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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

Commission File Number 000-27212

Endocare, Inc.

Registrant’s telephone number, including area code: (949) 450-5400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

Rights to Purchase Shares of Series A Junior Participating Preferred Stock

     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 o    No þ    (2) Yes þ    No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes þ    No o

     The aggregate market value of the common stock of the Registrant held by non-affiliates as of June 30, 2002, was approximately $312,181,137 (based on the closing price for shares of the Registrant’s common stock as reported by The Nasdaq National Market for that date). Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed affiliates. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.

     There were 24,312,454 shares of the Registrant’s common stock issued and outstanding as of September 30, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain exhibits filed with our prior registration statements and Forms 10-K, 8-K and 10-Q are incorporated herein by reference into Part IV of this Annual Report on Form 10-K.

Table of Contents

Endocare, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2002

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PART I

      This Annual Report on Form 10-K may contain forward-looking statements that involve risks and uncertainties. Such statements typically include, but are not limited to, statements containing the words “believes,” “intends,” “anticipates,” “expects,” “estimates,” “should,” “could,” “may,” “plans,” “planned” and words of similar import. Our actual results could differ materially from any such forward-looking statements as a result of the risks and uncertainties, including but not limited to those set forth below in “Risks Related to Our Business” and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q. Any such forward-looking statements reflect our management’s opinions only as of the date of this Annual Report on Form 10-K, and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Readers should carefully review the risk factors set forth below in “Risks Related to Our Business” and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q.

      You are further cautioned that we have not filed our quarterly reports for our quarters ended on September 30, 2002, March 31, 2003, June 30, 2003, and September 30, 2003 with the Securities and Exchange Commission, or SEC. Some of the information to be contained in those quarterly reports is unavailable at this time. Moreover, we can provide no assurances as to when such information will become available. Additionally, we have determined that in certain cases we misinterpreted or misapplied GAAP in our 2001 and 2000 consolidated financial statements and, accordingly, we have restated our consolidated financial statements as of December 31, 2001, and for the years ended December 31, 2000 and 2001, as explained in more detail in note 3 to our consolidated financial statements. Because these restatements have also impacted our 2002 results, as reflected herein and explained in more detail in notes 3 and 16 to our consolidated financial statements, the information previously filed in our quarterly reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002, and in our prior periodic reports, should not be relied upon.

      AutoFreeze^TM, CGC^TM, Cryocare®, Cryocare CS^TM, Cryocare Surgical System®, CryoDisc®, CryoGrid^TM, Cryoguide®, Direct Access^TM, Endocare® ^TM, ErecAid®, Esteem®, FastTrac®, Horizon Prostatic Stent®, Integrated Ultrasound^TM, RigiScan®, SmartTemp^TM, SnapGauge, SurErec^TM, Targeted Ablation^TM, Targeted Ablation of the Prostate TAP®, Targeted Ablation Therapy TAT®, Targeted Cryoablation of the Prostate TCAP®, Targeted Cryoablation Therapy TCAT®, TEMPprobe®, ThermaStent^TM, and Urethral Warmer^TM are trademarks of ours or our wholly-owned subsidiary, Timm Medical Technologies, Inc., or Timm Medical. This Annual Report on Form 10-K may also include trademarks and trade names owned by other parties, and all other trademarks and trade names mentioned in this Annual Report on Form 10-K are the property of their respective owners.

Item 1.     Business

Recent Developments

      Internal Review. In October 2002, our Audit Committee retained legal and financial experts to conduct an internal review of various accounting and other matters. In July 2003, our Audit Committee engaged independent counsel to review and evaluate the results of the initial investigation. The investigation and review process resulted in our undertaking certain modifications to our internal controls, accounting policies and procedures, disclosure controls and procedures and corporate governance policies and procedures in order to, among other things, enhance the quality and consistency of our financial information and reporting. We also determined to make certain changes to our senior management team and Board of Directors. For a further description of the nature and status of our internal review see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 3 to our consolidated financial statements.

      Legal Proceedings. Beginning in November 2002, we, together with certain current and former officers, one of whom is also a former board member, became parties to various shareholder class-action and derivative lawsuits and other legal proceedings. We, as well as certain of our current and former directors and officers, are

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      Nasdaq Delisting. Effective January 16, 2003, our common stock was delisted from The Nasdaq Stock Market. One result of this action is a limited public market for our common stock. Trading is now conducted in the over-the-counter market in the so-called “Pink Sheets.” We are working towards compliance with all listing requirements of The Nasdaq Stock Market, and we will be seeking to be relisted once we are in full compliance with our obligations as a reporting company pursuant to the Securities Exchange Act of 1934, as amended.

      Proxy Contest. Douglas O. Chinn, M.D., Solana Capital Partners, Inc., David Eller, William A. Barry, Joseph L. D’Angelo, Robert P. Fry, M.D., J.D., Kurt Landgraf and John R. Queen, operating through a self-supported organization called the Committee to Revitalize Endocare, have filed proxy materials and commenced a proxy contest in opposition to the director nominees recommended by our Board of Directors.

      New Independent Accountants and Restatements of Financials. In March of 2003, we dismissed KPMG LLP as our independent accounting firm. We then engaged Ernst and Young LLP as our new independent accounting firm to audit certain of our historical consolidated annual financial statements and to review our historical consolidated unaudited interim financial statements. As a result of this audit and our internal review, we have made various restatement adjustments to our historical financial statements. For a further description of the nature and status of these adjustments see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 3 to our consolidated financial statements.

      Management Changes. In March 2003, we appointed a new President and Chief Operating Officer, William J. Nydam, and a new Chief Financial Officer, Katherine Greenberg, as part of a management and corporate governance restructuring. In order to complete an orderly transition to our new management team, Paul W. Mikus has vacated his position as a director and as our Chairman and Chief Executive Officer and John V. Cracchiolo, our former Chief Financial Officer and Chief Operating Officer, has vacated his position as President of our Interventional Radiology business group.

