale of shares with a minimum aggregate
purchase price of $12.0 million. In the event that our
available cash drops below $1.0 million for more than ten
business days, Galil has the right to terminate the Merger
Agreement.
If additional cash is required before we complete the Merger and
Financing, we may access the remaining funds available under our
$4 million bank credit facility. 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. In 2008, we borrowed an additional $1.0 million
under our credit facility, bringing the total amount currently
outstanding under the credit facility to $1.9 million. As
of December 31, 2008, there was $2.1 million available
for additional borrowing under the credit facility. Our credit
facility contains a minimum tangible net worth covenant measured
on a monthly basis. 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. We cannot access
the bank credit facility if we fail to comply with all covenants
and borrowing conditions. If a waiver is not granted, the bank
can accelerate the outstanding indebtedness under the credit
facility and terminate the credit facility. Under the subjective
acceleration clause, the bank can accelerate payment on all
outstanding borrowings and cease to make further advances to us
in
F-8
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the event of default or if the bank determines in its judgment
that a material adverse change has occurred or will occur.
We were not in compliance with the minimum tangible net worth
covenant as of December 31, 2008 and January 31, 2009,
and received a waiver from the bank with respect to this
noncompliance on February 26, 2009. The waiver also
redefines the minimum tangible net worth requirement and
provides new lower net worth requirements for February through
April 2009. In addition, on February 26, 2009, the credit
facility, which was due to expire on that date, was extended to
May 27, 2009. We are in discussions with the lender to
obtain more permanent long-term financing, although such
financing may not be available or available on terms acceptable
to us. Also, there is no assurance that we will be able to
comply with all borrowing requirements and covenants in future
periods, that we can obtain a waiver if additional events of
default occur or that the lender will not exercise the
subjective acceleration clause.
There is no assurance that the Merger and Financing will occur
and we cannot guarantee the availability of our existing 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. We will continue to
assess the adequacy of our capital resources and may need to use
existing and new sources of capital to finance operations and
the growth of the business. If the Merger and Financing are not
consummated, Endocare, as a stand-alone 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.
Our continuing losses, cashflow deficits and obligations, along
with the contingencies in our funding sources, together raise
substantial doubt about our ability to continue as a going
concern. The accompanying financial statements have been
prepared assuming that we will continue as a going concern and
do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
|
|
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.
F-9
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
As a result of the shift in revenue mix from cryoablation
procedure fees (where we also provide the service component) to
direct 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 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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products
|
|
$
|
13,948
|
|
|
$
|
21,157
|
|
|
$
|
22,864
|
|
Cryocare Surgical Systems
|
|
|
1,096
|
|
|
|
1,573
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,044
|
|
|
$
|
22,730
|
|
|
$
|
24,375
|
|
Cryoablation procedure fees
|
|
$
|
12,298
|
|
|
$
|
6,418
|
|
|
$
|
6,693
|
|
Cardiac royalties
|
|
|
604
|
|
|
|
386
|
|
|
|
511
|
|
Other
|
|
|
44
|
|
|
|
153
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,990
|
|
|
$
|
29,687
|
|
|
$
|
31,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cryoablation disposable products and procedure fees
|
|
$
|
11,541
|
|
|
$
|
9,006
|
|
|
$
|
9,408
|
|
Cryocare Surgical Systems
|
|
|
802
|
|
|
|
774
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,343
|
|
|
$
|
9,780
|
|
|
$
|
9,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-10
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007, and 2008 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.
In 2006, 2007 and 2008, one customer accounted for
28.8 percent, 42.1 percent and 37.0 percent of
total revenues, respectively. This customer accounted for
38.9 percent and 40.4 percent of our accounts
receivable balance as of December 31, 2007 and 2008,
respectively. We derived 94.2 percent, 92.8 percent
and 91.9 percent of revenues from sales in the United
States during this three-year period.
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
2,331
|
|
|
$
|
1,831
|
|
Work in process
|
|
|
227
|
|
|
|
119
|
|
Finished goods
|
|
|
958
|
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
3,516
|
|
|
|
3,046
|
|
Less inventory reserve
|
|
|
(494
|
)
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
3,022
|
|
|
$
|
2,559
|
|
|
|
|
|
|
|
|
|
|
F-11
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $1.0 million, $0.6 million
and $0.5 million in 2006, 2007 and 2008 respectively.
The following is a summary of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Equipment and computers
|
|
$
|
1,899
|
|
|
$
|
1,818
|
|
Cryoablation systems placed at customer sites
|
|
|
5,169
|
|
|
|
5,203
|
|
Furniture and fixtures
|
|
|
1,040
|
|
|
|
1,059
|
|
Leasehold improvements
|
|
|
321
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, at cost
|
|
|
8,429
|
|
|
|
8,401
|
|
Accumulated depreciation and amortization
|
|
|
(7,579
|
)
|
|
|
(7,773
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
850
|
|
|
$
|
628
|
|
|
|
|
|
|
|
|
|
|
We lease 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. Office
equipment included in property and equipment above was
$0.1 million at December 31, 2007 and 2008 and related
depreciation expense was approximately $4,000 and $20,000 for
the years ended December 31, 2007 and 2008, respectively.
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
F-12
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 and no
impairment charge during 2006, 2007 and 2008.
