##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM                      TO                     .
 COMMISSION FILE NUMBER: 001-15063
 Endocare, Inc.
 (Exact name of Registrant as Specified in Its Charter)
 DELAWARE
    
    33-0618093(State of Incorporation)
    
    (I.R.S. Employer I.D. No.)
 201 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618  (Address of Principal Executive Office, Including Zip Code)
 (949) 450-5400  (Registrants Telephone Number, Including Area Code)
 þ o þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
 o þ




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##### 



Endocare, Inc.
 INDEX
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations  Three months and six months ended June
30, 2006 and 2005
    
    
    3Condensed Consolidated Balance Sheets  June 30, 2006 and December 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  Six months ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24Part II. Other InformationItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27Signatures
    
    
    28Exhibit 10.2Exhibit 10.5Exhibit 10.6Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ENDOCARE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share data)Total revenues
    
    $
    6,908
    
    
    $
    6,919
    
    
    $
    14,170
    
    
    $
    13,786Costs and expenses:Costs of revenues
    
    
    3,256
    
    
    
    3,924
    
    
    
    7,021
    
    
    
    8,110Research and development
    
    
    475
    
    
    
    687
    
    
    
    1,486
    
    
    
    1,110Selling and marketing
    
    
    3,904
    
    
    
    3,332
    
    
    
    7,673
    
    
    
    6,538General and administrative
    
    
    2,072
    
    
    
    3,146
    
    
    
    6,067
    
    
    
    6,789Impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Total costs and expenses
    
    
    9,707
    
    
    
    11,089
    
    
    
    22,247
    
    
    
    22,573Loss from operations
    
    
    (2,799
    )
    
    
    (4,170
    )
    
    
    (8,077
    )
    
    
    (8,787
    )Interest expense, net
    
    
    2,091
    
    
    
    (352
    )
    
    
    2,045
    
    
    
    (954
    )Loss from continuing operations before taxes
    
    
    (708
    )
    
    
    (4,522
    )
    
    
    (6,032
    )
    
    
    (9,741
    )Tax benefit on continuing operations
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    Loss from continuing operations
    
    
    (708
    )
    
    
    (4,522
    )
    
    
    (5,881
    )
    
    
    (9,741
    )Income from discontinued operations
    
    
    
    
    
    
    326
    
    
    
    245
    
    
    
    1,038Net loss
    
    $
    (708
    )
    
    $
    (4,196
    )
    
    $
    (5,636
    )
    
    $
    (8,703
    )Income (loss) per share  basic and diluted:Continuing operations
    
    $
    (0.02
    )
    
    $
    (0.15
    )
    
    $
    (0.20
    )
    
    $
    (0.35
    )Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.04Net loss
    
    
    (0.02
    )
    
    
    (0.14
    )
    
    
    (0.19
    )
    
    
    (0.31
    )Weighted average shares of common stock outstanding
    
    
    30,166
    
    
    
    30,044
    
    
    
    30,155
    
    
    
    27,835
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ENDOCARE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)(In thousands,except per share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,994
    
    
    $
    8,108Accounts receivable, net
    
    
    3,241
    
    
    
    3,549Inventories, net
    
    
    2,199
    
    
    
    2,462Prepaid expenses and other current assets
    
    
    1,015
    
    
    
    1,213Assets of discontinued operations
    
    
    
    
    
    
    9,624Total current assets
    
    
    14,449
    
    
    
    24,956Property and equipment, net
    
    
    1,325
    
    
    
    1,794Intangibles, net
    
    
    3,890
    
    
    
    4,167Investments and other assets
    
    
    2,401
    
    
    
    1,320Total assets
    
    $
    22,065
    
    
    $
    32,237LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,678
    
    
    $
    2,680Accrued compensation
    
    
    1,722
    
    
    
    3,614Other accrued liabilities
    
    
    5,083
    
    
    
    6,629Liabilities of discontinued operations
    
    
    
    
    
    
    1,461Total current liabilities
    
    
    9,483
    
    
    
    14,384Common stock warrants
    
    
    3,327
    
    
    
    5,023Total liabilities
    
    
    12,810
    
    
    
    19,407Stockholders equity:Preferred stock, $0.001 par value; 1,000
shares authorized; none issued and
outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 50,000
shares authorized; 30,175 and 30,089
issued and outstanding as of June 30,
2006 and December 31, 2005, respectively.
    
