As filed with the Securities and Exchange Commission on April 10, 2009

Registration No. 333-156921

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 3

to

 

Form S-4

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

ENDOCARE, INC.

(Exact name of registrant as specified in its charter)

 

 

201 Technology Drive

Irvine, California 92618

(949) 450-5400

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Michael R. Rodriguez

Senior Vice President, Finance and Chief Financial Officer

Endocare, Inc.

201 Technology Drive

Irvine, California 92618

(949) 450-5400

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement and the satisfaction or waiver of all other conditions to the Merger described in the proxy statement/prospectus.

 

If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED April 10, 2009

 

 

PROXY STATEMENT/PROSPECTUS OF ENDOCARE, INC.

 

To the Stockholders of Endocare, Inc. and the Shareholders of Galil Medical Ltd.:

 

On November 10, 2008, Endocare, Inc. (“Endocare”), and Galil Medical Ltd. (“Galil”), entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) pursuant to which Orange Acquisitions Ltd., a wholly owned subsidiary of Endocare (“Merger Sub”), will merge with and into Galil, with Galil continuing after the merger as the surviving company and a wholly owned subsidiary of Endocare (the “Merger”).

 

At the effective time of the Merger, each outstanding ordinary share of Galil will be converted into the right to receive the number of shares of Endocare common stock equal to the product of (1) the sum of the number of shares of Endocare common stock outstanding and the number of shares of Endocare common stock subject to in-the-money options immediately prior to the effective time of the Merger and (2) the exchange ratio of 0.923077, divided by the total number of Galil ordinary shares outstanding and the number of ordinary shares of Galil subject to in-the-money options immediately prior to the effective time of the Merger. It is expected that 11,174,898 shares of Endocare common stock will be issued in the Merger, including the shares that will be deposited into escrow pursuant to the Merger Agreement (the “Escrow Shares”). The exact conversion ratio cannot be calculated until immediately prior to the effective time of the Merger, but it is expected that approximately 33.0 ordinary shares of Galil will be converted into one share of Endocare common stock. Immediately following the effective time of the Merger and attributing ownership to Galil’s shareholders of the Escrow Shares, Galil’s shareholders will own approximately 48%, and Endocare’s existing stockholders will own approximately 52%, of Endocare’s 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 United States 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. Either party may terminate the Merger Agreement, without penalty, if the Merger has not been consumated by June 30, 2009.

 

Concurrent with the execution of the Merger Agreement, Endocare and certain existing institutional accredited stockholders of Endocare and Galil entered into a stock purchase agreement (the “Stock Purchase Agreement”), relating to the private placement by Endocare of up to 16,250,000 shares of Endocare common stock at a purchase price of $1.00 per share (the “Financing”). The offering proceeds to Endocare from the Financing are expected to be $16,250,000. The closing of the Financing is subject to the concurrent closing of the Merger and certain other conditions. Upon consummation of the Merger and the Financing and attributing ownership to Galil’s shareholders of the Escrow Shares, existing Endocare stockholders are expected to own approximately 38.5% of Endocare’s outstanding common stock and the shareholders of Galil are expected to own approximately 61.5% of Endocare’s 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 entity’s results of operations prior to completion of the Merger will be those of Galil.

 

Endocare’s common stock is currently listed on the NASDAQ Capital Market under the symbol “ENDO.” On April 3, 2009, the latest practicable date prior to the date of this proxy statement/prospectus, the closing sale price per share of Endocare’s common stock as reported on the NASDAQ Capital Market was $0.63 per share.

 

Endocare is holding a special meeting of its stockholders to obtain stockholder approval of the issuance of shares of Endocare common stock in the Merger and the Financing in order to comply with the requirements of NASDAQ Marketplace Rule 4350(i)(1)(c)(ii). At the special meeting, which will be held at 11:00 a.m., local time, on Wednesday, May 20, 2009, at the principal executive offices of Endocare located at 201 Technology Drive, Irvine, California 92618, unless postponed or adjourned to a later date, Endocare will ask its stockholders to approve (i) the issuance of shares of Endocare common stock in the Merger pursuant to the Merger Agreement, (ii) the issuance of up to 16,250,000 shares of Endocare common stock pursuant to the Stock Purchase Agreement, (iii) the Endocare, Inc. 2009 Stock Incentive Plan, (iv) an amendment to Endocare’s Restated Certificate of Incorporation, as amended, to increase the total number of shares of capital stock that Endocare is authorized to issue, and (v) an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 through 4. Endocare’s board of directors unanimously recommends that Endocare’s stockholders vote FOR each of the proposals.

 

Galil is holding a special general meeting and class meetings of shareholders in order to obtain the requisite shareholder approval necessary to complete the Merger. At the special general meetings and the class meetings, which will be held at 5:00 p.m., local time, on Thursday, April 23, 2009, at the office of Galil located at Tavor Building 1, Industrial Park, Yokneam 20692, Israel, unless postponed or adjourned to a later date, Galil will ask its shareholders to approve (i) the Merger and the Merger Agreement, the Stock Purchase Agreement, a Pre-Closing Shareholders Agreement among Galil and certain major shareholders of Galil and all other ancillary agreements to the Merger Agreement and the transactions contemplated thereby, (ii) certain amendments to the Articles of Association of Galil to be effective immediately prior to the closing of the Merger, (iii) the cancellation of any shares of Galil held in the treasury of Galil or owned by Galil immediately prior to the closing of the Merger, (iv) the grant to certain senior employees of Galil of certain bonus payments and retention packages, (v) the replacement of the Articles of Association of Galil with new Articles of Association as of the effective time of the Merger, and (vi) the designation of Martin J. Emerson as agent and proxy for the purposes of proxies executed by optionees of Galil. Galil’s board of directors unanimously recommends that Galil’s shareholders vote FOR each of the proposals.

 

More information about Endocare, Galil, the Merger, the Merger Agreement, the Financing and the Stock Purchase Agreement is contained in the accompanying proxy statement/prospectus. Endocare encourages you to read the proxy statement/prospectus carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 12.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the transactions described in this proxy statement/prospectus or the Endocare common stock to be issued pursuant to the Merger Agreement or the Stock Purchase Agreement or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus is dated April 13, 2009, and is first being mailed to Galil shareholders on or about April 14, 2009 and to Endocare shareholders on or about April 16, 2009.

 

ENDOCARE, INC.

201 Technology Drive

Irvine, California 92618

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

 

To Be Held On May 20, 2009

 

Dear Stockholder of Endocare, Inc.:

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Endocare, Inc., a Delaware corporation (“Endocare”), will be held at the principal executive offices of Endocare located at 201 Technology Drive, Irvine, CA 92618, on Wednesday, May 20, 2009 at 11:00 a.m., local time for the following purposes:

 

1. To consider and vote upon a proposal to issue shares of Endocare common stock, par value $0.001 per share, pursuant to the Agreement and Plan of Merger by and among Endocare, Orange Acquisitions Ltd., Endocare’s wholly owned merger subsidiary, and Galil Medical Ltd. (“Galil”), pursuant to which Endocare would acquire Galil through a merger of Orange Acquisitions Ltd. with and into Galil so that Galil becomes a wholly owned subsidiary of Endocare (the “Merger”);

 

2. To consider and vote upon a proposal to issue up to 16,250,000 shares of Endocare common stock, pursuant to the Stock Purchase Agreement by and among Endocare and certain existing institutional stockholders of Endocare and Galil;

 

3. To consider and vote upon a proposal to approve the Endocare, Inc. 2009 Stock Incentive Plan;

 

4. To consider and vote upon a proposal to amend Endocare’s Restated Certificate of Incorporation, as amended, to increase the total number of shares of capital stock that Endocare is authorized to issue from 51,000,000 shares to 76,000,000 shares by increasing the total number of authorized shares of common stock from 50,000,000 shares to 75,000,000 shares;

 

5. To consider and vote upon an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the foregoing proposals; and

 

6. To transact such other business that properly comes before the meeting or any adjournment or postponement thereof.

 

Endocare’s board of directors unanimously recommends that you vote FOR each of the proposals.

 

The approval of both Proposals 1 and 2 is required for completion of the Merger. In addition, unless the Merger is completed, neither the Endocare, Inc. 2009 Stock Incentive Plan nor the amendment to Endocare’s Restated Certificate of Incorporation, as amended, will be implemented, whether or not approved by the Endocare stockholders.

 

The foregoing items of business are more fully described in the proxy statement/prospectus accompanying this Notice. Only stockholders of record at the close of business on March 23, 2009 will be entitled to vote at the special meeting. Our stock transfer books will remain open between the record date and the date of the special meeting. A list of stockholders entitled to vote at the special meeting will be available for inspection at our principal executive offices.

All stockholders are cordially invited to attend the special meeting in person. Whether or not you plan to attend the special meeting in person, please cast your proxy vote promptly by Internet, telephone or mail. Voting instructions are included with your proxy card. Should you receive more than one proxy card because your shares are registered in different names or addresses, each proxy card should be voted to assure that all your shares are included in the vote. You may revoke your proxy vote at any time prior to the special meeting by following the instructions in the proxy statement/prospectus. If you attend the special meeting and vote by ballot, then your proxy vote will be revoked automatically and only your vote by ballot at the special meeting will be counted. Regardless of the number of shares of Endocare you own or whether or not you plan to attend the meeting, it is important that your shares be represented and voted.

 

By order of the board of directors of Endocare, Inc.,

 

 

Clint B. Davis

Senior Vice President, Legal Affairs,
General Counsel and Secretary

 

Irvine, California

April 13, 2009

 

 

 

 

ADDITIONAL INFORMATION

 

This proxy statement/prospectus incorporates important business and financial information about Endocare that is not included in or delivered with this proxy statement/prospectus. Endocare will provide without charge this information and any and all of the documents referred to herein to each person to whom a copy of this proxy statement/prospectus has been delivered, who makes a written or oral request by writing or calling Endocare at the following address or telephone number.

 

Corporate Secretary

Endocare, Inc.

201 Technology Drive

Irvine, California 92618

(949) 450-5400

 

If you would like to request any documents, please do so by April 16, 2009, in order to ensure timely delivery before the Galil shareholder meetings.

 

This proxy statement/prospectus forms a part of a registration statement on Form S-4 (Registration No. 333-156921), filed by Endocare with the United States Securities and Exchange Commission (the “SEC”). It constitutes a prospectus of Endocare under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), and the rules thereunder, with respect to the shares of Endocare common stock to be issued to holders of shares of Galil in the Merger. In addition, it constitutes a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules thereunder, and a notice of meeting with respect to the special meeting of stockholders at which Endocare’s stockholders will consider and vote on the proposals to approve the issuance of Endocare common stock issuable to the holders of Galil shares pursuant to the Merger Agreement, to approve the issuance of Endocare common stock issuable pursuant to the Stock Purchase Agreement, to approve the Endocare, Inc. 2009 Stock Incentive Plan, to approve an amendment to Endocare’s Restated Certificate of Incorporation, as amended, to increase the total number of shares of capital stock that Endocare is authorized to issue, and to approve an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 through 4, each as described in this proxy statement/prospectus. This proxy statement/prospectus does not constitute a prospectus of Galil or a proxy statement of Galil and is not being distributed to Galil shareholders for the purpose of soliciting proxies for the special general meeting and class meetings of Galil shareholders referred to herein.

 

You should rely only on the information contained in this proxy statement/prospectus or on information to which Endocare has referred you. Endocare has not authorized anyone else to provide you with any information. Endocare provided the information concerning Endocare, and Galil provided the information concerning Galil, appearing in this proxy statement/prospectus.

TABLE OF CONTENTS

 

 

The following section provides answers to frequently asked questions about the Endocare special meeting of stockholders and the Galil special general and class meetings of shareholders. This section, however, only provides summary information. These questions and answers do not address all issues that may be important to you as a stockholder of Endocare or shareholder of Galil. We encourage you to read this proxy statement/prospectus carefully and in its entirety, including each of the annexes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUMMARY

	•	Permit a consolidation of resources that will result in greater penetration of cryoablation technology in the marketplace;
	•	Create efficiency opportunities, through reorganization and elimination of redundant administrative, sales & marketing and research & development costs, by bringing together the best technologies of both organizations to provide greater combined innovative potential; and
	•	Result in a stronger international position, and allow the combined company to better compete with other treatments.

	•	Create opportunities for new innovation and technology synergies;
	•	Improve the product platform and allow penetration of a broader market for cryoablation;

	•	Eliminate duplicate selling and administrative costs;
	•	Eliminate redundant clinical trials and studies; and
	•	Leverage existing sales and distribution.

	•	the approval by Endocare’s stockholders of the issuance of shares of Endocare common stock pursuant to the Merger Agreement and Stock Purchase Agreement;
	•	the approval of the Merger, the Merger Agreement and the related transactions by the holders of all classes of Galil’s outstanding shares voting together at the special general meeting and at each individual class meeting;
	•	the receipt of all governmental and other third party consents;
	•	no governmental investigation or proceeding in process that makes it reasonably possible that an order will be issued enjoining or materially restraining or conditioning the Merger and the related transactions (including the closing of the pending investigation by the FTC);
	•	the lapse of the statutory waiting period as required by Israel law;
	•	the receipt of a withholding tax ruling from the Israeli tax authority with respect to the consideration payable to the shareholders of Galil (or the receipt of applicable withholding tax exemption certificates for each such shareholder);
	•	the receipt of an escrow tax ruling from the Israeli tax authority, if applicable;
	•	the effectiveness of Endocare’s registration statement on Form S-4, of which this proxy statement/prospectus forms a part, with no stop order suspending the effectiveness of the Form S-4, and no proceedings for that purpose initiated or threatened by the SEC;
	•	no governmental authority enacting any law or order that is then in effect and that enjoins, materially restrains or conditions, or makes illegal or otherwise prohibits the consummation of the Merger and the related transactions;
	•	no prospectus shall, in Endocare’s reasonable judgment, be required to be filed in Israel for the issuance of shares of Endocare common stock in connection with the Merger, the Financing and the other transactions contemplated by the Merger Agreement;
	•	the Financing, in all material respects consistent with the Stock Purchase Agreement, shall close concurrent with the closing of the Merger; and
	•	the absence of any change, event, or development or prospective change, event or development that individually or in the aggregate has had or is reasonably likely to have a material adverse change on either Endocare or Galil.

	•	solicit, initiate, encourage or take any other action designed to facilitate any inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any “acquisition proposal,” as defined in the Merger Agreement; or
	•	enter into, continue or otherwise participate in any discussions or negotiations regarding, furnish to any person any information with respect to, assist or participate in any effort or attempt by any person with respect to, or otherwise cooperate in any way with, any acquisition proposal.

	•	an order permanently restraining, enjoining or otherwise prohibiting the Merger shall be entered and becomes nonappealable; or
	•	the Merger is not completed by June 30, 2009.

	•	if there has been a material breach by the other party of any representation, warranty, covenant or agreement of such party contained in the Merger Agreement that is not curable or, if curable, is not cured within the earlier of (i) 30 days written notice to the breaching party or (ii) June 30, 2009;
	•	if any of the parties’ respective closing conditions are incapable of fulfillment;
	•	if either party’s board of directors changes its recommendation of the Merger;
	•	if the other party’s unrestricted cash balance falls below $1,000,000 for a period of 10 days; or
	•	if the conditions to the closing of the Merger have been satisfied and the shareholders of the other party default on their obligation to purchase the requisite number of shares pursuant to the Stock Purchase Agreement.

 

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
OF ENDOCARE AND GALIL

		For the
		Year Ended
		December 31,
		2008
Unaudited Pro Forma Condensed Combined Statement of Operations Data:
Total revenue		$	56,296
Research and development expenses			9,421
Selling and marketing			32,232
General and administrative expenses			15,204
Loss from operations			(35,500	)
Net loss			(35,209	)
Basic net loss per share		$	(0.90	)
Diluted net loss per share		$	(0.90	)

		As of
		December 31,
		2008
Unaudited Pro Forma Condensed Combined Balance Sheet Data:
Cash, cash equivalents, marketable securities and restricted cash		$	20,787
Working capital			18,604
Total assets			60,666
Accumulated deficit			(71,898	)
Total stockholders’ equity			35,824

COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA

		Year Ended
		December 31,
		2008
Historical Per Common Share Data:
Basic net loss per share		$	(0.71	)
Diluted net loss per share			(0.71	)
Book value per share			0.29

		Year Ended
		December 31,
		2008
Historical Per Ordinary Share Data:
Basic net loss per share			(0.38	)
Diluted net loss per share			(0.38	)
Book value per share			0.13

		Year Ended
		December 31,
		2008
Pro Forma Per Common Share Data:
Basic net loss per share		$	(0.90	)
Diluted net loss per share			(0.90	)
Book value per share			0.91

 

MARKET PRICE AND DIVIDEND INFORMATION

		High				Low
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
Year Ended December 31, 2008
First Quarter		$	7.70			$	5.03
Second Quarter		$	7.00			$	3.79
Third Quarter		$	4.98			$	1.16
Fourth Quarter		$	1.76			$	0.38
Year Ended December 31, 2009
First Quarter		$	0.99			$	0.41
Second Quarter (through April 3, 2009)		$	0.70			$	0.62

 

Endocare’s stockholders and Galil’s shareholders should consider the following risk factors and uncertainties, together with the other information included in this proxy statement/prospectus, in deciding how to cast their votes on the proposals discussed herein.

 

If the proposed Merger with Galil is consummated, Endocare’s business could suffer materially and Endocare’s 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:

 

 

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 Endocare’s common stock after the Merger may decline for a number of other reasons, including if:

 

 

The Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes.

 

In general, either party can refuse to complete the Merger if there is a material adverse change affecting the other party between the date of the Merger Agreement and the closing. However, some types of changes do not permit either party to refuse to complete the Merger, even if such changes would have a material adverse effect on Endocare or Galil, including the following:

 

 

 

If adverse changes occur but Endocare and Galil must still complete the Merger, the combined company’s operating results and financial condition may be materially and adversely impacted and Endocare’s stock price may suffer.

 

Ownership of Endocare’s 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 Endocare’s 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 Endocare’s assets or any other significant corporate transaction, even if the outcome sought by such stockholders is not in the interest of Endocare’s 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 party’s shares up to a maximum of 35% of the outstanding shares of Endocare common stock immediately after the Merger and the Financing. This could result in one or more stockholders owning more shares of Endocare’s outstanding common stock than currently allocated. In addition, the significant concentration of stock ownership may adversely affect the value of Endocare’s 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.

 

Galil’s 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 April 3, 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.

 

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 FTC’s 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 FTC’s 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.

 

Endocare’s stockholders and Galil’s 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, Endocare’s stockholders and Galil’s 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 Endocare’s common stock, a tender offer for Endocare’s common stock, or a merger or other business combination outside the ordinary course of business, whether or not any such transactions are favorable to Endocare’s stockholders.