      Strategic Divestures. We are refocusing our business on the development of minimally invasive technologies for tissue and cancer tumor ablation. As part of this strategy, we have begun divesting certain non-core product lines. Our first significant divestiture occurred on April 7, 2003, when our wholly-owned subsidiary Timm Medical sold its Dura-II positionable urological prostheses product line to American Medical Systems, Inc., or AMS. Under the terms of the agreement, the transaction, valued at approximately $2 million, included, among other things, the intellectual property, customer lists and production equipment related to the product as well as the then current Dura-II inventory. Our second significant divestiture occurred on April 14, 2003, when we sold our cardiac-related product manufacturing operations and licensed the related intellectual property to CryoCath Technologies Inc., or CryoCath. Under the terms of the agreement, we transferred all of our manufacturing assets and inventory related to the cardiac product line to CryoCath and are exclusively licensing to CryoCath for cardiovascular uses our proprietary argon gas based technology associated with the SurgiFrost^TM system — a cryoablation system designed to treat cardiac arrhythmias. Terms of the agreement also include the payment by CryoCath to us of $10 million during 2003. The agreement also calls for the payment by CryoCath to us of a nine-year descending royalty stream based on net sales of products incorporating the licensed technology. We believe CryoCath’s leadership position in the field of cardiovascular cryotherapy puts them in strong position to exploit the opportunities for our technology in this highly competitive arena. Our most recent divestiture occurred on October 15, 2003, when Timm Medical sold its urodynamics and incontinence product lines to SRS Medical Corp, or SRS. Under the terms of the agreement, the transaction, valued at approximately $2.7 million to be paid over approximately three and one-half years, included, among other things, the intellectual property, customer lists and production equipment related to the EasyPro, EasyFlo, C3, StepFree and Profilometer products, as well as the then current inventory relating to those products.

      Additionally, in connection with our divestiture strategy, we have terminated or allowed to lapse our rights to certain product offerings including the FastPack® System, a proprietary prostate cancer test

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Overview

      We are a medical device company focused on developing, manufacturing and selling cryoablation products with the potential to dramatically improve the treatment of cancer. We also contract with hospitals and healthcare payors to perform cryoablation procedures using our proprietary technology and products on a fee-for-service basis. We initially concentrated on developing devices for the treatment of prostate cancer, and our Food and Drug Administration, or FDA-cleared Cryocare Surgical System occupies a leading position in the market for the cryosurgical treatment of prostate cancer. Because of our initial concentration on prostate cancer, the majority of our sales and marketing resources are directed towards the promotion of our technology to urologists for the treatment of prostate and renal cancer. We are, however, expanding our focus across a number of surgical markets, including the ablation of tumors in the kidney, lung, and liver, as well as bone pain management. Accordingly, we recently formed a new sales and marketing group to focus on the radiology market where our products can be used to treat these other cancer sites.

      In addition to our cryoablation products, we also offer the ErecAid line of vacuum therapy systems, which include the SurErec system, Classic system, and Esteem system — a leading non-pharmaceutical treatment of erectile dysfunction and penile rehabilitation following treatment for cancer. We acquired these product lines in the first quarter of 2002 through our acquisition of the assets of Timm Medical, a leading provider of vacuum pumps for the treatment of erectile dysfunction. Also through our acquisition of Timm Medical, we acquired or obtained marketing rights to a number of other products, many of which we have or may be divesting, including products used in the diagnosis and management of BPH, products used in the diagnosis and treatment of erectile dysfunction, and products used in the diagnosis and management of urinary incontinence. More importantly, through our acquisition of Timm Medical, we significantly expanded our urology sales force. We believe this sales force will be a valuable asset as we continue divestiture of our non-core product lines and redeploy resources in the area of cancer treatment.

      Prostate Cancer: Our Cryocare Surgical System is a minimally invasive cryosurgical system for the targeted treatment of prostate cancer. In fiscal year 2002, we derived a significant percentage of our revenues from the sale of Cryocare Surgical System units and from recurring sales of disposable supplies used with the Cryocare Surgical System. The key elements of our Cryocare Surgical System include our patented real-time temperature monitoring system, our Cryoguide computer-controlled ultrasound guidance and planning system, and our disposable cryoprobes and temperature probes. Careful monitoring of the temperature around the prostate and optimal positioning of the cryoprobes enable physicians to destroy cancer with relatively minimal risk to surrounding healthy tissue. We began selling our Cryocare Surgical System in July 1999 following Medicare’s initiation of national reimbursement coverage of cryosurgery for the primary treatment of prostate cancer. Effective July 2001, Medicare approved reimbursement of secondary cryosurgical treatment for men who have been unsuccessfully treated with radiation therapy.

      In April 2003, we unveiled the next generation of our Cryocare Surgical System, the Cryocare CS. The Cryocare CS is a fully integrated cryosurgical planning, placement and treatment system designed to simplify our FDA-cleared Targeted Cryoablation of the Prostate TCAP procedure. It consists of the AutoFreeze, a computer-controlled automated freezing mechanism that utilizes optimal power settings based upon target endpoint temperatures and continual feedback from the thermocouple tips. Along with AutoFreeze, Cryocare CS includes new Integrated Ultrasound technology that provides internal visualization of the prostate gland and patented CryoGuide planning software that assists physicians in determining optimal treatment of the entire gland as well as targeting specific cancerous areas of the prostate. The Cryocare CS also includes a new

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      Additional Cryosurgical Markets: We believe our proprietary cryosurgical technologies have broad applications across a number of surgical markets, including the treatment of tumors in the kidney, lung, breast and liver, as well as bone pain management and the treatment of cardiac arrhythmias. In October 1999, we formed a strategic alliance with Sanarus Medical, Inc. to commercialize our proprietary cryosurgical technology for the treatment of breast cancer, benign breast tumors and gynecological diseases. As part of this strategic alliance, we have made equity investments in Sanarus and also have entered into a licensing, supply and manufacturing arrangement. We received FDA clearance in October 2001 for the use of our cryosurgical system for the treatment of benign breast tumors. Sanarus markets this product as the Visica^TM Treatment System. Effective December 2002, we are no longer manufacturing or supplying products for Sanarus in connection with our strategic alliance.