    
    30
    
    
    
    30Additional paid-in capital
    
    
    180,538
    
    
    
    178,477Accumulated deficit
    
    
    (171,313
    )
    
    
    (165,677
    )Total stockholders equity
    
    
    9,255
    
    
    
    12,830Total liabilities and stockholders equity
    
    $
    22,065
    
    
    $
    32,237
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ENDOCARE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2006
    
    
    2005(Unaudited)(In thousands)Cash flows from operating activities:Net loss
    
    $
    (5,636
    )
    
    $
    (8,703
    )Adjustments to reconcile net loss to net cash used in operating activities:Gain on divestiture
    
    
    (418
    )
    
    
    Depreciation and amortization
    
    
    857
    
    
    
    1,804Loss on disposals of fixed assets
    
    
    376
    
    
    
    12Stock compensation expense
    
    
    1,858
    
    
    
    45Costs related to assets held for sale
    
    
    
    
    
    
    (583
    )Minority interests
    
    
    
    
    
    
    (214
    )Interest expense related to common stock warrants
    
    
    (1,696
    )
    
    
    1,105Changes in operating assets and liabilities:Accounts receivable
    
    
    540
    
    
    
    (21
    )Inventories
    
    
    (71
    )
    
    
    (834
    )Prepaid expenses and other current assets
    
    
    531
    
    
    
    (234
    )Accounts payable
    
    
    (279
    )
    
    
    (8
    )Accrued compensation
    
    
    (1,914
    )
    
    
    (925
    )Other accrued liabilities
    
    
    (1,561
    )
    
    
    (2,090
    )Net cash used in operating activities
    
    
    (7,413
    )
    
    
    (10,646
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (86
    )
    
    
    (162
    )Proceeds from divestitures
    
    
    7,277
    
    
    
    850Net cash provided by investing activities
    
    
    7,191
    
    
    
    688Cash flows from financing activities:Borrowings under the credit facility
    
    
    250
    
    
    
    Repayments under the credit facility
    
    
    (250
    )
    
    
    Stock options and warrants exercised
    
    
    108
    
    
    
    108Proceeds from sale of common stock, net of issuance costs
    
    
    
    
    
    
    14,585Net cash provided by financing activities
    
    
    108
    
    
    
    14,693Net increase (decrease) in cash and cash equivalents
    
    
    (114
    )
    
    
    4,735Cash and cash equivalents, beginning of period
    
    
    8,108
    
    
    
    7,985Cash and cash equivalents, end of period
    
    $
    7,994
    
    
    $
    12,720Non-cash activities:Transfer of inventory to property and equipment
    
    $
    361
    
    
    $
    254Note receivable received in divestiture
    
    $
    1,425
    
    
    $
    
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ENDOCARE, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Tabular numbers in thousands, except per share data)
(Unaudited)
 1. Organization and Operations
   2. Basis of Presentation
   3. Recent Operating Results and Liquidity
     6




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4. Sale of Timm Medical
  Accounting for the Impairment or Disposal of
Long-Lived Assets,
 7




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Assets:Cash, inventories and other current assets
    
    $
    1,216Property and equipment, net
    
    
    75Goodwill, net
    
    
    4,552Intangibles, net
    
    
    3,716Other assets
    
    
    65Total assets
    
    $
    9,624Liabilities:Accounts payable and other current liabilities
    
    $
    942Other accrued liabilities
    
    
    519Total liabilities
    
    
    1,461Net assets
    
    $
    8,163
  5. Private Placement of Common Stock and Warrants
     8




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Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In,
a Companys Own Stock,
 