Amortization expense for each of the years ending December 31
will consist of the following amounts:
|
|
|
|
|
2009
|
|
|
501
|
|
2010
|
|
|
501
|
|
2011
|
|
|
501
|
|
2012
|
|
|
501
|
|
2013
|
|
|
302
|
|
Thereafter
|
|
|
270
|
|
|
|
|
|
|
|
|
$
|
2,576
|
|
|
|
|
|
|
Amortization expense from continuing operations totaled
$0.6 million, $0.5 million and $0.5 million in
2006, 2007 and 2008, respectively.
The following is a summary of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(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
|
|
|
(3,915
|
)
|
|
|
(4,416
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
$
|
3,077
|
|
|
$
|
2,576
|
|
|
|
|
|
|
|
|
|
|
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
F-13
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. As further
discussed under Note 11 Collaborative
and Other Agreements, we recorded an impairment charge
of $0.9 million related to our minority investment in a
privately held medical device company in the fourth quarter of
2008.
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 2006, 2007 or 2008.
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.
Advertising
Advertising costs are included in selling and marketing expenses
as incurred and totaled $0.3 million, $0.2 million and
$0.1 million for 2006, 2007 and 2008, 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, 42.1 percent and 37.0 percent of
our revenues for the years ended December 31, 2006, 2007
and 2008, respectively. This same customer accounted for
37.2 percent of our fourth quarter 2008 revenues.
38.9 percent and 40.4 percent of our accounts receivable as
of December 31, 2007 and 2008 were due 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
F-14
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
potential credit losses. There are no significant concentrations
of credit risk with respect to trade receivables except for the
customer referenced above.
Approximately $2.0 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. 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, 2009,
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. Effective September 2008, the
federal government provided a temporary guarantee through
April 30, 2009 on publicly traded or regulated money market
mutual funds that elect to participate in the program. The
program protects the shares of money market fund investors as of
September 19, 2008. The guarantee may be extended through
September 18, 2009 at the discretion of the
U.S. Treasury Department. 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.
In 2003, we acquired a $2.7 million note receivable from
the sale of a Timm Medical product line and in 2006, we received
a $1.4 million note receivable from the divestiture of Timm
Medical. In addition, in 2002, we received a $0.3 million
secured note receivable for certain advances we made to a
shareholder consultant of 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 interest. Also, in August 2008 we negotiated and
collected $750,000 in full satisfaction of the fully-reserved
$2.7 million note receivable. The note from the consultant
shareholder remains outstanding and has been fully reserved. See
Note 7 Dispositions and Discontinued
Operations, and Note 15
Related Party Transactions for further
discussion.
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 and a line of credit. 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 note receivable related
to the sale of Timm Medical generally approximate market rates
for secured obligations of similar terms and maturity. The fair
value of minority investments is based on the value of
comparable publicly traded early stage companies as further
discussed in Note 11 Collaborative and
Other Agreements. The line of credit bears interest at
variable rates and its carrying value approximates fair value.
See Note 13 Fair Value
Measurements for further discussion.
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
F-15
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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, 2007 and 2008
include $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. Basic earnings per share
also include contingently issuable shares (such as fully vested
deferred and restricted stock units) as of the date all
necessary conditions for issuance have been met. 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, 2008, 2007, and 2006, we had 3.4 million,
3.8 million, and 3.3 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 a current obligation.
Stock-Based
Compensation
Our equity awards include stock options, deferred stock units
and restricted stock units. Some awards vest based on continuous
service while others vest based on performance conditions, such
as profitability and sales
F-16
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
goals. Stock options generally have a maximum contractual term
of 10 years and vest pro-rata over four years, which is the
requisite service period.
Stock-based compensation expense is accounted for under SFAS
No.123R (revised), Share-Based Payment (SFAS
No. 123R), which requires companies to measure and
recognize in the financial statements the cost of services
received in exchange for awards of equity instruments to
employee, directors and consultants. The fair value of
share-based awards is estimated at the grant date using the
Black Scholes option pricing model, and the portion that is
ultimately expected to vest is recognized as compensation
expense over the explicit or implicit service period. Deferred
stock units and restricted stock units are accounted for similar
to restricted stock grants and are measured based on the trading
price of the underlying common shares at the date of grant. 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.
We use the Black-Scholes standard option pricing model and the
single option award approach for awards with graded vesting 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. The following are the significant
assumptions and estimation methodologies in the Black-Scholes
valuation calculations in accordance with the requirements of
SFAS No. 123R and Staff Accounting Bulletin (SAB)
No. 107, Share-Based Payment.
a. Expected term Through December 31,
2007, we utilized the shortcut method to estimate
the expected term for plain vanilla options as
permitted under SAB 107 (an expected term based on the mid
point between the vesting date and the end of the contractual
term). We converted to company-specific experience on
January 1, 2008. The expected term for grants during 2006
to 2008 averaged 6.25 years. The change in methodology did
not have a significant effect on the recorded expense.
b. Expected volatility We use historical
volatility (based on daily trading prices) to estimate the fair
value of options granted. Volatility is measured over a
sequential period that approximates the expected term of the
equity awards. 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. Average
volatility for options granted in 2006, 2007 and 2008 was
approximately 69.5 percent, 66.6 percent and 70.1
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 was not available.
c. Expected Forfeitures Stock-based
compensation expense is recorded net of expected forfeitures.
Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. We estimate an average forfeiture rate of
approximately 25.0 percent based on historical experience
from 2001 through December 31, 2008. We periodically assess
the forfeiture rate. Changes in estimates is recorded in the
period of adjustment.
F-17
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
d. Risk-Free Interest Rate The risk-free rate
is based on implied yields in effect at the time of the option
grant on U.S. Treasury zero-coupon bonds with remaining
terms equal to the expected term of the employee stock awards.
e. Dividends We have never paid any cash
dividends on our common stock and do not anticipate paying any
cash dividends in the foreseeable future. As such, our expected
dividend yield is zero.
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 was $2.8 million,
$3.9 million and $1.2 million in 2006, 2007 and 2008,
respectively. Stock-based compensation expense is included in
the following line items in the consolidated statements of
operations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
56
|
|
|
$
|
86
|
|
|
$
|
48
|
|
Research and development
|
|
|
107
|
|
|
|
94
|
|
|
|
25
|
|
Selling and marketing
|
|
|
630
|
|
|
|
702
|
|
|
|
506
|
|
General and administrative
|
|
|
2,052
|
|
|
|
3,019
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,845
|
|
|
$
|
3,901
|
|
|
$
|
1,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 assessment, we recorded $0.6 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 and determined that it was no longer
probable the profitability goals would be met during the
performance measurement period and as such, the related
performance based awards would not vest. In conjunction with
this change in assessment, we recorded a $1.2 million
reduction in stock-based compensation expense in the third
quarter of 2008 to reverse the expense previously recorded.
$0.6 million of this amount relates to expenses recorded in
2007.
In addition, we recorded a $0.1 million reduction in
expenses for equity awards forfeited by our former CEO who
resigned in September 2008.
As of December 31, 2008, there was $0.9 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 0.7 years. Unrecognized compensation for
restricted stock units was $1.7 million at
December 31, 2008 (assuming that all service and
performance milestones will be met) and will be recognized over
a weighted average period of 0.9 years. As of
December 31, 2006, 2007 and 2008 stock compensation cost
capitalized as inventory was insignificant.
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4.
|
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 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
F-18
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
are in the process of evaluating 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,
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
will adopt SFAS No. 141(R) and SFAS No. 160
as of January 1, 2009, as required. At the effective time
of the Merger, the accounting and business combination
transaction will be recorded in accordance with both
pronouncements. As of December 31, 2008 we have incurred
$2.4 million related to legal and financial advisory
expenses to evaluate potential strategic opportunities including
the Merger. 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 SFAS No. 141(R).
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 Capital Market.
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 will be applying FSP
FAS No. 142-3
on an ongoing basis to intangible assets acquired in our merger
with Galil that we are seeking to close in the second quarter of
2009.
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.
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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
F-19
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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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 Healthcare V, L.P.
(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 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 Fund II, LLC (Fusion
Capital). 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 November 6, 2008, we had sold 293,397 shares
issued to Fusion Capital for gross proceeds of
$1.6 million. The most recent sale occurred in May 2007 and
no additional shares were issued 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
F-20
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 November 6, 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 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 and
recorded as general and administrative expense,
$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. During 2006, we recorded a
non-cash
F-21
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reduction to interest expense of $3.7 million, which
represents a decrease 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 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.
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|
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. 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). 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. The note and unpaid accrued
interest totaling $1.6 million was paid in full on
February 11, 2008. The note receivable was included 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.
F-22
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
|
|
|
Revenues for Timm Medical were $1.0 million for the period
from January 1 to February 10, 2006. The operations of Timm
Medical are classified as discontinued operations in 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
SurgiFrosttm
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
SurgiFrosttm
system during the period 2004 to 2012. The royalty payments are
recorded in the periods earned. Royalty income was
$0.6 million, $0.4 million and $0.5 million in
2006, 2007 and 2008, 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 bore interest at 7.5 percent and was secured by the
assets sold. As amended in
F-23
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
March 2004, the note required quarterly payments of $45,000
beginning March 31, 2004, increasing to $60,000 for the
quarter ended December 31, 2005. Amounts which remained
outstanding at December 31, 2005 were payable at least
$60,000 per quarter until the outstanding principal and accrued
interest were 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 and
provided a full valuation allowance on the note. 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, would be reported as gain in
the period received.
The note was transferred from Timm Medical to Endocare prior to
the sale of Timm Medical in 2006. Collections during 2006, 2007
and 2008 were $0.2 million, $0.2 million and
$0.1 million respectively and were applied to accrued
interest. During August 2008, we negotiated and accepted a
$750,000 payment from SRS in full satisfaction of the note and
recorded this amount as gain on recovery of note receivable.
|
|
8.
|
Stock-Based
Compensation
|
As of December 31, 2008, we have four stock-based employee
compensation plans and two non-employee director stock-based
compensation plans.