      In September 2001, we formed a strategic alliance with CryoCath to market, sell and distribute our proprietary cryosurgical technology for the treatment of cardiac arrhythmias. In February 2002, we received FDA clearance for use of our cryosurgical technologies for the treatment of cardiac arrhythmias. CryoCath markets this product as the SurgiFrost^TM system. In April 2003, we terminated our original agreement with CryoCath and sold our cardiac-related product manufacturing operations and licensed the related intellectual property to CryoCath. Under the terms of the new agreement, we transferred all of our manufacturing assets and inventory related to the cardiac product line to CryoCath and will exclusively license to CryoCath for cardiovascular uses our proprietary technology associated with the SurgiFrost^TM system. Terms of the new agreement also include the payment by CryoCath to us of $10 million during 2003. The agreement also calls for the payment by CryoCath to us of a nine-year descending royalty stream based on net sales of products incorporating the licensed technology. We believe CryoCath’s leadership position in the field of cardiovascular cryotherapy puts them in a strong position to exploit the opportunities for our technology in this highly competitive arena.

      In addition to these two diversification strategies, we intend to continue to enhance and leverage our cryosurgical technology platform by partnering with third parties who can effectively assist in the development, distribution and commercialization of our technology in clinical areas outside of tumor ablation.

      Erectile Dysfunction: Through our acquisition of Timm Medical, we acquired fully commercialized products used in the diagnosis and treatment of erectile dysfunction. Our principal diagnostic tool is the Rigiscan, an ambulatory device that measures the frequency, rigidity and duration of both nocturnal and provocative erections. We also offer the ErecAid line of vacuum therapy systems, which include the Esteem, Classic and SurErec systems. We previously offered a prosthetic device for the treatment of erectile dysfunction, the Dura II Penile Prosthesis, which was sold to AMS in April 2003.

      We were incorporated under the laws of the State of Delaware in May 1994. We maintain our executive offices at 201 Technology, Irvine, California 92618, and our telephone number at that address is (949) 450-5400. Financial information regarding our financial condition and results of operations can be found in a separate section of this Annual Report on Form 10-K, beginning on page F-1.

Prostate Cancer

      The prostate is a walnut-size gland surrounding the male urethra, located below the bladder and adjacent to the rectum. Prostate cancer is one or more malignant tumors that begin most often in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body. If left untreated, prostate cancer can metastasize to the lung or bone and potentially other sites, resulting in death.

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      The number of men diagnosed with prostate cancer has risen steadily since 1980 and it is now the second most common cause of cancer-related deaths among men. Prostate cancer is most prominent in North America and northwestern Europe and less common in Asia, Africa, Central America, and South America. The American Cancer Society estimates there will be about 220,900 new cases of prostate cancer diagnosed and an estimated 28,900 deaths associated with the disease in the United States during 2003. Prostate cancer incidence and mortality increase with age. Prostate cancer is found most often in men who are over the age of 50. According to the American Cancer Society, more than 70% of men diagnosed with prostate cancer are over the age of 65. In addition to age, other risk factors are linked to prostate cancer, such as genetics and diet.

      The dramatic increase in prostate cancer diagnoses has led to heightened awareness of the disease, which has led to increased rates of testing and improved diagnostic methods. The American Cancer Society recommends that men without symptoms, risk factors and a life expectancy of at least 10 years should begin regular annual medical exams at the age of 50, and believes that the physicians should offer as a part of the exam, the prostate-specific antigen, or PSA, blood test and a digital rectal examination in which the physician places a gloved finger into the rectum and examines the prostate for lumps. The PSA blood test determines the amount of prostate specific antigen present in the blood. PSA is found in a protein secreted by the prostate, and elevated levels of PSA can be associated with, among other things, either prostatitis, a non-cancerous inflammatory condition, or a proliferation of cancer cells in the prostate. Transrectal ultrasound tests and biopsies are typically performed on patients with elevated PSA readings to confirm the existence of cancer.

      Over 85% of prostate cancer patients are eligible for our cryosurgical treatment. The U.S. market for prostate cancer treatment for newly diagnosed patients is estimated to be approximately $1.3 billion in 2001 and is expected to grow to $2 billion by 2006. We also believe the market for secondary cryosurgical treatment of patients with recurring prostate cancer is significant.

      Therapeutic alternatives for patients with prostate cancer have been both limited and unattractive. Current treatment options include radical surgery, radiation therapy, hormone or other ancillary therapies, “watchful waiting,” and cryotherapy. These options are evaluated using a number of criteria, including the patient’s age, physical condition and stage of the disease. Due to the slow progression of the disease, however, the decision for treatment is typically based upon the severity of the condition and the resulting quality of life.

      Radical prostatectomy has been used for over 30 years and is most often the therapy of choice due to the surgeon’s high degree of confidence in surgically removing the cancerous tissue, particularly for patients having more advanced stages of the disease. The procedure is dependent on the skill of the surgeon and is often associated with relatively high rates of impotence and incontinence and can result in operative mortality.

      Radiation therapy for prostate cancer includes both external radiation beam and interstitial radioactive seed therapies. External beam radiation therapy emerged as one of the first alternatives to radical prostatectomy; however, studies have shown that the success rate of this procedure is not comparable to that of radical prostatectomy. Interstitial radioactive seed therapy, also referred to as brachytherapy, is the permanent placement of radioactive seeds in the prostate. Brachytherapy has been shown to be most effective for localized tumors caught in the early stage of disease development.

      Ancillary therapies, primarily consisting of hormone therapy and chemotherapy, are used to slow the growth of cancer and reduce tumor size, but are generally not intended to be curative. Ancillary therapies are often used during advanced stages of the disease to extend life and to relieve symptoms. Side effects of hormonal drug therapy include increased development of breasts and other feminine physical characteristics, impotence and decreased libido. In addition, many hormone pharmaceuticals artificially lower PSA levels in patients, which can interfere with the staging of the disease and monitoring its progress. Side effects of chemotherapy include nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term, repeated administration of medication on an outpatient basis.