    
    First, we used the Black-Scholes option-pricing model with the following assumptions:
an expected life equal to the remaining contractual term of the warrants (3.75 years); no
dividends; a risk free rate of 5.13 percent, which equals the yield on Treasury bonds at
constant (or fixed) maturity equal to the remaining contractual term of the warrants; and
volatility of 60.97 percent. Under these assumptions, the Black-Scholes option-pricing
model yielded a value of $1.01 for each of the Series A warrants and $0.92 for each of the
Series B warrants, for an aggregate value of $3.8 million;
    
    Second, since the warrants are limited in the amount of realizable profit to the
holders as a result of the call provision described above, we reduced the value of the
warrants to account for the probability that the stock price will reach or exceed $6.50 and
$7.50, respectively (i.e., the prices above which we have the right to call the Series A
and Series B warrants, effectively compelling the holders to exercise their warrants). We
used a statistical formula to calculate the probability that our stock price will reach or
exceed $6.50 and $7.50, respectively. Based on this formula, we calculated that, for the
Series A warrants, the probability that the stock price of $6.50 will be reached or
exceeded is approximately 8.77 percent. Similarly, we calculated that, for the Series B
warrants, the probability that the stock price of $7.50 will be reached or exceeded is
approximately 4.51 percent. Based on these probabilities, we reduced the valuation of each
of the Series A warrants to $0.92 (which equals one minus 8.77 percent, multiplied by
$1.01) and we reduced the valuation of each of the Series B warrants to $0.88 (which equals
one minus 4.51 percent, multiplied by $0.92). This yields an aggregate value of the
warrants equal to $3.5 million; and
    
    Third, we further reduced the value of the warrants on the assumption that our stock
price on the day that the warrants are exercised will be affected by dilution as a result
of the additional stock introduced into the market. Given that we have approximately 30.2
million shares outstanding, we calculated that the exercise of the warrants will result in
dilution of approximately 6.2 percent. Using the dilution figure of 6.2 percent, we reduced
the value of each of the Series A warrants to $0.86 and the Series B warrants to $0.82.
This yields an aggregate value of the warrants equal to $3.3 million. As a result of this
fair value calculation, we recorded a reduction to net interest expense of $1.9 million and
$1.7 million, respectively, for the three and six months ended June 30, 2006 (compared to
net expense $0.5 million and $1.1 million, respectively, for the three and six months ended
June 30, 2005), which represents the change in the fair value of the warrants from March
31, 2006 and December 31, 2005, respectively.The $1.9 million reduction in the fair value of the warrants during the second quarter of
2006 from $5.2 million at March 31, 2006 to $3.3 million at June 30, 2006 is primarily the
result of decrease in the our share price from $3.44 at March 31, 2006 to $2.50 at June 30,
2006 and decrease in the overall volatility of our common shares. The $1.7 million
reduction to net interest expense for the six months ended June 30, 2006
 9




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includes a $0.8 million ($0.03 per basic and diluted share) reduction in the fair value of
the warrants as calculated at December 31, 2005 due to changes in the methodology we used to
measure volatility in conjunction with the adoption of SFAS No. 123R, Share Based Payment as
further discussed in Note 7  Stock-Based Compensation below. This reduction is a change in
estimate and is recorded in 2006 first quarter operations.
  6. Capital Stock and Net Loss Per Share
  7. Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock Based Compensation
    Share Based Payment
 10




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Share-Based Payment
 a.
    
    We increased the expected term from five years to 6.25 years using the shortcut
method under SAB 107 (an expected term based on the mid point between the vesting date
and the end of the contractual term). The use of the short cut method is permitted
through December 31, 2007. We will convert to company-specific experience on or before
January 1, 2008. The options have a maximum contractual term of 10 years and vest
pro-rata over four years, which is the requisite service period.b.
    