The following tables summarize our option activities:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Options
|
|
|
Per Option
|
|
|
Outstanding, beginning of year
|
|
|
1,757,962
|
|
|
$
|
12.75
|
|
Granted
|
|
|
78,407
|
|
|
|
3.22
|
|
Cancelled/forfeited
|
|
|
(480,886
|
)
|
|
|
12.29
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
1,355,483
|
|
|
|
12.36
|
|
Exercisable, end of year
|
|
|
1,148,015
|
|
|
|
13.38
|
|
The weighted average remaining contractual term of options
outstanding and options exercisable at December 31, 2008 is
5.81 years and 5.42 years, respectively. The aggregate
intrinsic value of options outstanding and options exercisable
at December 31, 2008 is zero. 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 31,2008, for those awards that have an exercise
price currently below the quoted price. In each of the years
ended December 31, 2006, 2007 and 2008, the aggregate
intrinsic value of options exercised under the stock option
plans was $0.1 million, $0.2 million and zero
respectively. Cash received from option exercises under all
stock-based payment arrangements for the years ended
December 31, 2006, 2007 and 2008 was $0.1 million,
$1.1 million and zero, respectively. The weighted average
fair value of our options granted at the grant date was
approximately $5.69 in 2006, $3.53 in 2007 and $2.02 in 2008.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Stock volatility
|
|
|
0.70
|
|
|
|
0.67
|
|
|
|
0.70
|
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.7
|
%
|
|
|
2.80
|
%
|
Expected life in years
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Stock dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total fair value of shares vested during 2008 is
approximately equal to the $1.3 million recorded as stock
compensation expense during 2008.
Stock
Units
During 2007 and 2008, the Company issued 0.5 million and
0.1 million restricted stock units at a weighted average
grant date fair value of $5.76 and $3.83, respectively, all of
which are non-vested and 0.4 million are outstanding at
December 31, 2008. No restricted stock units were granted
or outstanding in 2006.
As of December 31, 2007 and 2008, the Company had 81,589
and 79,301 deferred stock units outstanding with a weighted
average grant date fair value of $6.66 in 2007 and $7.00 in 2008
respectively, under the employee deferred stock unit program. As
of December 31, 2007 and 2008, we had 56,800 and 165,982
deferred stock units outstanding with a weighted average grant
date fair value of $6.78 in 2007 and $2.86 in 2008 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 31,2008,
based on the difference between the share price on the date of
grant and at December 31, 2008 is zero.
|
|
9.
|
Equity
Incentive Plans
|
Share-based
payments
As of December 31, 2008, 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
employee is terminated without cause within 12 months. As
of December 31, 2008, there were outstanding under the 2004
Stock Incentive Plan options and restricted stock units to
purchase 1,246,708 shares of our common stock and 702,548
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
F-25
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008, there
were outstanding under the 1995 Stock Plan options to purchase
425,583 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, 2008 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. There was no premium for
2008. 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, 2007 and
2008, the date of grant was June 23, 2006, March 30,
2007 and April 4, 2008, respectively, on which dates the
closing stock price was $8.10, $6.66 and $7.00, 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, 2008, 79,301
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
F-26
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008, 165,982
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, we also issued
options to certain executives outside the option plans. on
March 3, 2003, we granted options to purchase
250,000 shares of common stock to our then President and
Chief Operating Officer (the former President). 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 vested on
the first anniversary with the balance ratably over three years.
When the former officer separated from the Company in September
2006, 145,833 of the 166,667 options had vested and the 83,333
unvested options which would cliff vest on the fifth anniversary
were forfeited. 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. During the three months ended December 31, 2007,
the former President exercised the 166,667 options for
$1.1 million in cash ($6.75 per share).
On December 15, 2003, we granted 333,333 options to
purchase common stock to our former Chief Executive Officer. The
options were granted at $12.81 per share; 33,333 of these
options were 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 vested immediately with the balance ratably over three
years. These milestones were not met at the time our former CEO
resigned on September 30, 2008. We recorded a
$0.1 million reduction in the stock-based compensation
expense during the third and fourth quarter of 2008 to reverse
stock-based compensation expense related to the forfeited
options.
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
F-27
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
2008, 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,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Federal
|
|
$
|
(163
|
)
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(192
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 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.
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:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
454
|
|
|
$
|
500
|
|
Nondeductible reserves and accruals
|
|
|
3,077
|
|
|
|
2,015
|
|
Stock-based compensation
|
|
|
1,999
|
|
|
|
2,065
|
|
Other
|
|
|
91
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,621
|
|
|
|
4,672
|
|
Valuation allowance
|
|
|
(5,621
|
)
|
|
|
(4,672
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-28
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computed expected tax benefit
|
|
$
|
(3,831
|
)
|
|
$
|
(3,042
|
)
|
|
$
|
(2,861
|
)
|
Increase in valuation allowance
|
|
|
4,296
|
|
|
|
2,678
|
|
|
|
1,602
|
|
State taxes
|
|
|
(19
|
)
|
|
|
1
|
|
|
|
0
|
|
Warrants
|
|
|
(1,264
|
)
|
|
|
|
|
|
|
|
|
Merger expenses
|
|
|
|
|
|
|
|
|
|
|
833
|
|
Stock-based compensation
|
|
|
284
|
|
|
|
292
|
|
|
|
348
|
|
Other nondeductible expenses
|
|
|
342
|
|
|
|
71
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense (benefit)
|
|
$
|
(192
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we have federal and California net
operating loss carryforwards of $131.1 million and
$34.3 million, respectively. We also have approximately
$23.5 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
$0.9 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 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 2004
through 2007 remain open to examination by the major taxing
jurisdictions to which we are subject.
|
|
11.
|
Collaborative
and Other Agreements
|
Minority
Investment in Sanarus Medical, Inc.