 

The lack of a public market for Galil’s 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 Galil’s 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 Endocare’s equity to be issued to Galil’s shareholders was determined based on negotiations between the parties, it is possible that the value of Endocare’s 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 Endocare’s 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 Endocare’s 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 company’s common stock to decline.

 

If the proposed Merger with Galil is not consummated, Endocare’s business could suffer materially and Endocare’s 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:

 

 

 

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 March 31, 2009, we had cash and cash equivalents of $2.5 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 firm’s 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 on our financial statements as of and for the fiscal year ended December 31, 2008 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, a subsidiary of HealthTronics, 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 be materially and adversely impacted by various factors relating to this customer’s business, financial condition, results of operations and cash flows. In addition, HealthTronics has expressed an interest in pursuing an acquisition of Endocare, which the Endocare board of directors previously determined to be less favorable to Endocare’s stockholders than the Merger, which may materially and adversely affect our relationship with this customer. Furthermore, the Endocare board of directors is in the process of evaluating a written proposal from HealthTronics received on April 9, 2009. 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.

 

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:

 

 

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 11,899,372 shares of common stock outstanding as of April 3, 2009. After the Merger and the Financing are consummated, we expect to have an aggregate of 39,324,270 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 Endocare’s common stock, the market liquidity and market price of Endocare’s common stock could decline.

 

Our common stock is currently listed on the NASDAQ Capital Market. In order to maintain that listing, Endocare must satisfy minimum financial and other listing requirements. In addition, the issuance of Endocare common stock in the Merger and the Financing may constitute a “change of control” for purposes of NASDAQ Marketplace Rule 4340(a). Whether a “change of control” exists under NASDAQ Marketplace Rule 4340(a) is a facts and circumstances determination that is currently being undertaken by NASDAQ based on an evaluation of certain factors, such as changes in Endocare’s 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 Endocare’s 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. Endocare’s common stock has traded below $4.00 since July 21, 2008, and below $1.00 since November 29, 2008. The closing price of Endocare’s common stock as of April 3, 2009 was $0.63. 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 Endocare’s common stock may not be sustained and the market price of Endocare’s common stock could decline. If an active trading market for Endocare’s common stock is not sustained, it will be difficult for Endocare’s stockholders to sell shares of Endocare’s common stock without further depressing the market price of such common stock, if at all. A delisting of Endocare’s 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. 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 Galil’s 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 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.

 

Galil is incorporated under the laws of, and its principal offices are located in, the State of Israel and therefore its business operations may be harmed by adverse political, economic and military conditions affecting Israel.

 

Galil is incorporated under the laws of, and its principal executive offices and research and development facilities are located in, the State of Israel. In addition, some of its subcontractors are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect its business. The Israeli economy has

suffered in the past and may suffer in the future from instability, which may adversely affect Galil’s 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 Galil’s 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 Galil’s 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 Israel’s 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 Israel’s 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 Galil’s 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 Galil’s 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 and $1.9 million during the fiscal years ended December 31, 2008, 2007, and 2006, respectively. 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, 2007 Galil had an accumulated deficit of $45.6 million and as of 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 million during the fiscal years ended December 31, 2008, 2007 and 2006, respectively. 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, respectively. As of March 31, 2009, Galil had cash and cash equivalents of $4.05 million.

 

As a result of Galil’s recurring operating losses and negative cash flows from operating activities, among other matters, Galil’s independent registered public accounting firm’s report on its financial statements as of and for the fiscal year ended December 31, 2008 includes an explanatory paragraph expressing substantial doubt about Galil’s ability to continue as a going concern.

 

To date, Galil’s revenues have not been sufficient to sustain Galil’s 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 Galil’s 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 Galil’s 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 Galil’s expenses in the future, which would reduce its expected profits or increase its losses. Additionally, if Galil increases its activities outside of Israel, the increased activities generally will not be eligible for inclusion in Israeli tax benefit programs. Under the original approved plan, Galil enjoyed a tax holiday

for the years 2001 through 2003. On January 1, 2004 the plan was cancelled. A base turnover was determined at $2.5 million dollars. Galil received the Investment Center’s 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.

 

Galil’s operations may be disrupted by the obligation of its personnel to perform military service.

 

Some of Galil’s 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. Galil’s 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 Galil’s 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 Galil’s 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 Galil’s 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 Galil’s 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 Galil’s 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 Galil’s results of operations.

 

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 Endocare’s and Galil’s historical operating losses, among other matters, the reports of each company’s 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 company’s ability to continue as a going concern.

 

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. Furthermore, inclusion of an explanatory paragraph expressing substantial doubt about each of Endocare’s and Galil’s ability to continue as going concerns in the reports of their respective independent registered public accounting firms on each company’s audit report for its fiscal year ended December 31, 2008 may have a negative impact on each of their, and the combined company’s, abilities to raise additional capital and may adversely impact their respective stock prices.

 

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 1970’s resulted in high cancer recurrence and negative side effects, such as rectal fistulae and incontinence, and gave cryoablation treatment negative publicity. To overcome these negative side effects, we have developed ultrasound guidance and temperature sensing

to enable more precise monitoring in our cryoablation systems. Nevertheless, we need to overcome the earlier negative publicity associated with cryoablation in order to obtain market acceptance for our products. In addition, use of our cryoablation systems requires significant physician education and training. As a result, we may have difficulty obtaining adoption of the technology and recommendations and endorsements of physicians and patients for our cryoablation systems. We may also have difficulty raising the brand awareness necessary to generate interest in our cryoablation systems. Any adverse side effects, including impotence or incontinence, recurrence of cancer or future reported adverse events or other unfavorable publicity involving patient outcomes from the use of cryoablation, whether from our products or the products of our competitors, could adversely affect acceptance of cryoablation. In addition, emerging new technologies and procedures to treat prostate cancer may negatively affect the market acceptance of cryoablation. If our cryoablation systems do not achieve broad market acceptance, we will likely remain unprofitable.

 

If we are unable to continue to enhance our cryoablation systems, our business will suffer.

 

Our growth depends in part on continued ability to successfully develop, manufacture and commercialize enhancements to our cryoablation systems. We may experience difficulties that could delay or prevent the successful development, manufacturing and commercialization of these products. 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.

 

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

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 party’s 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 party’s 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 entity’s” use and disclosure of identifiable patient information, including research data. While Endocare is not a “covered entity” under HIPAA, Endocare’s 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.

 

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:

 

 

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 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 Endocare’s 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 Endocare’s 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.

 

This proxy statement/prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements may include statements regarding, among other things:

 

 

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology.

 

Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this proxy statement/prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this proxy statement/prospectus will in fact occur. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated from these forward-looking statements, even if new information becomes available in the future.

 

Resale Restrictions

 

The distribution of the common stock in the Merger in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Affected Galil stockholders are advised to seek legal advice prior to any resale of the common stock.

 

Representations of Purchasers

 

By acquiring common stock in Canada, a purchaser is representing to us and the dealer from whom the purchase confirmation is being received that:

 

 

Rights of Action — Ontario Purchasers Only

 

Under Ontario securities legislation, a purchaser who purchases common stock offered by this proxy statement/prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the common stock, for rescission against us in the event that this proxy statement/prospectus contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment or other consideration is made for the common stock. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made or deemed to be made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the consideration at which the common stock was offered to the purchaser and if the purchaser is shown to have purchased the common stock with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in the value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

 

Enforcement of Legal Rights

 

Any of the issuer’s directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada.

 

To the extent to which any promotion of Endocare’s common stock to be issued in the Merger or the Financing is deemed to take place in Guernsey, such shares of Endocare common stock are only being promoted in or from within the Bailiwick of Guernsey either (i) by persons licensed to do so under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) or (ii) to persons licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended), the Insurance Business (Bailiwick of Guernsey) Law, 2002 (as amended), the Banking Supervision (Bailiwick of Guernsey) Law, 1994 (as amended) or the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 (as amended). Promotion is not being made in any other way.

 

General

 

We are sending you this proxy statement/prospectus as part of the solicitation of proxies by Endocare’s board of directors for use at the special meeting of Endocare’s stockholders and any adjournments or postponements of the meeting. We are first mailing this proxy statement/prospectus, including a notice of the special meeting of Endocare stockholders and a form of proxy on or about April 16, 2009.

 

The special meeting is scheduled to be held on:

 

Wednesday, May 20, 2009
at 11:00 a.m., local time at:

 

Endocare, Inc.
201 Technology Drive,
Irvine, California 92618

 

Purpose of the Special Meeting

 

The purpose of the Endocare special meeting is to vote on:

 

 

The approval of both of Proposals 1 and 2 is required for completion of the Merger. In addition, unless the Merger is completed, neither the Endocare, Inc. 2009 Stock Incentive Plan nor the amendment to Endocare’s Restated Certificate of Incorporation, as amended, will be implemented, whether or not approved by the Endocare stockholders. In the event that either Proposal 1 or Proposal 2, or both, are not approved by the Endocare stockholders at the special meeting, the Merger will not be consummated.

 

Recommendation of Endocare’s Board of Directors

 

After careful consideration, Endocare’s board of directors unanimously recommends that Endocare’s stockholders vote FOR Proposal 1 to approve the issuance of shares of Endocare common stock in the Merger pursuant to the Merger Agreement, FOR Proposal 2 to approve the issuance of up to 16,250,000 shares of Endocare common stock pursuant to the Stock Purchase Agreement, FOR Proposal 3 to approve the Endocare, Inc. 2009 Stock Incentive Plan, FOR Proposal 4 to approve an amendment to Endocare’s Restated Certificate of Incorporation, as amended, to increase the total number of shares of common stock that Endocare is authorized to issue, and FOR

Proposal 5 to approve an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 through 4.

 

Voting

 

Each stockholder is entitled to one vote for each share of our common stock held by such stockholder on March 23, 2009, the record date for determining which stockholders are entitled to vote at the special meeting. On March 23, 2009 there were 11,816,548 issued and outstanding shares of Endocare common stock. Endocare’s amended and restated bylaws provide that a majority of the shares entitled to vote, represented in person or by proxy, will constitute a quorum for transaction of business at the special meeting.

 

You can vote your shares in two ways: either by proxy or in person at the special meeting by written ballot. See below under “Proxies” for information about voting by proxy.

 

The proposals, other than Proposal 4, will require the approval of the holders of a majority of our outstanding common stock present in person or represented by proxy at the special meeting.

 

Proposal 4 to approve an amendment to Endocare’s Restated Certificate of Incorporation, as amended, to increase the number of shares of common stock that Endocare is authorized to issue will require the approval of the holders of a majority of the outstanding shares of Endocare common stock entitled to vote as of the record date.

 

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For,” “Against” and “Abstain” votes, as well as broker non-votes. “Broker non-votes” occur when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions with respect to that proposal from the beneficial owner (despite voting on at least one other proposal for which the nominee does have discretionary authority or for which it has received instructions).

 

Proxies

 

If you choose to vote by proxy, you may do so via the Internet, by telephone or by mail. Even if you plan to attend the meeting, the Endocare board of directors recommends that you vote by proxy.

 

 

 

 

PLEASE DO NOT MAIL BACK YOUR PROXY CARD IF YOU ARE VOTING BY THE INTERNET OR TELEPHONE.

 

Endocare’s board of directors has selected David L. Goldsmith and Clint B. Davis, and each of them, to serve as proxyholders for the special meeting. If a stockholder properly votes by proxy, the proxyholders will vote the shares represented by such proxy at the special meeting in accordance with the stockholder’s proxy vote. If the proxy does not specify how the shares are to be voted, the proxy will be voted FOR the approval of each of the proposals. Properly executed proxies, other than proxies voting against Proposals 1 through 4, also will be voted for any adjournment of the special meeting for the purpose of soliciting additional votes to approve Proposals 1 through 4, if necessary. In addition, the shares represented by the proxy will be voted in accordance with the discretion of the proxyholders on any other matters that properly come before the special meeting.

We do not know of any other matters to be presented for consideration at the special meeting. However, if any other matters properly come before the special meeting, it is the intention of the persons named in the enclosed form of proxy to vote the shares they represent as Endocare’s board of directors may recommend. Discretionary authority with respect to such other matters is granted by means of your proxy vote.

 

Revocation of Proxies

 

You can revoke your proxy at any time before it is exercised at the special meeting by taking any one of the following actions:

 

 

Solicitation

 

Endocare will bear the entire cost of soliciting proxies, including the preparation, assembly, printing and mailing of this proxy statement/prospectus, the Endocare proxy and any additional solicitation material furnished to stockholders. Copies of solicitation material will be furnished to brokerage firms, banks, nominees, custodians and fiduciaries holding shares in their names that are beneficially owned by others so that they may forward this solicitation material to such beneficial owners. In addition, Endocare may reimburse such persons for their costs of forwarding the solicitation materials to such beneficial owners. The original solicitation of proxies by mail may be supplemented by solicitation by telephone or other means by Endocare’s directors, officers, employees or agents. No additional compensation will be paid to Endocare’s directors, officers or employees for any such services.

 

This section and the section entitled “The Merger Agreement” beginning on page 62 of this proxy statement/prospectus describe the material terms of the Merger, including the Merger Agreement. While Endocare believes that this description covers the material terms of the Merger and the Merger Agreement, it may not contain all of the information that is important to you. We encourage you to read this proxy statement/prospectus carefully and in its entirety, including the Merger Agreement, as amended, which is attached as Annex A to this proxy statement/prospectus, and the other documents to which Endocare has referred you.

 

General

 

The boards of directors of both Endocare and Galil have unanimously approved the Merger Agreement, which provides for the acquisition by Endocare of Galil through the Merger. The Merger will result in Orange Acquisitions Ltd., a wholly owned subsidiary of Endocare, merging with and into Galil, so that Galil will become a wholly owned subsidiary of Endocare. At the effective time of the Merger, each outstanding ordinary share of Galil will be converted into the right to receive the number of shares of Endocare common stock equal to the product of (1) the sum of the number of shares of Endocare common stock outstanding and the number of shares of Endocare common stock subject to in-the-money options immediately prior to the effective time of the Merger and (2) the exchange ratio of 0.923077, divided by the total number of Galil ordinary shares outstanding and the number of ordinary shares of Galil subject to in-the-money options immediately prior to the effective time of the Merger. The exact conversion ratio cannot be calculated until immediately prior to the effective time of the Merger, but it is expected that approximately 33.0 ordinary shares of Galil will be converted into one share of Endocare common stock. Immediately following the effective time of the Merger and attributing ownership to Galil’s shareholders of the Escrow Shares, Galil’s shareholders are expected to own approximately 48.0%, and Endocare’s existing stockholders are expected to own approximately 52.0%, of Endocare’s common stock, without giving effect to the shares issuable pursuant to the concurrent Financing. The Merger will have no effect on the number of shares of common stock of Endocare owned by existing Endocare stockholders. 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.

 

Background of the Merger

 

As part of their ongoing management of the business and affairs of their respective companies over the past several years, the board of directors of Endocare (the “Endocare Board”) and the board of directors of Galil (the “Galil Board”) frequently evaluated potential strategic alternatives and considered ways to enhance their respective company’s performance and prospects in light of business and economic conditions. For each company, these reviews have included consideration of potential strategic transactions with other companies in the health care industry and the potential benefits and risks of such transactions. In particular, Endocare and Galil each considered the potential benefits of a combination of the two companies and, on several occasions during the past several years, Endocare and Galil engaged in exploratory discussions regarding a potential strategic combination of the two companies. However, until 2008 these discussions remained entirely exploratory and did not result in any negotiations, agreement, arrangement or understanding between Endocare and Galil with respect to a business combination. Set forth below is a summary of material contacts and ultimately negotiations between Endocare and Galil over the past two years, as well as additional information describing the background of the Merger.

 

On December 10, 2006, Galil announced a $52 million financing led by Thomas, McNerney & Partners and The Vertical Group, and joined by Investor Growth Capital, all U.S. based venture capital funds. Of the $52 million, $40 million was used to purchase new equity securities from Galil, $8 million was used to purchase shares from existing Galil shareholders and $3.6 million was related to conversion to equity of a loan granted to Galil in 2004 by several of its then shareholders. Galil also announced its acquisition of the cryoablation business from Oncura, Inc., a jointly held affiliate that Galil had formed in 2003 with GE Champion Services, an affiliate of General Electric Company. In connection with this financing, James E. Thomas (a partner with Thomas, McNerney & Partners), Stephen M. Campe (a partner with Investor Growth Capital) and Richard B. Emmitt (a partner with The Vertical Group) joined the Galil Board.

Later in December 2006, Craig T. Davenport (who was Endocare’s then Chairman, Chief Executive Officer and President) and Michael R. Rodriguez (Endocare’s Chief Financial Officer) met with a representative of Montgomery & Co., an investment banking firm, to discuss Endocare’s business and potential strategic opportunities. During this meeting, the representative of Montgomery & Co. indicated that one of the principals of Montgomery & Co. knew Mr. Thomas. The representative of Montgomery & Co. offered to contact Mr. Thomas to determine whether Galil had any interest in discussing a potential business combination.

 

In early February 2007, the representative of Montgomery & Co. informed Messrs. Davenport and Rodriguez that he had spoken with Mr. Thomas and that Mr. Thomas had indicated that he and Chen Barir (who was Galil’s then President and Chief Executive Officer) would be interested in a meeting to discuss a potential business combination.

 

On February 28, 2007, the representative of Montgomery & Co. contacted Messrs. Thomas and Barir and requested that they provide certain limited financial information regarding Galil in order to make the proposed meeting more productive. It was tentatively planned that the meeting would occur at the end of March 2007.

 

On March 1, 2007, Mr. Barir provided to Mr. Davenport, David L. Goldsmith (an Endocare director) and the Montgomery & Co. representative the limited financial information that Galil was willing to share prior to the planned meeting.

 

On March 3, 2007, the Montgomery & Co. representative communicated with Mr. Barir and indicated that Endocare would be prepared to move forward with scheduling a meeting and signing a mutual nondisclosure agreement.

 

Over the following weeks, Endocare and Galil negotiated a mutual nondisclosure agreement, signing it on March 26, 2007.

 

On March 29, 2007, a meeting was held in New York City. Participants in the meeting included Messrs. Davenport, Goldsmith, Thomas and Barir, as well as the Montgomery & Co. representative. At this meeting, the participants engaged in preliminary discussions regarding a potential business combination between Endocare and Galil.

 

Following this meeting, Montgomery & Co. prepared a preliminary financial review of the potential business combination based on the limited financial information provided by Galil and publicly available research analyst’s estimates for Endocare contained in the then latest analyst report issued by Montgomery & Co.

 

On April 19, 2007, Messrs. Davenport and Goldsmith had a call with representatives of Montgomery & Co. It was decided that Galil would need to provide additional financial information in order for Endocare to assess whether it was worthwhile for the parties to engage in additional discussions regarding a potential business combination. The representatives of Montgomery & Co. stated that they would contact Messrs. Barir and Thomas to request such additional information.