    While we continue to use historical volatility (based on daily trading prices) to
estimate the fair value of options granted, we have increased the period over which
volatility is measured from three years to 6.25 years. We have excluded the period from
October 24, 2002 to January 16, 2003 (inclusive) during which our common stock
experienced unusually high volatility as a result of announcement of our failure to file
the September 30, 2002 Form 10-Q, temporary suspension of trading, delisting of our
shares from NASDAQ, and an investigation commenced by the SEC.c.
    
    These changes resulted in a net decrease in volatility from previous estimates.
Average volatility for options granted in 2005 and during the six months ended June 30,
2006 was approximately 89.6 percent and 70.6 percent, respectively. We did not
incorporate implied volatility since there are no actively traded option contracts on our
common stock and sufficient data for an accurate measure of implied volatility was not
available.d.
    
    Prior to January 1, 2006, we accounted for forfeitures as they occurred.
Compensation expense related to unvested forfeited options was reversed in the period the
employee was terminated. Upon adoption of SFAS No. 123R, we have estimated an average
forfeiture rate of approximately 25.0 percent based on historical experience during 2001
through June 30, 2006. Stock-based compensation expense recorded in the 2006 periods is
net of expected forfeitures. We will periodically assess the forfeiture rate. Changes in
estimates will be recorded in the period of adjustment.
   11




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Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,2005
    
    
    June 30,2005Net loss, as reported
    
    $
    (4,196
    )
    
    $
    (8,703
    )Add: Stock-based employee
compensation expense included in
reported net loss for all awards
    
    
    
    
    
    
    Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (919
    )
    
    
    (1,820
    )Net loss, as adjusted
    
    $
    (5,115
    )
    
    $
    (10,523
    )Basic and diluted loss per share:As reported
    
    $
    (0.14
    )
    
    $
    (0.31
    )As adjusted
    
    $
    (0.17
    )
    
    $
    (0.38
    )
    Remaining
    
    
    AggregateNumber of
    
    
    Weighted
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Average
    
    
    Term
    
    
    Value(in thousands)
    
    
    Exercise Price
    
    
    (in years)
    
    
    (in thousands)Options
outstanding at
December 31, 2005
    
    
    6,006
    
    
    
    4.27Granted
    
    
    612
    
    
    
    3.25Exercised
    
    
    (66
    )
    
    
    0.79Canceled
    
    
    (121
    )
    
    
    4.09Options outstanding
at March 31, 2006
    
    
    6,431
    
    
    $
    4.21Granted
    
    
    66
    
    
    
    3.31Exercised
    
    
    (20
    )
    
    
    2.81Canceled
    
    
    (176
    )
    
    
    4.38Options outstanding
at June 30, 2006
    
    
    6,301
    
    
    $
    4.20
    
    
    
    7.50
    
    
    $
    360Options
exercisable at June
30, 2006
    
    
    3,544
    
    
    $
    4.95
    
    
    
    6.65
    
    
    $
    264
 12




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WeightedAverageNumber
    
    Remaining
    
    Weighted
    
    Number
    
    WeightedOutstanding As
    
    Contractual
    
    Average
    
    Exercisable As of
    
    AverageRange of Exercise Prices
    
    
    of June 30, 2006
    
    Life (Years)
    
    Exercise Price
    
    June 30, 2006
    
    Exercise Price$2.03
    
    
    
    
    
    $
    2.15
    
    
    
    347,865
    
    
    
    6.95
    
    
    $
    2.13
    
    
    
    198,908
    
    
    $
    2.11$2.25
    
    
    
    
    
    $
    2.25
    
    
    
    875,000
    
    
    
    6.67
    
    
    $
    2.25
    
    
    
    695,313
    
    
    $
    2.25$2.36
    
    
    
    
    
    $
    2.80
    
    
    
    959,583
    
    
    
    8.39
    
    
    $
    2.72
    
    
    
    346,960
    
    
    $
    2.64$2.83
    
    
    
    
    
    $
    3.26
    
    
    
    644,503
    
    
    
    8.57
    
    
    $
    3.04
    
    
    
