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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q  (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
 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: 000-27212 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) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1)  Yes  þ  No  o;  (2)  Yes  þ  No  o. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  þ  No  o The number of shares of the Registrants common stock, par value $.001 per
share, outstanding at September 30, 2004 was 24,342,482




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Endocare, Inc.
INDEX Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Statements of Operations
  Three months ended September 30, 2004 and 2003;
  Nine months ended September 30, 2004 and 2003Condensed Consolidated Balance Sheets
  September 30, 2004 and December 31, 2003Condensed Consolidated Statements of Cash Flows
  Nine months ended September 30, 2004 and 2003Notes to Condensed Consolidated Financial Statements
  September 30, 2004Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSignaturesEXHIBIT 2.13EXHIBIT 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total revenues
    
    $
    8,365,118
    
    
    $
    8,041,119
    
    
    $
    24,059,102
    
    
    $
    23,193,270Costs and expenses:Cost of revenues
    
    
    4,273,836
    
    
    
    4,093,747
    
    
    
    12,821,216
    
    
    
    11,559,295Research and development
    
    
    421,967
    
    
    
    312,994
    
    
    
    1,410,022
    
    
    
    1,011,244Selling, general and administrative
    
    
    6,993,844
    
    
    
    14,606,250
    
    
    
    27,262,483
    
    
    
    36,133,116Impairment charge
    
    
    15,809,632
    
    
    
    
    
    
    
    15,809,632
    
    
    
    Total costs and expenses
    
    
    27,499,279
    
    
    
    19,012,991
    
    
    
    57,303,353
    
    
    
    48,703,655Loss from operations
    
    
    (19,134,161
    )
    
    
    (10,971,872
    )
    
    
    (33,244,251
    )
    
    
    (25,510,385
    )Gain on divestitures, net
    
    
    53,550
    
    
    
    
    
    
    
    104,073
    
    
    
    9,944,424Interest income
    
    
    17,823
    
    
    
    85,601
    
    
    
    89,687
    
    
    
    524,926Interest expense
    
    
    
    
    
    
    (6,870
    )
    
    
    
    
    
    
    (34,168
    )Loss before minority interests
    
    
    (19,062,788
    )
    
    
    (10,893,141
    )
    
    
    (33,050,491
    )
    
    
    (15,075,203
    )Minority interests
    
    
    (194,676
    )
    
    
    (219,704
    )
    
    
    (450,104
    )
    
    
    (464,088
    )Net loss
    
    $
    (19,257,464
    )
    
    $
    (11,112,845
    )
    
    $
    (33,500,595
    )
    
    $
    (15,539,291
    )Net loss per share of common stock
 basic and diluted
    
    $
    (0.80
    )
    
    $
    (0.46
    )
    
    $
    (1.38
    )
    
    $
    (0.64
    )Weighted average shares of common stock
outstanding
    
    
    24,174,982
    
    
    
    24,182,004
    
    
    
    24,262,868
    
    
    
    24,163,235
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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ENDOCARE, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,162,485
    
    
    $
    23,374,910Accounts receivable, net
    
    
    3,167,037
    
    
    
    2,973,518Inventories
    
    
    3,378,765
    
    
    
    2,019,077Prepaid expenses and other current assets
    
    
    2,376,174
    
    
    
    4,330,954Assets held for sale
    
    
    11,755,146
    
    
    
    3,654,203Total current assets
    
    
    30,839,607
    
    
    
    36,352,662Property and equipment, net
    
    
    2,729,532
    
    
    
    3,661,551Goodwill
    
    
    
    
    
    
    9,877,910Intangibles, net
    
    
    4,554,358
    
    
    
    5,162,445Investments and other assets
    
    
    1,852,624
    
    
    
    1,852,624Assets held for sale
    
    
    
    
    
    
    15,089,723Total assets
    
    $
    39,976,121
    
    
    $
    71,996,915LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,115,907
    
    
    $
    2,568,095Accrued compensation
    
    
    3,445,576
    
    
    
    3,718,873Other accrued liabilities
    
    
    8,848,963
    
    
    
    6,970,696Liabilities held for sale
    
    
    3,809,288
    
    
    
    3,180,735Total current liabilities
    
    
    18,219,734
    
    
    
    16,438,399Minority interests
    
    
    213,715
    
    
    
    237,229Total liabilities
    
    
    18,433,449
    
    
    
    16,675,628Commitments and Contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued and outstandingCommon stock, $.001 par value; 50,000,000 shares authorized;
24,342,482 and 24,183,254 issued and outstanding as of
September 30, 2004 and December 31, 2003, respectively
    
    
    24,342
    
    
    
    24,390Additional paid-in capital
    
    
    169,397,810
    
    
    
    171,875,434Accumulated deficit
    
    
    (147,879,480
    )
    
    
    (114,378,885
    )Deferred compensation
    
    
    
    
    
    
    (107,271
    )Treasury stock at cost, 206,200 shares as of December 31, 2003
    
    
    
    
    
    
    (2,092,381
    )Total stockholders equity
    
    
    21,542,672
    
    
    
    55,321,287Total liabilities and stockholders equity
    
    $
    39,976,121
    
    
    $
    71,996,915
 The accompanying notes are an integral part of these condensed consolidated balance sheets. 4




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ENDOCARE, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months Ended September 30,2004
    
    2003Net cash used in operating activities
    
    $
    (15,218,863
    )
    
    $
    (15,378,354
    )Cash flows from investing activities:Sales of property and equipment
    
    
    362,335
    
    
    
    Purchases of property and equipment
    
    
    (522,378
    )
    
    
    (533,241
    )Proceeds from divestitures
    
    
    2,604,073
    
    
    
    6,980,000Intangibles
    
    
    
    
    
    
    (61,000
    )Sale of available-for-sale securities
    
    
    
    
    
    
    22,183,160Other assets
    
    
    274,858
    
    
    
    (1,261,009
    )Net cash provided by investing activities
    
    
    2,718,888
    
    
    
    27,307,910Cash flows from financing activities:Stock options and warrants exercised
    
    
    91,900
    
    
    
    20,312Partnership distributions to minority interests
    
    
    (599,068
    )
    
    
    (437,350
    )Treasury stock received in litigation settlement
    
    
    (503,729
    )
    
    
    Net cash used in financing activities
    
    
    (1,010,897
    )
    
    
    (417,038
    )Net increase (decrease) in cash and cash equivalents
    
    
    (13,510,872
    )
    
    
    11,512,518Cash and cash equivalents, beginning of period
    
    
    23,976,539
    
    
    
    18,177,825Less: Cash transferred to assets held for sale
    
    
    (303,182
    )
    
    
    (978,987
    )Cash and cash equivalents, end of period
    
    $
    10,162,485
    
    
    $
    28,711,356Non-cash activities:Transfer of inventory to property and equipment
    
    $
    507,649
    
    
    $
    621,219Retirement of treasury shares held
    
    
    2,596,110
    
    
    
    Deferred compensation on options forfeited
    
    
    93,905
    
    
    
    Unrealized loss on available-for-sale securities
    
    
    
    
    