 

After such request, several weeks passed without Galil providing any additional information, and Endocare decided that it would focus on obtaining additional financing and negotiating a new licensing arrangement relating to cardiology, as well as exploring a variety of other potential strategic opportunities. On May 29, 2007, Endocare announced a $7 million investment by Frazier Healthcare Ventures. On June 19, 2007, CryoCath Technologies, Inc. and ATS Medical, Inc. entered into definitive agreement under which ATS acquired CryoCath’s cardiac surgery cryoablation business. In conjunction with that transaction, Endocare entered into an agreement with CryoCath and ATS in which Endocare agreed to bifurcate the prior agreement with CryoCath to give ATS the same rights with respect to the cardiac surgery market as CryoCath had prior to ATS’s purchase.

 

In August 2007, Endocare effectuated a reverse stock split in connection with Endocare’s application to list its common stock on the NASDAQ Capital Market. On October 10, 2007, Endocare’s common stock began to trade on the NASDAQ Capital Market.

 

At a regularly scheduled meeting of the Endocare Board on November 15, 2007, a representative of Seven Hills Partners, an Endocare financial advisor, reviewed and discussed with the Endocare Board a range of potential strategic opportunities. It was agreed that Mr. Davenport, together with Seven Hills Partners, should devote a

significant amount of time to exploring potential strategic opportunities in the months ahead. Mr. Davenport provided regular updates to the Endocare Board regarding these activities.

 

On February 2, 2008, Mr. Emmitt (a member of the Galil Board as noted above) approached Mr. Davenport at a urology conference in Florida and requested a meeting with Mr. Davenport to discuss the possibility of Galil participating in Endocare’s COLD Registry. The following day, on February 3, 2008, Messrs. Davenport and Emmitt met and during this meeting Mr. Emmitt suggested that Endocare and Galil consider restarting discussions regarding a potential business combination. Following this meeting, Mr. Davenport reported informally to each of the members of the Endocare Board the interest indicated by Mr. Emmitt in restarting discussions.

 

On February 5, 2008, the Endocare Board held a telephonic meeting during which Mr. Davenport provided a further report to the Endocare Board regarding his meeting with Mr. Emmitt.

 

On February 14, 2008, Endocare signed a nondisclosure agreement with Frazier Healthcare Ventures, Endocare’s largest stockholder, to enable Endocare to obtain Frazier’s input regarding the possibility of restarting discussions with Galil. On February 15, 2008, Mr. Davenport had a telephone conversation with Nathan Every, M.D., a partner of Frazier Healthcare Ventures, in which Mr. Davenport discussed several items that he believed Galil needed to address in order for it to be worthwhile to restart discussions regarding a potential business combination. Dr. Every, who knew Mr. Emmitt through his industry activities, stated that he would discuss these items with Mr. Emmitt in an effort to facilitate the process of restarting discussions between Endocare and Galil.

 

Shortly thereafter, Dr. Every reported to Mr. Davenport that he had spoken to Mr. Emmitt, and Mr. Emmitt had indicated that Galil planned to send a letter to Endocare in order to address the items raised by Mr. Davenport.

 

On February 27-28, 2008, the Endocare Board held a regularly scheduled meeting. During this meeting, Mr. Davenport and a representative of Seven Hills Partners conducted a detailed review of various potential strategic opportunities. One of these opportunities was a potential business combination with Galil.

 

During March 2008, in addition to exploring other potential strategic opportunities, Seven Hills Partners reviewed with Messrs. Davenport and Rodriguez certain publicly available information regarding Galil. During March and April 2008, Messrs. Davenport and Rodriguez also discussed various additional potential strategic opportunities with representatives of Oppenheimer & Co. Inc., or Oppenheimer, which subsequently was engaged as Endocare’s financial advisor.

 

On March 25, 2008, Galil announced the appointment of Martin J. Emerson as its President and Chief Executive Officer.

 

On April 18, 2008, Mr. Barir (who was transitioning out of the role of President and Chief Executive Officer of Galil) contacted Mr. Davenport and stated that Galil continued to be highly interested in discussing the feasibility of a business combination. Mr. Barir stated that Galil was in the process of preparing a letter to address the items raised by Mr. Davenport in February 2008 and planned to finalize the letter within the next few weeks, prior to the annual meeting of the American Urological Association (AUA), which was scheduled to be held in Orlando, Florida on May 17-22, 2008. Mr. Barir suggested that representatives of Endocare and Galil meet during the AUA annual meeting. Mr. Barir suggested that Mr. Davenport and he speak by telephone in advance of Galil providing the letter to Endocare. On April 23, 2008, Mr. Davenport responded to Mr. Barir, stating that Endocare remained open and interested in any and all possible strategic initiatives and actions that could lead to increased stockholder value. On April 25, 2008, Mr. Davenport further communicated with Mr. Barir, requesting that Galil provide the letter in time for consideration by the Endocare Board at its next meeting, scheduled to be held on May 14-15, 2008. On April 30, 2008, Messrs. Davenport and Barir had a telephone call in which they discussed the possibility of restarting conversations between Endocare and Galil regarding a potential business combination. Later that day, Mr. Davenport contacted Mr. Barir suggesting participants for a meeting during the AUA annual meeting and requesting that Galil sign a consent under the nondisclosure agreement signed in March 2007 to permit Endocare to share with Frazier Healthcare Ventures additional information regarding the discussions with Galil. On May 5, 2008, Mr. Barir provided Mr. Davenport with the signed consent.

 

On May 14, 2008, Mr. Barir sent to Mr. Davenport a letter from Galil. This letter stated that the Galil Board was very interested in discussing the feasibility of a business combination. The letter described several reasons that the

Galil Board believed a business combination was compelling. The letter also sought to address the items that Mr. Davenport had identified in February 2008 as needing to be addressed in order for further discussions between Endocare and Galil to be worthwhile for Endocare.

 

On May 14-15, 2008, the Endocare Board held a regularly scheduled meeting at which Dr. Every was present. During this meeting the Endocare Board, senior management and Dr. Every engaged in an extended discussion regarding the letter received from Galil and the planned meeting with Galil representatives in Orlando, Florida on May 18, 2008 during the AUA annual meeting. Dr. Every then left the meeting and the Endocare Board and senior management discussed several other potential strategic opportunities.

 

On May 18, 2008, Messrs. Davenport and Goldsmith, on behalf of Endocare, and Messrs. Emerson and Emmitt, on behalf of Galil, met along with Dr. Every to restart discussions between Endocare and Galil relating to a potential business combination. Among other things, the parties discussed initial financial modeling, the exchange of basic financial information and Galil’s capitalization. At the end of this meeting, it was agreed that the parties should reconvene in the first week of June 2008 for another meeting.

 

On May 18, 2008, the Endocare Board held a telephonic meeting during which Messrs. Davenport and Goldsmith discussed with the Endocare Board at length the meeting held with Galil earlier that day. Mr. Davenport, with Mr. Goldsmith’s input, then updated the Endocare Board regarding other potential strategic opportunities and the Board discussed its preliminary views on how these opportunities compared with the Galil opportunity.

 

Following the May 18, 2008 meeting between Endocare and Galil, the parties each provided financial information to Frazier Healthcare Ventures in order for Frazier Healthcare Ventures to undertake initial financial modeling for discussion by the parties at the meeting to be held during the first week of June 2008.

 

On June 3, 2008, the parties met in Chicago. The participants in this meeting included Messrs. Davenport, Goldsmith, Rodriguez, Emerson, Thomas and Emmitt, in addition to Terrence A. Noonan (who was then Endocare’s Lead Independent Director), Clint B. Davis (Endocare’s General Counsel) and Karen Sarid (Galil’s Chief Financial Officer and General Manager of Galil’s Israeli operations). Also present were Dr. Every and Sam Brasch of Frazier Healthcare Ventures. At this meeting, the parties reviewed and discussed the initial financial model prepared by Frazier Healthcare Ventures. The parties also engaged in a preliminary discussion regarding the general nature of a possible business combination, including valuation, management and governance matters and the timeline for the proposed transaction.

 

Later on June 3, 2008, Mr. Rodriguez provided Ms. Sarid with the outline of a proposed due diligence plan. It was agreed that they would have a telephone call on June 9, 2008 to discuss the due diligence process.

 

On June 4, 2008, Messrs. Goldsmith, Davenport, Rodriguez and Davis met with representatives of Oppenheimer to discuss a potential strategic acquisition by Endocare referred to as “Project Mandarin.” During this meeting, Messrs. Goldsmith, Davenport, Rodriguez and Davis also discussed with representatives of Oppenheimer a potential business combination with Galil.

 

On June 9, 2008, Messrs. Rodriguez and Davis had a call with Ms. Sarid to discuss the proposed due diligence process.

 

On June 10, 2008, the Endocare Board held a telephonic meeting during which Messrs. Davenport, Goldsmith and Noonan provided an update to the Endocare Board regarding the meeting with Galil that had been held on June 3, 2008. The Endocare Board provided input regarding valuation, governance and management matters. The Endocare Board also discussed other strategic opportunities. In addition, the Endocare Board discussed the engagement of Oppenheimer as Endocare’s financial advisor in connection with a potential business combination with Galil as well as Project Mandarin. Following additional discussion, the Endocare Board established a Special Committee to review and address matters and consult with management relative to the potential business combination with Galil and Project Mandarin, as well as other strategic opportunities that may be identified. Mr. Goldsmith was appointed Chairman of the Special Committee and Mr. Noonan and Eric S. Kentor were also appointed to the Special Committee. The Endocare Board also authorized the Special Committee to negotiate and approve an engagement letter with Oppenheimer, which was subsequently executed.

On June 11, 2008, Mr. Davis sent to Ms. Sarid a draft due diligence request list. Over the following few weeks, the parties finalized the due diligence request list and agreed upon the process.

 

On June 12, 2008, the parties exchanged summary balance sheet, revenue and gross profit information.

 

On June 13, 2008, the Endocare Special Committee held a telephonic meeting to discuss the latest communications with Galil regarding principal valuation, governance and management matters.

 

On June 19, 2008, the Endocare Special Committee held a telephonic meeting to discuss financial information received from Galil and potential relative contributions that could be made by Endocare and Galil to the future financial performance of the combined company. Also participating in this meeting were Endocare senior management and Endocare’s financial advisor. The Committee also discussed the proposed attendees and objectives for the meeting with Galil scheduled to be held in Chicago on June 27, 2008. The Endocare Special Committee also received an update regarding the status of Project Mandarin.

 

On June 24, 2008, the Endocare Special Committee held a telephonic meeting, in which Endocare’s senior management and financial advisor participated, during which it again reviewed and discussed with Endocare’s financial advisor potential relative contributions that could be made by Endocare and Galil. The Endocare Special Committee also reviewed a preliminary transaction timeline for the Galil transaction. The Endocare Special Committee also discussed a draft nonbinding letter of intent for the Galil transaction being prepared by Gibson Dunn & Crutcher LLP, Endocare’s corporate legal counsel (“Gibson Dunn”) Mr. Davenport also provided an update to the Endocare Special Committee regarding another potential strategic opportunity under consideration, referred to as “Project Energy.”

 

On June 27, 2008, the parties held a second meeting in Chicago. Participants at this meeting included Messrs. Davenport, Goldsmith, Noonan, Emerson, Emmitt and Thomas and Ms. Sarid. Also present were representatives of Endocare’s financial advisor and representatives of Piper Jaffray & Co., Galil’s financial advisor (“Piper Jaffray”). The parties discussed valuation, governance and management matters, as well as the proposed timeline for the transaction.

 

On June 30, 2008, the Endocare Special Committee held a telephonic meeting during which the Endocare Special Committee discussed with Messrs. Davenport, Rodriguez and Davis and representatives of Endocare’s financial advisor the status of negotiations with Galil. The Endocare Special Committee also discussed the status of Project Mandarin and Project Energy.

 

On July 2, 2008, Mr. Davenport notified the Endocare Board that the other party in Project Energy had communicated through its investment banker earlier that day that it was not interested in continuing to pursue the potential acquisition of Endocare for a number of reasons. At approximately the same time, the other party to Project Mandarin and Endocare determined to terminate negotiations as a result of changes in market conditions and their respective businesses.

 

On July 3, 2008, the Endocare Board held a telephonic meeting to review and discuss with Messrs. Davenport, Goldsmith and Noonan and representatives of Endocare’s financial advisor valuation, governance and management matters covered by the parties at the meeting held in Chicago on June 27, 2008.

 

On July 10, 2008, the Endocare Board held a telephonic meeting to engage in further review and discussion regarding valuation, governance and management matters in connection with a potential Galil transaction. Also on the call were Messrs. Rodriguez and Davis and representatives of Endocare’s financial advisor. The Endocare Board also discussed the latest draft of Endocare’s nonbinding letter of intent.

 

On July 10, 2008, Mr. Davis sent to Mr. Thomas Endocare’s initial draft nonbinding letter of intent relating to a potential business combination between Endocare and Galil. From July 10, 2008 to August 4, 2008, the parties negotiated this letter of intent.

 

On July 11, 2008, Mr. Goldsmith had a call with Mr. Thomas to discuss Galil’s reaction to certain terms included in Endocare’s draft nonbinding letter of intent.

On July 14, 2008, the independent directors on the Endocare Board held a telephonic executive session to discuss management matters relating to the Galil transaction. In particular, the scope of the proposed post-closing Chairman position was discussed.

 

On July 16, 2008, the Endocare Board held a telephonic meeting, with Messrs. Rodriguez and Davis present, to discuss the proposed post-closing Chairman position and other matters relating to Endocare’s draft letter of intent.

 

On July 24-25, 2008, the Endocare Board held a regularly scheduled meeting. During the executive session of this meeting, the Endocare Board discussed the Galil transaction and proposed revisions to Endocare’s draft letter of intent.

 

On July 29, 2008, Mr. Davis sent to Mr. Thomas a revised draft letter of intent. Between July 29, 2008 and August 4, 2008, the parties held a number of telephone calls and exchanged further revised drafts of the letter of intent.

 

On August 4, 2008, Endocare and Galil executed the letter of intent relating to the proposed combination.

 

On August 6, 2008, HealthTronics announced an unsolicited proposal to acquire all outstanding shares of Endocare common stock for $2.28 per share in cash.

 

On August 11, 2008, the Endocare Board held a telephonic meeting to discuss the HealthTronics proposal. During this meeting, Gibson Dunn reviewed with the Endocare Board the fiduciary duties applicable to it in connection with a business combination. The Endocare Board also discussed the status of the Galil transaction and the HealthTronics proposal. Oppenheimer discussed with the Endocare Board financial aspects of the Galil transaction. After discussion, the Endocare Board unanimously resolved to reject HealthTronics’ proposal as inadequate and not in the best interest of Endocare’s stockholders.

 

On August 11-12, 2008, in connection with his likely appointment as Chief Executive Officer of the combined company at the closing of the Galil transaction, as contemplated by the letter of intent that was executed by Endocare and Galil on August 4, 2008, Mr. Emerson met with several of Endocare’s independent directors and several members of Endocare’s senior management.

 

During the week of August 11, 2008, Endocare and Galil began the due diligence process by giving each other access to their respective virtual data rooms. Endocare and Galil each took appropriate measures to maintain the confidentiality of competitively sensitive information throughout the due diligence process. The due diligence process was largely completed by mid-September 2008. The process included a visit by Endocare representatives to Galil’s offices in Yokneam, Israel, Plymouth Meeting, Pennsylvania and London, England. The process also included a visit by Galil representatives to Endocare’s offices in Irvine, California.

 

On August 18, 2008, the Endocare Board held a telephonic meeting to discuss with representatives of Gibson Dunn and Endocare’s financial advisor the terms of the initial draft definitive merger agreement for the Galil transaction prepared by Gibson Dunn, with input from Mr. Davis, Endocare’s financial advisor and Endocare’s Israeli legal counsel, intellectual property legal counsel and health care regulatory legal counsel. In addition, Mr. Davis updated the Endocare Board regarding the status of due diligence. The Endocare Board also discussed with Endocare’s financial and legal advisors the potential size and terms of the financing expected to occur in connection with the Galil transaction.

 

On August 20, 2008, Gibson Dunn sent the initial draft definitive merger agreement to Galil’s corporate legal counsel, Arnold & Porter LLP. From August 20, 2008 to November 10, 2008, the parties and their respective legal counsel and financial advisors had numerous telephone calls and exchanged numerous drafts of the definitive merger agreement and ancillary agreements.

 

On September 5, 2008, the Endocare Special Committee held a telephonic meeting during which Endocare’s senior management updated the Endocare Special Committee regarding the meetings with Galil and related site visits that occurred the weeks of August 25, 2008 and September 1, 2008. The Endocare Special Committee also discussed with Endocare’s senior management and financial advisor financial forecasts for Endocare prepared by Endocare’s management that were circulated prior to the meeting. The Endocare Special Committee also discussed

with Endocare’s senior management the outstanding due diligence matters. In addition, the Endocare Special Committee discussed HealthTronics’ reaffirmation of its unsolicited proposal.

 

On September 11, 2008, the Endocare Special Committee held a telephonic meeting to review and discuss with Endocare’s senior management, legal and financial advisors various outstanding matters relating to the Galil transaction, including the terms of the definitive merger agreement. The Endocare Special Committee also engaged in further discussion regarding HealthTronics’ reaffirmation of its unsolicited proposal. Later that day, HealthTronics announced that it had decided to withdraw its unsolicited proposal.

 

On September 17, 2008, the Endocare Board held a regularly scheduled meeting. During this meeting, the Board met with Messrs. Rodriguez and Davis and representatives of Endocare’s legal and financial advisors to discuss various aspects of the merger agreement and proposed financing.

 

On September 25, 2008, the parties, represented by Messrs. Thomas, Goldsmith and Kentor, and their respective senior management, legal counsel and financial advisors held a lengthy telephone conference in an effort to finalize the merger agreement.

 

In mid-September, HealthTronics contacted Mr. Davenport to express its interest in further exploring a possible transaction. From mid-September 2008 until early November 2008, Endocare and HealthTronics had several telephone conferences and a meeting to discuss a possible transaction; however, the Endocare Board ultimately determined that a transaction with Galil appeared more likely to maximize stockholder value, among other considerations, and therefore determined not to pursue a transaction with HealthTronics.

 

Over September 26 and 27, 2008, Mr. Davenport contacted Endocare’s independent directors and indicated that he was considering resigning from his positions with Endocare to assume the position of Chief Executive Officer at a privately held health care company.

 

On September 28, 2008, the Endocare Board held a telephonic meeting, which included an executive session, to discuss Mr. Davenport’s possible resignation. On September 29, 2008, the independent directors on the Endocare Board held a telephonic meeting to engage in further discussion regarding Mr. Davenport’s possible resignation.

 

On September 30, 2008, Mr. Davenport notified the Endocare Board that he was resigning from his positions with Endocare.

 

On October 2, 2008, the Endocare Board held a telephonic meeting during which, among other matters, Mr. Noonan was appointed Interim Chief Executive Officer and Interim President. In addition, the Endocare Board discussed the status of the proposed Galil transaction.