    175,871
    
    
    $
    3.06$3.27
    
    
    
    
    
    $
    3.45
    
    
    
    774,500
    
    
    
    9.31
    
    
    $
    3.35
    
    
    
    82,760
    
    
    $
    3.43$3.69
    
    
    
    
    
    $
    4.20
    
    
    
    455,250
    
    
    
    7.59
    
    
    $
    4.07
    
    
    
    277,417
    
    
    $
    4.08$4.27
    
    
    
    
    
    $
    4.27
    
    
    
    1,000,000
    
    
    
    7.46
    
    
    $
    4.27
    
    
    
    562,500
    
    
    $
    4.27$4.50
    
    
    
    
    
    $
    5.13
    
    
    
    688,459
    
    
    
    6.43
    
    
    $
    4.75
    
    
    
    648,459
    
    
    $
    4.75$6.19
    
    
    
    
    
    $
    18.84
    
    
    
    555,300
    
    
    
    5.21
    
    
    $
    12.97
    
    
    
    554,728
    
    
    $
    12.97$21.23
    
    
    
    
    
    $
    21.23
    
    
    
    1,000
    
    
    
    5.35
    
    
    $
    21.23
    
    
    
    1,000
    
    
    $
    21.23$2.03
    
    
    
    
    
    $
    21.23
    
    
    
    6,301,460
    
    
    
    7.50
    
    
    $
    4.20
    
    
    
    3,543,916
    
    
    $
    4.95
   8. Inventories
   June 30
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    1,601
    
    
    $
    1,646Work in process
    
    
    231
    
    
    
    275Finished goods
    
    
    853
    
    
    
    911Total inventories
    
    
    2,685
    
    
    
    2,832Less inventory reserve
    
    
    (486
    )
    
    
    (370
    )Inventories, net
    
    $
    2,199
    
    
    $
    2,462
 9. Commitments and Contingencies
 Litigation and Regulatory Investigations
  13




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Other
  14




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10. Income Taxes
  11. Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Cryocare Surgical Systems
    
    $
    225
    
    
    $
    120
    
    
    $
    445
    
    
    $
    263Cryoablation disposable products and procedure fees
    
    
    6,532
    
    
    
    6,557
    
    
    
    13,406
    
    
    
    13,046Cardiac royalties (CryoCath) and other revenues
    
    
    151
    
    
    
    242
    
    
    
    319
    
    
    
    477$
    6,908
    
    
    $
    6,919
    
    
    $
    14,170
    
    
    $
    13,786Cost of Revenues:Cryocare Surgical Systems
    
    $
    228
    
    
    $
    158
    
    
    $
    597
    
    
    $
    315Cryoablation disposable products and procedure fees
    
    
    3,028
    
    
    
    3,766
    
    
    
    6,424
    
    
    
    7,795$
    3,256
    
    
    $
    3,924
    
    
    $
    7,021
    
    
    $
    8,110
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Disposable products
    
    $
    3,397
    
    
    $
    1,689
    
    
    $
    5,808
    
    
    $
    2,809Procedure fees
    
    
    3,135
    
    
    
    4,868
    
    
    
    7,598
    
    
    
    10,237$
    6,532
    
    
    $
    6,557
    
    
    $
    13,406
    
    
    $
    13,046
  12. Recent Accounting Pronouncements
 Accounting Changes and Error Corrections Accounting
Changes Reporting Changes in Interim Financial Statements
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part I  Item 1 of this
report, and the audited consolidated financial statements and notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2005.
 This discussion contains forward-looking statements based on our current expectations. There
are various factors  many beyond our control  that could cause our actual results or the
occurrence or timing of expected events to differ materially from those anticipated in these
forward-looking statements. Some of these factors are described below and other factors are
described elsewhere in this Quarterly Report on Form 10-Q or under Risk Factors in our Annual
Report on Form 10-K referred to above. In addition, there are factors not described in this
Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K that could cause our actual
results or the occurrence or timing of expected events to differ materially from those anticipated
in these forward-looking statements. All forward-looking statements included in this Quarterly
Report on Form 10-Q are based on information available to us as of the date hereof, and we assume
no obligation to update any such forward-looking statements.
 Overview
    Strategy, Key Metrics and Developments
   16