    
    12,466
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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ENDOCARE, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Operations of the Company Endocare, Inc. (the Company) is a medical device company focused on
developing, manufacturing and selling cryosurgical products with the potential
to improve the treatment of cancer and other tumors. In addition, the Company
offers vacuum therapy systems for non-pharmaceutical treatment of erectile
dysfunction. The Company was formed in 1990 as a research and development
division of Medstone International, Inc. (Medstone), a manufacturer of
shockwave lithotripsy equipment for the treatment of kidney stones. Following
its incorporation under the laws of the state of Delaware in 1994, the Company
became an independent, publicly-owned corporation upon Medstones distribution
of the Companys stock to the existing stockholders on January 1, 1996. Following the rules and regulations of the Securities and Exchange
Commission (the SEC) the Company has omitted footnote disclosures in this
report that would substantially duplicate the disclosures contained in the
Companys annual audited financial statements. The accompanying condensed
consolidated financial statements should be read together with the consolidated
financial statements and the notes thereto included in the Companys December
31, 2003 Annual Report on Form 10-K, filed with the SEC on March 15, 2004. The accompanying condensed consolidated financial statements reflect all
adjustments, consisting solely of normal recurring accruals, needed to present
fairly the financial results for these interim periods. The condensed
consolidated results of operations presented for the interim periods are not
necessarily indicative of the results for a full year. All intercompany
transactions and accounts have been eliminated in consolidation. 2. Recent Operating Results and Liquidity Since inception, the Company has incurred losses from operations and has
reported negative cash flows. As of September 30, 2004, the Company had an
accumulated deficit of approximately $147.9 million and cash and cash
equivalents of approximately $10.2 million. In addition to the cash needed to
fund the Companys ongoing operations, there will continue to be substantial
demands on cash related to ongoing investigations of the Companys historical
accounting and financial reporting. Regulators may fine the Company, or the
Company may agree to make one or more settlement payments in order to resolve
the matters under investigation. There may also be material cash payments
required in connection with resolving a class action and a derivative law suit
(see Note 5). The Company may be required to pay judgments or settlements and
incur expenses in defending against these claims. Any judgment, settlement or
expenses in excess of the Companys insurance coverage would have to be paid
from the Companys cash reserves, to the extent of such excess. The Companys operating results for the third quarter and for the first
nine months of 2004 reflect the impact of divestitures in 2003 of certain
non-core lines of business. In April 2003, the Company sold the Dura II penile
implants line for approximately $2.2 million, which resulted in an
insignificant loss. The Company also sold the cardiac-related product
manufacturing operations and licensed the related technology to CryoCath
Technologies, Inc. for approximately $10.0 million, resulting in a gain of the
same amount. The Company receives a royalty based on net sales of the products
incorporating the licensed technology (the Surgifrost System) at royalty rates
which decrease from 10 percent to 3 percent over a nine year period from 2004
to 2012. Royalty income from sales of CryoCath products was $150,000 and
$443,000 for the three-month and nine-month periods ended September 30, 2004,
respectively. In October 2003, the Company sold its urinary incontinence
product lines for a long-term note receivable of approximately $2.7 million.
Due to the uncertainty of the collectibility of the note, payments are recorded
as gain on divestiture on a cash basis. Payments received during the three and
nine months ended September 30, 2004, were approximately $54,000 and $104,000
respectively. The sale of the urinary incontinence product line resulted in a
loss of approximately $1.3 million. Revenues associated with these divested
product lines totaled approximately $1.6 million during the nine months ended
September 30, 2003. 6




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ENDOCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In June 2004, the Company initiated a cost reduction program, which
included streamlining its corporate organizational structure, reduction in
staffing, and elimination or deferral of some longer-term research and
development, and clinical and marketing activities. While the Company has
continued to make progress in lowering its recurring selling, general and
administrative expenses throughout 2003 and 2004, it expects to record a loss
for fiscal 2004 and has continued to experience significant non-recurring costs
associated with ongoing investigations and other matters related to historical
accounting and financial reporting. These non-recurring costs, primarily legal, audit and accounting support
fees, totaled approximately $14.3 million during the fiscal year 2003, and
approximately $10.9 million and approximately $5.4 million (net of insurance
reimbursement) in the first nine months of 2003 and 2004, respectively. For the
nine months ended September 30, 2004 approximately $1.3 million of these costs
also related to the Companys efforts to achieve compliance with section 404 of
the Sarbanes-Oxley Act of 2002 (Sarbanes 404) by the December 31, 2004
deadline. The Company also faces potentially large cash expenditures in the future
related to directors and officers liability insurance and indemnification
obligations, delinquent state and local tax obligations, as well as additional
investment needed to bring the Company into compliance with Sarbanes 404. The Company will use cash reserves to finance its cash flow deficit
throughout the remainder of 2004. In order to continue as a going concern, the
Company will need to raise additional capital to fund operations and has
engaged an investment banker to assist it in analyzing and evaluating various
strategic alternatives to enhance stockholder value and raise capital. These
alternatives include, among other things: debt financing, a strategic alliance,
joint venture or other collaborative arrangement; a sale of some or all of the
Companys assets (see Note 3); a business combination or similar transaction;
or the issuance of additional equity securities. The Company is continuing to
explore its strategic alternatives, and there can be no assurance that any such
transaction will occur. Additional capital may not be available on terms
acceptable to the Company, or at all. Any additional equity financing may be
dilutive to stockholders, and debt financing may involve restrictive covenants.
Collaborative arrangements may require the Company to relinquish rights to some
of its technologies, products or marketing territories. 3. Assets Held for Sale During the second quarter in 2004, the Company engaged an advisor to
evaluate the potential divestiture of its wholly-owned subsidiary, Timm Medical
Technologies, Inc. (Timm Medical) and its equity interests in the mobile
prostate treatment businesses (the Partnerships). Timm Medical and the
Partnerships were acquired in February and September 2002, respectively
(collectively the Disposal Groups). In July 2004, the Company began actively
marketing the Disposal Groups to potential buyers. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the assets and liabilities of
Timm Medical and the Partnerships have been classified as assets held for sale
in the accompanying consolidated balance sheets as of September 30, 2004.
Assuming the Company is able to negotiate acceptable terms and conditions, it
expects to complete the sale and collect the proceeds within 12 months.
Therefore, these assets and liabilities have been classified as current as of
September 30, 2004. The assets and liabilities of the Disposal Groups as of December 31, 2003
have also been reclassified as assets held for sale (based on their
classifications at that date) for comparative presentation. In accordance with
SFAS No. 144, the assets and liabilities of Timm Medical and the Partnerships
have been adjusted to fair value less estimated cost to sell. Depreciation of
fixed assets and amortization of intangibles have also been suspended as of
July 31, 2004. In conjunction with the assessment of fair value, the Company
performed an interim impairment test of the goodwill and amortizable
intangibles related to the Disposal Groups in the third quarter of 2004, which
resulted in total impairment charges of approximately $15.8 million as
discussed below. 7




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ENDOCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Partnerships On September 30, 2002, the Company acquired certain general and limited
equity interests in the Partnerships from a group of affiliated companies
collectively known as USMD. USMD was an exclusive distributor of our
cryosurgical products in certain states and operated the mobile businesses to
provide support services for cryoablation procedures, including the use of a
cryosurgical system, logistics and coordination, transport and technician
services. Under service agreements with each Partnership, the Company pays a
fixed fee per procedure, which is eliminated in consolidation. In conjunction with the potential divestiture, the Company has reduced the
net assets of the Partnerships to $950,000 based on a purchase offer (net of
$50,000 in estimated selling costs), which approximated the carrying value of
the net tangible assets to be sold. There were also approximately $9.8 million
in goodwill and $80,000 in a covenant-not-to-compete (net of amortization) from
the original acquisition. The goodwill primarily relates to the distribution
network provided by the Partnerships, which allows the Company to further
penetrate desired markets. Since investors in the mobile treatment businesses
are comprised of urologists, the Partnerships facilitate the continued
promotion of cryosurgery as the preferred treatment for prostate cancer. In
addition, upon the Companys purchase of the Partnerships, USMD exited the
cryosurgical operations and terminated its exclusive distribution agreement
with the Company, allowing it to market directly to urologists previously
served by USMD and to competitors of USMD who were precluded from purchasing
from the Company under the exclusive arrangement. After the potential
divestiture, the Company will retain access to the service and distribution
network through its existing contracts and will continue to benefit from the
strategic value of a non-exclusive distribution arrangement with the buyer.
However, since this economic benefit cannot be quantified with reasonable
accuracy, the Company has recorded an approximately $9.8 million charge to
write off the excess of the carrying value of the Partnerships net assets
(primarily goodwill and the covenant-not-to-compete) over the purchase offer,
less selling costs, in the third quarter of 2004. The potential divestiture is
not expected to have a significant impact on the Companys operating results
and cash flows. The Partnerships are separately presented in the
Assets/Liabilities Held for Sale captions in the condensed consolidated
balance sheets. Timm Medical The Company acquired Timm Medical through a stock purchase in February
2002. There were approximately $7.7 million in goodwill and approximately $6.3
million in amortizable intangibles, net of amortization (developed technology
and trade name) from the original acquisition. The goodwill primarily relates
to enhancements in our product lines through complementary product offerings
that provide non-pharmaceutical therapeutic treatments following cryosurgery
and Timm Medicals distribution channels through its in-house sales force. The Company used a third-party appraiser to assess the aggregate fair
value of the Disposal Group based on a weighted combination of (i) the
guideline company method that utilizes revenue multiples for comparable
publicly-traded companies, and (ii) a discounted cash flow model that utilizes
future cash flows, the timing of these cash flows, and a discount rate (or
weighted average cost of capital which considers the cost of equity and cost of
debt financing expected by a typical market participant) representing the time
value of money and the inherent risk and uncertainty of the future cash flows.
The Company then determined the implied fair value of the goodwill and
amortizable intangibles. Based on this analysis, the Company recorded an
impairment charge of approximately $3.1 million and approximately $2.1 million
to reduce the carrying value of its goodwill and intangibles, respectively, to
fair value and an additional charge of approximately $700,000 for the estimated
cost to sell. The impairment arose in 2004 due to declining revenues, turnover
in sales force, and below average growth as compared to general industry
trends. Revenues for Timm Medical were approximately $6.2 million and
approximately $8.7 million for the nine months ended September 30, 2004 and
2003, respectively. Net income (loss) was approximately $(200,000) and
approximately $100,000 for the nine months ended September 30, 2004 and 2003,
respectively, excluding the impairment charge. 8