 

On October 6, 2008, the Endocare Special Committee held a telephonic meeting during which it discussed with representatives of Endocare’s legal and financial advisors various matters relating to the proposed Galil transaction and proposed financing.

 

On October 7, 2008, the parties, including Messrs. Thomas, Goldsmith, Kentor and Noonan, and their respective legal counsel and financial advisors, and Willkie Farr & Gallagher LLP (“Willkie Farr”), legal counsel to certain U.S. based Galil shareholders in connection with the Merger and the proposed financing, held a lengthy telephone conference in effort to resolve open items. After a brief break, the conference call resumed and Mr. Thomas presented a proposal to Mr. Goldsmith with respect to the open items.

 

Between October 7, 2008 and the date of execution of the Merger Agreement and the Stock Purchase Agreement, Willkie Farr participated on various conference calls with the parties and counsel to Endocare and Galil with respect to the negotiation of the terms of the Merger, the voting agreements and the proposed financing on behalf of certain U.S. based Galil shareholders. In addition, Frazier Healthcare Ventures was represented by Goodwin Procter LLP in connection with its participation in the proposed financing.

 

On October 8, 2008, the Endocare Board held a telephonic meeting to discuss proposed resolutions to the open items on the terms of the Merger and the Financing. Topics covered included, among other matters, the Merger exchange ratio, financing allocations, lock-ups, breakup provisions, indemnification and constitution of the Endocare Board after the Merger. Following this meeting, Mr. Goldsmith communicated Endocare’s counterproposal on these open terms to Mr. Thomas.

On October 9, 2008, the Endocare Special Committee held a telephonic meeting with Endocare’s senior management and financial advisor in which Mr. Goldsmith updated the participants on the status of negotiations and the Special Committee discussed the developments.

 

On October 13, 2008, the Endocare Special Committee held a telephonic meeting with Endocare’s senior management, Gibson Dunn, Oppenheimer and Endocare’s primary tax advisor relative to the transaction to discuss the status of negotiations with Galil and several matters relating to the proposed financing.

 

On October 22, 2008, the Endocare Special Committee held a telephonic meeting with Endocare’s senior management and legal and financial advisors to discuss Galil’s latest proposal to address the outstanding issues, which was received earlier in the day.

 

On October 28, 2008, the Endocare Special Committee held a telephonic meeting with Endocare’s senior management and legal, financial and tax advisors to review the status of negotiations with Galil. In addition, the Endocare Special Committee approved the engagement of Oppenheimer as placement agent in connection with the proposed financing and Endocare subsequently executed an engagement letter with Oppenheimer for such purpose.

 

On October 30, 2008, the Endocare Special Committee held a telephonic meeting with Endocare’s senior management and legal and financial advisors to discuss the status of negotiations with Galil and the proposed financing. Gibson Dunn advised the Endocare Special Committee regarding a number of legal considerations relative to the proposed Galil transaction and proposed financing in light of the decline in the trading price of Endocare’s common stock and the related increase in post-closing ownership of the Galil shareholders and financing participants.

 

On October 31, 2008 and November 4, 2008, the Endocare Special Committee held telephonic meetings with Endocare’s senior management and legal and financial advisors to discuss the latest drafts of the merger agreement, stock purchase agreement and other draft transaction documents.

 

On November 7, 2008, the Endocare Special Committee held a telephonic meeting with Endocare’s senior management and legal and financial advisors to discuss the status of negotiations with Galil and the transaction agreements. Oppenheimer provided an update regarding financing efforts and market conditions for the proposed financing. The Endocare Special Committee discussed the pricing of the financing. After discussion, it was agreed that the financing would be priced at $1.00 per share, subject to Endocare Board approval and the signing of the stock purchase agreement with investors by November 10, 2008. The Endocare Special Committee then reviewed and discussed the proposed agenda for the meeting of the Endocare Board to be held on November 8, 2008 to consider approval of the proposed Galil transaction and the proposed financing and the related documents.

 

On November 8, 2008, the Endocare Board met, with Endocare’s senior management and legal and financial advisors in attendance, to consider approval of the Galil transaction and the proposed financing. At this meeting, Gibson Dunn again reviewed with the Endocare Board the fiduciary duties applicable to the Galil transaction and proposed financing under Delaware law, and the Endocare Board discussed related considerations. The Endocare Board then discussed the pro forma ownership at closing, cash requirements, financing terms and post-closing projections. Gibson Dunn reviewed with the Endocare Board the principal terms of the merger agreement, stock purchase agreement and other transaction agreements. The Endocare Board then reviewed the strategic reasons for the Galil transaction, including, among other considerations, Endocare’s financial performance over the past several quarters, market conditions and the extremely difficult financing environment, Endocare’s liquidity and capital resources, the view that the merger with Galil would result in a combined company with the potential for enhanced future growth and value as compared to Endocare remaining as an independent, standalone company, and the belief that the merger was more favorable to Endocare’s stockholders than any other alternative reasonably available to Endocare and its stockholders, including the alternative of a transaction with HealthTronics and remaining an independent, standalone company. Gibson Dunn reviewed with the Endocare Board, and the Endocare Board discussed, the principal risk factors related to the proposed merger and the proposed financing. Also at this meeting, Oppenheimer reviewed with the Endocare Board its financial analysis of the aggregate exchange ratio provided for in the proposed merger and informed the Endocare Board that, assuming no material change in the terms of the proposed merger or in the totality of the information it considered in connection with its financial analysis, Oppenheimer believed it would be in a position to render to the Endocare Board in connection with the execution of the merger agreement an opinion as to the fairness, from a financial point of view and as of the date of the opinion, to Endocare of

the aggregate exchange ratio provided for in the merger. Following these discussions, and after further review and discussion, the Endocare Board unanimously approved the Galil transaction and proposed financing, subject to satisfactory resolution of the terms of the standstill agreement and indemnification relating to potential claims by a certain shareholder of Galil and delivery of Oppenheimer’s opinion once the merger agreement was ready to be executed.

 

On the morning of November 10, 2008, the Endocare Board held a telephonic meeting with Endocare’s senior management and legal and financial advisors. During this meeting, the Endocare Board discussed with Gibson Dunn the negotiated terms of the indemnification relating to potential claims by a certain shareholder of Galil and confirmed resolution of the terms of the standstill agreement. Also at this meeting, Oppenheimer rendered to the Endocare Board an oral opinion, which was confirmed by delivery of a written opinion dated November 10, 2008, to the effect that, as of that date and based on and subject to the matters described in its opinion, the 0.923077 aggregate exchange ratio provided for in the Merger Agreement was fair, from a financial point of view, to Endocare. After discussion, the Endocare Board unanimously approved Endocare proceeding with the Galil transaction and proposed financing, consistent with the Board’s approval at its meeting held on November 8, 2008 and the terms presented to the Endocare Board at the November 10, 2008 meeting.

 

Later on November 10, 2008, the parties executed the Merger Agreement and ancillary agreements and Endocare and the investors in the Financing executed the Stock Purchase Agreement. After the close of the market, the parties issued a joint press release to announce the execution of the Merger Agreement and Stock Purchase Agreement. On November 11, 2008, the parties held a joint conference call to discuss the Merger and Financing with investors, analysts and other interested persons.

 

In January 2009, the Chief Executive Officer of HealthTronics, informed Mr. Noonan that HealthTronics was still interested in pursuing a transaction with Endocare if the transaction with Galil encountered difficulties. Subsequently, on February 3, 2009, the Chief Executive Officer of HealthTronics reiterated HealthTronics’ interest in pursuing a transaction with Endocare and clarified that HealthTronics was interested in pursuing such a transaction irrespective of whether Endocare experienced difficulties moving forward with Galil. In connection with the foregoing events, the Endocare Board believed that it was in the best interests of Endocare and its stockholders to focus on the Galil transaction, because the Endocare Board believed that combining Endocare and Galil would provide significant advantages over an acquisition of Endocare by HealthTronics and was more likely to maximize stockholder value for several reasons including the following:

 

 

 

On April 9, 2009, Endocare received a written proposal from HealthTronics, which is subject to negotiation of a definitive written agreement and due diligence, offering to purchase all of Endocare’s outstanding common stock for $1.25 per share, with Endocare stockholders having the ability to elect to receive either cash or HealthTronics’ common stock as consideration. The Endocare Board is in the process of evaluating HealthTronics’ latest proposal. Endocare expects to publicly announce the results of the Endocare Board’s evaluation when it is completed.

 

Endocare’s Reasons for the Merger

 

In evaluating the Merger, Endocare’s board of directors consulted with senior management and Endocare’s legal and financial advisors, and, in the course of reaching its determination to approve the Merger Agreement, Endocare’s board of directors considered a number of factors, including the following:

 

 

 

 

 

In the course of its deliberations, Endocare’s board of directors also considered a variety of risks and other countervailing factors related to entering into the Merger Agreement and the Stock Purchase Agreement, including the following:

 

 

 

The foregoing discussion of the factors considered by Endocare’s board of directors is not intended to be exhaustive, but is believed to set forth the principal factors considered by Endocare’s board of directors. Endocare’s board of directors collectively reached the unanimous conclusion to approve the Merger with Galil in light of the various factors described above and other factors that each member of Endocare’s board of directors deemed relevant. In view of the wide variety of factors considered by the members of Endocare’s board of directors in connection with their evaluation of the Merger Agreement and the Stock Purchase Agreement and the complexity of these matters, Endocare’s board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. Endocare’s board of directors made its decision based on the totality of information presented to and considered by it. In considering the factors discussed above, individual directors may have given different weights to different factors.

 

Endocare’s board of directors unanimously determined that Proposals 1 and 2 are in the best interests of Endocare’s stockholders and unanimously approved the Merger Agreement and Financing. Endocare’s board of directors unanimously recommends that Endocare’s stockholders approve Proposals 1 and 2.

 

Opinion of Endocare’s Financial Advisor

 

Endocare has engaged Oppenheimer as its financial advisor in connection with the Merger. In connection with this engagement, Endocare’s board of directors requested that Oppenheimer evaluate the fairness, from a financial point of view, to Endocare of the 0.923077 aggregate exchange ratio provided for in the Merger Agreement. On November 10, 2008, Oppenheimer delivered a written opinion, dated November 10, 2008, to Endocare’s board of directors to the effect that, as of that date and based on and subject to the matters described in its opinion, the 0.923077 aggregate exchange ratio provided for in the Merger Agreement was fair, from a financial point of view, to Endocare.

 

The full text of Oppenheimer’s written opinion, dated November 10, 2008, which describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached to this proxy statement/prospectus as Annex E. Oppenheimer’s opinion was provided to Endocare’s board of directors in connection with its evaluation of the 0.923077 aggregate exchange ratio from a financial point of view and does not address any other aspect of the Merger or any related transaction. Oppenheimer’s opinion does not address the underlying business decision of Endocare to effect the Merger or any related transaction, the relative merits of the Merger or any related transaction as compared to any alternative business strategies that might exist for Endocare or the effect of any other transaction in which Endocare might engage and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to any matters relating to the Merger or any related transaction. The summary of Oppenheimer’s opinion described below is qualified in its entirety by reference to the full text of its opinion.

 

In arriving at its opinion, Oppenheimer:

 

 

 

In rendering its opinion, Oppenheimer relied upon and assumed, without independent verification or investigation, the accuracy and completeness of all of the financial and other information provided to or discussed with Oppenheimer by Endocare, Galil and their respective employees, representatives and affiliates or otherwise reviewed by Oppenheimer. Oppenheimer was advised that financial forecasts relating to Endocare and Galil beyond the fiscal year ending 2010 were not prepared by the managements of Endocare and Galil and, accordingly, Oppenheimer did not undertake an analysis of the future financial performance of Endocare and Galil beyond such period. With respect to the financial forecasts and estimates relating to Endocare and Galil utilized in Oppenheimer’s analyses (including estimates as to potential synergies and strategic benefits anticipated by the managements of Endocare and Galil to result from the Merger), Oppenheimer was advised and, at the direction of the managements of Endocare and Galil and with Endocare’s consent, assumed, without independent verification or investigation, that such forecasts and estimates were reasonably prepared on bases reflecting the best available information, estimates and judgments of the managements of Endocare and Galil, as the case may be, as to the future financial condition and operating results of Endocare and Galil and such synergies and strategic benefits and that the financial results reflected in such forecasts and estimates (including estimates as to potential synergies and strategic benefits) would be achieved at the times and in the amounts projected. Oppenheimer relied, at Endocare’s direction, without independent verification or investigation, on the assessments of Endocare’s management as to (i) the existing and future products, technology and intellectual property of Endocare and Galil and the risks associated with such products, technology and intellectual property and (ii) Endocare’s ability to integrate the businesses of Endocare and Galil and to retain key customers and suppliers of Endocare and Galil. Oppenheimer assumed, with Endocare’s consent, that the Merger would qualify for federal income tax purposes as a reorganization under Section 368(a) of the Code. Oppenheimer also assumed, with Endocare’s consent, that the Merger and related transactions, including the Financing contemplated to be consummated concurrently with the Merger, would be consummated in accordance with their respective terms without waiver, modification or amendment of any material term, condition or agreement and in compliance with all applicable laws and other requirements and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases with respect to the Merger or any related transaction, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on Endocare, Galil or the Merger (including the contemplated benefits to Endocare of the Merger). Oppenheimer neither made nor obtained any independent evaluations or appraisals of the assets or liabilities, contingent or otherwise, of Endocare or Galil.

 

Oppenheimer’s opinion relates to the relative values of Endocare and Galil. Oppenheimer did not express any opinion as to the underlying valuation, future performance or long-term viability of Endocare or Galil, the actual

value of Endocare common stock when issued or the price at which Endocare common stock would trade at any time. Oppenheimer expressed no view as to, and its opinion did not address, any terms or other aspects or implications of the Merger (other than the 0.923077 aggregate exchange ratio to the extent expressly specified in its opinion) or any related transaction or any aspect or implication of any other agreement, arrangement or understanding entered into in connection with the Merger or otherwise, including, without limitation, the form or structure of the Merger or any terms or other aspects or implications of the financing contemplated to be consummated concurrently with the Merger. In addition, Oppenheimer expressed no view as to, and its opinion did not address, the fairness of the amount or nature of, or any other aspect relating to, the compensation to be received by any individual officers, directors or employees of any parties to the Merger, or any class of such persons, relative to the 0.923077 aggregate exchange ratio. Oppenheimer also expressed no view as to, and its opinion did not address, the underlying business decision of Endocare to effect the Merger or any related transaction, the relative merits of the Merger or any related transaction as compared to any alternative business strategies that might exist for Endocare or the effect of any other transaction in which Endocare might engage. Oppenheimer’s opinion was necessarily based on the information available to it and general economic, financial and stock market conditions and circumstances as they existed and could be evaluated by Oppenheimer on the date of its opinion. The credit, financial and stock markets were experiencing unusual volatility as of the date of Oppenheimer’s opinion and Oppenheimer expressed no opinion or view as to the potential effects, if any, of such volatility on Endocare, Galil or the proposed Merger. Although subsequent developments may affect its opinion, Oppenheimer does not have any obligation to update, revise or reaffirm its opinion. Except as described above, Endocare imposed no other instructions or limitations on Oppenheimer with respect to the investigations made or the procedures followed by it in rendering its opinion.

 

This summary is not a complete description of Oppenheimer’s opinion or the financial analyses performed and factors considered by Oppenheimer in connection with its opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. Oppenheimer arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion. Accordingly, Oppenheimer believes that its analyses and this summary must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Oppenheimer’s analyses and opinion.

 

In performing its analyses, Oppenheimer considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Endocare and Galil. No company or transaction used in the analyses is identical to Endocare, Galil or the Merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or transactions analyzed.

 

The forecasts and estimates contained in Oppenheimer’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the forecasts and estimates used in, and the results derived from, Oppenheimer’s analyses are inherently subject to substantial uncertainty.

 

The type and amount of consideration payable in the Merger were determined through negotiation between Endocare and Galil, and the decision to enter into the transaction was solely that of Endocare’s board of directors. Oppenheimer’s opinion and financial analyses were only one of many factors considered by Endocare’s board of directors in its evaluation of the Merger and should not be viewed as determinative of the views of Endocare’s board of directors or management with respect to the Merger or the 0.923077 aggregate exchange ratio provided for in the Merger Agreement.

The following is a summary of the material financial analyses performed in connection with Oppenheimer’s opinion, dated November 10, 2008, to Endocare’s board of directors. The financial analyses summarized below include information presented in tabular format. In order to fully understand Oppenheimer’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Oppenheimer’s financial analyses. In performing the financial analyses summarized below, Oppenheimer utilized estimated financial data of Galil and Endocare based on internal estimates of Galil’s management and Endocare’s management, respectively. In calculating implied equity values of Galil and Endocare, net cash was adjusted to exclude operating cash in the case of Galil and to exclude working capital-related debt and operating cash in the case of Endocare.