      “Watchful waiting” is recommended by some physicians in some circumstances based upon the severity and growth rate of the disease, as well as the age and life expectancy of the patient. The aim of watchful

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      Cryosurgery, freezing tissue to destroy tumor cells, was first developed in the 1960’s. During this period, the use of “cold probes,” or cryoprobes, was explored as a method to kill prostate tissue without resorting to radical surgery. Although effective in killing cancer cells, the inability to control the amount of tissue frozen during the procedure prevented broad use and development of cryotherapy for prostate cancer. These initial limitations in the application of cryosurgery continue to contribute to a lack of widespread acceptance of the procedure today.

      In the late 1980’s, progress in ultrasound imaging allowed for a revival in the use of cryosurgery. Using ultrasound, the cryoprobe may be guided to the targeted tissue from outside the body through a small incision. The physician activates the cryoprobe and uses ultrasound to monitor the growth of ice in the prostate as it is occurring. When the ice encompasses the entire prostate, the probe is turned off. This feedback mechanism of watching the therapy as it is administered allows the physician more precise control during application. Published studies suggest that cryosurgery may be able to deliver disease-free rates comparable to radical surgery and radiation, but with the benefit of lower rates of incontinence and mortality, shorter recovery periods and relatively minimal complications.

      We have developed our proprietary Cryocare Surgical System to allow the urologist to treat prostate cancer in a minimally invasive manner. We designed the Cryocare Surgical System to freeze tissue much faster and with more control than previous cryosurgical systems.

      The Cryocare Surgical System incorporates enhanced control mechanisms to minimize the risk of unintended damage to tissue surrounding the prostate. The argon gas-based cryoprobes stop freezing instantly. During cryosurgical procedures, six to eight temperature probes are selectively placed in the prostate near the rectal tissue, sphincter muscles, which control continence, and neurovascular bundles, which control potency. These temperature probes enable the physician to monitor temperatures of tissue adjacent to the prostate in real time.

      The majority of our cryosurgical procedures to date have been performed in medium to high risk patients. In these procedures, the urologist intentionally ablates the neurovascular bundles to prevent the recurrence of cancer, typically resulting in impotence. We have developed a nerve-sparing procedure for lower risk patients through a combination of early detection and improved surgical techniques. Several clinical studies are in process to determine the disease-free rates that are attainable with this procedure.

      Our Cryoguide, a software-controlled ultrasound planning and mapping system, sold as an accessory to the Cryocare Surgical System, is a significant advancement in targeted cryoablation of the prostate. The Cryoguide control unit consists of a computer console and display screen designed to be compatible with standard ultrasound equipment. The Cryoguide allows physicians to visualize the prostate in three dimensions and uses a grid system to facilitate the precise placement of our cryoprobes in the optimal position in the prostate. Our Cryoguide incorporates a visualization and planning process allowing the surgeon to simulate cryoablation of the prostate. This simulation allows validation of the positioning of the cryoprobes prior to initiating treatment and tailoring the iceball formation for individual patients, improving patient outcomes. The Cryoguide creates a standardized repeatable procedure and decreases procedural time.

      Our proprietary cryoprobes are engineered to consistently produce sculpted ice conforming to the unique anatomy of the prostate. Our efficient argon gas-based system delivers lethal ice in a controllable and repeatable fashion. We have also developed a percutaneous access device, named FastTrac, which allows a simplified one step insertion of our cryoprobes to significantly reduce procedure time.

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      We are regularly evaluating and implementing technology that will refine and improve the Cryocare Surgical System. In April 2003, we unveiled the next generation of our Cryocare Surgical System, the Cryocare CS. The Cryocare CS is a fully integrated cryosurgical planning, placement and treatment system designed to simplify our FDA-cleared Targeted Cryoablation of the Prostate TCAP procedure. It consists of the AutoFreeze, a computer-controlled automated freezing mechanism that utilizes optimal power settings based upon target endpoint temperatures and continual feedback from the thermocouple tips. Along with AutoFreeze, Cryocare CS includes new Integrated Ultrasound technology that provides internal visualization of the prostate gland and patented CryoGuide planning software that assists physicians in determining optimal treatment of the entire gland as well as targeting specific cancerous areas of the prostate. The new system also includes a new Urethral Warmer, along with the highly successful vacuum-insulated Direct Access CryoProbes and CryoGrid, a brachytherapy-like grid fixed to the ultrasound stepper. We plan to be in full commercialization of the new system by the end of 2003.

      The Cryocare Surgical System has been cleared for marketing by the FDA. We commercially launched the Cryocare Surgical System in July 1999 following the initiation of national Medicare coverage for cryosurgical procedures as a primary treatment alternative for localized prostate cancer. As a result of direct sales and our placement program, there were approximately 100 Cryocare Surgical Systems in use in the United States as of the end of 2001 and approximately 190 in use as of the end of 2002. There were approximately 110 United States physicians trained and using the Cryocare Surgical System as of the end of 2001 and approximately 275 as of the end of 2002. The number of cryoablation procedures performed domestically was 1,093 in 2001 and increased to 2,474 in 2002. Our blended average selling price for those periods was approximately $2,900 per procedure in 2001 and $4,500 per procedure in 2002. This was primarily due to a shift in our business model from selling only probes and other disposables used in a cryosurgical procedure, without the service component, to invoicing for a bundled procedure, which includes both the devices and a service fee. The service fee covers use and transport of the Cryocare Surgical System as well as clinical assistance provided to the physician in the use and monitoring of the equipment during the cryosurgical procedure. The service component is either provided directly by Endocare or subcontracted to a third party service provider.

      Cryosurgery is the first minimally invasive procedure that urologists can perform themselves. With radiation therapies, urologists must refer the patient for treatment to a radiation oncologist. Cryosurgery offers the urologist both the opportunity to maintain continuity of patient care and to generate additional revenue.