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ENDOCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Combined assets held for sale of Timm Medical and the Partnerships as of
September 30, 2004 and December 31, 2003 include the following: September 30,
    
    December 31,2004
    
    2003Assets:Cash, inventories and other current assets
    
    $
    1,176,680
    
    
    $
    2,142,274Property and equipment, net
    
    
    1,641,923
    
    
    
    1,977,028Goodwill, net
    
    
    4,660,423
    
    
    
    7,660,314Intangibles, net
    
    
    4,170,000
    
    
    
    6,583,333Other assets
    
    
    106,120
    
    
    
    380,977Total assets
    
    
    11,755,146
    
    
    
    18,743,926Liabilities:Accounts payable and other current liabilities
    
    
    633,951
    
    
    
    606,801Other accrued liabilities
    
    
    2,445,197
    
    
    
    2,573,934Costs to sell
    
    
    730,140
    
    
    
    Total liabilities
    
    
    3,809,288
    
    
    
    3,180,735Net assets held for sale
    
    $
    7,945,858
    
    
    $
    15,563,191
 4. Stock-Based Compensation As of September 30, 2004, the Company had five stock-based compensation
plans. On September 10, 2004, the Companys stockholders approved the 2004
Stock Incentive Plan. The Company accounts for the plans under the recognition
and measurement principles (the intrinsic-value method) prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees,and related interpretations. Compensation cost for stock options
granted to employees is reflected in net loss and is measured as the excess of
the market price of the Companys stock at the date of grant over the exercise
price. Compensation costs for fixed awards that are subject to vesting are
recognized prorata over the vesting period. In practice, the Company has only
awarded stock options to its employees with exercise prices equal to the fair
market value of the stock at the date of grant. The Company has adopted the disclosure provisions required by SFAS No.
148, Accounting for Stock-Based Compensation  Translation and Disclosure.The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions to stock-based
employee compensation. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported (a)
    
    $
    (19,257,464
    )
    
    $
    (11,112,845
    )
    
    $
    (33,500,595
    )
    
    $
    (15,539,291
    )Reconciling items (net of related tax
effects):Add: Stock-based employee compensation
expense determined under the intrinsic-value-based method for all awards (b)
    
    
    120,571
    
    
    
    6,194
    
    
    
    133,675
    
    
    
    18,582Less: Stock-based compensation expense
determined under the fair-value-based
method for all awards expense (c)
    
    
    (1,018,901
    )
    
    
    873,196
    
    
    
    (2,823,079
    )
    
    
    (2,785,470
    )Net adjustment
    
    
    (898,330
    )
    
    
    879,390
    
    
    
    (2,689,404
    )
    
    
    (2,766,888
    )Net loss, as adjusted
    
    $
    (20,155,794
    )
    
    $
    (10,233,455
    )
    
    $
    (36,189,999
    )
    
    $
    (18,306,179
    )Basic and diluted loss per share:As reported
    
    $
    (0.80
    )
    
    $
    (0.46
    )
    
    $
    (1.38
    )
    
    $
    (0.64
    )As adjusted
    
    $
    (0.83
    )
    
    $
    (0.42
    )
    
    $
    (1.49
    )
    
    $
    (0.76
    )
 9




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ENDOCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (a) In the past, the Company had issued stock options and warrants to
consultants for services performed. Compensation expense for the fair value of
these options is determined by the Black-Scholes option-pricing model and is
charged to operations over the service period or as performance goals are
achieved. Such expense is included in net loss as reported. (b) Since the Company issues options with exercise prices equal to or
exceeding the fair values of the underlying common stock, no compensation
expense is recorded for options issued to employees, except for compensation
expense equal to the intrinsic value of unvested options assumed in the
Companys 2002 acquisition of Timm Medical and amortized over the remaining
vesting period. The 2004 amounts include a $119,000 charge related to options
held by the Companys then CFO, which will continue to vest for one year after
separation in August 2004. (c) Pursuant to APB No. 25, the $1.7 million charge for replacement
options was recorded upon termination of the then CFO on July 31, 2003.
Pursuant to SFAS No. 148, the fair value of these options would have been
recorded prorata between the option modification date of March 3, 2003 and
termination date. The difference between the fair value allocation and the
actual charge recorded resulted in a net reduction in reported compensation
expense for the three months ended September 30, 2003. On
October 13, 2004, the FASB concluded that Statement No. 123R,
Share-Based Payments, which requires all companies
to measure compensation cost for all share-based payments (including
employee stock options) at fair value, would be effective for public
companies for interim or annual periods beginning after June 15,
2005. SFAS No. 123R will eliminate the Companys ability to account for
share-based compensation using the intrinsic value method permitted
under Opinion No. 25. The Company will utilize the modified prospective
method, recognizing compensation cost for share-based awards to
employees based on their grant-date fair values from the beginning of
the year in which the recognition provisions are first applied as if
the fair value-based method had been used to account for all employee
awards. Under this transition approach, compensation cost will be
recognized for all awards granted, modified or settled after the date
of adoption as well as for any awards that were not fully vested as of
that date. Any adjustments to recognize share-based liabilities at
fair value from the beginning of the year through the date of
adoption will be recognized as a cumulative effect of a change in
accounting principle. The Company intends to apply the new rules beginning
July 1, 2005. 5. Commitments and Contingencies In July 2003, the Company recorded severance charges of approximately
$775,500 and $731,000 in connection with the termination of its then CEO and
CFO, respectively. In addition, the Company recorded a non-cash charge of
approximately $1.7 million for the fair value of 385,000 options issued to the
former CFO after his termination. The fair value was determined using the
Black-Scholes option pricing model. In August 2004, the Company entered into a severance agreement with its
then CFO. In conjunction with this agreement, the Company recorded
approximately $200,000 in related severance payments. Since the former CFO
continues to vest in her stock options for a period of one year after the
termination of her employment, the Company recorded an additional $119,000 in
stock-based compensation expense. Legal Matters The Company is a party to lawsuits in the normal course of its business.
Litigation and governmental investigation can be expensive and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict. The Company can provide no assurance that significant
judgments or settlements in connection with the legal proceedings described
below will not have a material adverse effect on the Companys business,
financial condition, results of operations and cash flows. See Part I, Item 2
 Managements Discussion and Analysis of Financial Condition and Results of
Operations. Other than as described below, the Company is not a party to any
material legal proceedings. In November 2002, the Company was named as a defendant, together with
certain former officers, one of whom is also a former board member, in a
class-action lawsuit filed in the United States District Court for the Central
District of California. On February 2, 2003, the court issued an order
consolidating this action with various other similar complaints and ordering
plaintiffs to file a consolidated complaint, which was filed on October 31,
2003. The consolidated complaint asserts two claims for relief, alleging that
the defendants violated sections of the Securities Exchange Act of 1934 by
purportedly issuing false and misleading statements regarding the Companys
revenues and expenses in press releases and SEC filings. Plaintiffs seek class
certification and unspecified damages from the Company, as well as forfeiture
and reimbursement of bonus compensation received by two of the individual
defendants. On April 26, 2004, the court issued an order denying the Companys
motion to dismiss the consolidated complaint. The Company has executed a
settlement agreement with the lead plaintiffs and their counsel which
will be submitted to the court for its preliminary approval and for
authorization to provide notice of its terms to class members. Under
the agreement, in exchange for release of all claims, the Company and
certain individuals will pay a total of $8.95 million in cash.
The Companys directors and officers liability insurance
carriers will fund the total amount of $8.95 million, subject to
reservations of rights by the carriers in connection with the
rescission arbitration described below. Consummation of the
settlement is subject to the court approval. The Company believes it
has properly accrued for its share of the settlement cost. On December 6, 2002, Frederick Venables filed a purported derivative
action against the Company and certain former officers, certain former board
members and one current board member in the California Superior Court for 10