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Cryocare Surgical Systems
    
    $
    225
    
    
    $
    120
    
    
    $
    445
    
    
    $
    263Cryoablation disposable products and procedure fees
    
    
    6,532
    
    
    
    6,557
    
    
    
    13,406
    
    
    
    13,046Cardiac royalties (CryoCath) and other revenues
    
    
    151
    
    
    
    242
    
    
    
    319
    
    
    
    477$
    6,908
    
    
    $
    6,919
    
    
    $
    14,170
    
    
    $
    13,786Costs of Revenues:Cryocare Surgical Systems
    
    $
    228
    
    
    $
    158
    
    
    $
    597
    
    
    $
    315Cryoablation disposable products and procedure fees
    
    
    3,028
    
    
    
    3,766
    
    
    
    6,424
    
    
    
    7,795$
    3,256
    
    
    $
    3,924
    
    
    $
    7,021
    
    
    $
    8,110
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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Disposable products
    
    $
    3,397
    
    
    $
    1,689
    
    
    $
    5,808
    
    
    $
    2,809Procedure fees
    
    
    3,135
    
    
    
    4,868
    
    
    
    7,598
    
    
    
    10,237$
    6,532
    
    
    $
    6,557
    
    
    $
    13,406
    
    
    $
    13,046
       Share Based Payment
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##### Table of Contents



Accounting for Stock Issued to Employees,
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Revenues.
   Cost of Revenues.
 Gross Margins.
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##### Table of Contents



Research and Development Expenses.
 Selling and Marketing Expenses.
 General and Administrative Expenses.
 Interest Expense, Net.
 Loss from Continuing Operations.
 Income from Discontinued Operations.
 Net Loss.
 Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Revenues.
 20




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##### Table of Contents



Costs of Revenues.
 Gross Margins.
 Research and Development Expenses. .
 Selling and Marketing Expenses.
 General and Administrative Expenses.
 21




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##### Table of Contents



Interest Expense, Net.
 Loss from Continuing Operations.
 Income from Discontinued Operations.
 Net Loss.
 Liquidity and Capital Resources
    22




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##### Table of Contents




    
    $8.1 million in cash paid to us on February 10, 2006; and
    
    $1.4 million in the form of a secured convertible promissory note due and payable in
full, together with all accrued interest, on the date 24 months or, under certain
circumstances, 15 months following the closing date of the transaction, bearing
interest at five percent per annum.
      
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   23




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Controls.
 24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
      
 Item 1A. Risk Factors
  We face risks relating to our liquidity.
   25




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##### Table of Contents



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 sold
to this customer.
  We may be subject to civil or criminal liability if we violate the terms of our settlements
with the SEC and the DOJ.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Number of SharesFor
    
    
    AbstainJohn R. Daniels, M.D.
    
    
    23,308,983
    
    
    
    474,165Craig T. Davenport
    
    
    23,308,799
    
    
    
    474,349David L. Goldsmith
    
    
    23,658,551
    
    
    
    124,597Eric S. Kentor
    
    
    23,669,551
    
    
    
    113,597Terrence A. Noonan
    
    
    23,669,551
    
    
    
    113,597Thomas R. Testman
    
    
    23,658,551
    
    
    
    124,597
 26




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##### Table of Contents



Number of SharesFor
    
    
    21,665,105Against
    
    
    1,991,124Abstain
    
    
    126,919
  Number of SharesFor
    
    
    23,718,355Against
    
    
    62,293Abstain
    
    
    2,500
 
 Item 5. Other Information
  
 Item 6. Exhibits
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##### Table of Contents



SIGNATURES
  ENDOCARE, INC.By:
    