      Our Cryocare Surgical System provides the following significant clinical advantages relative to other principal treatment options for prostate cancer:

	•	Effective for a broad range of low to high risk prostate cancer patients. In low risk cases, the success of cryosurgery, including our Cryocare Surgical System, is comparable to radiation therapy and surgery. In medium to high risk cases, results of cryosurgery are at least equivalent and appear to be superior to radiation therapy and surgery.
	•	High quality of life following treatment. Our minimally invasive procedure offers patients the shortest recovery period of any definitive prostate cancer therapy and may result in a lower incidence of certain side effects, including incontinence.
	•	Treatment of patients who have failed radiation therapy. Patients who have failed radiation therapy have limited options. Cryosurgery is a potentially curative treatment option that can be used to treat these patients effectively with significantly fewer side effects than surgery.
	•	Treatment can be performed more than once. Regardless of what therapy is chosen there is always a chance that the cancer will recur. Unlike radiation therapy or surgery, cryosurgery can be repeated without increased morbidity.

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Benign Prostate Hyperplasia

      We have developed a proprietary urological stent, the Horizon Prostatic Stent, to provide temporary and immediate relief for patients who undergo thermal therapy or other procedures to treat BPH. We also have explored the development of a stent, the ThermaStent, that physicians could use to deliver heat to destroy excess prostate tissue in patients with moderate to severe BPH. During 2003, in view of the significant investment needed to bring the Horizon Prostatic Stent to market and the fact that it does not fit well with our strategic focus on cancer treatment, we have decided to abandon further efforts to obtain FDA approval of our Horizon Prostatic Stent and have also ceased development of our ThermaStent. We are actively looking for a buyer for the patent and product portfolio related to our stent products.

Erectile Dysfunction

      Erectile dysfunction, or impotence, is the inability to achieve or maintain an erection firm enough, or for a sufficient amount of time, for sexual intercourse. Worldwide sales for erectile dysfunction products are estimated at $1.2 billion annually. Approximately 30 million men in the United States suffer from erectile dysfunction, primarily those over the age of 40. A variety of physical and psychological conditions can cause erectile dysfunction, including diabetes, high blood pressure, high cholesterol, nervous system disorders, complications from surgery, medication, alcoholism, spinal cord injuries, depression and other psychological conditions. Erectile dysfunction is most often caused by physical problems, rather than psychological problems.

      Men suffering from erectile dysfunction generally have five treatment options: drug therapy, vacuum systems, needle injection therapy, urethral suppositories and penile implants. Historically, it is estimated that fewer than 10% of men afflicted with erectile dysfunction sought treatment for their condition. The introduction and advertising of Viagra by Pfizer Inc. in 1998, however, significantly increased the population of patients seeking treatment. This trend is expected to continue during the next five years as patients become increasingly comfortable in seeking treatment. Although the success of Viagra has had a positive impact on the diagnosis and treatment of patients suffering from erectile dysfunction, a significant number of patients do not respond to Viagra, experience side effects or are not proper candidates for Viagra or other drug therapies. We believe that these patients will turn to alternative treatments for erectile dysfunction, including vacuum systems.

      Through our acquisition of Timm Medical, we now have an erectile dysfunction product line consisting of diagnostic and treatment products.

      We now market a leading tool for the diagnosis of erectile dysfunction. The RigiScan Plus Rigidity Assessment System is an ambulatory diagnostic tool used to measure the frequency, rigidity and duration of both nocturnal and provocative erections. It is a non-threatening, non-invasive, cost-effective method for a physician to differentiate between organic and psychological erectile dysfunction and support the treatment program of choice.

      We also offer a leading line of vacuum therapy systems for the treatment of erectile dysfunction. Even with the success of drug therapies, this product line continues to appeal to a growing patient population. Target patient populations include individuals who have not responded to or have conditions contraindicated for existing drug therapies, patients who are not eligible for third-party reimbursement under their present healthcare plans and those patients concerned with the side-effects of drug therapies.

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      We hold a leading market position in vacuum therapy systems. We offer a full line of products, including the ErecAid line of vacuum therapy systems, which include the SurErec system, Classic system, and Esteem system. Vacuum therapy involves the use of a mechanical system that creates a vacuum around the penis, causing the erectile bodies to fill with blood. A constriction ring is then placed around the base of the penis to impede blood drainage and maintain the erection. These systems are over 90% effective and represent a low cost treatment for erectile dysfunction. We are reviewing various revenue opportunities in this market, including the development and distribution of new accessories for our existing vacuum therapy systems.

      As part of our strategy to focus on tumor ablation, we have begun divesting our non-core product lines, including our Dura-II positionable urological prostheses product line, which we sold to AMS in April 2003.

Strategy

      Since our inception we have focused considerable resources on establishing our Cryocare Surgical System as a primary treatment option for prostate cancer. We have recently expanded that focus across broad surgical markets, including liver, lung, kidney and bone cancer. Our strategy is to apply our proprietary cryosurgical technology across horizontal markets, while acquiring a dominant position in the market for prostate cancer. Key objectives of our strategy include:

	•	maximizing the market opportunity for use of our Cryocare Surgical System in treating tumors of the prostate, liver, lung and kidney and for alleviation of bone pain in metastatic cancer patients;
	•	educating physicians and patients regarding the use and advantages of our Cryocare Surgical System;
	•	further demonstrating the safety and efficacy of cryosurgery as a primary treatment for prostate, liver, and kidney cancer;
	•	demonstrating the safety and efficacy of cryosurgery as a primary treatment for lung cancer, as well as a safe and effective tool for bone pain management;
	•	further demonstrating the safety and efficacy of cryosurgery as a secondary treatment in treating patients that have failed radiation therapy;
	•	obtaining appropriate reimbursement for cryosurgery;
	•	marketing our products to physicians and hospitals through our direct sales force and our direct-to-consumer advertising programs;
	•	continuing to enhance our Cryocare Surgical System to improve its ease of use across a broad range of tissue ablation applications; and
	•	further demonstrating the utility of regular penile vacuum therapy as an effective sexual function rehabilitation therapy following definitive prostate cancer treatments, including radical prostatectomy and cryosurgery.

Strategic Alliances and other Arrangements

      We have used and will continue to use marketing collaborations, distribution alliances and licensing arrangements to exploit the market for our Cryocare Surgical System in areas outside our sales and marketing focus of urology and radiology.