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ENDOCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) the County of Orange alleging breach of fiduciary duty, abuse of control,
gross mismanagement, waste of corporate assets and unjust enrichment. Pursuant
to a stipulation filed on or about April 23, 2004 and approved by the court,
the deadline to respond to the complaint has been stayed until 2005. The
complaint seeks unspecified monetary damages, equitable relief and injunctive
relief based upon allegations that the defendants issued false and misleading
statements regarding the Companys revenues and expenses in press releases and
SEC filings. We are currently engaged in settlement discussions in an effort
to resolve this matter. While the Company carries $20 million of directors and officers liability
insurance coverage, the three excess carriers, representing $15 million of the
$20 million of coverage, have filed arbitration complaints seeking rescission
of the policies. The primary carrier has agreed to reimburse the Companys
defense costs up to the limits of its $5 million policy subject to a $0.5
million deductible. The amount of estimated settlement accruals, net of
reimbursement from the primary carrier for prior defense-related costs, was not
material to selling, general and administrative expenses and net loss for the
three-month and nine-month periods ended September 30, 2004. Managements
evaluation of the likely impact of these actions could change in the future and
an unfavorable outcome, depending upon the amount and timing, could have a
material adverse effect on the Companys consolidated financial position,
results of operations or cash flows for a future quarter. The SEC is currently conducting an investigation to determine whether any
federal securities laws were violated in connection with the filing of the
Companys financial statements for 2001 and the first two quarters of 2002,
including investigation into allegations that the Company and certain of the
Companys current and former officers and directors issued or caused to be
issued false and misleading statements regarding the Companys revenues and
expenses in those SEC filings. On June 30, 2004, the Company reported receipt
of a Wells Notice from the SEC and the issuance of Wells Notices to former
members of its senior management, former sales personnel, and its current head
of sales and marketing. On July 23, 2004, the Company reported the receipt of
Wells Notices from the SEC by two former members and one then-current member
of its board of directors, all of whom are former members of the audit
committee. The Company is cooperating fully with this investigation, but there
can be no assurance that this matter will be resolved in its favor. The Department of Justice (DOJ) is currently conducting an investigation
into allegations that the Company and certain of its current and former
officers and directors intentionally issued, or caused to be issued, false and
misleading statements regarding the Companys revenues and expenses in SEC
filings. The Company is cooperating fully with this investigation but there can
be no assurance that this matter will be resolved in its favor. 6. Related Party Transactions In January 2003, the Company extended a $344,000 non-recourse loan to an
individual who is a shareholder and consultant. The Company previously entered
into an asset purchase agreement with the shareholder in February 2002 to
acquire certain patents and a covenant-not-to-compete for 100,000 shares of the
Companys common stock valued at approximately $1.4 million. The Company
extended the loan to the shareholder to assist with the payment of related
federal income taxes arising from the 2002 purchase transaction. The loan is
secured by the shares issued, bears interest at 1.8 percent and is due at the
earlier of January 2005 or 30 days after the borrower ceases to be a consultant
to the Company. The Company intends to extend the maturity date to December
2005. 7. Capital Stock and Earnings Per Share During the first quarter of 2004, the Company retired 326,222 of its
common shares held in treasury, including 120,022 shares purchased from BioLife
Solutions, Inc. for approximately $504,000 in February 2004, in connection with
settlement of its litigation with this company. 11




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ENDOCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the respective periods. Diluted
loss per share, calculated using the treasury stock method, gives effect to the
potential dilution that could occur upon the exercise of certain stock options
that were outstanding during the respective periods presented. For periods when
the Company reported a net loss, these potentially dilutive common shares were
excluded from the diluted loss per share calculation because they were
antidilutive. Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (19,257,464
    )
    
    $
    (11,112,845
    )
    
    $
    (33,500,595
    )
    
    $
    (15,539,291
    )Basic and diluted
loss per common
share
    
    $
    (0.80
    )
    
    $
    (0.46
    )
    
    $
    (1.38
    )
    
    $
    (0.64
    )Basic and diluted
weighted average
shares
    
    
    24,174,982
    
    
    
    24,182,004
    
    
    
    24,262,868
    
    
    
    24,163,235
 8. Income Taxes The Company reported no income tax expense for each of the nine months
ended September 30, 2004 and 2003 due to its operating losses. The continuing
operating losses resulted in an increase in the valuation allowance of
approximately $12.2 million and approximately $6.2 million during the nine
months ended September 30, 2004 and 2003, respectively. Due to the Companys
history of operating losses, management has determined that it is more likely
than not that the Companys deferred tax assets will not be realized through
future earnings. Accordingly, valuation allowances were recorded to fully
reserve the deferred tax assets as of September 30, 2004 and 2003. As of
December 31, 2003, the Company had federal and state net operating loss carry
forwards of approximately $85.4 million and approximately $53.7 million,
respectively. 12




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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 onForm 10-Kfor the fiscal year ended December 31, 2003. 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 onForm 10-Qor in our Annual Report on Form
10-K referred to above. In addition, there are factors not described in this
Quarterly Report onForm 10-Qor in our Annual Report onForm 10-Kthat 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 We are an innovative medical device company focused on the development of
minimally invasive technologies for tissue and tumor ablation through
cryoablation. We develop and manufacture devices for the treatment of prostate
cancer and we believe that our proprietary technologies have broad applications
across a number of markets, including the ablation of tumors in the kidney,
lung, liver and bone. In addition to our cryosurgery products, we sell other products we
acquired when we purchased Timm Medical in the first quarter of 2002. The
primary products are our ErecAid vacuum therapy systems. In 2003 we either
divested or discontinued certain non-strategic urological product lines
acquired in the Timm Medical purchase. The reduction in year-over-year sales of
our Timm Medical products is largely attributable to these divestitures. Currently, our cryosurgical products are sold chiefly to hospitals for the
treatment of prostate cancer. In addition, we are exploring the application of
our cryosurgical technologies for ablation of other tumors, specifically in the
treatment of tumors of the kidney, lung and liver, and for pain management
related to metastatic bone cancer. We sell our vacuum therapy products for
treatment of erectile dysfunction primarily to individual patients on a
prescription basis. Results of Operations Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003 Revenues.Revenues for the three months ended September 30, 2004 increased
4.0 percent to approximately $8.4 million compared to $8.0 million for the
three months ended September 30, 2003. The increase in revenues was primarily
attributable to growth in sales of disposables and procedure fees related to
our cryosurgical business, partially offset by lower revenues from Timm
Medical. The number of cryosurgical procedures performed, and related sales of
disposable products used in these procedures, grew significantly in the three
months ended September 30, 2004 compared to the same period in 2003. Procedures
increased 17.6 percent to approximately 1,134 in the third quarter of 2004 from
approximately 964 in the third quarter of 2003, while the related revenues
increased 12.4 percent to approximately $5.4 million in the third quarter of
2004 from approximately $4.8 million in the third quarter of 2003. Contributing
to growth in sales of cryosurgical products was an increase in sales with a
lower average selling price to a market served by interventional radiologists
(Interventional Radiology Market), treating tumors in the lung, liver and
bone. Sales of our Timm Medical product lines decreased 15.4 percent to
approximately $2.2 million in the three months ended September 30, 2004 from
approximately $2.6 million in the three months ended September 30, 2003. This
was primarily due to an approximate $287,000 decrease from the divestiture of
the Dura II line of implantable penile prostheses and the divestiture of the
urinary incontinence product lines in the second and fourth quarter of 2003,
respectively. 13