    /s/ CRAIG T. DAVENPORTCraig T. DavenportChief Executive Officer andChairman of the Board(Duly Authorized Officer)By:
    
    /s/ MICHAEL R. RODRIGUEZMichael R. RodriguezSenior Vice President, Finance andChief Financial Officer(Principal Financial andAccounting Officer)Date: August 8, 2006
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1(1)
    
    Partnership Interest Purchase Agreement, dated as of December 30, 2004, by and between the
Company and Advanced Medical Partners, Inc.2.2(2)
    
    Stock Purchase Agreement, dated as of January 13, 2006, by and among the Company, Plethora
Solutions Holdings plc and Timm Medical Technologies, Inc. The schedules and other
attachments to this exhibit were omitted. The Company agrees to furnish a copy of any
omitted schedules or attachments to the Securities and Exchange Commission upon request.2.3(3)
    
    $1,425,000 Secured Convertible Promissory Note, dated as of February 10, 2006, from
Plethora Solutions Holdings plc to the Company.3.1(4)
    
    Certificate of Amendment of Restated Certificate of Incorporation of the Company.3.2(4)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.3.3(4)
    
    Restated Certificate of Incorporation.3.4(5)
    
    Amended and Restated Bylaws of the Company.4.1(6)
    
    Form of Stock Certificate.4.2(7)
    
    Form of Series A Warrant.4.3(7)
    
    Form of Series B Warrant.4.4(8)
    
    Rights Agreement, dated as of June 30, 1999, between the Company and U.S. Stock Transfer
Corporation, which includes the form of Certificate of Designation for the Series A Junior
Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B
and the Summary of Rights to Purchase Series A Preferred Shares as Exhibit C.4.5(9)
    
    Amendment No. 1 to Rights Agreement, dated as of June 24, 2005, between the Company and
U.S. Stock Transfer Corporation.10.1(10)
    
    Amendment to Loan Documents, dated as of April 24, 2006, by and between Endocare, Inc. and
Silicon Valley Bank.10.2
    
    First Amendment to Lease, dated as of May 19, 2006, between Endocare, Inc. and The Irvine
Company LLC.10.3(11)
    
    Employee Deferred Stock Unit Program.10.4(11)
    
    Non-Employee Director Deferred Stock Unit Program.10.5*
    
    Customer Quote, dated as of
January 9, 2006, to Advanced Medical Partners, Inc.10.6*
    
    Amended and Restated Endocare Service Agreement, dated as of January 9, 2006, between
Endocare, Inc. and Advanced Medical Partners, Inc.31.1
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Craig T. Davenport.31.2
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 2002 for Michael R. Rodriguez.32.1
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 for Craig T. Davenport.32.2
    
    Certification under Section 906 of the Sarbanes-Oxley Act of 2002 for Michael R. Rodriguez.
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##### Table of Contents




    
    Management contract or compensatory plan or arrangement*
    
    Certain confidential portions of this exhibit were omitted and provided separately to the SEC
pursuant to a request for confidential treatment.(1)
    
    Previously filed as an exhibit to our Form 8-K filed on January 6, 2005.(2)
    
    Previously filed as an exhibit to our Form 8-K filed on January 18, 2006.(3)
    
    Previously filed as an exhibit to our Form 10-K filed on March 16, 2006.(4)
    
    Previously filed as an exhibit to our Registration Statement on Form S-3 filed on September 20, 2001.(5)
    
    Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.(6)
    
    Previously filed as an exhibit to our Form 10-K for the year ended December 31, 1995.(7)
    
    Previously filed as an exhibit to our Form 8-K filed on March 16, 2005.(8)
    
    Previously filed as an exhibit to our Form 8-K filed on June 3, 1999.(9)
    
    Previously filed as an exhibit to our Form 8-K filed on June 28, 2005.(10)
    
    Previously filed as an exhibit to our Form 8-K filed on April 25, 2006.(11)
    
    Previously filed as an exhibit to our Form 8-K filed on May 22, 2006. 30