 

Selected Companies Analysis

 

Oppenheimer reviewed financial and stock market information of Endocare and the following 11 selected publicly held companies in the medical devices industry:

 

 

Oppenheimer reviewed, among other things, enterprise values of the selected companies, calculated as market value based on closing stock prices on November 7, 2008, plus straight debt and preferred stock, out-of-the-money convertible securities and minority interests, less cash, cash equivalents and investments in unconsolidated affiliates, as a multiple of latest 12 months revenue and, to the extent publicly available, calendar years 2008 and 2009 estimated revenue. Financial data of the selected companies were based on publicly available research analysts’ estimates, public filings and other publicly available data. Based on implied equity reference ranges for Galil and Endocare, calculated by applying a range of selected multiples of latest 12 months revenue and calendar years 2008 and 2009 estimated revenue derived from the selected companies to corresponding data of Galil and Endocare, this analysis indicated the following implied aggregate exchange ratio reference ranges, as compared to the 0.923077 aggregate exchange ratio provided for in the Merger Agreement:

 

 

Selected Precedent Transactions Analyses

 

Oppenheimer reviewed certain publicly available information for selected transactions involving urology applications companies in the medical devices industry, given that both Galil and Endocare are primarily focused on developing urology applications, as well as selected transactions in the medical devices industry generally:

 

Selected Urology Transactions.  Oppenheimer reviewed the transaction values of the following five selected transactions involving urology application companies announced from November 20, 1997 through September 25, 2008, referred to as the selected urology transactions:

 

 

Oppenheimer reviewed transaction values in the selected urology transactions, calculated as the equity value implied for the target company based on the consideration payable in the selected transaction, plus straight debt and preferred stock, out-of-the-money convertible securities and minority interests, less cash, cash equivalents and investments in unconsolidated affiliates, as a multiple, to the extent publicly available, of latest 12 months revenue. Financial data for the selected urology transactions were based on publicly available information at the time of announcement of the relevant transaction. Based on implied equity reference ranges for Galil and Endocare, calculated by applying a range of selected multiples of latest 12 months revenue derived from the selected urology transactions, excluding the multiple for the Medtronic, Inc./VidaMed, Inc. transaction as an outlier, to corresponding data of Galil and Endocare for the latest 12 months (as of September 30, 2008), this analysis indicated the following implied aggregate exchange ratio reference range, as compared to the 0.923077 aggregate exchange ratio provided for in the Merger Agreement:

 

 

Selected Medical Devices Transactions.  Oppenheimer also reviewed the transaction values of the following 12 selected transactions involving companies in the medical devices industry announced from January 19, 2006 through July 7, 2008, referred to as the selected medical devices transactions:

 

 

Oppenheimer reviewed transaction values in the selected medical devices transactions as a multiple of latest 12 months revenue and, to the extent publicly available, one-year and two-year forward estimated revenue. Financial data for the selected medical devices transactions were based on publicly available information at the time of announcement of the relevant transaction. Based on implied equity reference ranges for Galil and Endocare, calculated by applying a range of selected multiples of latest 12 months revenue and one-year and two-year forward estimated revenue derived from the selected medical devices transactions to corresponding data of Galil and Endocare for the latest 12 months (as of September 30, 2008) and calendar years 2008 and 2009, this analysis

indicated the following implied aggregate exchange ratio reference ranges, as compared to the 0.923077 aggregate exchange ratio provided for in the Merger Agreement:

 

 

Contribution Analysis

 

Oppenheimer reviewed the relative contributions of Endocare and Galil to various financial metrics, including the pro forma revenue and gross profit of the combined company for calendar year 2007, the latest 12 months (as of September 30, 2008) and calendar years 2008 through 2010. Oppenheimer then compared the implied equity ownership percentages of Galil’s shareholders in the combined company derived from the relative contributions of Endocare and Galil to such financial metrics to the pro forma equity ownership percentages of Galil’s shareholders in the combined company upon consummation of the Merger implied by the 0.923077 aggregate exchange ratio provided for in the Merger. This analysis indicated the following range of implied pro forma equity ownership percentages for Galil’s shareholders, as compared to the pro forma equity ownership percentage for Galil’s shareholders upon consummation of the Merger implied by the 0.923077 aggregate exchange ratio provided for in the Merger Agreement:

 

 

Accretion/Dilution Analysis

 

Oppenheimer reviewed the potential pro forma effect of the Merger on Endocare’s calendar years 2008, 2009 and 2010 estimated earnings per share, referred to as EPS, taking into account the full impact in each calendar year observed of potential synergies for calendar year 2010 anticipated by the managements of Endocare and Galil to result from the Merger before giving effect to transaction costs and the number of shares of Endocare common stock to be issued in the financing contemplated to be consummated concurrently with the Merger. Based on the aggregate Merger exchange ratio and an assumed Merger closing date of January 1, 2008, this analysis indicated that the Merger could reduce Endocare’s calendar year 2008 estimated loss per share and could be accretive to Endocare’s calendar years 2009 and 2010 estimated EPS. Actual results may vary from projected results and the variations may be material.

 

Miscellaneous

 

Endocare has agreed to pay Oppenheimer for its financial advisory services in connection with the Merger an aggregate fee of $800,000, a portion of which was payable upon Oppenheimer’s engagement by Endocare, a portion of which was payable upon delivery of Oppenheimer’s opinion and a significant portion of which is contingent upon consummation of the Merger. Endocare also has agreed to reimburse Oppenheimer for its reasonable expenses, including reasonable fees and expenses of its legal counsel, and to indemnify Oppenheimer and related parties against liabilities, including liabilities under the federal securities laws, relating to, or arising out of, its engagement. Oppenheimer is acting as placement agent in connection with the financing contemplated to be consummated concurrently with the Merger, for which Oppenheimer expects to receive compensation. In the ordinary course of business, Oppenheimer and its affiliates may actively trade securities of Endocare for Oppenheimer’s and its affiliates’ own accounts and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities.

 

The issuance of Oppenheimer’s opinion was approved by an authorized committee of Oppenheimer. Endocare selected Oppenheimer as its financial advisor based on Oppenheimer’s reputation and experience. Oppenheimer is an internationally recognized investment banking firm and, as a part of its investment banking business, is regularly

engaged in valuations of businesses and securities in connection with acquisitions and mergers, underwritings, secondary distributions of securities, private placements and valuations for other purposes.

 

Merger Consideration

 

At the effective time of the Merger, each outstanding ordinary share of Galil will be converted into the right to receive the number of shares of Endocare common stock equal to the product of (1) the sum of the number of shares of Endocare common stock outstanding and the number of shares of Endocare common stock subject to in-the-money options immediately prior to the effective time of the Merger and (2) the exchange ratio of 0.923077, divided by the total number of Galil ordinary shares outstanding and the number of ordinary shares of Galil subject to in-the-money options immediately prior to the effective time of the Merger. The exact conversion ratio cannot be calculated until immediately prior to the effective time of the Merger, but it is expected that approximately 33.0 ordinary shares of Galil will be converted into one share of Endocare common stock.

 

Indemnification; Escrow Shares

 

At the closing of the Merger, Endocare will deduct from the Merger consideration payable to the Galil Shareholders and deposit with Deutsche Bank National Trust Company, as escrow agent, a number of shares of Endocare common stock equal to 7.5% of the total number of shares of Endocare common stock comprising the aggregate Merger consideration rounded down to the nearest whole share, for the purpose of satisfying any indemnification obligations to Endocare and its affiliates under the Merger Agreement. The number of shares of Endocare common stock currently expected to be deposited into escrow upon consummation of the Merger is 838,117 shares. While the shares are held in escrow, Galil shareholders will be entitled to vote the Escrow Shares otherwise payable to such shareholders and to any cash dividends paid on such Escrow Shares at the time such dividends are paid.

 

Pursuant to the Merger Agreement, Endocare will be indemnified, solely to the extent of the Escrow Shares, for damages that Endocare incurs arising from a breach or inaccuracy of Galil’s representations and warranties or a breach of any of Galil’s covenants prior to consummation of the Merger, and for any damages that Endocare incurs arising from taxes of Galil attributable to taxable periods ending on or before the consummation of the Merger. In the event that the parties are unable to agree upon matters relating to the indemnification procedures, such matters will be determined by an impartial arbitrator pursuant to the dispute resolution provisions of the Merger Agreement. Pursuant to the Merger Agreement, any claim against the Escrow Shares must be made on or before the date on which Endocare is required to file with the SEC its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (without regard to any extensions), or March 31, 2010. Escrow Shares remaining in the escrow after settlement of all claims will be distributed to Galil’s former shareholders based on their proportionate holdings of Galil shares at the time of consummation of the Merger.

 

Galil Share Options

 

Each outstanding option to purchase Galil ordinary shares issued pursuant to the Galil 1997 Option Plan, the Galil 2000 Share Option Plan and the Galil 2003 Share Option Plan will be converted into an option to purchase, on the same terms and conditions as applied to the Galil share option, a number of shares of Endocare common stock (rounded up to the nearest whole share) equal to the number of shares of Endocare common stock that the holder of such Galil stock option would have been entitled to receive in the Merger had such holder exercised the option in full immediately prior to the Merger. The exercise price per share of Endocare common stock for these converted options will be equal to the former aggregate exercise price for Galil ordinary shares that otherwise could have been purchased under the Galil share option, divided by the number of shares of Endocare common stock for which such option will become exercisable (rounded down to the nearest whole cent). In addition, in the case of options intended to be treated as “incentive stock options” under the Code, the option price, the number of shares that could be purchased and the terms and conditions of exercise will be determined in order to comply with the applicable provisions of the Code.

Merger Mechanics

 

Assuming ownership by Galil’s shareholders of the Escrow Shares, the shares of Endocare common stock issued to Galil’s shareholders in connection with the Merger are expected to represent approximately 48.0%, and Endocare’s existing stockholders are expected to own approximately 52.0%, of the shares of Endocare’s common stock outstanding after the Merger but without taking into consideration the shares issued in the Financing.

 

No certificate representing fractional shares of Endocare’s common stock will be issued in connection with the Merger. The aggregate number of shares which each holder of Galil shares is entitled to receive in the Merger will be rounded down to the nearest whole share and such shareholder shall not be entitled to any rights with respect to any fractional share or any cash in lieu thereof.

 

The Merger Agreement provides that, at the effective time of the Merger, Endocare will deposit with the exchange agent designated by Endocare and reasonably acceptable to Galil the shares of Endocare’s common stock issuable to Galil’s shareholders and any dividends or distributions to which holders of such stock certificates may be entitled. Endocare anticipates that Computershare, Endocare’s transfer agent, will act as exchange agent.

 

The Merger Agreement provides that, as soon as practicable after the effective time of the Merger, the exchange agent will mail to each record holder of Galil shares immediately prior to the effective time of the Merger a letter of transmittal and instructions for surrendering and exchanging the record holder’s Galil share certificates. Upon surrender of a Galil share certificate for exchange to the exchange agent, together with a duly signed letter of transmittal, and such other documents as the exchange agent may reasonably require, the holder of the Galil share certificate will be entitled to receive the following:

 

 

All Galil share certificates surrendered will be cancelled.

 

At the effective time of the Merger, all holders of certificates representing Galil shares that were outstanding immediately prior to the effective time of the Merger will cease to have any rights as shareholders of Galil. In addition, no transfer of Galil shares after the effective time of the Merger will be registered on the share transfer books of Galil.

 

If any Galil share certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and delivery of a letter of transmittal and, if required by Endocare or the exchange agent, the posting by such person of a bond in such reasonable amount as Endocare or the exchange agent may direct as indemnity against any claim that may be made against it with respect to such certificate, the exchange agent shall issue in exchange for such lost, stolen or destroyed certificate the shares of Endocare’s common stock and any unpaid dividends and distributions on such shares of Endocare’s common stock.

 

Interests of Endocare’s Directors and Executive Officers in the Merger

 

In considering the recommendation of Endocare’s board of directors with respect to the proposals, Endocare’s stockholders should be aware that members of the board of directors and executive officers of Endocare may have interests in the Merger that may be different from, or in addition to, the interests of Endocare’s stockholders. Endocare’s directors were aware of these potential conflicts of interest and considered them, among other matters, in reaching their respective decisions to approve the Merger and the Merger Agreement, and to recommend that Endocare’s stockholders vote to approve the proposals.

Payments Upon a “Change in Control”

 

Upon a “Change in Control” for purposes of Section 409A of the Code, the following table lists the directors and executive officers of Endocare that are entitled to be issued shares of Endocare common stock pursuant to Endocare’s Employee Deferred Stock Unit Program and Endocare’s Non-Employee Director Deferred Stock Unit Program as of March 31, 2009:

 

 

 

 

 

Management of the Combined Company

 

It is intended that Martin J. Emerson, the current President and Chief Executive Officer of Galil, will become the Chief Executive Officer and President of Endocare after the Merger. Michael R. Rodriguez, Endocare’s Senior Vice President, Finance and Chief Financial Officer, and Clint B. Davis, Endocare’s Senior Vice President, Legal Affairs and General Counsel, who were appointed as co-principal executive officers on March 19, 2009, will resign from such positions as co-principal executive officers, but will remain in their other officer positions. All current directors of Endocare will remain on the board of directors.

 

Interests of Galil’s Directors and Executive Officers in the Merger

 

Members of the board of directors and executive officers of Galil may have interests in the Merger that are different from, or are in addition to, the interests of Galil’s shareholders generally. These interests generally include, among other things, the assumption by Endocare of Galil’s share options in the Merger, the potential for such persons to occupy positions as officers or directors of the combined company, to collect director’s fees and other related equity and non-equity compensation, and to receive potential benefits under employment arrangements as a result of the Merger. The members of Galil’s board of directors were aware of these interests and considered them, among other matters, in approving the Merger Agreement and in determining to recommend that Galil’s shareholders vote to approve and adopt the Merger Agreement.

 

Board of Directors and Management of the Combined Company

 

Pursuant to the Merger Agreement, Endocare has agreed to appoint four current members of Galil’s board of directors to Endocare’s board of directors upon completion of the Merger. It is currently the parties’ intention that these individuals will be Martin J. Emerson, Richard B. Emmitt, Doron Birger and James E. Thomas. Each of these individuals voted, in their capacity as directors, to approve the adoption of the Merger Agreement and have recommended to the shareholders of Galil that they vote to approve the Merger Agreement and the Merger.

In addition, it is intended that Martin J. Emerson, who is the President and Chief Executive Officer of Galil, will become the Chief Executive Officer and President of Endocare upon closing of the Merger. Mr. Emerson participated in the negotiation and approval of the terms of the Merger on behalf of Galil.

 

Indemnification and Directors’ and Officers’ Insurance

 

Pursuant to the Merger Agreement, prior to the effective time of the Merger, Galil may purchase a “tail” policy under Galil’s existing directors’ and officers’ insurance policy which (i) has an effective term of seven years from the effective time of the Merger, (ii) covers those persons who are currently covered by Galil’s directors’ and officers’ insurance policy in effect as of November 10, 2008 for actions and omissions occurring on or prior to the effective time of the Merger, and (iii) contains terms and conditions that are no less favorable, in the aggregate, to the insured than those of Galil’s directors’ and officers’ insurance policy in effect as of November 10, 2008.

 

In addition, for a period of seven years following the effective time of the Merger, to the fullest extent permitted by applicable law, Endocare and Galil shall fulfill and honor in all respects the obligations of Galil to the current officers and directors of Galil or any of its subsidiaries and each other person who is or was a director or officer of Galil or any of its subsidiaries at or at any time prior to the effective time of the Merger, pursuant to all rights to any indemnification and exculpation from liabilities for acts or omissions contained in Galil’s charter documents or available under applicable law.

 

Stock Option Plans

 

As of April 3, 2009, directors and officers of Galil held in the aggregate options to purchase approximately 12,880,000 ordinary shares of Galil. Under the terms of the Merger Agreement, these options will be converted into options to purchase approximately 393,742 shares of Endocare common stock as described above.

 

Financing

 

On November 10, 2008, concurrently with the execution of the Merger Agreement, Endocare and certain existing institutional accredited stockholders of Endocare and Galil, including affiliates of certain directors of Galil, entered into the Stock Purchase Agreement, relating to the sale by Endocare of up to 16,250,000 shares of Endocare common stock at a purchase price of $1.00 per share. Entities affiliated with directors of Galil will purchase 13,050,000 shares in the Financing, representing approximately 33.33% of the outstanding common stock of Endocare immediately after consummation of the Merger and the Financing. Pursuant to the terms of the Stock Purchase Agreement, entities affiliated with three of the current directors of Galil are expected to beneficially own in excess of 5% of Endocare’s outstanding common stock and to collectively own 50.9% of Endocare’s outstanding common stock immediately upon the closing of the Merger and the Financing.

 

Composition of Endocare’s Board of Directors Following the Merger

 

The board of directors of Endocare following the Merger will be comprised of nine directors. Endocare has agreed to appoint four current members of Galil’s board of directors to the board of directors of Endocare upon completion of the Merger. It is currently the parties’ intention that these individuals will be Martin J. Emerson, Richard B. Emmitt, Doron Birger and James E. Thomas. Endocare has also agreed to appoint a current or former partner of Frazier Healthcare Ventures or the current or former chief executive officer of one of Frazier Healthcare Ventures’ portfolio companies to its board of directors upon consummation of the Merger. It is currently intended that this individual will be Daniel A. Pelak. As of April 3, 2009, Frazier Healthcare Ventures held 1,721,915 shares of Endocare common stock comprising 14.6% of the total number of shares of Endocare common stock outstanding as of that date. In addition, Frazier Healthcare V, L.P. has committed to purchase 3,000,000 shares of Endocare common stock in the financing. The remaining four directors will be members of Endocare’s current board of directors. Those individuals are currently expected to be John R. Daniels, M.D., David L. Goldsmith, Eric S. Kentor and Thomas R. Testman. The parties have agreed that a member of Endocare’s pre-Merger board of directors will be Chairman of the post-Merger board of directors. It is the parties’ current intention that David L. Goldsmith will be the Chairman of the board of directors after completion of the Merger.

Effective Time of the Merger

 

The Merger Agreement requires the parties to consummate the Merger after all of the conditions to the consummation of the Merger contained in the Merger Agreement are satisfied or waived. The Merger will become effective upon the issuance of a certificate evidencing the Merger by the Companies Registrar of the State of Israel. While we are seeking to consummate the Merger in the second quarter of 2009, neither Endocare nor Galil can predict the exact timing of the consummation of the Merger, if at all.

 

Government and Regulatory Matters

 

Endocare and Galil have each agreed to use their commercially reasonable efforts to do all things necessary under applicable laws to complete the Merger. These things include:

 

 

In the United States, Endocare must comply with applicable federal and state securities laws and, to the extent Endocare is to remain listed on the NASDAQ Capital Market, NASDAQ rules and regulations in connection with the issuance of shares of Endocare’s common stock in the Merger and the Financing, including the filing with the SEC and effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus is a part and obtaining stockholder approval of the issuance of the shares of Endocare common stock pursuant to the Merger Agreement and Stock Purchase Agreement in accordance with NASDAQ Marketplace Rule 4350(i)(1)(c)(ii).

 

Neither Endocare nor Galil is required to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the Merger. However, the FTC has opened 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 FTC’s investigation and are in the process of providing the FTC with information and materials. There can be no assurances that the FTC investigation will not prevent or materially delay consumation of the Merger.

 

Israeli Governmental Approvals

 

Israeli Companies Law.  Under the Israeli Companies Law, Endocare and Galil cannot complete the Merger without making certain filings and notifications to the Israeli Companies Registrar.

 

 

 

Assuming that the shareholders of each of the merging companies approve the Merger Agreement and the Merger and that all of these statutory procedures and requirements have been complied with, upon filing of the shareholder approval notice, and so long as 30 days have passed from the date of the special meetings of each of the merging companies and at least 50 days from the date of the filing of the Merger Proposals with the Israeli Companies Registrar has lapsed, the Companies Registrar will declare the Merger effective and issue the surviving company a certificate to that effect.

 

Office of the Chief Scientist.  The Israeli Research and Development Law imposes certain reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify the OCS of any change in control of the recipient, or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient, and requires the new interested party to undertake to the OCS to comply with the Research and Development Law. The OCS is a part of Israel’s Ministry of Industry, Trade and Labor and provides research and development grants to high-tech companies, subject to an obligation to repay the grants by means of royalties on the sale of products funded by the grants. Until 2003, Galil received grants from the Office of the Chief Scientist, including the Magnet Division, for the financing of a portion of different development programs for its cryoablation products. Therefore, Endocare and Galil are required to notify the OCS of the proposed Merger. Galil sent a notice to the OCS in that respect on December 4, 2008. Endocare has agreed in writing to observe strictly all the requirements of the Israel Research and Development Law and the regulations, rules and procedures promulgated thereunder, as applied to Galil and as directed by the Israeli Research Committee, in particular those requirements relating to the prohibitions on the transfer of know-how and/or production rights and, as a shareholder of Galil, to make all reasonable efforts that Galil shall observe strictly all such requirements. Galil further confirmed to the OCS that after the completion of the Merger Galil will continue to exist as a subsidiary of Endocare, and accordingly, shall continue to hold its assets and carry out its business. On December 8, 2008 an approval of receipt of Galil’s notice to the OCS was obtained.

 

Israeli Investment Center in the Israeli Ministry of Industry and Commence.  To the extent that a company has received benefits from the Israeli Investment Center, its consent will also be required to the company’s acquisition by a non-Israeli shareholder. The Investment Center, which is also a part of Israel’s Ministry of Industry, Trade and Labor, provides various benefits to Israeli companies including grants to finance capital investments and tax benefits ranging from reduced rates of company tax to a full tax holiday for a fixed period, depending on a number of factors. Galil has also received tax benefits from the Investment Center, and therefore Endocare and Galil have agreed to seek the approval of the Investment Center to the Merger. Galil filed an application with the Investment Center in that respect on December 4, 2008. On January 13, 2009 the Investment Center granted its approval in principle for the Merger.

 

Israeli Securities Authority.  Endocare requires an exemption, pursuant to Section 15D of the Israeli Securities Law, 1968, from the requirement to publish a prospectus in respect of the assumption by Endocare of the Galil share options granted to employees of Galil. On December 11, 2008, the Israeli Securities Authority granted this exemption. In order to comply with the terms of the exemption, Endocare will be required to make copies of the relevant share option plans and related SEC filings available to Israeli employees of Galil, and, upon demand, to provide Hebrew translations of these documents. One of the conditions to the exemption is that the closing of the Merger occurs by March 31, 2009. On March 8, 2009, Endocare was granted an extension of the exemption under which the closing of the Merger was extended until June 30, 2009.

 

Israeli Restrictive Practices Law.  Under Israel’s Restrictive Trade Practices Law 1988, a Merger which meets certain conditions is subject to the approval of the Director of Restrictive Trade Practices. However, because Endocare does not conduct business in Israel, Endocare and Galil believe that the Merger will be exempt from the requirement to obtain the consent in connection with the Merger.

Endocare and Galil are not aware of any other regulatory approvals or actions that are required to effect the Merger. If any additional governmental approvals or actions are required, we intend to try to obtain them. We cannot assure you, however, that we will be able to obtain any required approvals or actions.

 

Appraisal Rights

 

Israeli law does not afford Galil’s shareholders any appraisal rights in connection with the Merger. Endocare’s stockholders are also not entitled to appraisal rights in connection with the Merger.

 

Material United States Federal Income Tax Consequences of the Merger

 

The following is a general discussion of the material United States federal income tax consequences of the Merger to the U.S. Holders (as defined below) of Galil ordinary shares, and to Endocare, Orange Acquisitions Ltd. and Galil. This discussion is based on the opinion of Gibson, Dunn & Crutcher LLP, counsel to Endocare. A U.S. Holder is defined as:

 

 

If a partnership (including for this purpose any entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of Galil shares, the treatment of a partner in the partnership will generally depend upon the status of the partner and upon the activities of the partnership. Partnerships and partners in such partnerships should consult their tax advisors about the United States federal income tax consequences of participating in the Merger.

 

The discussion is based upon current provisions of the Code, existing regulations promulgated under the Code and current administrative rulings and court decisions, all of which are subject to change, possibly with retroactive effect. No attempt has been made to comment on all United States federal income tax consequences of the Merger that may be relevant to particular holders, including holders that are subject to special tax rules, for example, dealers in securities, non-U.S. Holders, banks, mutual funds, insurance companies, financial services entities, tax-exempt entities, and holders who do not hold their shares as capital assets, who acquired their shares through stock option or stock purchase programs or otherwise as compensation, who are subject to alternative minimum tax, or who hold their shares as part of a hedge, straddle or other risk reduction transaction and persons who hold, directly, constructively or by attribution, 5% or more of either the total voting power or total value of the capital stock of Endocare immediately after the Merger, or 10% or more of the total voting power of the capital stock of Endocare at any time. U.S. Holders of Galil ordinary shares are advised to consult their own tax advisors regarding the United States federal income tax consequences of the Merger in light of their personal circumstances and the consequences under applicable state, local and foreign tax laws.

 

Endocare has received from its counsel, Gibson, Dunn & Crutcher LLP, an opinion to the effect that the Merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. In rendering its opinion, Gibson, Dunn & Crutcher LLP relied upon representations made by Galil, Endocare and Orange Acquisitions Ltd.

 

Assuming the Merger is treated as a reorganization within the meaning of Section 368(a) of the Code, no gain or loss will be recognized for United States federal income tax purposes by Endocare, Orange Acquisitions Ltd. or Galil as a result of the Merger. A U.S. Holder of Galil shares will not recognize gain or loss on the exchange of Galil shares for Endocare common stock pursuant to the Merger for United States federal income tax purposes. The aggregate tax basis of the Endocare common stock received by a U.S. Holder of Galil shares will be the same as the aggregate tax basis of the shares surrendered therefor. The holding period of the Endocare common stock will

include the holding period of the Galil shares surrendered therefor, provided that the Galil shares are held as capital assets at the time of the Merger.

 

Notwithstanding the foregoing, if Galil is or has been a Passive Foreign Investment Company (“PFIC”) at any time since 1986, the exchange of Galil shares for Endocare common stock pursuant to the Merger may constitute a taxable transaction for United States federal income tax purposes. In general, under Section 1297 of the Code, a foreign corporation may be a PFIC if 75% or more of its gross income is passive or if at least 50% of its assets produce or are held for the production of passive income. Galil does not believe that it is or has been a PFIC for any tax year to date. Even if Galil is or has been a PFIC, certain exceptions under proposed Treasury regulations may exempt the exchange of Galil shares for Endocare common stock from taxation. U.S. Holders are urged to consult their tax advisors regarding the specific tax consequences if Galil is or was a PFIC.

 

Tax Implications of Holding Endocare Common Stock.  A U.S. Holder of Endocare common stock will be required to include in gross income as dividend income the amount of any distributions (including constructive distributions) paid on the Endocare common stock on the date such distribution is received to the extent such distributions are paid out of Endocare’s current or accumulated earnings and profits. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in the Endocare common stock and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of the Endocare common stock. In general, dividends paid on the Endocare common stock to a corporate U.S. Holder will qualify for the dividends-received deduction. The dividends-received deduction is subject to certain holding period, taxable income and other limitations.

 

Dividends received by a non-corporate U.S. Holder during taxable years beginning on or before December 31, 2010 will be taxed at a maximum rate of 15%, provided that the U.S. Holder held the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and certain other requirements are met. Dividends received by non-corporate U.S. Holders in taxable years beginning after December 31, 2010 will be subject to tax at ordinary income rates.

 

For United States federal income tax purposes, a U.S. Holder will recognize taxable gain or loss on any sale, exchange or other disposition of Endocare common stock in an amount equal to the difference between the United States dollar value of the amount realized on such sale, exchange or other disposition and such U.S. Holder’s basis in such shares. Any such gain or loss will be capital gain or loss and will be long-tem capital gain or loss if the stock is held for more than one year. The deductibility of capital losses is subject to limitations. Any gain or loss generally will be treated as United States source income or loss for United States foreign tax credit purposes.

 

U.S. HOLDERS OF GALIL ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM FROM THE MERGER AND FROM HOLDING ENDOCARE COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.

 

Material Israeli Tax Consequences of the Merger

 

The following is a summary discussion of certain Israeli tax considerations in connection with the consummation of the Merger. The following summary is based upon the Israeli Income Tax Ordinance [New Version] 1961, as amended and other laws and regulations, all as in effect as of the date hereof. No assurance can be given that future legislation, regulations or interpretations will not significantly change the tax considerations described below, and any such change may apply retroactively. This summary does not discuss all aspects of Israeli tax consequences which may apply to particular holders of Galil ordinary shares in light of their particular circumstances, such as investors subject to special tax rules or other investors referred to below. Holders of Galil ordinary shares should consult their own tax advisors as to the Israeli tax consequences applicable to them of the Merger.

 

Sale of Galil Shares.  In general, under the Israeli Income Tax Ordinance [New Version], 1961 and the rules and regulations promulgated thereunder (the “Tax Ordinance”), the disposition of shares of an Israeli company is generally deemed to be a sale of capital assets, unless such shares are held for the purpose of trading. The Tax

Ordinance generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in an Israeli resident company, by both residents and non-residents of Israel, unless a specific exemption is available or unless a double taxation prevention treaty between Israel and the seller’s country of residence provides otherwise.

 

Under the Tax Ordinance, the tax rate applicable to capital gains derived from the disposition of Galil shares in the Merger is generally 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “Significant Shareholder” at any time during the twelve-month period preceding such disposition (i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in Galil) the tax rate will be 25%. Companies are subject to a 25% tax rate on capital gains derived from the disposition of Galil shares. However the foregoing tax rates will not apply to dealers in securities. In addition, for shareholders who acquired their Galil shares prior to January 1, 2003, the aforementioned tax rates will apply only to a proportionate part of the gain, in accordance with the holding periods of the Galil shares, before and after January 1, 2003, on a linear basis. Accordingly, the proportionate part of the gain corresponding to the holding period of the Galil shares after January 1, 2003 and until their disposition will be subject to the above tax rates, while the proportionate part of the gain corresponding to the holding period of the Galil shares prior to January 1, 2003 will be subject to the applicable marginal tax rate (currently up to 47% and expected to be reduced to up to 46% for the 2009 tax year) for Galil shareholders who are individuals, or the corporate tax rate (currently 27% and expected to be reduced to 26% for the 2009 tax year) for Galil shareholders which are companies.

 

As mentioned above, certain capital gains tax exemptions provided under the Tax Ordinance or certain reduced tax rates on capital gains tax provided under applicable double taxation prevention treaties to which Israel is party may provide relief for certain Galil shareholders from Israeli capital gains tax on any gain derived by such shareholders on the disposition of Galil shares in the Merger. Galil shareholders should consult their tax advisors regarding the tax consequences of the Merger to them and the applicability of any such tax exemption or tax relief.

 

Israeli Withholding Tax.  In some instances where Galil shareholders may be liable for Israeli tax on the disposition of their Galil shares, the payment of the Merger consideration may be subject to the deduction of Israeli tax at source.

 

Endocare and Galil have agreed that Galil will file with the Israeli tax authority, or ITA, one or more applications for the receipt of one or more tax rulings that (A) provide for a full exemption from withholding requirements as a result of a deferral of Israeli income tax pursuant to Section 104H of the Tax Ordinance, or (B) to the extent that the exemption mentioned above does not apply, that either: (x) exempts Endocare from any obligation to withhold Israeli tax at source from any consideration payable or otherwise deliverable pursuant to the Merger Agreement, or clarifies that no such obligation exists; or (y) clearly instructs Endocare how and when such withholding at source is to be performed, and the rate or rates of withholding to be applied. Notwithstanding the above, no withholding or a reduced rate of withholding, as applicable, under Israeli tax law will be made from any consideration payable under the Merger Agreement to a Galil shareholder to the extent that such Galil shareholder has provided Endocare, prior to the time such payment is made, with an appropriate unequivocal exemption from withholding of Israeli tax issued by the ITA confirming that no withholding of Israeli tax is required with respect to the particular Galil shareholder in question.

 

In addition, Endocare and Galil have agreed that Galil will file with the ITA one or more applications for the receipt of one or more tax rulings, if applicable, that provide that payments out of the indemnity escrow fund shall not be subject to Israeli tax until actually received by the persons entitled thereto, subject to the terms and periods set forth in such ruling.

 

Receipt of these tax rulings is a condition to close the Merger. The parties are obligated under the Merger Agreement to cooperate with one another in obtaining these tax rulings.

 

Shares Issued as Compensation for Employment or Service.  Shareholders who received or acquired their Galil shares under one or more of Galil’s incentive plans, or otherwise as compensation for employment or services provided to Galil or any of its affiliates, may be subject to different tax rates. Because individual circumstances may

differ, any such holders of Galil shares should consult their own tax advisors as to the Israeli tax consequences applicable to them.

 

Endocare and Galil have agreed that Galil will file with the ITA one or more applications for the receipt of one or more tax rulings that will confirm that the assumption of Galil share options (whether vested or unvested) under the Merger Agreement will not result in a requirement for an immediate Israeli tax payment and that the statutory trust period under Section 102 of the Tax Ordinance for any Galil share options that are assumed by Endocare will continue uninterrupted from the original date of grant of such Galil share options and will not recommence as a result of the the Merger; which ruling may be subject to customary conditions regularly associated with such a ruling. In the event that such pre-ruling from the ITA is not obtained prior to the closing of the Merger, the payment at the closing of the Merger of the consideration to such holders of options shall be subject to deduction of Israeli tax at the source, at the rate set under applicable law, unless the ITA provides for an extension of time with respect to the obligation to deduct or withhold Israeli tax at source from such consideration in order to allow for the receipt of this tax ruling after closing of the Merger. An application in that respect was filed by Galil with the ITA on December 17, 2008.

 

Anticipated Accounting Treatment

 

Upon consummation of the Merger and the concurrent Financing and attributing ownership to Galil’s shareholders of the Escrow Shares, existing Endocare stockholders are expected to own approximately 38.5% of Endocare’s outstanding shares of common stock and the shareholders of Galil are expected to own approximately 61.5% of Endocare’s outstanding shares of common stock. As a result, the Merger will be accounted for as a reverse acquisition and equity recapitalization in accordance with U.S. generally accepted accounting principles.

 

For accounting purposes, Galil is considered to be acquiring Endocare in this transaction by issuing stock for the net assets of Endocare. The combined entity’s results of operations prior to completion of the Merger will be those of Galil. The assets and liabilities and results of operations of Endocare will be consolidated into the results of operations of Galil as of the effective time of the Merger. The net assets of Endocare, including intangible assets and goodwill (if any) will be stated at their fair value determined at the acquisition date based upon a valuation to be completed at that time.

 

The following summary describes certain material provisions of the Merger Agreement, as amended, entered into by Endocare, Merger Sub and Galil, a copy of which is attached as Annex A hereto and incorporated herein by reference. This summary may not contain all of the information about the Merger Agreement that is important to Endocare stockholders or Galil shareholders, and Endocare stockholders and Galil shareholders are encouraged to read the Merger Agreement carefully and in its entirety. The legal rights and obligations of the parties are governed by the specific language of the Merger Agreement and not this summary.

 

The Merger

 

The Merger Agreement provides for the merger of Merger Sub with and into Galil. As a result of the Merger, Merger Sub will cease to exist and Galil will continue as the corporation surviving the Merger (the “Surviving Company”). After the Merger, the Surviving Company will be a wholly owned subsidiary of Endocare and the former Galil shareholders will not have any equity ownership interest in the Surviving Company.

 

Closing and Effectiveness of the Merger

 

The closing of the Merger (the “Closing”) is expected to take place on the third business day following the satisfaction or, to the extent permitted under the Merger Agreement and by applicable law, waiver of all conditions to the obligations of the parties set forth in the Merger Agreement and described below (other than such conditions as may, by their terms, only be satisfied at the Closing or on the Closing Date, subject to such satisfaction or waiver thereof) (see “Conditions to Completion of the Merger” below), or on such other date as Endocare and Galil mutually agree in writing. The day on which the Closing takes place is referred to as the “Closing Date.”

 

Merger Sub and Galil are required to deliver to the Registrar of Companies of the State of Israel (the “Israeli Companies Registrar”) a notice of the contemplated Merger and the proposed Closing Date on which the Israeli Companies Registrar is requested to issue a certificate evidencing the Merger in accordance with the Israeli Companies Law (the “Merger Certificate”) after notice that the Closing has occurred is served to the Israeli Companies Registrar. The Merger will become effective only upon issuance of the Merger Certificate by the Israeli Companies Registrar (the “Effective Time”).

 

Merger Consideration

 

At the Effective Time, each outstanding ordinary share of Galil will be converted into the right to receive the number of shares of Endocare common stock equal to the product of (1) the sum of the number of shares of Endocare common stock outstanding and the number of shares of Endocare common stock subject to in-the-money options immediately prior to the effective time of the Merger and (2) the exchange ratio of 0.923077, divided by the total number of Galil ordinary shares outstanding and the number of ordinary shares of Galil subject to in-the-money options immediately prior to the Effective Time (the “Merger Consideration”). The exact conversion ratio cannot be calculated until immediately prior to the Effective Time, but it is expected that approximately 33.0 ordinary shares of Galil will be converted into one share of Endocare common stock. All of the shares of Galil preferred stock will be converted to ordinary shares immediately prior to the Effective Time pursuant to the Galil Pre-Closing Shareholders Agreement described below.

 

Fractional Shares

 

No fractional shares of Endocare’s common stock will be issued in connection with the Merger. The aggregate number of shares which each holder of Galil shares is entitled to receive in the Merger will be rounded down to the nearest whole share and such shareholder will not be entitled to any rights with respect to any fractional share or any cash in lieu thereof.

 

Galil Share Options

 

At the Effective Time, unless otherwise agreed by Endocare and any affected Galil share option holder, each outstanding option to purchase Galil ordinary shares issued pursuant to the Galil 1997 Option Plan, the Galil

2000 Share Option Plan and the Galil 2003 Share Option Plan (whether vested or unvested) will be converted into an option to purchase, on the same terms and conditions as such Galil share option, a number of shares of Endocare common stock equal to the number of shares of Endocare common stock (rounded up to the nearest whole share) that the holder of such Galil share option would have been entitled to receive in the Merger had such holder exercised such Galil share option immediately prior to the Effective Time, at an exercise price per share of Endocare common stock (rounded down to the nearest whole cent) equal to (x) the aggregate existing exercise price for Galil shares purchasable pursuant to such Galil share option divided by (y) the number of shares of Endocare common stock for which Galil share option will become exercisable.

 

Endocare is obligated under the Merger Agreement to take all corporate action necessary to reserve for issuance a sufficient number of shares of Endocare common stock for delivery upon exercise of Galil share options assumed pursuant to the Merger Agreement. As soon as practicable after the Effective Time, Endocare has agreed that if no registration statement is in effect covering the shares of Endocare common stock issuable upon exercise of Galil share options under the Merger Agreement, it will file a registration statement on Form S-8 with respect to the shares of Endocare common stock issuable upon exercise of such Galil share options to the extent registrable on Form S-8 and has further agreed to maintain the effectiveness of such registration statement for so long as such Galil share options remain outstanding.

 

At or prior to the Effective Time, Galil has agreed, to the extent necessary, to cause to be effected, in a manner reasonably satisfactory to Endocare, amendments to Galil’s share incentive plans and any other documents governing Galil share options to give effect to the provisions of the Merger Agreement affecting such Galil share options.

 

Exchange Fund

 

The Merger Agreement provides that, at the Effective Time, Endocare will deposit with the exchange agent the shares of Endocare’s common stock issuable to Galil’s shareholders and any dividends or other distributions to which holders of such stock certificates may be entitled. It is currently contemplated that the exchange agent will be Computershare, Endocare’s transfer agent.

 

Exchange of Galil Stock Certificates for the Merger Consideration

 

The Merger Agreement provides that, as soon as practicable after the Effective Time, the exchange agent will mail to each record holder of Galil ordinary shares immediately prior to the Effective Time a letter of transmittal and instructions for surrendering and exchanging the record holder’s Galil share certificates. Upon surrender of a Galil share certificate for exchange to the exchange agent, together with a duly signed letter of transmittal, and such other documents as the exchange agent may reasonably require, the holder of the Galil share certificate will be entitled to receive the following:

 

 

All Galil share certificates surrendered will be cancelled.

 

At the Effective Time, all holders of certificates representing Galil shares that were outstanding immediately prior to the Effective Time will cease to have any rights as shareholders of Galil. In addition, no transfer of Galil shares after the Effective Time will be registered on the share transfer books of Galil.

 

If any Galil share certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if required by Endocare or the exchange agent, the posting by such person of a bond in such reasonable amount as Endocare or the exchange agent may direct as indemnity against any claim that may be made against it with respect to such certificate, the exchange agent will issue in exchange for such lost, stolen or destroyed certificate, and delivery of the other documents required by the Merger Agreement, the shares of Endocare’s common stock and any unpaid dividends and distributions on such shares of Endocare’s common stock.

Escrow Deposits

 

At the Closing, Endocare will deduct from the Merger consideration payable to the Galil shareholders and deposit with Deutsche Bank National Trust Company, as escrow agent, a number of shares of Endocare common stock equal to 7.5% of the total number of shares of Endocare common stock comprising the aggregate Merger Consideration rounded down to the nearest whole share (the “Indemnity Escrow Fund”), for the purpose of satisfying any indemnification obligations arising under the Merger Agreement (see “Survival; Indemnification” below). The number of shares of Endocare common stock currently expected to be deposited into the Indemnity Escrow Fund upon consummation of the Merger is 838,117 shares. While the shares are held in escrow, Galil shareholders will be entitled to vote the Escrow Shares otherwise payable to such shareholders and to any cash dividends paid on such Escrow Shares at the time such dividends are paid. In the event of a successful claim by Endocare for indemnification, a number of Escrow Shares equal to the recoverable damages underlying such claim will be cancelled and such shares will not be paid out to Galil shareholders upon expiration of the escrow period. The value of the Escrow Shares to be cancelled to make an indemnification payment will be calculated according to the market value of Endocare’s common stock at the time the stock is presented for cancellation. (see “Survival; Indemnification — Value Used for Indemnity”). Pursuant to the Merger Agreement, the escrow period will expire on the date (without regard to any extensions) on which Endocare is required to file with the SEC its Annual Report on Form 10-K for the fiscal year ended December 31, 2009, or March 31, 2010. Escrow Shares remaining in the Indemnity Escrow Fund after settlement of all claims will be distributed pro rata to Galil’s shareholders.

 

Shareholder Representative

 

Pursuant to the Merger Agreement, Galil’s shareholders must maintain a representative at all times for purposes of taking certain actions and giving certain consents on behalf of the Galil shareholders, as specified in the Merger Agreement (the “Shareholder Representative”). Pursuant to the Major Shareholders Agreement, the shareholder parties appointed Thomas, McNerney Representative, LLC, as the initial Shareholder Representative, and immediately upon the approval of the Merger Agreement by the requisite vote or written consent of Galil’s shareholders, each other Galil shareholder will be deemed to have consented to such appointment.

 

Representations and Warranties

 

The Merger Agreement contains customary representations and warranties of the parties. These include representations and warranties of Galil with respect to, among other things: organization and qualification; authority; capitalization; equity interests; financial statements; absence of undisclosed liabilities; absence of certain changes or events; compliance with laws; permits; litigation; benefit plans; labor and employment matters; title, sufficiency and condition of assets; real property; intellectual property; tax matters; environmental matters; material contracts; customers and suppliers; warranties; accounts receivable; accounts payable; grants, incentives and subsidies; affiliate interests and transactions; health care regulatory compliance; insurance; and brokers. The Merger Agreement also contains customary representations and warranties of Endocare and Merger Sub, including among other things: organization and qualification; authority; application of anti-takeover protections; capitalization; SEC reports; financial statements; absence of undisclosed liabilities; absence of certain changes or events; litigation; compliance with applicable law; intellectual property; health care regulatory compliance; tax matters; material contracts; customers and suppliers; affiliate interests and transactions; and brokers’ fees. The representations and warranties of Endocare and Merger Sub contained in the Merger Agreement expire with and are terminated and extinguished upon, the Effective Time. The representations and warranties of Galil contained in the Merger Agreement survive for the escrow period.

 

The representations, warranties and covenants made by Endocare and Merger Sub in the Merger Agreement are qualified by information contained in a disclosure schedule delivered to Galil in connection with the execution of the Merger Agreement, or Endocare’s SEC reports filed prior to the date thereof. The representations, warranties and covenants made by Galil in the Merger Agreement are qualified by information contained in a disclosure schedule delivered to Endocare and Merger Sub in connection with the execution of the Merger Agreement. Endocare stockholders and Galil shareholders are not third party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Endocare or Galil or any of their respective affiliates.

Covenants Relating to the Conduct of Business of Endocare and Galil

 

Covenants Relating to the Conduct of Galil’s Business

 

Between November 10, 2008, the date of execution of the Merger Agreement (the “Execution Date”), and the Closing Date, unless Endocare otherwise consents in writing (which consent may not be unreasonably withheld, conditioned or delayed), Galil has agreed that its business and the business of its subsidiaries will be conducted materially in the ordinary course of business consistent with past practice; and Galil will, and will cause each of its subsidiaries to, preserve substantially intact the business organization, use commercially reasonable efforts to preserve substantially intact its assets and the assets of its subsidiaries, and to keep available the services of its current officers and key employees and consultants and to preserve its current relationships with customers, suppliers and other persons with which Galil or any of its subsidiaries has significant business relations. Galil has also agreed not to undertake certain other actions during the period between the Execution Date and the Closing Date, without the prior written consent of Endocare (which consent may not be unreasonably withheld, conditioned or delayed), including the following:

 

 

 

Covenants Relating to the Conduct of Endocare’s Business

 

Between the Execution Date and the Closing Date, unless Galil otherwise consents in writing (which consent may not be unreasonably withheld, conditioned or delayed), Endocare has agreed that its business and the business of its subsidiaries will be conducted materially in the ordinary course of business consistent with past practice; and Endocare will, and will cause each of its subsidiaries to, preserve substantially intact the business organization, use commercially reasonable efforts to preserve substantially intact its assets and the assets of its subsidiaries, and to keep available the services of its current officers and key employees and consultants and to preserve its current

relationships with customers, suppliers and other persons with which Endocare or any of its subsidiaries has significant business relations. Endocare has also agreed not to undertake certain other actions during the period between the Execution Date and the Closing Date, without the prior written consent of Galil (which consent may not be unreasonably withheld, conditioned or delayed), including the following:

 

 

 

Form S-4 and Proxy Statement/Prospectus

 

Pursuant to the Merger Agreement, Endocare has agreed to use its commercially reasonable efforts to cause this proxy statement/prospectus to be mailed to the holders of Endocare common stock and Galil has agreed to use commercially reasonable efforts to cause this proxy statement/prospectus to be mailed to its shareholders, in each case, as promptly as practicable after the Form S-4 is declared effective under the Securities Act. If, at any time prior to the Effective Time, any information relating to Endocare or Galil, or any of their respective affiliates, or their respective officers or directors, is discovered by Endocare or Galil, as applicable, and such information should be set forth in an amendment or supplement to the Form S-4 or this proxy statement/prospectus so that such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party discovering such information has agreed to promptly notify the other party and, to the extent required by law, an appropriate amendment or supplement describing such information will be promptly filed with the SEC and disseminated to Endocare’s stockholders and Galil’s shareholders.

 

Endocare Stockholder Approval

 

Pursuant to the Merger Agreement, Endocare is obligated to take all lawful action to call, give notice of, convene and hold a meeting of its stockholders as promptly as practicable, but in no event later than 40 days after the date the Form S-4 is declared effective by the SEC (unless compliance is waived by the board of directors of Galil), to consider and vote for the approval pursuant to the Merger Agreement of the issuance of shares of Endocare common stock in connection with the Merger and the other Transactions. Subject to its rights under the Merger Agreement to change its recommendation under certain circumstances (see “Exclusivity; Change of Recommendation” below), the board of directors of Endocare has agreed to recommend such approval and to take all lawful action, consistent with its fiduciary duties, to solicit the approval of Endocare’s stockholders in favor of the issuance of shares of Endocare common stock in the Merger and the Financing.

 

Galil Shareholder Approval

 

Galil has agreed to take, in accordance with applicable law and its charter documents, all action necessary to convene a general meeting of its shareholders and separate meetings of the holders of each class or series of company shares as promptly as practicable, but in no event later than 40 days after the date the Form S-4 is declared effective by the SEC, to consider and vote for the approval of the Merger Agreement, the Merger and the transactions contemplated thereby. The board of directors of Galil has agreed to recommend such approval subject to the notice requirements of the Israeli Companies Law and the rules and regulations promulgated thereunder and under Galil’s charter documents.

Covenants Related to Compliance with Israeli Law

 

Merger Proposal

 

Pursuant to the Merger Agreement, each of Galil and Merger Sub is required to file with the Israeli Companies Registrar, jointly with the other merging company, a “Merger Proposal” setting forth specified details with respect to the Merger. Each of Galil and Merger Sub have agreed to cause a copy of its Merger Proposal to be delivered to its secured creditors, if any, no later than three days after the date on which such Merger Proposal is delivered to the Israeli Companies Registrar and to promptly inform its respective non-secured creditors, if any, of such Merger Proposal and its contents in accordance with the Israeli Companies Law.

 

Israeli Tax Rulings

 

Under the Merger Agreement, Galil is obligated to cause its Israeli counsel or Israeli consultants to prepare and file with the Israeli tax authority one or more applications, or, in the case of applications that have previously been filed, to continue to use its best efforts to diligently pursue in good faith the receipt from the Israeli tax authority of one or more rulings:

 

 

 

 

Endocare has agreed to reasonably cooperate with Galil and its Israeli counsel, consultants, representatives and other advisors with respect to the preparation and filing of such applications and in the preparation of any written or oral submissions that may be necessary, proper or advisable to obtain the Israeli tax rulings described above.

 

Israeli Securities Exemption

 

Pursuant to the Merger Agreement, Endocare has agreed to cause its Israeli counsel to prepare and file with the Israeli Securities Authority an application for an exemption from the requirements of the Israeli Securities Law concerning the publication of a prospectus in respect of the conversion of Galil options into options to purchase Endocare common stock in accordance with the provisions of the Merger Agreement. Galil has agreed to cooperate with all reasonable requests of Endocare in connection with the preparation and filing of such application and in the preparation of any written or oral submissions that may be necessary, proper or advisable to obtain the Israeli securities exemption. On December 11, 2008, the Israeli Securities Authority granted this exemption. In order to comply with the terms of the exemption, Endocare will be required to make copies of the relevant share option plans and related SEC filings available to Israeli employees of Galil, and, upon demand, to provide Hebrew translations of these documents. One of the conditions to the exemption is that the closing of the Merger occurs by June 30, 2009. If

the Closing of the Merger does not occur by such date, Endocare will have to apply again to the Israeli Securities Authority for an exemption.

 

Exclusivity; Change of Recommendation

 

Except as described below, until the earlier of (i) the termination of the Merger Agreement, and (ii) the Effective Time, Endocare and Galil have each agreed that they will not, nor will either of them authorize or permit any of their subsidiaries or any of their respective affiliates or representatives to directly or indirectly:

 

 

Notwithstanding the foregoing, if at any time prior to approval by Endocare’s stockholders of the issuance of shares of Endocare common stock in the Merger, Endocare receives a written Acquisition Proposal from any person or “group” (as defined in Section 13(d) of the Exchange Act) that did not result from the breach by Endocare of its obligations under the Merger Agreement, (i) Endocare may contact such person or group to clarify the terms and conditions thereof and (ii) if the board of directors of Endocare, or any committee thereof, determines in good faith, after consultation with outside legal counsel and a nationally recognized financial advisor, that such Acquisition Proposal constitutes or could reasonably be expected to lead to a Superior Proposal (as such term is defined below and in the Merger Agreement), then Endocare and its representatives may, (A) furnish information with respect to Endocare to the person or group making such Acquisition Proposal and its representatives pursuant to a customary confidentiality agreement, and (B) participate in discussions or negotiations with such person or group and its representatives regarding any Superior Proposal.

 

Pursuant to the Merger Agreement and notwithstanding the foregoing, neither the board of directors of Endocare, nor the board of directors of Galil, nor any committee thereof is permitted to:

 

 

 

Notwithstanding the foregoing, pursuant to the Merger Agreement, the board of directors of Endocare may withdraw or modify its recommendation with respect to the Merger and the other transactions contemplated by the Merger Agreement if the board of directors determines in good faith after consultation with outside counsel that its fiduciary obligations require it to do so, but only at a time that is prior to approval of the Endocare stockholders of the shares to be issued in the Merger and the Financing and after two business days following receipt by Galil of written notice advising it that the board of directors of Endocare desires to withdraw or modify the recommendation and, if such withdrawal is due to the existence of an Acquisition Proposal, specifying the material terms and conditions of such Acquisition Proposal and identifying the person or entity making such Acquisition Proposal. However, Endocare has agreed that it will not enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or similar agreement constituting or relating to any Acquisition Proposal (other than a confidentiality agreement under the circumstances described above); or

adopt, approve or recommend, or propose to adopt, approve or recommend, any Acquisition Proposal. Endocare and its board of directors are, however, permitted to take and disclose to Endocare’s stockholders a position contemplated by Rule 14d-9 and 14e-2(a) under the Exchange Act (or any similar communication to stockholders in connection with the making or amendment of a tender offer or exchange offer) and are further permitted to make any other disclosure to stockholders required by law with regard to an Acquisition Proposal, including by virtue of the board of directors’ fiduciary duties.

 

Each party has agreed to immediately advise the other party orally, with written confirmation to follow promptly (and in any event within 24 hours), of any Acquisition Proposal or any request for nonpublic information in connection with any Acquisition Proposal, or of any inquiry with respect to, or that could reasonably be expected to lead to, any Acquisition Proposal, the material terms and conditions of any such Acquisition Proposal or inquiry and the identity of the person or entity making the Acquisition Proposal or inquiry. Endocare has agreed not to provide any information to or participate in discussions or negotiations with a person or entity making a Superior Proposal until after it has first notified Galil of such Acquisition Proposal as required by the preceding sentence. Under the terms of the Merger Agreement, Galil is not permitted to provide any information to or participate in discussions or negotiations with any such person or entity under any circumstances.

 

Contemporaneously with providing any information to a third party in connection with any Superior Proposal or inquiry, Endocare is required under the Merger Agreement to furnish a copy of such information to Galil.

 

Each of Endocare and Galil have agreed to immediately cease all discussions and negotiations regarding any proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal.

 

For purposes of this summary and pursuant to the terms of the Merger Agreement, “Acquisition Proposal” means any offer or proposal or related offers or proposals for, or any indication of interest in, any of the following (other than the Merger) by any person or entity or “group” (as defined in Section 13(d) of the Exchange Act): (i) any direct or indirect acquisition or purchase of (A) 5% or more of Galil’s share capital or the share capital or capital stock of any of its subsidiaries or (B) 15% or more of Endocare’s capital stock, (ii) any acquisition, license or purchase of assets (other than inventory to be sold in the ordinary course of business consistent with past practice) of Endocare, or Galil or any of its subsidiaries, (iii) any merger, consolidation or other business combination relating to Endocare, or Galil or any of its subsidiaries or (iv) any other transaction that would inhibit, or materially interfere with or delay the consummation of the Transactions contemplated in the Merger Agreement and the Ancillary Agreements.

 

For purposes of this summary and pursuant to the terms of the Merger Agreement, “Superior Proposal” means, with respect to Endocare, any unsolicited, bona fide written Acquisition Proposal on terms that the board of directors of Endocare determines in its good faith judgment to be (A) materially more favorable to Endocare’s stockholders than the Merger and the other Transactions, taking into account all the terms and conditions of such proposal (including any written counterproposal by Galil to amend the terms of the Merger Agreement in response to such Acquisition Proposal or otherwise) and after consultation with outside legal counsel and a nationally recognized financial advisor, and (B) reasonably capable of being completed on the terms proposed, taking into account all financial, regulatory, legal and other aspects of such proposal; provided, however, that no Acquisition Proposal will be deemed to be a Superior Proposal if any financing required to consummate the Acquisition Proposal is not fully and irrevocably committed.

 

Director and Officer Indemnification

 

Pursuant to the Merger Agreement, prior to the Effective Time, Galil may purchase a “tail” policy under Galil’s existing directors’ and officers’ insurance policy which (i) has an effective term of seven years from the Effective Time, (ii) covers those individuals who were covered by Galil’s directors’ and officers’ insurance policy in effect as of the Execution Date for actions and omissions occurring on or prior to the Effective Time, and (iii) contains terms and conditions that are no less favorable, in the aggregate, to the insured than those of Galil’s directors’ and officers’ insurance policy in effect as of the Execution Date. For a period of seven years from the Closing Date, Endocare has agreed to use its commercially reasonable efforts to cause the Surviving Company to maintain such tail policy, provided that no additional amounts will be payable by the Surviving Company thereunder.

During the period commencing as of the Effective Time and ending on the seventh anniversary of the Effective Time, to the fullest extent permitted by applicable law, Endocare has agreed to cause the Surviving Company to fulfill and honor in all respects the obligations of Galil and its subsidiaries to the officers and directors of Galil as of the Execution Date, any of its subsidiaries and each other person who is or was a director or officer of Galil or any of its subsidiaries at or at any time prior to the Effective Time, pursuant to all rights to any indemnification and exculpation from liabilities for acts or omissions contained in Galil’s charter documents (as in effect on the Execution Date) or available under applicable law.

 

Conditions to the Completion of the Merger

 

General Conditions to the Completion of the Merger

 

The respective obligations of Galil, Endocare and Merger Sub to complete the Merger under the Merger Agreement are subject to the satisfaction of the following conditions:

 

 

 

 

Conditions to the Obligations of Galil to Consummate the Merger

 

The obligations of Galil to consummate the transactions contemplated by the Merger Agreement are subject to the fulfillment, at or prior to the Closing, of each of the following additional conditions, any of which may be waived in writing by Galil in its sole discretion:

 

 

Conditions to the Obligations of Endocare to Consummate the Merger

 

The obligations of Endocare and Merger Sub to consummate the transactions contemplated by the Merger Agreement are subject to the fulfillment, at or prior to the Closing, of each of the following additional conditions, any of which may be waived in writing by Endocare in its sole discretion:

 

 

 

Definitions of “Material Adverse Effect” and “Material Adverse Change”

 

For purposes of this summary and pursuant to the terms of the Merger Agreement, “Material Adverse Effect” means with respect to any person or entity, one or more events, occurrences, conditions or circumstances (whether or not covered by insurance) which, individually or in the aggregate, result in a material adverse effect on or change in (i) the business, operations, assets, liabilities, condition (financial or otherwise), prospects, or results of operations of such person or entity, taken as a whole with its subsidiaries, or (ii) the ability of such person or entity (and, in the case of Galil, including its shareholders) to timely (A) perform his, her or its material obligations under the Merger Agreement or any Ancillary Agreement, or (B) consummate the transactions contemplated in the Merger Agreement and the Ancillary Agreements.

 

For purposes of this summary and pursuant to the terms of the Merger Agreement, “Material Adverse Change” means with respect to any person or entity, any change, event, occurrence, condition or circumstance (whether or not covered by insurance) which, individually or in the aggregate, results in a Material Adverse Effect, in each case other than to the extent caused by, arising out of or attributable to any of the following: (i) changes or proposed changes in law or accounting standards or interpretations thereof applicable to such person or entity, (ii) changes in global, national or regional economic or political conditions (including acts of war (whether or not declared), armed hostilities, sabotage, military actions or the escalation thereof (whether underway on the Execution Date or thereafter commenced), and terrorism) or in general financial, credit, business, or securities market conditions, including changes in interest rates or the availability of credit financing; (iii) changes generally applicable in the industries in which such person or entity operates, (iv) any failure of such person or entity to meet internal or analysts’ estimates, projections or forecasts of revenues, earnings or other financial or business metrics (it being understood that the cause of any such failure may be taken into consideration when determining whether a Material Adverse Change has occurred or would be reasonably likely to occur); (v) a decline in the market price, or a change in the trading volume, of the capital stock or share capital of such person or entity (it being understood that the cause of any such decline or change may be taken into consideration when determining whether a Material Adverse Change has occurred or would be reasonably likely to occur); provided, in the case of clauses (i) and (ii), that such

conditions or changes do not have a materially disproportionate impact on such person or entity and its subsidiaries, taken as a whole, relative to other participants in the industries in which such person or entity operates.

 

Survival; Indemnification

 

Survival of Representations and Warranties and Covenants

 

Pursuant to the Merger Agreement, the representations and warranties of Galil made in the Merger Agreement survive for the period beginning on the Closing Date through the due date (without regard to any extensions) of Endocare’s required filing with the SEC of its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 or March 31, 2010. The representations and warranties of Endocare made in the Merger Agreement will not survive the Closing.

 

Pursuant to the terms of the Merger Agreement, the covenants and agreements of the parties contained in the Merger Agreement will survive the Closing indefinitely, except as expressly provided otherwise in the Merger Agreement.

 

Indemnification and Other Rights

 

Pursuant to the terms of the Merger Agreement, if the Closing occurs, to the extent and solely out of the Indemnity Escrow Fund, Endocare and its affiliates (including the Surviving Company following the Closing), each of their respective officers, directors, employees, stockholders, agents, representatives, and each of their respective successors and assigns (the “Endocare Indemnified Parties”) will be indemnified and held harmless, reimbursed and made whole from and against any losses or other liability (including reasonable legal and expert fees and expenses incurred in investigation or defense (including any appeal) of any of the same, or in asserting, preserving or enforcing its rights hereunder) actually incurred, accrued or claims suffered by any such indemnified party (collectively “Damages”) to the extent arising from or in connection with any of the following:

 

 

Any payments made out of the Indemnity Escrow Fund pursuant to the Merger Agreement will be treated for all purposes as an adjustment to the Merger Consideration.

 

Other Limitations

 

The Endocare Indemnified Parties may not recover any Damages pursuant to the indemnification procedures of the Merger Agreement, unless and until collectively they have incurred, accrued or suffered Damages in excess of $250,000 in the aggregate (the “Basket Amount”), after which, such Endocare Indemnified Parties are entitled to recover all such Damages, including Damages in the Basket Amount. Notwithstanding the foregoing, the Endocare Indemnified Parties are entitled to recover for, and the Basket Amount does not apply as a threshold to, any and all claims or payments made with respect to any Damages incurred for taxes as set forth above, or any Damages incurred as a result of fraud by any Galil shareholder.

 

Sole and Exclusive Remedy if the Closing Occurs

 

Should the Closing occur, the sole and exclusive remedies of Endocare and Merger Sub with respect to claims under or otherwise relating to the Merger Agreement, will be limited to the indemnification rights set forth in the

Merger Agreement. Should the Closing occur, the sole and exclusive remedies of Galil’s shareholders with respect to claims under or otherwise relating to the Merger Agreement and any Ancillary Agreements will be the remedies afforded to such shareholders by the securities laws applicable to each such Galil shareholder by virtue of their receipt of shares of Endocare common stock in the Merger.

 

If the Closing does not occur, the sole and exclusive remedy of the parties will be as set forth below in the section entitled “Termination Fees and Expenses,” and the indemnification provision described above will be inapplicable.

 

Termination of the Merger Agreement

 

Termination by Endocare or Galil

 

The Merger Agreement may be terminated at any time before the Effective Time:

 

 

 

Termination by Endocare

 

Under the Merger Agreement, Endocare may terminate the Merger Agreement if:

 

 

 

 

Termination by Galil

 

Under the Merger Agreement, Galil may terminate the Merger Agreement if:

 

 

 

 

Termination Fees and Expenses

 

Except as set forth below, all costs and expenses incurred in connection with the Merger Agreement will be paid by the party incurring the same.

 

The Merger Agreement provides for the payment of a termination fee of $900,000 by each of Endocare and Galil (in such circumstance, the “defaulting party”) to the other party, in the event of:

 

 

In each case where a defaulting party is obligated to pay a termination fee, such party is also obligated to reimburse the other party for the other party’s expenses related to the transaction in an amount not to exceed $850,000. In addition, in the event of a material breach not covered by the foregoing, in connection with termination of the Merger Agreement, the breaching party is required to reimburse the other party for its expenses related to the transaction in an amount not to exceed $850,000.

 

Effect of Termination

 

If the Merger Agreement is terminated, all obligations of the parties under the Merger Agreement will terminate, without any liability on the part of any party to the Merger Agreement to any person or entity in respect of the Merger Agreement or the transactions contemplated by the Merger Agreement other than the fees and expenses

described above, if any. Furthermore, no party will have any claim against another (and no person or entity will have any rights against such party), whether under contract, tort or otherwise, except that certain sections of the Merger Agreement related to confidentiality and termination, the Confidentiality Agreement and any Ancillary Agreement entered into prior to termination of the Merger Agreement with respect to any breaches occurring prior to any termination of the Merger Agreement, will survive. None of the parties may seek specific performance or monetary damages in connection with termination except as set forth above.

 

Specific Performance

 

Each party to the Merger Agreement is entitled to specific performance of the terms of the Merger Agreement or other equitable relief, in addition to any other remedy to which such party is entitled at law or in equity. After termination of the Merger Agreement the parties are only entitled to specific performance and injunctive relief with respect to those provisions that expressly survive termination, as described above. In no event is Endocare or Galil entitled to require the other to bring any action against any purchaser to the Financing Agreement, in such capacity.

 

Amendment

 

The Merger Agreement may be amended, modified or supplemented by the parties by action taken or authorized by their respective boards of directors at any time prior to the Closing Date (notwithstanding any approval by the stockholders of Endocare or the shareholders of Galil). However, the parties have agreed that after the approval of the Endocare’s stockholders and Galil’s shareholders has been obtained, no amendment may be made which pursuant to applicable law would require further approval by such stockholders or shareholders without such further approval.

 

Amendment No. 1 to Agreement and Plan of Merger

 

On March 19, 2009, the board of directors of each of Endocare and Galil approved, and Endocare and Galil entered into, Amendment No. 1 to Agreement and Plan of Merger, which is set forth in its entirety beginning on Page A-79 of this proxy statement/prospectus.

 

The Merger Agreement and Stock Purchase Agreement are included as annexes to this proxy statement/prospectus 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 Endocare’s 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 proxy statement/prospectus and Endocare’s other SEC filings, which are available at www.endocare.com and on the SEC’s website at www.sec.gov.

 

Galil Voting Agreements

 

Concurrent with and as a condition to Endocare’s entering into the Merger Agreement, on November 10, 2008, the following Galil shareholders (together, the “Shareholder Parties”), entered into voting agreements with Endocare (the “Voting Agreements”), whereby the Shareholder Parties have agreed to vote all shares of Galil currently beneficially owned by them and all shares acquired by them prior to the date of termination of the Voting Agreement in favor of the Merger Agreement, the Merger and related transactions and against any alternative, competing or inconsistent transaction:

 

 

As noted above, each of the Shareholder Parties, with their affiliates, are holders of 5% or more of the voting power of Galil. In addition, each of the Shareholder Parties, has a representative on the board of directors of Galil. In connection with the Voting Agreements, each Shareholder Party granted to Endocare an irrevocable proxy to vote such Shareholder Party’s Galil shares in accordance with the terms of the Voting Agreements. The Voting Agreements limit the ability of the Shareholder Parties to sell or otherwise transfer the shares of Galil beneficially owned by them. As of November 10, 2008, the Shareholder Parties owned an aggregate of approximately 97.5% of Galil’s outstanding shares. The remaining 25 shareholders of Galil, who as of November 10, 2008, owned an aggregate of 4,132,312 ordinary shares representing approximately 2.5% of Galil’s outstanding shares, have not entered into voting agreements with Endocare. The Voting Agreements terminate upon the earlier to occur of (i) the closing of the Merger, and (ii) the termination of the Merger Agreement in accordance with its terms.

 

Major Shareholders Agreement

 

On November 10, 2008, as a condition to and concurrent with the execution of the Merger Agreement, the Shareholder Parties entered into an agreement with Endocare (the “Major Shareholders Agreement”), pursuant to which each Shareholder Party has made certain representations and warranties to Endocare with respect to its Galil shares, entered into a limited mutual general release with Endocare and agreed, severally and not jointly, to indemnify Endocare with respect to certain tax liabilities.

Stock Purchase Agreement

 

Concurrent with the execution of the Merger Agreement, Endocare and certain existing institutional accredited stockholders of Endocare and Galil entered into a Stock Purchase Agreement, relating to the sale of up to 16,250,000 shares of Endocare common stock at a purchase price of $1.00 per share representing approximately 137% of the outstanding shares of Endocare common stock on April 3, 2009. Pursuant to the Stock Purchase Agreement, the parties set forth below have agreed to purchase the number of shares of Endocare common stock set forth next to each such party’s name:

 

 

The gross offering proceeds to Endocare are expected to be approximately $16,250,000. Pursuant to the Stock Purchase Agreement, the closing of the Financing is subject to the concurrent closing of the Merger and certain other conditions, including the accuracy of Endocare’s and the purchasers’ representations and warranties at closing, the sale of shares with a minimum aggregate purchase price of $12,000,000 and that Endocare’s common stock remains listed on the NASDAQ Capital Market or the Over-The-Counter Bulletin Board. The purchasers have agreed to a lock-up period of six months from the closing of the Financing, subject to earlier release under certain circumstances, as well as a standstill (which shall expire on the first anniversary of Endocare’s 2009 annual stockholders meeting and no later than June 30, 2010) whereby no purchaser may own more than 35% of the then outstanding shares of Endocare common stock, subject to certain exceptions. In the event that a purchaser breaches its obligation to purchase shares in the Financing, Endocare has the ability to offer the shares allocated to such breaching purchaser to other purchasers in the Financing on a pro rata basis and to third parties to the extent that such other purchasers do not purchase all of the defaulting purchaser’s shares. Assuming all of the purchasers acquire the shares for which they have subscribed and attributing ownership to Galil’s shareholders of the Escrow Shares, upon the closing of the Merger and the Financing, existing Endocare stockholders are expected to own approximately 38.5% of the outstanding shares of Endocare common stock and the shareholders of Galil are expected to own approximately 61.5% of the outstanding shares of Endocare common stock. It is currently expected that Discount Investment Corporation Ltd., and its affiliates, Frazier Healthcare V, L.P., Investor Growth Capital Limited and its affiliates, Thomas, McNerney & Partners, L.P. and its affiliates, and The Vertical Group GP, LLC and its affiliates will each beneficially own more than 5% of the outstanding shares of Endocare common stock upon consummation of the Merger and the Financing.

 

The Merger Agreement and Stock Purchase Agreement are included as annexes to this proxy statement/prospectus 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 Endocare’s 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 proxy statement/prospectus and Endocare’s other SEC filings, which are available at www.endocare.com and on the SEC’s website at www.sec.gov.

 

Registration Rights Agreement

 

Pursuant to the Stock Purchase Agreement, upon consummation of the Financing, the purchasers of the Endocare common stock in the Financing will enter into a registration rights agreement, pursuant to which Endocare will agree to prepare and file with the SEC a “shelf” registration statement covering the resale of the shares of Endocare common stock issued pursuant the Stock Purchase Agreement.

 

IDB Entity Indemnification Agreement

 

On November 10, 2008, as a condition to and concurrent with the execution of the Merger Agreement, Discount Investment Corporation Ltd., Elron Electronic Industries Ltd. and RDC-Rafael Development Corporation Ltd., each an Israeli shareholder of Galil, agreed, severally and not jointly, and each of them up to its respective pro rata ratio set forth under the IDB Entity Indemnification Agreement, to indemnify Endocare and the surviving company in an amount of up to $3,774,037 in connection with a preference payment potentially payable to certain other shareholders of Galil pursuant to that certain Restructure, Consent and Waiver, entered into between Galil and its then shareholders on December 31, 2003 (the “Indemnified Preference”), plus any related out-of-pocket legal fees and expenses incurred by Endocare or the surviving company as a result of any action relating to the Indemnified Preference.

 

Pre-Closing Shareholders Agreement

 

On November 10, 2008, Galil and certain shareholders of Galil entered into a Shareholders Agreement, which provides for certain matters in connection with the consummation of the Merger and the transactions contemplated thereby, including, the conversion of all its outstanding preferred shares into ordinary shares immediately prior to the consummation of the Merger.

 

The following unaudited pro forma condensed combined financial statements give effect to the proposed business combination of Endocare and Galil to be effected via the Merger and the $16.25 million concurrent Financing as if these transactions occurred as of December 31, 2008 for purposes of the pro forma condensed combined balance sheet, and as of January 1, 2008 for the pro forma condensed combined statements of operations for the year ended December 31, 2008. For accounting purposes Galil is considered to be acquiring Endocare in the Merger inasmuch as the existing stockholders of Galil will have a controlling interest in the combined company after the Merger and Financing. Accordingly, the Merger will be accounted for as a reverse acquisition and equity capitalization in accordance with U.S. GAAP for accounting and financial reporting purposes. Under this method of accounting, the arrangement will be treated as the equivalent of Galil issuing stock for the net assets of Endocare at their fair value on the Merger date. The existing assets and liabilities of Galil will be carried forward at historical costs. Operations prior to the Merger will be those of Galil.

 

The transaction will be accounted for under the acquisition method of accounting in accordance with Statement of Financial Accounting Standards, or SFAS, No. 141R, Business Combinations (SFAS No. 141R) since it will be consummated in 2009 after the effective date of this accounting standard. In merger transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the purchase consideration is based on the fair value of the consideration given or the fair value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable. Since Galil is a private company, the purchase consideration received by Galil in the form of Endocare’s equity securities is most reliably measured based on their fair value. As such, the purchase price will be measured based on the fair value of Endocare’s equity securities outstanding at the consummation date and will be allocated to the acquired tangible and intangible assets and assumed liabilities of Endocare based on their estimated fair values at that date.

 

Under SFAS No. 141R, all the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair value while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the purchase price over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Where the fair value of the consideration transferred for an acquirer’s interest is less than its fair value (a bargain purchase), the accounting acquiror will record a gain at the transaction date. In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts. Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies. Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. Subsequent to the Merger, Endocare and Galil will develop an integration plan, which may affect how the assets acquired, including intangibles, will be utilized in the combined company. For those assets in the combined company that will be phased out or will no longer be used, additional amortization, depreciation and possibly impairment charges will be recorded after management formulates the integration plan.

 

For purposes of these unaudited pro forma condensed combined financial statements, Endocare and Galil have made preliminary allocations of the estimated purchase price to the tangible and intangible assets to be acquired and liabilities to be assumed based on preliminary estimates of their fair value as of December 31, 2008, as described in Note 2. A final determination of these estimated fair values, which cannot be made prior to the completion of the Merger, will be based on the actual fair value of Endocare’s outstanding equity securities and the net assets of Endocare that exist as of the date of completion of the Merger. The actual amounts recorded as of the completion of the Merger may differ materially from the information presented in these unaudited pro forma condensed combined financial statements as a result of:

 

 

 

The unaudited pro forma condensed combined financial statements presented below are based on the historical financial statements of Endocare and Galil, adjusted to give effect to the acquisition of Endocare by Galil for accounting purposes and the Financing. The unaudited pro forma adjustments are described in the accompanying notes presented on the following pages. These adjustments do not give effect to any synergies that may be realized as a result of the Merger, nor do they give effect to any nonrecurring/unusual restructuring charges that may be incurred as a result of the integration of the two companies. The unaudited pro forma condensed combined financial statements assume that, at the effective time of the Merger, all of Galil’s preferred stock will convert into ordinary shares, which will in turn convert into Endocare common shares at the ratio of 32.956 to 1.

 

The unaudited pro forma condensed combined balance sheet as of December 31, 2008 gives effect to the proposed Merger as if it occurred on December 31, 2008 and combines the historical balance sheets of Endocare and Galil as of December 31, 2008. The Galil balance sheet information was derived from their audited balance sheet as of December 31, 2008 included herein. The Endocare balance sheet information was derived from its audited consolidated balance sheet included herein.

 

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2008 are presented as if the Merger was consummated on January 1, 2008, and combines the historical results of Endocare and Galil for the year ended December 31, 2008. The historical results of Galil were derived from their statement of operations for the year ended December 31, 2008 included herein. The historical results of Endocare were derived from its audited consolidated statement of operations for the year ended December 31, 2008 included herein.

 

The unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Endocare and Galil been a combined company during the specified periods. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this proxy statement/prospectus. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements of Endocare and Galil for the year ended December 31, 2008 included herein.

 

Following is a preliminary allocation of the total estimated purchase price, to the acquired assets and assumed liabilities of Endocare based on the estimated fair values as of December 31, 2008 (in thousands).

Unaudited Pro Forma Condensed Combined Balance Sheet