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Cost of Revenues.Cost of revenues for the three months ended September
30, 2004 increased 4.4 percent to approximately $4.3 million compared to
approximately $4.1 million for the three months ended September 30, 2003. The
increase in cost of revenues resulted primarily from growth in sales of
cryosurgical probes and procedures, offset by elimination of costs related to
the Dura II and urinary incontinence product lines. Cost of revenues related to
our cryosurgical probes and procedures increased approximately $500,000 to
approximately $3.0 million for the third quarter of 2004 from approximately
$2.5 million,compared to the same period in the prior year. This increase was
also partly driven by an increase in the number of cryosurgical procedures for
which we subcontract a portion of the service to third party service providers
at an additional cost. Gross Margins.Gross margins on revenues declined to 48.9 percent for the
three months ended September 30, 2004 compared to 49.1 percent for the three
months ended September 30, 2003, due to increased use of third party service
providers in our cryosurgical procedures, and offset by the divestiture in 2003
of higher margin product lines acquired in our purchase of Timm Medical. Research and Development Expenses.Research and development expenses for
the three months ended September 30, 2004 increased 34.8 percent to
approximately $422,000 compared to approximately $313,000 for the three months
ended September 30, 2003. The increase was primarily attributable to increased
costs associated with several new development projects that we have undertaken
in our efforts to reduce the manufacturing costs of the disposable components
used in cryoablation surgical procedures. As a percentage of revenues, research
and development expenses increased to 5.0 percent in the third quarter of 2004
from 3.9 percent during the three months ended September 30, 2003. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the three months ended September 30, 2004 decreased
52.1 percent to approximately $7.0 million compared to approximately $14.6
million for the three months ended September 30, 2003. Non-recurring legal and
accounting costs incurred in connection with investigations into our historical
accounting and financial reporting, declined to approximately $102,000 (net of
reimbursement) in the quarter ended September 30, 2004 from approximately $4.3
million in the same period in 2003. The prior year quarter included total
charges of approximately $3.2 million for severance and stock compensation
expense related to the termination of the then chief executive and chief
financial officers. The remaining approximately $700,000 decrease reflects the results of our
June 2004 cost reduction program. We consolidated certain sales functions and
territories, streamlined our corporate organizational structure, reduced staff,
eliminated marketing activities and restructured our sales and marketing
programs. Impairment charge. During the quarter ended September 30, 2004, we
recorded $15.8 million in impairment charges to write down the goodwill and
amortizable intangibles in conjunction with Timm Medical and our mobile
prostate treatment businesses. The charge represents the excess of the carrying
value of these entities compared to their fair value, less estimated costs to
sell. Fair value for the mobile prostate treatment businesses was based on a
proposed purchase offer. Fair value for Timm Medical was based on an
independent appraisal using a weighted combination of the publicly-traded peer
group company valuations and discounted cash flow analyses. Interest Income, Net.Interest income, net, for the three months ended
September 30, 2004 was $17,800 compared to $85,600 for the three months ended
September 30, 2003. The decrease in net interest income in 2004 compared to
2003 resulted from a decline in our average cash balance. Minority Interests.Minority interests represent earnings attributable to
minority investors in the mobile prostate treatment businesses we acquired in
2002. The amounts recorded for minority interests were approximately $195,000
for the three months ended September 30, 2004 compared to approximately
$220,000 for the three months September 30, 2003. Revenues and earnings from
these businesses remained consistent with our overall operations. Net Loss.Net loss for the three months ended September 30, 2004 was
approximately $19.3 million or $0.80 per basic and diluted share on 24,174,982
weighted average shares outstanding, compared to a net loss of approximately
$11.1 million, or $0.46 per basic and diluted share on 24,182,004 weighted
average shares outstanding for the same period in 2003. 14




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Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003 Revenues.The number of cryosurgical procedures performed, and related
sales of disposable products used in these procedures, grew significantly in
the nine months ended September 30, 2004 compared to the same period in 2003.
Procedures increased 38.7 percent to approximately 3,487 in the nine months
ended September 30, 2004 from approximately 2,514 in the nine months ended
September 30, 2003. Revenues for the nine months ended September 30, 2004
increased 3.7 percent to approximately $24.1 million compared to approximately
$23.2 million for the nine months ended September 30, 2003. The increase in
revenue is primarily due to growth in sales of cryosurgical disposables and
procedure fees, including an increase in cases from the Interventional
Radiology Market which has a lower average selling price per case, partially
offset by divestitures of the urinary incontinence products and the Dura II
line. Sales of cryosurgical probes and procedures grew 31.7 percent to
approximately $15.8 million for the nine months ended September 30, 2004 from
approximately $12.0 million for the same period in 2003. Revenues from Timm
Medical decreased $2.5 million to approximately $6.2 million in the nine months
ended September 30, 2004 compared to approximately $8.7 million in the prior
year period primarily due to the divestitures of certain product lines. Sales
of Cryocare Surgical Systems also decreased to $457,000 for the first nine
months of 2004 from $568,000 in the first nine months of 2003, due to a
reduction in the number of units sold. Cost of Revenues.Cost of revenues for the nine months ended September 30,
2004 increased 10.9 percent to approximately $12.8 million compared to
approximately $11.6 million in the prior-year period. The increase is due to
growth in the number of cryosurgical procedures and sale of disposables and
increased use of third party service providers, offset by elimination of costs
of the divested product lines in Timm Medical. Cost of revenues for
cryosurgical probes and procedures for the first nine months of 2004 was
approximately $9.5 million compared to approximately $6.5 million for the first
nine months of 2003. Gross Margins.Gross margins on revenues for the nine months ended
September 30, 2004 decreased to 46.7 percent compared to 50.2 percent for the
same period in 2003 due to increased use of third party service providers and
the divestiture in 2003 of certain higher margin product lines at Timm Medical. Research and Development Expenses.Research and development expense for
the nine months ended September 30, 2004 increased 39.4 percent to
approximately $1.4 million compared to approximately $1.0 million for the same
period in 2003. As a percentage of revenues, research and development expenses
increased to 5.9 percent from 4.4 percent. The increase is attributable to
costs associated with several new development projects that we have undertaken
in our efforts to reduce the manufacturing costs of the disposable components
used in cryoablation surgical procedures. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the nine months ended September 30, 2004 decreased
24.5 percent to approximately $27.3 million compared to approximately $36.1
million for the same period in 2003. Legal, audit and accounting support fees
related to regulatory investigations of our historical accounting and financial
reporting and related litigation, were approximately $4.1 million for the nine
months ended September 30, 2004 compared to approximately $7.7 million for the
same period in 2003 due to a reduction in accounting support expenses and audit
fees. The Company streamlined its corporate
organizational structure, reduction in staffing, and elimination or
deferral of some longer-term research and development, and clinical
and marketing activities reducing expenses by $1.6 million for the
nine months ended September 30, 2004. The first three quarters of 2003 also included total charges of
approximately $3.2 million for severance and stock compensation expenses
related to the termination of the then chief executive and chief financial
officers. In addition, for the nine months ended September 30, 2004 there were
approximately $1.3 million of accounting support expenses related to the
Companys efforts to achieve compliance with Sarbanes 404. Impairment charge. During the quarter ended September 30, 2004, we
recorded $15.8 million in impairment charges to write down the goodwill and
amortizable intangibles in conjunction with Timm Medical and our mobile
prostate treatment businesses. The charge represents the excess of the carrying
value of these entities compared to their fair value, less estimated costs to
sell. Fair value for the mobile prostate treatment businesses was based on a
proposed purchase offer. Fair value for Timm Medical was based on an
independent appraisal using a weighted combination of the publicly-traded peer
group company valuations and discounted cash flow analyses. Interest Income.Interest income, net for the nine months ended September
30, 2004 was $90,000 compared to $525,000 for the nine months ended September
30, 2003. The decrease was due to our declining average cash balances. 15




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Net Loss.Our net loss for the nine months ended September 30, 2004 was
approximately $33.5 million, or $1.38 per basic and diluted share, on
24,262,868 weighted average shares outstanding, compared to a net loss of
approximately $15.5 million, or $0.64 per basic and diluted share, on
24,163,235 weighted average shares outstanding for the same period in 2003. Liquidity and Capital Resources Since inception, we have incurred losses from operations and have reported
negative cash flows. As of September 30, 2004, we had an accumulated deficit of
approximately $147.9 million, and cash and cash equivalents of approximately
$10.2 million. We currently have no long-term debt, and no long-term financial
obligations other than under operating leases and purchase commitments for raw
materials used in manufacturing our products. Although we believe that our
existing cash balances will be sufficient to fund our working capital
requirements, capital expenditures and other obligations at least through 2004,
there are certain risks and uncertainties that could, in the future, change our
opinion regarding the adequacy of our capital resources. During the nine months
ended September 30, 2004, approximately $15.2 million of our cash was used to
fund operating activities. In February 2004 we paid approximately $1.5 million in directors and
officers liability insurance premiums, and we paid approximately $1.9 million
to settle litigation. In addition, during the first nine months of 2004 we
incurred approximately $4.1 million in non-recurring legal and accounting fees
associated with the ongoing investigations into possible irregularities in our
accounting and financial reporting in earlier periods. In addition, for the
nine months ended September 30, 2004 there were approximately $1.3 million of
accounting support expenses related to the Companys efforts to achieve
compliance with Sarbanes 404. We face the possibility that there will be additional material cash
payments required in connection with resolving matters related to the
investigations into our historical accounting and financial reporting. We and
certain former officers, one of whom is also a former board member have been
named as defendants in a pending class action lawsuit. We and certain former
officers, certain former board members and one current board member, also have
been named as defendants in a pending derivative lawsuit. In addition, we,
former board members, former members of our senior management, former sales
personnel, and our current head of sales and marketing have received Wells
Notices from the SEC (see Note 5 to our condensed consolidated financial
statements contained in this report). We are generally obliged, to the extent
permitted by law, to indemnify our directors and officers who are named
defendants in litigation related to their service. At this time we are unable
to provide a reasonable estimate of our potential liability in these cases. We may be required to pay judgments or settlements and to incur expenses
in defending against these claims that could be material. While we carry $20
million of directors and officers liability insurance coverage, this coverage
may not be adequate to cover all costs related to these lawsuits, including any
resulting judgments or settlements. As described below under Risks Related to
Our Business, for claims asserted during the period from June 10, 2002 through
June 10, 2003, our three excess carriers have filed arbitration complaints,
contending our former management made misstatements or omissions in the
applications for insurance coverage and seeking rescission of the policies. Any
judgment, settlement or expenses in excess of our insurance coverage would have
to be paid out of our cash reserves, to the extent of such excess, which could
have a material adverse effect on our business, financial condition, results of
operations and cash flows. Beyond the factors described above, we expect to face significant demands
on our capital resources related to the execution of our 2004 operating plan,
maintaining compliance with the SEC rules and regulations required of publicly
traded companies, including Sarbanes 404, and fulfilling requirements
prerequisite to becoming relisted on a national stock exchange or market. We
are currently projecting an operating loss for fiscal 2004, as well as a net
use of cash. While we have continued to experience growth in cryosurgical probe and
procedure revenues through the first nine months of 2004 and have reduced our
selling, general and administrative costs through this period compared to the
same period in 2003, we do not expect to reach break-even or cash flow positive
in 2004. We will use cash reserves to finance our cash flow deficit in 2004. In order to continue as a going concern, we will need to raise additional
capital to fund operations. We have engaged an investment banker to assist us
in analyzing various strategic alternatives to enhance stockholder value and
raise capital. These alternatives include, among other things: debt financing;
a strategic alliance, joint venture or 16