      U.S. Medical Development, Inc. On June 30, 2001, we issued 213,010 shares of our common stock with a fair market value of $2,837,293 as consideration for a membership interest in the form of Class A Units of U.S. Medical Development, Inc., formerly U.S. Therapies, LLC, equal to approximately 9% of the total issued and outstanding Class A Units of U.S. Medical Development, Inc. and approximately 5% of the Class A Units on a fully-diluted basis. U.S. Medical Development, Inc. is a national urology group representing more than 150 urologists across the nation. We simultaneously entered into a distribution agreement with U.S.M.D.,

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      In September 2002, we terminated our distribution agreement with U.S.M.D., Ltd. and acquired the mobile prostate treatment businesses owned by U.S. Medical Development, Inc., and its affiliates, U.S.M.D., Ltd. and U.S.M.D. I, L.L.C., collectively referred to as “USMD.” The transaction allowed us to sell directly to the large base of USMD customers via an experienced sales force with established physician relationships. We purchased the mobile prostate businesses in exchange for a total consideration of approximately $11.2 million in the form of cash, assumption of debt and forgiveness of debt. The debt forgiveness component of the purchase consideration is structured in the form of an earn-out. The balance of $ 7.7 million owed to us by USMD at the purchase date will be forgiven, pro-rata, upon the achievement of $12,000,000 in gross revenues by the businesses purchased from USMD during the period between October 1, 2002 and December 31, 2005. Management believes that the entire $7.7 million will be forgiven.

      Sanarus Medical, Inc.: In October 1999, we entered into a strategic alliance with Sanarus Medical, Inc., a privately held medical device company, to commercialize our proprietary cryosurgical technology in the treatment of breast cancer, benign breast tumors and gynecological diseases. The terms of the related agreements included an equity investment by us in Sanarus totaling $300,000, which represented 6.8% of all outstanding voting securities on the investment date. We also received a warrant to acquire at that time approximately 52.0% of Sanarus’ voting stock on an as-converted, fully-diluted basis, in consideration for entering into a manufacturing, supply and license agreement. In June 2001, we provided a bridge loan to Sanarus in the principal amount of $250,000, which accrued interest at the rate of 8% per annum, compounded annually. This amount was subsequently repaid in July 2001 upon Sanarus’ receipt of additional equity financing. This financing along with other financings by Sanarus reduced our ownership percentage to approximately 1.8% of Sanarus’ voting stock on an as-converted basis and reduced our maximum potential ownership percentage in Sanarus to approximately 20% on an as-converted, fully-diluted basis. In April 2003, we and other investors entered into a bridge loan financing with Sanarus in which Sanarus issued to us a convertible promissory note in the aggregate amount of $600,000 and a related stock purchase warrant with an aggregate exercise price of up to $300,000. In October 2003, we and other investors participated in an equity financing with Sanarus in which Sanarus issued to us shares of preferred stock in exchange for our cancellation of the indebtedness evidenced by our convertible promissory note. This financing along with other financings by Sanarus increased our percentage ownership to approximately 2.7% of Sanarus’ voting stock on an as-converted basis and reduced our maximum potential ownership percentage in Sanarus to approximately 7.9% on an as-converted, fully-diluted basis.

      In September 2001, we entered into an exclusive market access and supply agreement with CryoCath, a public company listed on the Toronto Stock Exchange focused on developing minimally invasive, catheter-based, cryotherapy products to treat cardiovascular disease. Under this agreement, CryoCath obtained an exclusive, worldwide right to market, sell and distribute our cryosurgical technologies for the targeted treatment of cardiac arrhythmias. The agreement required CryoCath to pay license fees and to make minimum product purchases. We were obligated under the agreement to undertake product development projects, maintain regulatory approval for the products in the United States and Europe and indemnify CryoCath in the event of some third-party claims. We had the right to reduce CryoCath’s rights to a non-exclusive license if CryoCath failed to meet certain minimum purchase requirements. In February 2002, we received FDA clearance for use of our cryosurgical technologies for the treatment of cardiac arrhythmias. CryoCath marketed the system as the SurgiFrost^TM system.

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      On April 14, 2003, we sold our cardiac-related product manufacturing operations and licensed the related intellectual property to CryoCath. In connection with this sale and license, we terminated our exclusive market access and supply agreement with CryoCath. Under the terms of the sale and license agreement, we transferred all of our manufacturing assets and inventory related to the cardiac product line to CryoCath and will exclusively license to CryoCath for cardiovascular uses our proprietary technology associated with the SurgiFrost^TM system — a cryoablation system designed to treat cardiac arrhythmias. Terms of the agreement also include the payment by CryoCath to us of $10 million during 2003. The agreement also calls for the payment by CryoCath to us of a nine-year descending royalty stream based on net sales of products incorporating the licensed technology. We believe CryoCath’s leadership position in the field of cardiovascular cryotherapy puts them in a strong position to exploit the opportunities for our technology in this highly competitive arena.

Products

      We are marketing, developing or have commercial rights to distribute the following products:

Raw Materials

      We rely on third-party suppliers to provide certain critical components for all of our product lines. In a number of cases, these suppliers are our sole source of supply for these components. Our policy is to enter into long-term supply agreements that require suppliers to maintain adequate inventory levels and that contain other terms and conditions protecting us against unforeseen interruptions in their production. In addition, we maintain buffer stock at our own locations to ensure an uninterrupted source of supply. Wherever possible, we actively seek to establish secondary sources of supply or other manufacturing alternatives. Nevertheless, there can be no assurance that we will not experience an interruption in supply of one or more of our critical components resulting in backorders to our customers. If such a supply interruption proves lengthy or should no manufacturing alternative be quickly identified, we could experience a significant reduction in revenues, net income and cash flows.