We hold a minority interest in Sanarus Medical, Inc. a privately
held medical device company. The investment had a carrying value
of $0.9 million and was included in investments and other
assets. At December 31, 2007 and 2008, our voting interest
was approximately 4.1 percent and 4.3 percent,
respectively, on an as-converted fully
F-29
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
diluted basis. Since we do not exercise significant influence
over the operations of Sanarus (Sanarus), the
investment is accounted for on the cost method.
Current capital market conditions have adversely affected small
and start-up
companies which require continual access to financing for
operations and growth. The independent auditors report for
the 2007 financial statements of Sanarus included an explanatory
paragraph, to the effect that there is substantial doubt about
Sanaruss ability to continue as a going concern. In the
fourth quarter of 2008, we determined that the fair value of our
investment has declined below the carrying value and that the
impairment was other-than-temporary. As such, we have recorded
an impairment charge of $0.9 million. Our determination is
based on fund raising results by the investee in the fourth
quarter of 2008, comparable valuation of similar companies,
Sanaruss financial condition and liquidity constraints and
uncertainty regarding access to credit. We are also considering
divesting our investment though no expression of interest has
been received. We have utilized Level 2 inputs in estimating the
fair value of our minority equity interest at December 31,
2008, including market capitalizations and market multiples of
publicly traded comparable companies. Prior to 2008, there were
no identified indicators of impairment or events that adversely
affected Sanarus. In accordance with SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, we
did not estimate a fair value for this investment in 2007 and
prior periods since the value of privately held early stage
companies was not readily determinable and it was not
practicable to develop such estimates.
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 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
$0.5 million of research and development costs in each of
the three years ended December 31, 2008, 2007 and 2006 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.
F-30
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2012. 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 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, 2009
|
|
$
|
34
|
|
|
$
|
612
|
|
2010
|
|
|
34
|
|
|
|
168
|
|
2011
|
|
|
34
|
|
|
|
6
|
|
2012
|
|
|
|
|
|
|
2
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
102
|
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense during 2006, 2007 and 2008 was $0.8 million,
$0.7 million and $0.7 million, respectively.
Employment
Agreements
We have entered into employment agreements with certain
executives which provide for annual base salaries and incentive
payments of up to 40% 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.
On October 14, 2008, we entered into an agreement with our
former CEO Paul W. Mikus that terminated 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 provided that our
obligation to pay for legal costs incurred by our former CEO in
August 2008 and September 2008 was limited to the
$0.5 million that we received from the former CEO as
restitution.
Indemnification
Agreements
We have entered into customary indemnification agreements with
certain officers and directors against expenses, judgments,
fines, and amounts paid in settlement by them in connection with
litigation or regulatory proceedings when they act in such
capacities. The terms of the indemnification requires that such
officer or director
F-31
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
has acted in good faith, or not opposed to, the best interests
of the corporation and, with respect to any criminal action has
no reasonable cause to believe his or her conduct was unlawful.
Employee
Benefit Plans
We have 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 2006, 2007 or 2008.
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 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 (including our former CEO and our former CFO)
and certain 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 the former CEO and CFO related to
our historical financial reporting issues and related matters,
which were the subject of the aforementioned investigations. On
April 9, 2007, these two former officers were indicted by a
federal grand jury in Orange County, California for multiple
counts of felony. Although we terminated both officers in 2003,
we were contractually obligated to advance legal fees for their
defense under indemnification agreements. As further discussed
below, our directors and officers liability
insurance had funded litigation settlements and losses related
to these matters, including defense costs for these and other
former officers and directors. As of March 31, 2008, we had
exhausted all remaining available coverage under the applicable
excess directors and officers liability policy and began
funding the payments with our cash reserves.
Under a prior agreement, the former CEO and the former CFO each
agreed to repay us severance and related amounts they received
upon separation in 2003 $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.
In August and October 2008, we entered into agreements with the
former CFO and former CEO, respectively, pursuant to which their
indemnification agreements were terminated in exchange for our
waiver of the 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. The
agreement with the former CEO in October 2008 also provides that
our obligation to pay for his legal costs incurred in August
2008 and September 2008 is limited to the amount, if any,
F-32
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that we receive from the former CEO as restitution. Under this
provision, we received $0.5 million from our former CEO as
restitution payments in October, 2008 and applied the funds to
his legal costs in August and September 2008. These former
officers have recently entered into plea agreements with the DOJ
to resolve the criminal cases against them.
The United States Federal Trade Commission (FTC) has opened an
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 are in
the process of providing the FTC with information and materials.
We cannot provide any assurance that the FTCs
investigation will not delay or prevent the consummation of the
Merger.
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. On December 6, 2002,
Frederick Venables filed a purported derivative action against
us and certain former officers and a former director in
California. Both actions were based upon allegations that the
defendants issued false and misleading statements regarding our
revenues and expenses in press releases and SEC filings. In late
2004, we executed settlement agreements for both actions in
exchange for the plaintiffs release of all claims. Under
the settlement agreements, we paid a total of $9.45 million
in cash, which was funded by our directors and
officers liability insurance carriers prior to
December 31, 2004.
The settlements referenced above, the related legal and defense
costs and costs under our indemnification agreements with former
officers and 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. All coverage has been exhausted as
of March 31, 2008.