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other collaborative arrangement; the sale of Timm Medical and the
Partnerships; a business combination or other similar transaction; or issuing
equity securities. We are continuing to explore our strategic alternatives, and
there can be no assurance that any such transaction will occur. Additional
capital may not be available on terms acceptable to us, or at all. Risks Related to Our Business The risks and uncertainties described below are not the only ones we face.
For information regarding other risks related to our business, please see
Risks Related to Our Business in our Annual Report onForm 10-Kfor the
fiscal year ended December 31, 2003. Furthermore, additional risks and
uncertainties not presently known to us or that we currently deem immaterial
may also impair our operations. The occurrence of any of these risks could
harm our business. In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment. We face risks relating to our liquidity. Since the fourth quarter of 2002, we have incurred significant costs
related to, among other things, legal, accounting and other professional fees
associated with our internal reviews of various accounting and other matters,
the ongoing investigation of us by the SEC and DOJ, various shareholder
class-action and derivative lawsuits and other legal proceedings described
below. We are generally obliged, to the extent permitted by law, to indemnify
our directors and officers who are named defendants in litigation related to
their service. At this point in time we are unable to provide a reasonable
estimate of our potential liability in these cases. In addition we are making significant investments in the development and
implementation of sound internal controls and corporate governance policies and
procedures designed to enhance the accuracy, quality and consistency of our
financial information and reporting and to achieve compliance with Sarbanes
404. We will continue to incur significant related expenses in the future. We expect that we will require additional financing in order to continue
operating our business beyond 2004. We have engaged an investment banker to
assist us in analyzing various strategic alternatives to enhance stockholder
value and raise capital. These alternatives include, among other things: debt
financing; a strategic alliance, joint venture or other collaborative
arrangement; a sale of some or all of our assets; a business combination or
other similar transaction; or issuing equity securities. We are continuing to
explore our strategic alternatives, and there can be no assurance that any such
transaction will occur. Additional capital may not be available on terms
acceptable to us, or at all. Any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve interest expense
and restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require us to relinquish rights to some of our
technologies, products or marketing territories. Our failure to raise capital
would have a material adverse effect on our business, financial condition,
results of operations and cash flows, and could cause us to discontinue
operations or declare bankruptcy. In addition, if we fail to adequately address our liquidity concerns, then
our independent auditors may issue a qualified opinion, to the effect that
there is substantial doubt about our ability to continue as a going concern. A
qualified opinion could itself have a material adverse effect on our business,
financial condition, results of operations and cash flows. For a further description of the nature of the risks relating to our
liquidity see, Part I, Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources. We face risks related to investigations by the SEC and DOJ and related to
other legal proceedings. The SEC and the DOJ are conducting investigations into allegations that we
and certain of our current and former officers and directors issued, or caused
to be issued, false and misleading statements regarding our revenues and
expenses in press releases and SEC filings. Although we have fully cooperated
with these governmental agencies in these matters and intend to continue to
fully cooperate, these agencies may determine we have violated federal
securities laws. We cannot predict when these investigations will be completed
or their outcomes. If it is determined that we have violated federal securities
laws or other laws or regulations, we may face sanctions, including, but not
limited to, significant monetary penalties and injunctive relief. 17




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We and certain former officers, one of whom is also a former board member,
have been named as defendants in a pending class-action lawsuit. In addition,
we and certain former officers, certain former board members and one current
board member, have been named defendants in a pending derivative lawsuit. The
findings and outcome of the SEC and DOJ investigations described above may
affect the class action and the derivative lawsuit. We are generally obliged,
to the extent permitted by law, to indemnify our directors and officers who are
named defendants in litigation related to their service. We are unable to
estimate what our liability in these matters may be, and we may be required to
pay judgments or settlements and incur expenses in aggregate amounts that could
have a material adverse effect on our business, financial condition, results of
operations and cash flows. We have $20 million of directors and officers liability insurance
coverage. The coverage is provided in four $5 million policies issued by a
primary insurance carrier and three excess insurance carriers. For claims
asserted during the period from June 10, 2002 through June 10, 2003, the three
excess carriers have filed arbitration complaints, contending our former
management made misstatements or omissions in the applications for insurance
coverage and seeking rescission of the policies. Any judgment, settlement or
expenses in excess of our insurance coverage would have to be paid out of our
cash reserves, to the extent of such excess, which could have a material
adverse effect on our business, financial condition, results of operations and
cash flows. We may be unable to satisfy the requirements of Sarbanes 404, or we or our
auditors may identify significant deficiencies or material weaknesses in our
internal controls. Pursuant to Sarbanes 404, we will be required to furnish a report of our
managements assessment of the effectiveness of our internal controls over
financial reporting as part of our Annual Report on Form 10-K for the fiscal
year ending December 31, 2004. In addition, our auditors will be required to
provide an attestation report on managements assessment. We have prepared an
internal plan of action for compliance, and we are in the process of
evaluating, enhancing and testing our internal controls to provide the basis
for our report. However, we may be unable to satisfy the requirements of
Sarbanes 404, or our internal control report or the related attestation report
may identify significant deficiencies or material weaknesses in our internal
controls, either of which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. Our management members have spent considerable time and effort dealing
with internal and external investigations and re-auditing of financial
statements. In addition to the challenges of the SEC investigation, the DOJ
investigation, a shareholder class-action and a derivative lawsuit and other
legal proceedings described above, our new management members have spent
considerable time and effort dealing with internal and external investigations
involving our previous internal controls, accounting policies and procedures,
disclosure controls and procedures and corporate governance policies and
procedures. The significant time and effort spent has adversely affected our
operations and may continue to do so in the future. Our success will depend on our ability to attract and retain key personnel. 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 marketing 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, including Craig
T. Davenport, our Chief Executive Officer, William J. Nydam, our President and
Chief Operating Officer, and Michael R. Rodriguez, our Senior Vice President,
Finance and Chief Financial Officer. None of our key management personnel is
covered by an insurance policy of which we are the beneficiary. 18




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##### Table of Contents



Item 3.Quantitative and Qualitative Disclosures About Market Risk The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
invested cash without significantly increasing risk of loss. Our financial
instruments include cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities. At September 30, 2004, the carrying values of
our financial instruments approximated their fair values. Our policy is not to
enter into derivative financial instruments. In addition, we do not enter into
any futures or forward contracts and therefore, we do not have significant
market risk exposure with respect to commodity prices. Although we transact our business in U.S. dollars, future fluctuations in
the value of the U.S. dollar may affect the price competitiveness of our
products. However, we do not believe that we currently have any significant
direct foreign currency exchange rate risk and have not hedged exposures
denominated in foreign currencies or any other derivative financial
instruments. 
 Item 4.Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures.We maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports pursuant to the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) of the Securities Exchange of 1934, as
amended, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the quarter covered by
this report. Based on the foregoing, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were
not yet effective at the reasonable assurance level. Since March 2003, management has implemented and continues to implement
significant changes in organization, policies and procedures designed to
enhance our disclosure controls and procedures and the related internal
controls, and to achieve compliance with Sarbanes 404. Nevertheless, during
much of 2003, many of these enhancements to our disclosure controls and
procedures and the related internal controls were not yet in place, or were
only partially in place. In addition, until the recent filing of our past due
reports on Form 10-Q, we have not been current in our reporting under Section
15(d) of the Securities Exchange Act of 1934. For this reason, management has
undertaken an extensive and substantive review and evaluation of all financial
transactions that, individually or collectively, could have a material impact
on the information contained in this Form 10-Q. These review procedures, in
combination with the changes in internal control that have been implemented as
of the end of the period covered by this report, form the basis for our
determination that the financial statements and other information contained in
this report fairly present, in all material respects, our financial condition,
results of operations and cash flows for the nine months ended September 30,
2004 and 2003. We
are continuing a detailed assessment of our internal controls as
required for Sarbanes 404 compliance. We are beginning the testing
phase of our project. We have supplemented our internal project team
with the services of several outside specialists. Although we have
made this project a top priority, there can be no assurances that all
control deficiencies identified and validated will be remediated
before the end of our fiscal year or that any control deficiencies
found as a result of our testing will not rise to the level of
significant deficiencies or material weaknesses. (b) Changes in Internal Controls.Except as described above in subsection
(a) of this Item 4, there was no change in our internal control over financial
reporting during our third fiscal quarter for 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 19




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings We are a party to lawsuits in the normal course of our business.
Litigation and governmental investigation can be expensive and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict. We can provide no assurance that significant
judgments or settlements in connection with the legal proceedings described
below will not have a material adverse effect on our business, financial
condition, results of operations and cash flows. See Part I, Item 2 
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Other than as described below, we are not a party to any material
legal proceedings. In November 2002, we were named as a defendant, together with certain
former officers, one of whom is also a former board member, in a class-action
lawsuit filed in the United States District Court for the Central District of
California. On February 2, 2003, the court issued an order consolidating this
action with various other similar complaints and ordering plaintiffs to file a
consolidated complaint, which was filed on October 31, 2003. The consolidated
complaint asserts two claims for relief, alleging that the defendants violated
sections of the Securities Exchange Act of 1934 by purportedly issuing false
and misleading statements regarding our revenues and expenses in press releases
and SEC filings. Plaintiffs seek class certification and unspecified damages
from us, as well as forfeiture and reimbursement of bonus compensation received
by two of the individual defendants. On April 26, 2004, the court issued an
order denying our motion to dismiss the consolidated complaint. We have executed a
settlement agreement with the lead plaintiffs and their counsel which
will be submitted to the court for its preliminary approval and for
authorization to provide notice of its terms to class members. Under
the agreement, in exchange for release of all claims, we and
certain individuals will pay a total of $8.95 million in cash.
Our directors and officers liability insurance
carriers will fund the total amount of $8.95 million, subject to
reservations of rights by the carriers in connection with the
rescission arbitration described in Note 5 in Part I, above. Consummation of the
settlement is subject to the court approval. We believe we have
properly accrued for our share of the settlement cost. On December 6, 2002, Frederick Venables filed a purported derivative
action against us and certain former officers, certain former board members and
one current board member in the California Superior Court for the County of
Orange alleging breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment. Pursuant to a
stipulation filed on or about April 23, 2004 and approved by the court, the
deadline to respond to the complaint has been stayed until 2005. The complaint
seeks unspecified monetary damages, equitable relief and injunctive relief
based upon allegations that the defendants issued false and misleading
statements regarding our revenues and expenses in press releases and SEC
filings. We are currently engaged in settlement discussions in an effort to
resolve this matter. The SEC is currently conducting an investigation to determine whether any
federal securities laws were violated in connection with the filing of our
financial statements for 2001 and the first two quarters of 2002, including
investigation into allegations that we and certain of our current and former
officers and directors issued, or caused to be issued, false and misleading
statements regarding our revenues and expenses in those SEC filings. On June
30, 2004, we reported our receipt of a Wells Notice from the SEC and the
issuance of Wells Notices to our former senior management, former sales
personnel and our current head of sales and marketing. On July 23, 2004, we
reported the receipt of Wells Notices from the SEC by two former members and
one then-current member of our board of directors, all of whom are former
members of our audit committee. We are cooperating fully with this
investigation. We cannot assure you that this matter will be resolved in our
favor. The DOJ is currently conducting an investigation into allegations that we
and certain of our current and former officers and directors intentionally
issued, or caused to be issued, false and misleading statements regarding our
revenues and expenses in SEC filings. We are cooperating fully with this
investigation. We cannot assure you that this matter will be resolved in our
favor. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds In addition to the 275,000 stock option grants that we previously reported
in the Form 8-K that we filed on August 10, 2004, during the quarter ended
September 30, 2004 we granted an aggregate of 709,000 stock options to 19
employees, at exercise prices ranging from $2.72 to $2.97 per share. The terms
of these stock options provide that they cannot be exercised until they vest
over our standard four-year vesting term and until we file a registration
statement on Form S-8 to register these stock options, which we filed on
October 19, 2004. In August 2004, we issued 10,000 shares to a former employee upon his
exercise of stock options granted to him while he was an employee. The exercise
price of these options was $0.18 per share, for an aggregate exercise price of
$1,800. In September 2004 our former CEO exercised 325,000 options at an
exercise price of $0.18 for aggregate proceeds of $58,500. We issued these
shares in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, in that the issuance did not involve a public
offering. The issuees represented to us their intention to acquire the shares
for investment only and not with a view to sell in connection with any
distribution thereof and appropriate legends were affixed to the certificate
evidencing the shares. 20




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##### Table of Contents



Item 3.Defaults Upon Senior Securities Not applicable. 
 Item 4.Submission of Matters to a Vote of Security Holders We held our Annual Meeting of Stockholders on Friday, September 10, 2004.
Our stockholders approved the following matters at the Annual Meeting by the
votes indicated: 1. The stockholders elected the following five directors to our Board of
Directors to serve during the ensuing year or until their respective successors
are duly elected and qualified: Number of SharesFor
    
    WithheldJohn R. Daniels, M.D.
    
    
    21,304,274
    
    
    
    660,340Craig T. Davenport
    
    
    21,653,365
    
    
    
    311,249Terrence A. Noonan
    
    
    21,605,274
    
    
    
    359,340Michael J. Strauss, M.D
    
    
    18,279,374
    
    
    
    3,685,240Thomas R. Testman
    
    
    21,605,674
    
    
    
    358,940
 2. The stockholders approved our 2004 Stock Incentive Plan: Number of SharesFor
    
    
    5,869,306Against
    
    
    5,264,667Abstain
    
    
    43,422Broker Non-Votes
    
    
    10,787,219
 3. The stockholders ratified the selection of Ernst & Young LLP as our
independent auditors for the fiscal year ended December 31, 2004: Number of SharesFor
    
    
    21,929,245Against
    
    
    28,712Abstain
    
    
    6,657
 
 Item 5.Other Information None. 
 Item 6.Exhibits. ExhibitNo.
    
    Description2.1(1)
    
    Agreement and Plan of Reorganization dated February 21, 2002, by and among the Company,
Technologies, Inc., TMT Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to this exhibit were omitted.
We agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.2.2(2)
    
    Agreement and Plan of Merger dated June 30, 1999, by and among the Company, Advanced
Medical Procedures, Inc., Advanced Medical Procedures, L.L.C., Gary M. Onik, M.D., Robert
F. Byrnes and Jerry Anderson. Certain schedules and other attachments to this exhibit were
omitted. We agree to furnish supplementally a copy of any omitted schedules or attachments
to the Commission upon request.2.3(3)
    
    Asset Purchase Agreement, dated February 6, 2002, by and between the Company and Gary M.
Onik, M.D. Certain schedules and other attachments to this exhibit were omitted. We agree
to furnish supplementally a copy of any omitted schedules or attachments to the Commission
upon request.
 21




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##### Table of Contents



ExhibitNo.
    
    Description2.4(3)
    
    Asset Purchase Agreement dated May 28, 2002, by and among the Company and Cryomedical
Sciences, Inc. Certain schedules and other attachments to this exhibit were omitted. We
agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.2.5(4)
    
    Partnership and Limited Liability Company Membership Interest Purchase Agreement, dated as
of August 12, 2002, by and among Endocare, Inc. and U.S. Medical Development, Inc.,
U.S.M.D., Ltd. and U.S.M.D. I, L.L.C. Certain schedules and exhibits referenced in this
exhibit have been omitted. We agree to furnish supplementally a copy of any omitted
schedules or attachments to the Commission upon request.2.6(5)
    
    Amendment No. 1 to Partnership and Limited Liability Company Membership Interest Purchase
Agreement, dated as of August 12, 2002, by and among Endocare, Inc. and U.S. Medical
Development, Inc., U.S.M.D., Ltd. and U.S.M.D. I, L.L.C.2.7(6)
    
    Agreement of Purchase and Sale, dated as of April 7, 2003, by and among American Medical
Systems, Inc., the Company and Timm Medical Technologies, Inc.2.8(7)
    
    Asset Purchase and Technology License Agreement, dated as of April 29, 2003, by and
between the Company and CryoCathTechnologies Inc.2.9(8)
    
    Agreement of Purchase and Sale, dated as of October 15, 2003, by and between SRS Medical
Corp. and Timm Medical Technologies, Inc.2.10(9)
    
    Amendment No. 2 to Partnership and Limited Liability Company Membership Interest Purchase
Agreement, dated as of February 27, 2004, by and among Endocare, Inc. and U.S. Medical
Development, Inc., U.S.M.D., Ltd. and U.S.M.D. I, L.L.C.2.11(9)
    
    Service Fee Agreement, dated as of February 26, 2004, by and among Endocare, Inc. and the
Limited Partners of Mid-America Cryotherapy, L.P.2.12(9)
    
    First Amendment to Agreement of Purchase and Sale, dated as of March 25, 2004, by and
between SRS Medical Corp. and Timm Medical Technologies, Inc.2.13
    
    First Amendment to Asset Purchase Agreement, dated as of August 18, 2005, by and between
Endocare, Inc. and Gary Onik, M.D.3.1(2)
    
    Certificate of Amendment of Restated Certificate of Incorporation of the Company.3.2(2)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.3.3(2)
    
    Restated Certificate of Incorporation.3.4(10)
    
    Amended and Restated Bylaws of the Company.10.1(11)
    
    Employment Agreement, dated as of August 11, 2004, by and between Endocare, Inc. and
Michael R. Rodriguez.10.2(12)
    
    General Release of All Claims, dated as of August 10, 2004, by and between Endocare, Inc.
and Katherine G. Greenberg.10.3(13)
    
    2004 Stock Incentive Plan.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.
    *

    
    We have requested confidential treatment with respect to certain
portions of these documents.
    
    Management contract or compensatory plan or arrangement 22




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##### Table of Contents



(1)
    
    Previously filed as exhibits to our Form 8-K filed on March 5, 2002.(2)
    
    Previously filed as exhibits to our Registration Statement on Form S-3
filed on September 20, 2001 and October 31, 2001.(3)
    
    Previously filed as exhibits to our Form 10-Q filed on August 14, 2002.(4)
    
    Previously filed as exhibits to our Form 8-K filed on August 16, 2002.(5)
    
    Previously filed as an exhibit to our Form 8-K filed on October 15, 2002.(6)
    
    Previously filed as an exhibit to our Form 8-K filed on April 22, 2003.(7)
    
    Previously filed as an exhibit to our Form 8-K filed on April 29, 2003.(8)
    
    Previously filed as an exhibit to our Form 8-K filed on October 20, 2003.(9)
    
    Previously filed as an exhibit to our Form 10-Q filed on May 10, 2004.(10)
    
    Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.(11)
    
    Previously filed as an exhibit to our Form 8-K filed on August 12, 2004.(12)
    
    Previously filed as an exhibit to our Form 8-K filed on September 1,
2004.(13)
    
    Previously filed as an appendix to our Definitive Proxy Statement filed
on August 6, 2004. 23




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. 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 and Chief Financial Officer(Principal Financial and Accounting Officer)Date:
November 8, 2004
 24




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    Description2.1(1)
    
    Agreement and Plan of Reorganization dated February 21, 2002, by and among the Company,
Technologies, Inc., TMT Acquisition Corporation and certain stockholders of Timm Medical
Technologies, Inc. Certain schedules and other attachments to this exhibit were omitted.
We agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.2.2(2)
    
    Agreement and Plan of Merger dated June 30, 1999, by and among the Company, Advanced
Medical Procedures, Inc., Advanced Medical Procedures, L.L.C., Gary M. Onik, M.D., Robert
F. Byrnes and Jerry Anderson. Certain schedules and other attachments to this exhibit were
omitted. We agree to furnish supplementally a copy of any omitted schedules or attachments
to the Commission upon request.2.3(3)
    
    Asset Purchase Agreement, dated February 6, 2002, by and between the Company and Gary M.
Onik, M.D. Certain schedules and other attachments to this exhibit were omitted. We agree
to furnish supplementally a copy of any omitted schedules or attachments to the Commission
upon request.2.4(3)
    
    Asset Purchase Agreement dated May 28, 2002, by and among the Company and Cryomedical
Sciences, Inc. Certain schedules and other attachments to this exhibit were omitted. We
agree to furnish supplementally a copy of any omitted schedules or attachments to the
Commission upon request.2.5(4)
    
    Partnership and Limited Liability Company Membership Interest Purchase Agreement, dated as
of August 12, 2002, by and among Endocare, Inc. and U.S. Medical Development, Inc.,
U.S.M.D., Ltd. and U.S.M.D. I, L.L.C. Certain schedules and exhibits referenced in this
exhibit have been omitted. We agree to furnish supplementally a copy of any omitted
schedules or attachments to the Commission upon request.2.6(5)
    
    Amendment No. 1 to Partnership and Limited Liability Company Membership Interest Purchase
Agreement, dated as of August 12, 2002, by and among Endocare, Inc. and U.S. Medical
Development, Inc., U.S.M.D., Ltd. and U.S.M.D. I, L.L.C.2.7(6)
    
    Agreement of Purchase and Sale, dated as of April 7, 2003, by and among American Medical
Systems, Inc., the Company and Timm Medical Technologies, Inc.2.8(7)
    
    Asset Purchase and Technology License Agreement, dated as of April 29, 2003, by and
between the Company and CryoCathTechnologies Inc.2.9(8)
    
    Agreement of Purchase and Sale, dated as of October 15, 2003, by and between SRS Medical
Corp. and Timm Medical Technologies, Inc.2.10(9)
    
    Amendment No. 2 to Partnership and Limited Liability Company Membership Interest Purchase
Agreement, dated as of February 27, 2004, by and among Endocare, Inc. and U.S. Medical
Development, Inc., U.S.M.D., Ltd. and U.S.M.D. I, L.L.C.2.11(9)
    
    Service Fee Agreement, dated as of February 26, 2004, by and among Endocare, Inc. and the
Limited Partners of Mid-America Cryotherapy, L.P.2.12(9)
    
    First Amendment to Agreement of Purchase and Sale, dated as of March 25, 2004, by and
between SRS Medical Corp. and Timm Medical Technologies, Inc.2.13
    
    First Amendment to Asset Purchase Agreement, dated as of August 18, 2004, by and between
Endocare, Inc. and Gary Onik, M.D.3.1(2)
    
    Certificate of Amendment of Restated Certificate of Incorporation of the Company.3.2(2)
    
    Certificate of Designation of Series A Junior Participating Preferred Stock of the Company.3.3(2)
    
    Restated Certificate of Incorporation.3.4(10)
    
    Amended and Restated Bylaws of the Company.10.1(11)
    
    Employment Agreement, dated as of August 11, 2004, by and between Endocare, Inc. and
Michael R. Rodriguez.10.2(12)
    
    General Release of All Claims, dated as of August 10, 2004, by and between Endocare, Inc.
and Katherine G. Greenberg.
 25




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ExhibitNo.
    
    Description10.3(13)
    
    2004 Stock Incentive Plan.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.
    *
    
    We have requested confidential treatment with respect to certain
portions of these documents.
    
    Management contract or compensatory plan or arrangement(1)
    
    Previously filed as exhibits to our Form 8-K filed on March 5, 2002.(2)
    
    Previously filed as exhibits to our Registration Statement on Form S-3
filed on September 20, 2001 and October 31, 2001.(3)
    
    Previously filed as exhibits to our Form 10-Q filed on August 14, 2002.(4)
    
    Previously filed as exhibits to our Form 8-K filed on August 16, 2002.(5)
    
    Previously filed as an exhibit to our Form 8-K filed on October 15, 2002.(6)
    
    Previously filed as an exhibit to our Form 8-K filed on April 22, 2003.(7)
    
    Previously filed as an exhibit to our Form 8-K filed on April 29, 2003.(8)
    
    Previously filed as an exhibit to our Form 8-K filed on October 20, 2003.(9)
    
    Previously filed as an exhibit to our Form 10-Q filed on May 10, 2004.(10)
    
    Previously filed as an exhibit to our Form 10-K filed on March 15, 2004.(11)
    
    Previously filed as an exhibit to our Form 8-K filed on August 12, 2004.(12)
    
    Previously filed as an exhibit to our Form 8-K filed on September 1,
2004.(13)
    
    Previously filed as an appendix to our Definitive Proxy Statement filed
on August 6, 2004. 26