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Patents and Intellectual Property

      We have rights to 32 issued U.S. patents relating to cryosurgical ablative technology. Included within these 32 issued U.S. patents are 5 patents in which we have licensed-in rights. The remainder of the patents are assigned to us. Most of these patents relate to our cryoprobe technology for creating the freeze zone and precisely controlling the shape of the freeze zone produced by the cryoprobes. Additionally, our patents relate to our computer guided system for assisting surgeons in properly placing cryoprobes in a patient, a computer controlled cryosurgery apparatus and method, a cryosurgical integrated control and monitoring system and urethral warming technology. We also have approximately 13 pending U.S. patent applications relative to cryosurgical ablative technology. Additionally, we have approximately 24 foreign patents and pending foreign patent applications in this technology area. The earliest of our patents do not expire until 2011. Most of the earliest patents in our core technology area do not expire until about 2016.

      We have rights to 16 issued U.S. patents relating to our stent product line. Included within these 16 patents are 3 licensed-in patents. The remainder are assigned to us. We also have approximately 3 pending U.S. patent applications relative to the stent product line. Additionally, we have rights to 7 foreign patents and pending foreign patent applications in this technology area. The earliest of our stent patents do not expire until about 2016.

      We own 22 issued U.S. patents relating to our erectile dysfunction product line. We also have 1 pending U.S. patent application relative to this product line. Additionally, we have approximately 15 foreign patents and pending foreign patent applications in this technology area. Some of these patents will expire within the next few years.

      Our policy is to secure and protect intellectual property rights relating to our technology through patenting inventions and licensing others when necessary. While we believe that the protection of patents and licenses is important to our business, we also rely on trade secrets, know-how and continuing technological innovation to maintain our competitive position. Given our technology and patent portfolio, we do not consider the operation of our business to be materially dependent upon any one patent, group of patents or single technological innovation.

      Our policy is to sell our products under trademarks and to secure trademark protection in the United States and worldwide where possible. We believe the protection of our trademarks is important to our business.

      No assurance can be given that our processes or products will not infringe patents or other intellectual property rights of others or that any license required would be made available under any such patents or intellectual property rights, on terms acceptable to us or at all. From time to time, we have received correspondence alleging infringement of intellectual property rights of third parties. No assurance can be given that any relevant claims of third parties would not be upheld as valid and enforceable, and therefore we could be prevented from practicing the subject matter claimed or could be required to obtain licenses from the owners of any such intellectual property rights to avoid infringement.

      In December 2000, we settled a patent lawsuit against Cryomedical Sciences, Inc., now known as BioLife Solutions, Inc., or BioLife, and in March 2001 we settled two patent lawsuits against Israel-based Galil Medical, Ltd. and its U.S. affiliate, Galil Medical (USA), Inc. The lawsuits against BioLife and Galil concerned the infringement of our patent for an integrated cryosurgical system. The settlements resulted in cross-licensing agreements between Galil and us and BioLife and us.

      We seek to preserve the confidentiality of our technology by entering into confidentiality agreements with our employees, consultants, customers and key vendors and by other means. No assurance can be given, however, that these measures will prevent the unauthorized disclosure or use of such technology.

Research Strategy

      Our research goal is to develop innovative cryoablation technology which dramatically improves patient outcomes. Our primary focus is on developing devices for the treatment of prostate, kidney, lung, liver and

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      We spent approximately $2.4 million, $2.5 million and $2.9 million for the years ended 2000, 2001 and 2002, respectively, on research and development activities.

Sales and Marketing

      We sell our products primarily to physicians and hospitals and have both domestic and international customers. Net sales to CryoCath pursuant to our market access and supply agreement with them constituted approximately 6.8% of our net revenues for the year ended December 31, 2002. In April 2003, we sold our cardiac-related product manufacturing operations and the licensed the related intellectual property to CryoCath. In connection with this sale and license, we terminated the original supply arrangement with CryoCath. None of our customers accounted for in excess of 10% of our net revenues in 2002. The following products and services account for 15% or more of total revenues for each of the years ended December 31:

*	These products account for less than 15% of total revenues.

      We currently sell our products domestically through our direct sales force which, as of December 31, 2002, consisted of 57 people, including two directors of partnership development, five regional sales managers, six clinical application specialists and 44 field sales representatives. Our strategy is to focus marketing and sales efforts and generating physician access to and awareness of the Cryocare Surgical System. We also intend to create patient demand by providing education regarding the benefits of cryosurgical therapy versus alternative treatment options. We also have plans to expand our marketing initiatives to programs targeted directly at prostate disease patients.

      In December 2002, we began to test market direct consumer response via “800” number call-in advertisements placed on televised segments of CNN Headline News. Based on initial call volume and consumer interest, we expanded direct-to-consumer advertising throughout 2003. Due to the continued success of this strategy, we plan to further expand this marketing strategy.

      Internationally, our products are sold primarily through independent distributors. Our international sales represented approximately 12%, 8% and 15% of our consolidated revenue in 2000, 2001 and 2002, respectively.

      We derive our revenues from the following geographic regions for each of the years ended December 31 (in thousands):

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Reimbursement

      We sell our Cryocare Surgical System and related disposable temperature probes and cryoprobes to hospitals and other entities that provide services to hospitals. Most procedures involving the Cryocare Surgical System are performed in hospitals on an inpatient basis. While patients occasionally pay for cryosurgical procedures directly, virtually all patients depend upon third-party payors, including Medicare, Medicaid, Tricare and other federal healthcare programs, as well as private insurers to pay for their procedures. Accordingly, our revenue is dependent upon third-party reimbursement, particularly Medicare, since an estimated 70% of patients receiving cryosurgical treatments using are proprietary technology are Medicare beneficiaries.

      Medicare reimbursement for cryosurgical procedures using our products as a primary treatment alternative for localized prostate cancer began July 1999. Effective July 2001, Medicare coverage was approved for secondary cryosurgical treatment of prostate cancer patients who have failed radiation therapy.

      When Medicare reimbursed services are provided on an inpatient basis, the hospital is reimbursed under the Medicare prospective payment system, based on the applicable diagnosis related group, or DRG. A single payment covers all facility services.