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 to dismiss the litigation and
to grant mutual releases to each party. In addition, KPMG paid
us a settlement amount of $1.0 million and returned to us
audit fees paid in the amount of $0.2 million on
October 11, 2007. Under a preexisting contingency fee
agreement, we were 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 2007
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.
F-33
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Fair
Value Measurements
|
We adopted the provisions of SFAS No. 157, Fair
Value Measurements, effective January 1, 2008, for our
financial assets and liabilities. In February 2008, the FASB
issued FSP
No. 157-2,
Effective Date of FASB Statement No. 157, which
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).
Therefore, we adopted the provisions of SFAS No. 157
only with respect to financial assets and liabilities, as well
as any other assets and liabilities carried at fair value. 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.
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 December 31, 2008, we had
$2.0 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. 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. As
discussed in Note 11 Collaborative and
Other Agreements, we have utilized Level 2 inputs
in 2008 to estimate the fair value of our minority investment in
a privately held medical device company. We do not hold any
Level 3 instruments.
We do not currently expect the application of the fair value
framework established by SFAS No. 157 to non-financial
assets and liabilities measured on a nonrecurring basis to have
a material impact on the consolidated financial statements.
However, we will continue to assess the potential effects of
SFAS No. 157 as additional guidance becomes available.
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 many
financial instruments and certain other items at fair value.
Entities that choose the fair value option will recognize the
unrealized gains and losses on items for which the fair value
option was elected in earnings at each subsequent reporting
date. 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).
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
F-34
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$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 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 December 31, 2008 and December 31,
2007, there was $1.9 million and $0.9 million
respectively, outstanding on the line of credit. The weighted
average interest rate at December 31, 2007 and 2008 was
10.18% and 6.60% respectively.
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, 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.
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 requirements
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.
As of December 31, 2008 and January 31, 2009, we were
not in compliance with the minimum net worth covenant. On
February 26, 2009, we received a waiver from the bank with
respect to this noncompliance. The amendment and waiver revises
the definition of tangible net worth as a Base
Amount plus 25% of all consideration received after
January 1, 2009 from equity issuances and the principal
amount of subordinated
F-35
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
debt, plus 25% of the Companys positive consolidated net
income in each quarter ending after January 1, 2009. The
amendment also provides new lower Base Amounts for February,
March and April 2009. On February 26, 2009 the agreement
was further extended to expire on May 27, 2009. Endocare is
in discussions with the lender to obtain more permanent
long-term financing.
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.
|
|
15.
|
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 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 intend to
enter into 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 debts 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.
|
|
16.
|
Quarterly
Results of Operations (Unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2008 and 2007
(in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
Revenues
|
|
$
|
8,143
|
|
|
$
|
7,930
|
|
|
|
7,599
|
|
|
$
|
7,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
2,505
|
|
|
$
|
2,347
|
|
|
$
|
2,275
|
|
|
$
|
2,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss(a)
|
|
$
|
(1,690
|
)
|
|
$
|
(2,032
|
)
|
|
$
|
(921
|
)
|
|
$
|
(3,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.31
|
)
|
Weighted average shares of common stock outstanding
basic and diluted
|
|
|
11,785
|
|
|
|
11,802
|
|
|
|
11,972
|
|
|
|
12,044
|
|
F-36
ENDOCARE,
INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Revenues
|
|
$
|
7,546
|
|
|
$
|
7,901
|
|
|
$
|
7,326
|
|
|
$
|
6,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
2,622
|
|
|
$
|
2,713
|
|
|
$
|
2,171
|
|
|
$
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss(a)
|
|
$
|
(3,259
|
)
|
|
$
|
(2,264
|
)
|
|
$
|
(984
|
)
|
|
$
|
(2,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
(a) |
|
Net loss in the fourth quarter of 2008 includes a
$0.9 million impairment charge in the fourth quarter to
fully reserve for our investment in a privately held medical
device company. See Note 11
Collaborative and Other Agreements for
further discussion. |
Net loss in the third quarter of 2008 includes a
$0.8 million gain on recovery of note receivable. See
Note 7 Dispositions and Discontinued
Operations.
Net loss in the third quarter of 2007 includes a
$0.7 million gain on litigation settlement. See
Note 12 Commitments and
Contingencies.
F-37
ENDOCARE,
INC. AND SUBSIDIARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the
|
|
|
Additions
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Charges to
|
|
|
|
|
|
|
|
|
the End of
|
|
|
|
the Period
|
|
|
Operations
|
|
|
Other
|
|
|
Deductions
|
|
|
the Period
|
|
|
|
(In thousands)
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
70
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
(22
|
)
|
|
$
|
84
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
84
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
90
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts and Sales Returns
|
|
$
|
90
|
|
|
$
|
76
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
146
|
|
Amounts exclude discontinued operations.
F-38
EXHIBIT INDEX
The Merger Agreement and Stock Purchase Agreement, which have
been filed as exhibits to this Annual Report on
Form 10-K,
have been included as exhibits to provide you with information
regarding the terms of the transactions described therein and
are not intended to provide any other factual information or
disclosure about Endocare, Galil or the investors in the
Financing. The representations, warranties and covenants
contained in the Merger Agreement and Stock Purchase Agreement
were made only for purposes of such agreements and as of a
specific date, were solely for the benefit of the parties to
such agreements, 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. Moreover, information concerning the
subject matter of the representations and warranties may change
after the dates of the Merger Agreement and the Stock Purchase
Agreement, which subsequent information may or may not be fully
reflected in Endocares public disclosures. Investors are
not third-party beneficiaries under the Merger Agreement or the
Stock Purchase Agreement and, in light of the foregoing reasons,
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, Orange
Acquisitions, Ltd., the investors in the Financing or any of
their respective subsidiaries or affiliates. Information
regarding Endocare is provided elsewhere in this Annual Report
on
Form 10-K
and Endocares other SEC filings, which are available at
www.endocare.com and on the SECs website at
www.sec.gov.
|
|
|
|
|
|
|
|
|
|
|
2
|
.1(1)
|
|
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.
|
|
|
|
|
|
|
2
|
.2(2)
|
|
$1,425,000 Secured Convertible Promissory Note, dated as of
February 10, 2006, from Plethora Solutions Holdings plc to
Endocare.
|
|
|
|
|
|
|
2
|
.3(3)
|
|
Agreement and Plan of Merger, dated as of November 10, 2008, by
and among Endocare, Orange Acquisitions Ltd. and Galil Medical
Ltd.
|
|
|
|
|
|
|
3
|
.1(4)
|
|
Restated Certificate of Incorporation.
|
|
|
|
|
|
|
3
|
.2(4)
|
|
Certificate of Amendment of Restated Certificate of
Incorporation of Endocare.
|
|
|
|
|
|
|
3
|
.3(5)
|
|
Amended and Restated Bylaws of Endocare.
|
|
|
|
|
|
|
3
|
.4(6)
|
|
Amendment No. 1 to Amended and Restated Bylaws of Endocare.
|
|
|
|
|
|
|
3
|
.2(4)
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of Endocare.
|
|
|
|
|
|
|
4
|
.1(7)
|
|
Form of Stock Certificate.
|
|
|
|
|
|
|
4
|
.2(8)
|
|
Form of Series A Warrant.
|
|
|
|
|
|
|
4
|
.3(8)
|
|
Form of Series B Warrant.
|
|
|
|
|
|
|
4
|
.4(9)
|
|
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.
|
|
|
|
|
|
|
4
|
.5(10)
|
|
Amendment No. 1 to Rights Agreement, dated as of September 24,
2005, between Endocare and U.S. Stock Transfer Corporation.
|
|
|
|
|
|
|
10
|
.1(11)
|
|
Lease Agreement, dated as of November 26, 2001, by and between
Endocare and The Irvine Company.
|
|
|
|
|
|
|
10
|
.2(11)
|
|
Form of Indemnification Agreement by and between Endocare and
its directors.
|
|
|
|
|
|
|
10
|
.3(11)
|
|
Form of Indemnification Agreement by and between Endocare and
its executive officers.
|
|
|
|
|
|
|
10
|
.4(12)
|
|
1995 Director Option Plan (as amended and restated through
March 2, 1999).
|
|
|
|
|
|
|
10
|
.5(13)
|
|
1995 Stock Plan (as amended and restated through December 30,
2003).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.6(14)
|
|
Employment Agreement, dated as of December 15, 2003, by and
between Endocare and Craig T. Davenport.
|
|
|
|
|
|
|
10
|
.7(15)
|
|
Employment Agreement, dated as of August 11, 2004, by and
between Endocare and Michael R. Rodriguez.
|
|
|
|
|
|
|
10
|
.8(16)
|
|
2004 Stock Incentive Plan.
|
|
|
|
|
|
|
10
|
.9(17)
|
|
2004 Non-Employee Director Option Program under 2004 Stock
Incentive Plan.
|
|
|
|
|
|
|
10
|
.10(17)
|
|
Form of Award Agreement Under 2004 Stock Incentive Plan.
|
|
|
|
|
|
|
10
|
.11(18)
|
|
Confidential Settlement Agreement and Release, dated as of
February 18, 2005, by and between Endocare and Great American
E&S Insurance Company.
|
|
|
|
|
|
|
10
|
.12(8)
|
|
Purchase Agreement, dated as of March 10, 2005, by and between
Endocare and the Investors (as defined therein).
|
|
|
|
|
|
|
10
|
.13(8)
|
|
Registration Rights Agreement, dated as of March 10, 2005, by
and between Endocare and the Investors (as defined therein).
|
|
|
|
|
|
|
10
|
.14(19)
|
|
First Amendment to Employment Agreement with Craig T. Davenport,
dated as of April 28, 2005.
|
|
|
|
|
|
|
10
|
.15(2)
|
|
Loan and Security Agreement, dated as of October 26, 2005, by
and among Endocare, Timm Medical Technologies, Inc. and
Silicon Valley Bank.
|
|
|
|
|
|
|
10
|
.16(2)
|
|
Commercialization Agreement, dated as of November 8, 2005, by
and between Endocare and CryoDynamics, LLC.
|
|
|
|
|
|
|
10
|
.17(20)
|
|
Employment Agreement, dated as of January 17, 2006, by and
between Endocare and Clint B. Davis.
|
|
|
|
|
|
|
10
|
.18(21)
|
|
Amendment to Loan Documents, dated as of April 24, 2006, by and
between Endocare and Silicon Valley Bank.
|
|
|
|
|
|
|
10
|
.19(22)
|
|
Amendment to Loan Documents, dated as of February 10, 2006,
between Endocare, Timm Medical Technologies, Inc. and Silicon
Valley Bank.
|
|
|
|
|
|
|
10
|
.20(23)
|
|
Employee Deferred Stock Unit Program, effective as of May 18,
2006.
|
|
|
|
|
|
|
10
|
.21(23)
|
|
Non-Employee Director Deferred Stock Unit Program, effective as
of May 18, 2006.
|
|
|
|
|
|
|
10
|
.22(24)
|
|
First Amendment to Lease, dated as of May 19, 2006, between
Endocare and The Irvine Company.
|
|
|
|
|
|
|
10
|
.23(24)*
|
|
Customer Quote, dated as of January 9, 2006, to Advanced Medical
Partners, Inc.
|
|
|
|
|
|
|
10
|
.24(24)*
|
|
Amended and Restated Endocare Service Agreement, dated as of
January 9, 2006, between Endocare and Advanced Medical Partners,
Inc.
|
|
|
|
|
|
|
10
|
.25(25)
|
|
Common Stock Purchase Agreement, dated as of October 25, 2006,
by and between Endocare and Fusion Capital Fund II, LLC.
|
|
|
|
|
|
|
10
|
.26(25)
|
|
Registration Rights Agreement, dated as of October 25, 2006, by
and between Endocare and Fusion Capital Fund II, LLC.
|
|
|
|
|
|
|
10
|
.27(26)
|
|
Non-Prosecution Agreement, dated as of July 18, 2006, by and
between Endocare and the Department of Justice.
|
|
|
|
|
|
|
10
|
.28(26)
|
|
Consent to Entry of Judgment, dated as of July 14, 2006, in
favor of the Securities and Exchange Commission.
|
|
|
|
|
|
|
10
|
.29(27)
|
|
Form of Retention Agreement.
|
|
|
|
|
|
|
10
|
.30(28)
|
|
Amendment to Loan Documents, dated as of December 22, 2006, by
and between Endocare, Inc. and Silicon Valley Bank.
|
|
|
|
|
|
|
10
|
.31(29)
|
|
Standard Form of RSU Agreement under 2004 Stock Incentive Plan.
|
|
|
|
|
|
|
10
|
.32(29)
|
|
Form of RSU Agreement used for Mr. Davenport under 2004 Stock
Incentive Plan.
|
|
|
|
|
|
|
10
|
.33(29)
|
|
Summary Description of 2007 MICP.
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.34(30)
|
|
Amendment to Loan Documents, dated as of February 23, 2007, by
and between Endocare and Silicon Valley Bank.
|
|
|
|
|
|
|
10
|
.35(31)
|
|
Common Stock Subscription Agreement, dated as of May 24, 2007,
by and between Endocare and Frazier Healthcare V, L.P.
|
|
|
|
|
|
|
10
|
.36(31)
|
|
Registration Rights Agreement, dated as of May 25, 2007, by and
between Endocare and Frazier Healthcare V, L.P.
|
|
|
|
|
|
|
10
|
.37(32)
|
|
First Amendment to Employee Deferred Stock Unit Program, dated
August 6, 2007.
|
|
|
|
|
|
|
10
|
.38(32)
|
|
First Amendment to Non-Employee Director Deferred Stock Unit
Program, dated August 6, 2007.
|
|
|
|
|
|
|
10
|
.39(33)
|
|
Memorandum of Understanding, dated September 11, 2007, between
Endocare and KPMG LLP.
|
|
|
|
|
|
|
10
|
.40(34)
|
|
Description of Non-Employee Director Compensation, as amended on
December 20, 2007.
|
|
|
|
|
|
|
10
|
.41(34)
|
|
Non-Employee Director RSU Program.
|
|
|
|
|
|
|
10
|
.42(34)
|
|
Form of RSU Agreement under Non-Employee Director RSU Program.
|
|
|
|
|
|
|
10
|
.43(35)
|
|
Amendment to Loan Documents, dated as of February 8, 2008, by
and between Endocare and Silicon Valley Bank.
|
|
|
|
|
|
|
10
|
.44(36)
|
|
Third Amendment to Employment Agreement, dated February 28,
2008, between Craig T. Davenport and Endocare.
|
|
|
|
|
|
|
10
|
.45(36)
|
|
Summary Description of 2008 MICP.
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
10
|
.47(3)
|
|
Form of Voting Agreement between Endocare and certain
shareholders of Galil Medical Ltd.
|
|
|
|
|
|
|
21
|
.1(37)
|
|
Subsidiaries of Endocare.
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm to Endocare.
|
|
|
|
|
|
|
24
|
.1
|
|
Power of Attorney (included on the signature page to this Form
10-K).
|
|
|
|
|
|
|
31
|
.1
|
|
Certification under Section 302 of the
Sarbanes-Oxley
Act of 2002 for Clint B. Davis.
|
|
|
|
|
|
|
31
|
.2
|
|
Certification under Section 302 of the
Sarbanes-Oxley
Act of 2002 for Michael R. Rodriguez.
|
|
|
|
|
|
|
32
|
.1
|
|
Certification under Section 906 of the
Sarbanes-Oxley
Act of 2002 for Clint B. Davis.
|
|
|
|
|
|
|
32
|
.2
|
|
Certification under Section 906 of the
Sarbanes-Oxley
Act of 2002 for Michael R. Rodriguez.
|
|
|
|
|
|
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. |