      Outpatient reimbursement for cryosurgical procedures for Medicare beneficiaries is in accordance with the Hospital Outpatient Prospective Payment System, or HOPPS. Under HOPPS, the hospital is paid on a per procedure basis, based on the ambulatory payment classification (APC) for the procedure. The payment to the hospital includes the per procedure share of the cost for any depreciable equipment, such as our Cryocare Surgical System unit, and the provision of disposable devices, such as our temperature probes and cryoprobes.

      Medicare makes additional payments to hospitals under HOPPS when certain qualifying new medical devices are used to perform a procedure or service on a program beneficiary on an outpatient basis. These “pass-through” payments help to compensate hospitals for the additional costs of utilizing new technology in treating Medicare beneficiaries on an outpatient basis. Our temperature probes and cryoprobes are currently paid on a pass-through basis but these payments will end on December 31, 2003.

      Items qualifying for pass-through payment continue to be eligible for at least two, but not more than three, years. After the pass-through status of an item expires, the relevant APC groupings, weights and payments are updated to include costs associated with former pass-through items. Effective January 1, 2004, cryosurgery of the prostate will be reimbursed under APC 674 as a single payment, including the cryoprobes and temperature probes previously reimbursed on a pass-through basis. This integrated payment for outpatient procedures for Medicare patients is a reduction of approximately 15 percent from previous HOPPS reimbursement rates to hospitals for prostate cryosurgery. Many hospitals, however, did not routinely or accurately bill Medicare for the disposables. In these cases, the effect of reduced reimbursement will not be as great. Nevertheless, we cannot provide assurance that the new HOPPS payment levels will not have a negative impact on our revenues, net income and cash flows.

      We are exploring percutaneous ablation of cancerous tissue in bone, kidney, lung and liver. Clinical studies are underway and as soon as studies are complete coverage decisions and unique reimbursement codes will be sought from Medicare and private payors

      Our ErecAid Esteem and ErecAid Classic Systems, which we sell through Timm Medical, are also reimbursed by Medicare and other federal health care programs, as well as private insurers. Timm Medical provides certain items to patients on a prescription basis and bills the patient or third-party payor directly, including Medicare and private insurers. Consequently, Timm Medical’s business would be directly impacted by any changes in either coverage policies or reimbursement amounts adopted by Medicare or other payors.

      Approval of new device or technology by the FDA does not guarantee payment by Medicare or other payors. Future devices and technology that we develop would have to be approved for coverage by Medicare after we obtain FDA approval or clearance. The Medicare approval process is lengthy and there is no assurance that Medicare approval would be granted. Each private insurer makes its own determination

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Backlog

      As of December 31, 2002, we maintained minimal backlog. Our policy is to carry enough inventory to be able to ship most orders within a few days of receipt of order. Historically, most of our orders have been for shipment within 30 days of the placement of the order. Therefore, we rely on orders placed during a given period for sales during that period. Backlog information as of the end of a particular period is not necessarily indicative of future levels of our revenue.

Government Contracts

      Timm Medical has entered into a contract with the Department of Veterans Affairs Prosthetics and Sensory Aids Service pursuant to which Timm Medical became the national mandatory source for vacuum erection devices for the Veterans Affairs network of hospitals and clinics through March 31, 2005. In 2002, Timm Medical received approximately $1.2 million under this contract. The Department of Veterans Affairs can terminate this contract on 30 days notice.

Manufacturing

      We manufacture our Cryocare Surgical System and related disposables internally at our facilities in Irvine, California. We moved our executive offices and transferred our manufacturing activities to our existing facility in Irvine, California in April 2002. The new facility has been inspected by the California Department of Health Services and has been issued a Device Manufacturing License.

      Our current manufacturing facility was subjected to Quality System Regulation compliance inspections by the FDA in September 2002 and again in February and March 2003. Both audits have been successfully closed by the FDA. We have received ISO 9001, ISO 13485, and CE Marking certifications, indicating compliance with European standards for quality assurance and manufacturing process control.

      The erectile dysfunction products we acquired through our acquisition of Timm Medical are packaged and shipped in our Irvine facility and are manufactured for us by The MedTech Group of South Plainfield, New Jersey.

Government Regulation

      Governmental regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of medical devices, including our products. In the United States, the FDA has broad authority under the Federal Food, Drug and Cosmetic Act, the FDC Act, to regulate the distribution, manufacture and sale of medical devices. Foreign sales of medical devices are subject to foreign governmental regulation and restrictions that vary from country to country.

      We are also required to register as a medical device manufacturer with state agencies, such as the State of California Department of Health Services, or CDHS. As such, we will be inspected by such regulatory agencies and authorities for compliance with applicable regulations. These regulations require that we manufacture our products and maintain our documents in a prescribed manner.

      Noncompliance with applicable requirements can result in, among other things, warning letters, proceedings to detain imported products, fines, injunctions, civil and criminal penalties against us, our officers and our employees, recall or seizure of products, total or partial suspension of production, refusal of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and a recommendation by the FDA that we not be permitted to enter into government contracts.

      Medical devices intended for human use in the United States are classified into one of three categories, depending upon the degree of regulatory control to which they will be subject. Such devices are classified by regulation into either class I general controls, class II special standards or class III pre-market approval

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      Most Class I devices are exempt from premarket notification or approval. Class II devices are subject to the premarket notification requirements under Section 510(k) of the FDC Act. For a 510(k) to be cleared by the FDA, the manufacturer must demonstrate to the FDA that a device is substantially equivalent to another legally marketed device that was either cleared through the 510(k) process or on the market prior to 1976. It generally takes four to twelve months from the date of submission to obtain 510(k) clearance although it may take longer, in particular if clinical trials are required. Class III devices generally include the most risky devices as well as devices that are not substantially equivalent to other legally marketed devices. To obtain approval to market a Class III device, a manufacturer must obtain FDA approval of a premarket approval application, or PMA. The PMA process requires more data, takes longer and is more expensive than the 510(k) procedure.

      Our Cryocare Surgical System, Rigiscan, ErecAid and SurErec products have been cleared for marketing through the 510(k) process.

      There can be no assurance that we will be able to obtain necessary clearances or approvals for clinical testing or for manufacturing or marketing of our products. After a device is placed on the market, numerous regulatory requirements apply. These include: