#### ** **

#### **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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#### **FORM10-Q**

 

**ý****  QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended April 30, 2004**

 

**or**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)********OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number 0-26670**

 

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#### **NORTHAMERICAN SCIENTIFIC, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                     |   | **51-0366422**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |
| **20200 Sunburst Street, Chatsworth, CA 91311**                  |
| (Address of  principal executive offices)                        |
|                                                             |
| **(818) 734-8600**                                               |
| (Registrant’s  telephone number, including area code)       |

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

ý Yes     o No

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

o Yes     ý No

 

The number of shares of Registrant’s CommonStock, $.01 par value, outstanding as of June 10, 2004 was 15,228,339shares.

 

 

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**NORTHAMERICAN SCIENTIFIC, INC.**

 

**Index**

 
| **Part I – Financial Information** |                                                                                                   |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                   |
| **Item 1.**                             | **Financial Statements**                                                                               |   |
|                                    |                                                                                                   |
|                                    | Consolidated Balance Sheets as of April 30, 2004 and  October 31, 2003                       |   |
|                                    | Consolidated Statements of Operations for  the three and six months ended April 30, 2004 and 2003 |   |
|                                    | Consolidated Statements of Cash Flows for  the six months ended April 30, 2004 and 2003           |   |
|                                    | Condensed Notes to the Consolidated  Financial Statements                                              |   |
|                                    |                                                                                                   |
| **Item 2.**                             | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**        |   |
|                                    |                                                                                                   |   |
| **Item 3.**                             | **Quantitative and Qualitative Disclosures  About Market Risk**                                        |   |
|                                    |                                                                                                   |   |
| **Item 4.**                             | **Controls and  Procedures**                                                                           |   |
|                                    |                                                                                                   |
| **Part II – Other Information**    |                                                                                                   |
|                                    |                                                                                                   |
| **Item 6.**                             | **Exhibits and  Reports on Form 8-K**                                                                  |   |
|                                    |                                                                                                   |
| **Signatures**                          |                                                                                                   |
|                                         |                                                                                                        |  |  |

 

2

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**PART I – FINANCIAL INFORMATION**

 

###### **Item1.**           Financial Statements

 

**NORTHAMERICAN SCIENTIFIC, INC.**

 

**Consolidated Balance Sheets**

### ** **

|                                                                                                                                                                                                                   |   | **April 30,  2004** |       | **October 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|----------------------------|--------|
|                                                                                                                                                                                                                   |   | **(Unaudited)**          |       |                       |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| **Assets**                                                                                                                                                                                                             |   |                     |       |                       |   |
| Current  assets                                                                                                                                                                                                        |   |                     |       |                       |   |
| Cash and  cash equivalents                                                                                                                                                                                             |   | $                        | 1,003,000  |                       | $      | 1,761,000 |   |
| Marketable  securities                                                                                                                                                                                                 |   | 32,515,000               |       | 32,587,000                 |   |
| Accounts  receivable                                                                                                                                                                                                   |   | 2,305,000                |       | 2,167,000                  |   |
| Inventories                                                                                                                                                                                                            |   | 713,000                  |       | 692,000                    |   |
| Income taxes  receivable                                                                                                                                                                                               |   | —                   |       | 496,000                    |   |
| Prepaid  expenses and other current assets                                                                                                                                                                             |   | 1,401,000                |       | 1,053,000                  |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Total current assets                                                                                                                                                                                                   |   | 37,937,000               |       | 38,756,000                 |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Non-current  marketable securities                                                                                                                                                                                     |   | 7,070,000                |       | 14,767,000                 |   |
| Equipment  and leasehold improvements                                                                                                                                                                                  |   | 3,615,000                |       | 2,996,000                  |   |
| Goodwill                                                                                                                                                                                                               |   | 3,866,000                |       | 3,866,000                  |   |
| Intangible  assets                                                                                                                                                                                                     |   | 840,000                  |       | 813,000                    |   |
| Other assets                                                                                                                                                                                                           |   | 2,302,000                |       | 1,334,000                  |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Total assets                                                                                                                                                                                                           |   | $                        | 55,630,000 |                       | $      | 62,532,000 |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                          |   |                     |       |                       |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Current  liabilities                                                                                                                                                                                                   |   |                     |       |                       |   |
| Accounts  payable                                                                                                                                                                                                      |   | $                        | 1,584,000  |                       | $      | 1,620,000 |   |
| Accrued  expenses                                                                                                                                                                                                      |   | 4,506,000                |       | 5,166,000                  |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Total  current liabilities                                                                                                                                                                                             |   | 6,090,000                |       | 6,786,000                  |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Commitments  and contingencies                                                                                                                                                                                         |   |                     |       |                       |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Stockholders’  equity                                                                                                                                                                                             |   |                     |       |                       |   |
| Preferred  stock, $.01 par value, 2,000,000 shares authorized; no shares issued                                                                                                                                        |   | —                   |       | —                     |   |
| Common  stock, $.01 par value, 40,000,000 shares authorized; 10,482,638 and  10,298,241 shares issued; 10,463,638 and 10,279,241 shares outstanding as of  April 30, 2004 and October 31, 2003, respectively |   | 108,000                  |       | 103,000                    |   |
| Additional  paid-in capital                                                                                                                                                                                            |   | 75,972,000               |       | 74,343,000                 |   |
| Treasury  stock, at cost – 19,000 shares                                                                                                                                                                          |   | (129,000                 | )          | (129,000                   | )      |
| Accumulated  deficit                                                                                                                                                                                                   |   | (26,411,000              | )          | (18,571,000                | )      |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Total  stockholders’ equity                                                                                                                                                                                       |   | 49,540,000               |       | 55,746,000                 |   |
|                                                                                                                                                                                                                   |   |                     |       |                       |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                       |   | $                        | 55,630,000 |                       | $      | 62,532,000 |   |

 

See condensed notes to the consolidatedfinancial statements.

 

3

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**NORTHAMERICAN SCIENTIFIC, INC.**

 

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
|                                                                       |   | **Three Months Ended  April 30,** |             | **Six Months Ended  April 30,** |   |
|----------------------------------------------------------------------------|--------|----------------------------------------|------------------|--------------------------------------|--------|
|                                                                       |   | **2004**                               |             | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Net sales                                                                  |   | $                                      | 3,482,000        |                                 | $      | 2,904,000 |   | $ | 6,845,000 |   | $ | 8,045,000 |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Cost of  goods sold                                                        |   | 1,933,000                              |             | 1,412,000                            |   | 3,838,000 |   | 3,255,000 |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Gross profit                                                               |   | 1,549,000                              |             | 1,492,000                            |   | 3,007,000 |   | 4,790,000 |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Selling  expenses                                                          |   | 861,000                                |             | 998,000                              |   | 1,646,000 |   | 1,604,000 |   |
| General and  administrative                                                |   | 2,415,000                              |             | 2,032,000                            |   | 5,785,000 |   | 3,841,000 |   |
| Research and  development                                                  |   | 2,347,000                              |             | 1,813,000                            |   | 3,791,000 |   | 3,770,000 |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Loss from  operations                                                      |   | (4,074,000                             | )                | (3,351,000                           | )      | (8,215,000 | ) | (4,425,000 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Interest and  other income, net                                            |   | 164,000                                |             | 926,000                              |   | 375,000 |   | 1,284,000 |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Loss before  provision for income taxes                                    |   | (3,910,000                             | )                | (2,425,000                           | )      | (7,840,000 | ) | (3,141,000 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Provision  for income taxes                                                |   | —                                 |             | —                               |   | — |   | — |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle           |   | (3,910,000                             | )                | (2,425,000                           | )      | (7,840,000 | ) | (3,141,000 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Cumulative  effect of change in accounting principle                       |   | —                                 |             | —                               |   | — |   | (311,000 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Net loss                                                                   |   | $                                      | (3,910,000  | )                                    | $      | (2,425,000 | ) | $ | (7,840,000 | ) | $ | (3,452,000 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Loss per  share:                                                           |   |                                   |             |                                 |   |   |   |   |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Basic and  diluted loss per share                                          |   |                                   |             |                                 |   |   |   |   |   |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Loss per  share before cumulative effect of change in accounting principle |   | $                                      | (.38             | )                                    | $      | (.24 | ) | $ | (.76 | ) | $ | (.31 | ) |
| Cumulative  effect of change in accounting principle                       |   | $                                      | —           |                                 | $      | — |   | $ | — |   | $ | (.03 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Net loss                                                                   |   | $                                      | (.38             | )                                    | $      | (.24 | ) | $ | (.76 | ) | $ | (.34 | ) |
|                                                                       |   |                                   |             |                                 |   |   |   |   |   |
| Weighted  average number of shares outstanding                             |   | 10,338,011                             |             | 10,251,968                           |   | 10,343,740 |   | 10,254,106 |   |

 

See condensed notes to the consolidatedfinancial statements.

 

4

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**NORTHAMERICAN SCIENTIFIC, INC.**

 

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

 
|                                                                         |   | **Six Months Ended  April 30,** |       |
|------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                         |   | **2004**                             |       | **2003** |   |
|                                                                         |   |                                 |       |   |   |
| Cash flows  from operating activities:                                       |   |                                 |       |   |   |
| Net loss                                                                     |   | $                                    | (7,840,000 | ) | $ | (3,452,000 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                 |       |   |   |
| Cumulative  effect of change in accounting principle                         |   | —                               |       | 311,000 |   |
| Depreciation  and amortization                                               |   | 515,000                              |       | 458,000 |   |
| Non-cash  stock compensation expense                                         |   | 351,000                              |       | 47,000 |   |
| Provision  for doubtful accounts                                             |   | 20,000                               |       | 39,000 |   |
| Write-off of  licenses and equipment                                         |   | 14,000                               |       | 105,000 |   |
| Gain on sale  of non-marketable securities                                   |   | —                               |       | (600,000 | ) |
| Changes in  assets and liabilities:                                          |   |                                 |       |   |   |
| Accounts  receivable                                                         |   | (158,000                             | )          | 434,000 |   |
| Inventories                                                                  |   | (21,000                              | )          | (72,000 | ) |
| Prepaid  expenses and other current assets                                   |   | (348,000                             | )          | (496,000 | ) |
| Accounts  payable                                                            |   | (36,000                              | )          | 59,000 |   |
| Accrued  expenses                                                            |   | (660,000                             | )          | 235,000 |   |
| Income taxes  receivable                                                     |   | 496,000                              |       | 1,006,000 |   |
|                                                                         |   |                                 |       |   |   |
| Net cash  used in operating activities                                       |   | (7,667,000                           | )          | (1,926,000 | ) |
|                                                                         |   |                                 |       |   |   |
| Cash flows  from investing activities:                                       |   |                                 |       |   |   |
| Proceeds  from sale of marketable securities                                 |   | 15,868,000                           |       | 11,882,000 |   |
| Purchases of  marketable securities                                          |   | (8,099,000                           | )          | (10,477,000 | ) |
| Proceeds  from sale of non-marketable securities                             |   | —                               |       | 408,000 |   |
| Purchase of  licenses                                                        |   | (75,000                              | )          | — |   |
| Other assets                                                                 |   | (967,000                             | )          | — |   |
| Capital  expenditures                                                        |   | (1,100,000                           | )          | (356,000 | ) |
|                                                                         |   |                                 |       |   |   |
| Net cash  provided by investing activities                                   |   | 5,627,000                            |       | 1,457,000 |   |
|                                                                         |   |                                 |       |   |   |
| Cash flows from  financing activities:                                       |   |                                 |       |   |   |
| Purchases of  common stock as treasury stock                                 |   | —                               |       | (129,000 | ) |
| Proceeds  from exercise of stock options and stock purchase plan             |   | 1,282,000                            |       | 84,000 |   |
|                                                                         |   |                                 |       |   |   |
| Net cash  provided by (used in) financing activities                         |   | 1,282,000                            |       | (45,000 | ) |
|                                                                         |   |                                 |       |   |   |
| Net decrease  in cash and cash equivalents                                   |   | (758,000                             | )          | (514,000 | ) |
|                                                                         |   |                                 |       |   |   |
| Cash and  cash equivalents at beginning of period                            |   | 1,761,000                            |       | 2,708,000 |   |
|                                                                         |   |                                 |       |   |   |
| Cash and  cash equivalents at end of period                                  |   | $                                    | 1,003,000  |   | $ | 2,194,000 |   |

 

See condensed notes to the consolidatedfinancial statements.

 

5

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**NORTHAMERICAN SCIENTIFIC, INC.**

 

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

 

**Note 1 – Consolidated Financial Statements**

 

*Basis of Presentation*

 

The accompanying consolidated financial statements of North AmericanScientific, Inc. (the “Company”) are unaudited, other than the consolidatedbalance sheet at October 31, 2003, and reflect all material adjustments,consisting only of normal recurring adjustments, which management considersnecessary for a fair statement of the Company’s financial position, results ofoperations and cash flows for the interim periods.  The results of operations for the current interim period are not necessarilyindicative of the results to be expected for the entire fiscal year.

 

These consolidated financial statements have been prepared inaccordance with the rules and regulations of the Securities and ExchangeCommission ("SEC").  Certaininformation and footnotes normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America have been condensed or omitted pursuant to these rules andregulations.  These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company’s Form 10-K, as filedwith the SEC for the year ended October 31, 2003.

 

Certain reclassifications have been made to prior period balances inorder to conform to the current period presentation.

 

*Use of Estimates*

 

In the normal course of preparing the financial statements inconformity with generally accepted accounting principles in the United Statesof America, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andreported amounts of revenue and expenses during the reporting period.  Actual results could differ from thoseamounts.

 

*Accounting for Stock-based Compensation*

 

The Company accounts for its stock option awards to employees anddirectors using the intrinsic value method of accounting in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  The Company has provided additional disclosures required byStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation.”

 

6

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Had compensation cost for the Company’s stock options been recognizedbased upon the estimated fair value on the grant date under the fair valuemethodology prescribed by SFAS No. 123, as amended by SFAS No. 148, theCompany’s net loss and loss per share would have been as follows:

 
|                                           |   | **Three Months Ended  April 30,** |       | **Six Months Ended  April 30,** |   |
|------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|--------|
|                                           |   | **2004**                               |       | **2003**                             |   | **2004** |   | **2003** |   |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Net loss, as reported                          |   | $                                      | (3,910,000 | )                                    | $      | (2,425,000 | ) | $ | (7,840,000 | ) | $ | (3,452,000 | ) |
| Add: stock based  compensation recognized      |   | —                                 |       | —                               |   | 351,000 |   | — |   |
| Less: total stock-based  compensation (1)      |   | (995,000                               | )          | (506,000                             | )      | (1,599,000 | ) | (1,126,000 | ) |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Net loss, as adjusted                          |   | $                                      | (4,905,000 | )                                    | $      | (2,931,000 | ) | $ | (9,088,000 | ) | $ | (4,578,000 | ) |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Basic and diluted loss per  share, as reported |   | $                                      | (.38       | )                                    | $      | (.24 | ) | $ | (.76 | ) | $ | (.34 | ) |
| Basic and diluted loss per  share, as adjusted |   | $                                      | (.47       | )                                    | $      | (.29 | ) | $ | (.88 | ) | $ | (.45 | ) |

 

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(1) As determined under thefair value method.

 

The Company uses the Black-Scholesoption-pricing model for estimating the fair value of options granted. TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions, includingthe expected stock price volatility. The Company uses projected volatility rates, which are based uponhistorical volatility rates, trended into future years. Because the Company’semployee stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of the Company’s options. For purposes of pro forma disclosures, theestimated fair values of the options are amortized over the options’ vestingperiods.

 

**Note 2**– **Variable Interest Entity**

 

InOctober, 2003, the Company entered into a Secured Loan Agreement with ProstateCenters of America (“PCA”).  Under theagreement, the Company is obligated to make periodic advances subject to PCA achievingcertain milestones.  The secured notebears interest at 6% per annum and is repayable in four installments commencingon December 1, 2004, with all unpaid principal and interest due onSeptember 1, 2005.

 

Asof April 30, 2004, the Company’s advances to PCA totaled $700,000, with anobligation, contingent upon certain milestones, to advance an additional$500,000. The Company has no equity interest in PCA.

 

Thefunds are to be used for general working capital to provide variousbrachytherapy services to ambulatory surgical centers. A distributor who hasagreed to procure all of its brachytherapy seeds exclusively from the Companyfor a period of five years has a majority interest in PCA. Based on the termsof the lending and supply agreements with the above entities, the Companydetermined that PCA is a variable interest entity (“VIE”) and the Company isthe primary beneficiary under Financial Accounting Standards BoardInterpretation No. 46, “Consolidation of Variable Interest Entities—aninterpretation of ARB No. 51” (“FIN No. 46”). FIN No. 46 iseffective for a VIE created after January 31, 2003 and to a VIE in whichan enterprise obtains an interest after that date.

 

TheCompany determined that PCA is a VIE since it does not have sufficient equity atrisk for the entity to finance its activities. FIN No. 46 requires that anenterprise consolidate a VIE if that enterprise has a variable interest thatwill absorb a majority of the entity’s expected losses if they occur.Accordingly, the

 

7

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Companyadopted FIN No. 46 in October 2003 and consolidated PCA as a VIE,regardless of the Company not having an equity interest in PCA and itscreditors having no recourse against the Company.

 

Consolidationof the PCA as of April 30, 2004, and October 31, 2003 resulted in theconsolidation of cash of $462,000 and $350,000, respectively, which is held byPCA.  The consolidated balance sheet ofApril 30, 2004 included $520,000 of Equipment and leasehold improvements and$685,000 of accounts payable and accrued expenses from PCA.  Consolidation of PCA’s  results of operations for the three and sixmonths ended April 30, 2004 were losses of $42,000 and $238,000,respectively.

 

**Note 3 – Marketable Securities**

 

The Company invests excess cash in marketablesecurities consisting primarily of commercial paper, corporate notes and bonds,U.S. Government securities and money market funds.

 

Debt securities that the Company has thepositive intent and ability to hold to maturity are classified as“held-to-maturity” and reported at amortized cost. Debt securities notclassified as held-to-maturity and marketable equity securities are classifiedas “available-for-sale,” are recorded at fair value with unrealized gains andlosses included in stockholders’ equity. All other equity securities areaccounted for using either the cost method or the equity method.

 

The Company continually reviews itsinvestments to determine whether a decline in fair value below the cost basisis other than temporary. If the decline in fair value is judged to be otherthan temporary, the cost basis of the security is written down to fair valueand the amount of the write-down is included in the Consolidated Statements ofOperations.

 

**Note 4 – Inventories**

 

Inventories are valued at the lower of costor market as determined under the first-in, first-out method. Costs includematerials, labor and manufacturing overhead. Inventories are shown net ofapplicable reserves and allowances. Inventories consist of the following:

 

|             |   | **April 30,  2004** |    | **October 31,  2003** |   |
|------------------|--------|--------------------------|---------|----------------------------|--------|
|             |   |                     |    |                       |   |
| Raw  materials   |   | $                        | 615,000 |                       | $      | 639,000 |   |
| Work in  process |   | 51,000                   |    | 25,000                     |   |
| Finished  goods  |   | 47,000                   |    | 28,000                     |   |
|             |   |                     |    |                       |   |
|             |   | $                        | 713,000 |                       | $      | 692,000 |   |

 

**Note 5 – Net Loss per Share**

 

Basic earnings (loss) per share is computed by dividing the net income(loss) by the weighted average number of shares outstanding for the period.Diluted earnings (loss) per share is computed by dividing the net income (loss)by the sum of the weighted average number of common shares outstanding for theperiod plus the assumed exercise of all dilutive securities by applying thetreasury stock method unless such assumed exercises are anti-dilutive. Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share:

 

8

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|                                           |   | **Three Months Ended  April 30,** |       | **Six Months Ended  April 30,** |   |
|------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|--------|
|                                           |   | **2004**                               |       | **2003**                             |   | **2004** |   | **2003** |   |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Net loss                                       |   | $                                      | (3,910,000 | )                                    | $      | (2,425,000 | ) | $ | (7,840,000 | ) | $ | (3,452,000 | ) |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Weighted  average shares outstanding - Basic   |   | 10,338,011                             |       | 10,251,968                           |   | 10,343,740 |   | 10,254,106 |   |
| Dilutive  effect of stock options              |   | —                                 |       | —                               |   | — |   | — |   |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Weighted  average shares outstanding - Diluted |   | 10,338,011                             |       | 10,251,968                           |   | 10,343,740 |   | 10,254,106 |   |
|                                           |   |                                   |       |                                 |   |   |   |   |   |
| Basic loss  per share                          |   | $                                      | (.38       | )                                    | $      | (.24 | ) | $ | (.76 | ) | $ | (.34 | ) |
| Diluted loss  per share                        |   | $                                      | (.38       | )                                    | $      | (.24 | ) | $ | (.76 | ) | $ | (.34 | ) |

 

Stock options to purchase 2,539,150 and 2,303,184 common shares for thethree months ended April 30, 2004, and 2003, respectively, and 2,587,039and 2,308,096 common shares for the six months ended April 30, 2004 and2003, respectively, were not included in the computation of diluted earningsper share because their effect would have been anti-dilutive.

 

**Note 6 – Subsequent Event**

 

OnMay 4, 2004, the Company completed its acquisition of NOMOS Corporation(“NOMOS”). Under the terms of the merger agreement, the Company issuedapproximately 5.3 million shares of common stock and cash of approximately $12million, in exchange for all of the outstanding capital stock of NOMOS.

 

TheCompany has incurred approximately $2.3 million and $1.3 million in acquisitionrelated costs which are included in Other Assets on the Balance Sheet atApril 30, 2004 and October 31, 2003, respectively.

 

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## **Item2.**                     Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis provides information, which ourmanagement believes is relevant to an assessment and understanding of ourfinancial condition and results of operations. The discussion should be read inconjunction with the Consolidated Financial Statements contained herein and thenotes thereto. Certain statements contained in this Form 10-Q, including,without limitation, statements containing the words “believes”, “anticipates”,“estimates”, “expects”, “projections”, and words of similar import are forwardlooking as that term is defined by: (i) the Private Securities LitigationReform Act of 1995 (the “1995 Act”) and (ii) releases issued by theSecurities and Exchange Commission (“SEC”). These statements are being madepursuant to the provisions of the 1995 Act and with the intention of obtainingthe benefits of the “Safe Harbor” provisions of the 1995 Act. We caution thatany forward looking statements made herein are not guarantees of futureperformance and that actual results may differ materially from those in suchforward looking statements as a result of various factors, including, but notlimited to, any risks detailed herein or detailed from time to time in ourother filings with the SEC including our most recent report on Form 10-K.We are not undertaking any obligation to update publicly any forward-lookingstatements. Readers should not place undue reliance on these forward-lookingstatements.

 

**Overview**

 

We manufacture, market and sell products for the radiation oncologycommunity, including brachytherapy seeds used in the treatment of prostatecancer, as well as intensity modulated radiation therapy (“IMRT”) products andservices.  We have also applied ourexpertise to manufacture other radioistopic products used in various medical,environmental, research and industrial applications.  In addition, we have been developing a nuclear medicine imagingagent intended to image cell death in patients with cancer or other medicalconditions.

 

From 1998 to January 2003, our brachytherapy seeds weredistributed under an exclusive agreement with a third party distributor.  In January 2003, the agreementterminated and we began to market and sell our brachytherapy products directlyto health care providers.  Futurerevenues and gross profit relating to our brachytherapy products will depend onseveral factors, including our ability to successfully directly market anddistribute our brachytherapy products and to successfully withstand pricingpressure from competition and price containment pressure and reimbursementlimits for brachytherapy procedures.

 

On May 4, 2004, we closed our acquisition of NOMOS Corporation(“NOMOS”). NOMOS was a privately held developer, manufacturer, and marketer ofIMRT products and services.  Thisacquisition will significantly expand our product offerings to radiation oncologists.  Under the terms of the merger agreement, weissued approximately 5.3 million shares of common stock and paid cash ofapproximately $12 million, in exchange for all of the outstanding capital stockof NOMOS.

 

In October 2000, we acquired Theseus Imaging Corporation, adeveloper of proprietary radiopharmaceuticals to enhance the medical managementof patients with cancer or other medical conditions.  Our principal radiopharmaceutical product candidate isHynic-Annexin V, which is currently in Phase II clinical trials in Europe andthe United States.

 

Our anticipated expenditures in the development of Hynic-Annexin V areexpected to have a continued significant negative impact on our earnings.  Development of this product presentsconsiderable risks including:

 

•                  Wemay not have the financial resources to complete development andcommercialization of the Hynic-Annexin V program;

 

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•                  Theuse of radiopharmaceuticals for imaging cell death is a new and unproventechnology and may not receive acceptance among healthcare providers, payers orpatients;

•                  Theproduction of Hynic-Annexin V kits depends on successful manufacturing andtesting of stable Hynic-Annexin V conjugate and other materials by contractmanufacturers under cGMP standards.  Delaysin this process could adversely impact the timing of clinical studies;

•                  Clinicaltrials with respect to these products may not be successful and we may notreceive government approvals in a timely manner or at all.  We do not expect to submit our biologicallicense application ("BLA") for Hynic-Annexin V to the FDA formarketing approval for several years. FDA review of a BLA typically takes aminimum of one year.  Our BLA filingdate could be extended for a number of reasons, including changes in theregulatory landscape or changes in our strategic initiatives; and

•                  Ifmarketing approval of Hynic-Annexin V is achieved, there is no assurance thatany products resulting from our development of Hynic-Annexin V will achievemarket acceptance or compete successfully against existing or future diagnosticproducts intended for similar purposes.

 

In October 2003, we announced observations from a preliminaryinternal review of data from our European clinical trials of Hynic-AnnexinV.  The data from these observations,which were derived from the first 28 subjects enrolled in these clinicaltrials, were preliminary and to some extent inconclusive.  Therefore, we have expanded enrollment inour clinical trial program in order to evaluate post treatment assessments attime points other than twenty four hours.  We believe that this clinical trial will be completed during our fiscalquarter ended October 31, 2004. The analyses may result in negativefindings, may delay the availability of Hynic-Annexin V as a product candidateand may reveal the need for greater expenditures than currently planned tocommercialize Hynic-Annexin V.  Even iffurther clinical trials produce positive results, these results may not predictresults that will be obtained in large-scale clinical trials and there can beno assurance that the clinical trials will demonstrate the safety and efficacyof Hynic-Annexin V or that the clinical trials will lead to any marketableproducts.

 

In view of these risks and uncertainties, we are unable to estimatewith any certainty when, if ever, we will complete the development of ourHynic-Annexin V product candidate or the final cost thereof.  We believe that successful completion andreceipt of required regulatory approvals allowing marketing will not occurearlier than 2007, and additional related costs could be at least $50million.  We estimate that meaningfulrevenues from this product would commence within one year after receipt of therequired marketing approvals.

 

We expect that the costs related to our Hynic-Annexin V developmentprogram will continue to have a significant negative effect on our earnings,and therefore, on our liquidity and financial position.  Most of the costs that we incur inconnection with this project are being expensed as incurred.  We continue to evaluate, on an ongoing basis, strategic alternativesfor our Hynic-Annexin V product development program and are engaged inassessing various options with a view to optimizing stockholder value.

 

**Resultsof Operations**

 

**Second Quarter of Fiscal 2004 Compared toSecond Quarter of Fiscal 2003**

 

**Netsales**.  Netsales increased $578,000, or 20%, to $3,482,000 for the three months endedApril 30, 2004, from $2,904,000 for the three months ended April 30,2003.  The increase in sales during thequarter ended April 30, 2004, is attributed to an increase in volume ofiodine brachytherapy seeds, accessories and ancillary products.

 

**Grossprofit**.  Grossprofit increased $57,000, or 4%, to $1,549,000 for the three months endedApril 30, 2004, from $1,492,000 for the three months ended April 30,2003.  Gross profit as a percent ofsales

 

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decreased from 51% to 44% during this period.  The decrease in gross profit as a percentage of sales was primarilydue to the increase in volume of lower margin products.

 

**SellingExpense**. Selling expenses decreased $137,000, or 14% to $861,000 for the threemonths ended April 30, 2004, from $998,000 for the three months endedApril 30, 2003.  The decrease inselling expenses is primarily attributed to the deployment of our direct salesforce during the three months ended April 30, 2003, and to a lesserextent, a reduction in head count in the three months ended April 30, 2004.

 

**Generaland administrative expenses**.  General and administrative (“G&A”) expenses increased$383,000, or 19%, to $2,415,000 for the three months ended April 30, 2004,from $2,032,000 for the three months ended April 30, 2003. The increase isprimarily attributed to the inclusion of expenses of PCA (see note 6), withwhom we partnered to promote and develop ambulatory surgical centers, and anincrease in accounting and legal fees.

 

**Researchand development**. Research and development (“R&D”) expenses increased $534,000, or29%, to $2,347,000 for the three months ended April 30, 2004, from$1,813,000 for the three months ended April 30, 2003.  The increase in R&D spending isprimarily due to increase in manufacturing costs of the raw materialsassociated with our Hynic-Annexin V program. All of our R&D costs areexpensed as incurred.

 

**Interestand other income, net.**  Interest and other income decreased $762,000, or 82%, to $164,000for the three months ended April 30, 2004, from $926,000 for the threemonths ended April 30, 2003. The decrease reflects a one-time gain of$600,000 from sale of our remaining shares of RadioMed Corporation, a privatelyheld company, which occurred during the three months ended April 30, 2003,and by lower interest income as a result of a general decline in the effectiveyield of our portfolio of marketable securities consistent with the generaldecline in interest rates during the period.

 

**Six Months Ended April 30, 2004 Comparedto Six Months Ended April 30, 2003**

 

**Netsales**.  Netsales decreased $1,200,000, or 15%, to $6,845,000 for the six months endedApril 30, 2004, from $8,045,000 for the six months ended April 30,2003.  The decrease in net sales wasprimarily due to a decrease in unit volume as we transitioned from selling ourbrachytherapy products through a distributor to selling our products directlyto our customers.  Sales for the sixmonths ended April 30, 2003, include approximately three months ofdistributor sales and approximately three months of direct sales.

 

**Grossprofit.**  Grossprofit decreased $1,783,000, or 37%, to $3,007,000 for the six months endedApril 30, 2004, from $4,790,000 for the six months ended April 30,2003.  Gross profit as a percent ofsales decreased from 60% to 44% during this period.  The decrease in gross profit as a percentage of sales wasprimarily due to reduced economies of scale due to a reduction in brachytherapyunit volume and an increase in the volume of lower margin ancillary services.

 

**SellingExpenses.** Selling expenses remained relatively constant, increasing slightly to$1,646,000 for the six months ended April 30, 2004, from $1,604,000 forthe six months ended April 30, 2003. The increase reflects the timing of marketing programs.

 

**Generaland administrative expenses**.  G&A expenses increased $1,944,000, or 51%, to $5,785,000 forthe six months ended April 30, 2004, from $3,841,000 for the six monthsended April 30, 2003. The increase is primarily attributed to the $951,000in severance and non-cash stock compensation expense

 

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associated with the resignation of our former chief financial officer,the inclusion of expenses associated with PCA, and an increase in accountingand legal fees.

 

**Researchand development.** R&D costs increased $21,000, or 1% to $3,791,000 for the six monthsended April 30, 2004, from $3,770,000 for the six months endedApril 30, 2003.  These costsprimarily represent our continued investment in our Hynic-Annexin V productcandidate. All of our R&D cost are expensed as incurred. We anticipate incurringsignificant costs in the future as we continue our clinical trials in theUnited States and Europe.  Our R&Dspending reflects our belief that to maintain our competitive position in amarket characterized by rapid rates of technological advancement, we mustcontinue to invest significant resources in new product development, as well ascontinue to enhance existing products.

 

**Interestand other income**. Interest and other income decreased $909,000, or 71%, to $375,000 forthe six months ended April 30, 2004, from $1,284,000 for the six monthsended April 30, 2003. The decrease in interest and other income reflects aone-time gain of $600,000 from sale of our remaining shares of RadioMedCorporation, a privately held company, which occurred during the six monthsended April 30, 2003, and lower interest income as a result of a generaldecline in the effective yield of our portfolio of marketable securitiesconsistent with the general decline in interest rates during the period.

 

**CriticalAccounting Policies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires management to make judgments, assumptions and estimatesthat affect the amounts reported in the Consolidated Financial Statementsincluded in the Company’s Form 10-K for the year ended October 31, 2003,and accompanying notes. Note 1 to the Consolidated Financial Statementsdescribes the significant accounting policies and methods used in thepreparation of the Consolidated Financial Statements. Estimates are used for,but not limited to, the accounting for revenue recognition, allowance fordoubtful accounts, goodwill and long-lived asset impairments, losscontingencies, and taxes. Estimates and assumptions about future events andtheir effects cannot be determined with certainty. We base our estimates onhistorical experience and on various other assumptions believed to beapplicable and reasonable under the circumstances. These estimates may changeas new events occur, as additional information is obtained and as our operatingenvironment changes. These changes have historically been minor and have beenincluded in the consolidated financial statements as soon as they became known.The following critical accounting policies are impacted significantly byjudgments, assumptions and estimates used in the preparation of theConsolidated Financial Statements and actual results could differ materiallyfrom the amounts reported based on these policies.

 

*Allowance for Doubtful Accounts and SalesReturns*

 

The allowance for doubtful accounts is based on our assessment of thecollectibility of specific customer accounts and the aging of the accountsreceivable. We regularly review the allowance by considering factors such ashistorical experience, age of the accounts receivable balances and currenteconomic conditions that may affect a customer’s ability to pay.  If there were a deterioration of a majorcustomer’s credit worthiness or actual defaults are higher than our historicalexperience, our estimates of the recoverability of amounts due us could beoverstated which could have an adverse impact on our financial results.

 

A reserve for sales returns is established based on historical trendsin product return rates and is recorded as a reduction of our accountsreceivable. If the actual future returns were to deviate from the historical

 

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data on which the reserve had been established, our revenue could beadversely affected. To date, product returns have not been material to ourresults of operations.

 

*Goodwill*

 

Our methodology for allocating the purchase price related to purchaseacquisitions is determined through established valuation techniques.  Goodwill is measured as the excess of thecost of the acquisition over the amounts assigned to identifiable assetsacquired less assumed liabilities.  Weperform goodwill impairment tests on an annual basis and between annual testsin certain circumstances. In response to changes in industry and marketconditions, we may strategically realign our resources and considerrestructuring, disposing of, or otherwise exiting businesses, which couldresult in an impairment of goodwill.

 

*Impairment of Long-lived Assets*

 

We assess the impairment of long-lived assets, which include equipmentand leasehold improvements and identifiable intangible assets, whenever eventsand circumstances indicate that such assets might be impaired.  In the event the expected undiscountedfuture cash flow attributable to the asset is less than the carrying amount ofthe asset, an impairment loss equal to the excess of the asset’s carrying valueover its fair value is recorded.

 

*Loss Contingencies*

 

We record liabilities related to pending litigation when an unfavorableoutcome is probable and we can reasonably estimate the amount of the loss.  We are subject to various legal proceedingsand claims, either asserted or unasserted, that arise in the ordinary course ofbusiness. We evaluate, among other factors, the degree of probability of anunfavorable outcome and an estimate of the amount of the loss. Significantjudgment is required in both the determination of the probability and as towhether an exposure can be reasonably estimated. When we determine that it isprobable that a loss has been incurred and the amount can be reasonablyestimated, the effect is recorded promptly in the consolidated financialstatements. Although the outcome of these claims cannot be predicted withcertainty, we do not believe that any of the existing legal matters will have amaterial adverse effect on our financial condition or results of operations.

 

*Income Taxes*

 

We account for income taxes using the liability method. Deferred taxesare determined based on the differences between the financial statement and taxbases of assets and liabilities, using enacted tax rates in effect for the yearin which the differences are expected to reverse. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amountsexpected to be realized.  In addition,we are subject to examination of our income tax returns by the Internal RevenueService and other tax authorities.  Weregularly assess the likelihood of adverse outcomes resulting from these examinations.

 

*Liquidity and Capital Resources*

 

To date, our short-term liquidity needs have generally consisted ofoperating capital to finance growth in inventories, trade accounts receivable,new product research and development, capital expenditures,

 

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acquisitions and strategic investments in related businesses.  We have satisfied these needs primarilythrough a combination of cash generated by operations, public offerings andfrom private placements of our common stock. We do not currently have a line of credit or similar arrangement with abank.

 

The following sections discuss the effects of changes in our balancesheets, cash flows, and commitments on our liquidity and capital resources.

 

**BalanceSheet and Cash Flows**

 

Cash, cash equivalents, cash held in variableinterest entity and investments in marketable securities.  At April 30, 2004, we had cash, andcash equivalents, including cash held in variable interest entity andinvestments in marketable securities aggregating approximately $40.6 million, adecrease of approximately $8.5 million from $49.1 million at October 31,2003. The decrease was primarily a result of a (i) decrease in net sales as wecontinue to transition from our distribution agreement with a third party todirect sales of our brachytherapy products, (ii) an increase in general andadministrative expenses and (iii) an increase in transaction and integrationcosts associated with the acquisition of NOMOS.

 

We expect that cash used in operating activities may fluctuate infuture periods as a result of a number of factors, including fluctuations inour operating results, accounts receivable collections, inventory management,research and development expenses, including the costs of clinical trials, theimpact of the NOMOS acquisition and integration and the timing of payments.

 

During the quarter ended April 30, 2004, we received $1.3 millionfrom the exercise of stock options and the purchase of shares related to ouremployee stock purchase plan.  Proceedsfrom the exercise of stock options and the employee stock purchase plan willvary from period to period based upon, among other factors, fluctuations in themarket value of our stock relative to the exercise price of such options.

 

The primary objectives for our investment portfolio are liquidity andsafety of principal.  Investments aremade to achieve the highest rate of return, consistent with these twoobjectives.  We invest excess cash insecurities with varying maturities to meet projected cash needs.

 

Equipment and leasehold improvements.  Equipment and leasehold improvementsincreased approximately $0.6 million to $3.6 million at April 30, 2004,from $3.0 million at October 31, 2003. The increase reflects capital expenditures of $1.1 million, offset by$0.5 million in depreciation expenses. Included in the $1.1 million of capital expenditures are $0.5 million inequipment and leasehold improvements of PCA.

 

Other assets.  At April 30, 2004, other assets wereapproximately $2.3 million, an increase of approximately $1.0 million from $1.3million at October 31, 2003.  Otherassets consist primarily of capitalized acquisition and integration relatedcosts related to the NOMOS transaction.

 

Accounts payable and accrued expenses.  Accounts payable and accrued expensesdecreased approximately $0.7 million to $6.1 million as of April 30, 2004,from $6.8 million at October 31, 2003. The decrease was primarily a resultof partial payment of accrued transaction costs in connection with the NOMOStransaction and the timing of payments to vendors.

 

**Liquidity and Capital Resource Requirements**

 

We have operating lease obligations for facilities and equipment undernon-cancelable operating lease agreements. Future minimum lease payments aresubject to annual adjustment for increases in the

 

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Consumer Price Index.  We havealso entered into contractual arrangements with third parties for (i) servicesassociated with our Hynic-Annexin V development program, (ii) services relatedto the acquisition of NOMOS, (iii) contingent obligations to PCA, and (iv)installments obligations under a separation agreement.  The contract obligations associated with theHynic-Annexin V program contain provisions to terminate our payment obligationswith 30 to 90 day notification.

 

|                         |   | **Payments Due By Period** |       |
|------------------------------|--------|----------------------------|------------|
| **Contractual  Obligations** |   | **Total**                  |       | **Less than 1  year** |   | **1-3 years** |   | **3-5 years** |   | **More than  5 years** |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Operating  Leases            |   | $                          | 476,000    |   | $ | 419,000 |   | $ | 57,000 |   | $ | — |   | $ | — |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Acquisition  Costs           |   | 12,000,000                 |       | 12,000,000 |   |   |   |   |   |   |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Other  long-term debt        |   | 3,345,000                  |       | 3,345,000 |   | — |   | — |   | — |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
|                         |   | $                          | 15,821,000 |   | $ | 15,764,000 |   | $ | 57,000 |   | $ | — |   | $ | — |   |

 

In May 2004, we completed our acquisition of NOMOS. Under the terms ofthe merger agreement, we issued approximately 5.3 million shares of commonstock and paid approximately $12 million in cash in exchange for all theoutstanding capital stock of NOMOS.  Asof April 30, 2004, we have incurred approximately $2.3 million inacquisition and integration related expenses. We estimate that we will incurapproximately $1.2 million in additional direct transaction costs in connectionwith the merger.

 

We believe our current cash and marketable securities will besufficient to support our operations and planned expansion for the foreseeablefuture.  However, the amount of capitalthat we will need in the future will depend on many factors including:

 

•                  Costsrelated to research, development, clinical trials, license fees, royaltyobligations, regulatory approvals and commercialization of our Hynic-Annexin Vproduct candidate and other product candidates;

 

•                  Levelsof sales and marketing that will be required to launch future products andachieve and maintain a competitive position in the marketplace for bothexisting and new products;

 

•                  Marketacceptance of our products;

 

•                  Levelsof inventory and accounts receivable that we maintain;

 

•                  Competitors’responses to our products;

 

•                  Levelof capital expenditures; and

 

•                  Integrationof NOMOS and/or acquisition or development of other complementary businesses,technologies or products.

 

We anticipate continuing significant expenses with respect to ourHynic-Annexin V product candidate over the next several years for clinicaltrials and development costs. We are unable to estimate with any certaintywhen, if ever, we will complete the development of our Hynic-Annexin V productcandidate or the final cost thereof. Significant milestone payments to third parties are payable throughoutthe life of

 

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the contracts associated with our licenses of patent rights oftechnology related to our Hynic-Annexin V product candidate.  We believe that successful completion and receiptof required regulatory approvals allowing marketing will not be earlier than2007, and additional related costs could be at least $50 million. We may nothave the financial resources to complete development and commercialization ofthe Hynic-Annexin V program.

 

We estimate that meaningful revenues from this product would commencewithin one year after our receipt of the required marketing approvals.

 

We expect that the costs related to our Hynic-Annexin V developmentprogram will continue to have a significant negative effect on our earnings,and therefore, on our liquidity and financial position.

 

We continue to evaluate, on an ongoing basis, strategic alternativesfor our Hynic-Annexin V product development program and are engaged inassessing various options with a view to optimizing stockholder value.

 

Future capital requirements will also depend on the extent to which weacquire or invest in other businesses, products and technologies.  If we should require additional financingdue to unanticipated developments, additional financing may not be availablewhen needed or, if available, we may not be able to obtain this financing onterms favorable to our stockholders or us. Insufficient funds may require us to delay, scale back or eliminate someor all of our research and development programs.  If additional funds are raised by issuing equity securities,dilution to existing stockholders would result.

 

**Recent Accounting Pronouncements**

 

In January 2003, FASB issued Interpretation No. 46 (“FIN 46”), Consolidationof Variable Interest Entities - an Interpretation of ARB No. 51.  TheInterpretation clarified the application of Accounting Research Bulletin No.51, Consolidated Financial Statements, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. The provisions of this Interpretation are effective for allenterprises with variable interest entities created after January 31,2003, and are required to be fully implemented no later than the third quarterof 2003. Theadoption of FIN 46 resulted in the our consolidation of PCA as a variableinterest entity.

 

In December 2003, the SEC issued SAB No. 104.  SAB No. 104revises or rescinds portions of the interpretive guidance included in Topic 13of the codification of staff accounting bulletins in order to make thisinterpretive guidance consistent with current authoritative accounting andauditing guidance and SEC rules and regulations.  It also rescinds theRevenue Recognition in Financial Statements Frequently Asked Questions andAnswers document issued in conjunction with Topic 13.  Selected portionsof that document have been incorporated into Topic 13.  We do not believethat SAB 104 will have a material impact on the our financial position, resultsof operations or cash flows.

 

In December 2003, the FASB revised Statement of FinancialAccounting Standards No. 132 (revised 2003), “Employers’ Disclosures aboutPensions and Other Postretirement Benefits” (“Revised Statement 132”). RevisedStatement 132 revises employers’ required disclosures about pension plans andother postretirement benefit plans. It does not change the measurement orrecognition of those plans required by FASB Statements No. 87, “Employers’Accounting for Pensions,” No. 88, “Employers’ Accounting

 

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for Settlements and Curtailments of Defined Benefit Pension Plans andfor Termination Benefits” and No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions” (“Statement 106”). RevisedStatement 132 requires disclosures in addition to those in the original FASBStatement No. 132. Revised Statement 132 is effective for financialstatements with fiscal years ending after December 15, 2003. Theinterim-period disclosures required by Revised Statement 132 are effective forinterim periods beginning after December 15, 2003. We do not believe thatRevised Statement 132 will have a material impact on the our financialposition, results of operations or cash flows.

 

In January 2004, the FASB issued Staff Position No. 106-1,“Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003” (“FSP 106-1”). FSP 106-1permits a sponsor of a postretirement health care plan that provides aprescription drug benefit to make a one-time election to defer accounting forthe effects of the Medicare Prescription Drug, Improvement and ModernizationAct of 2003 (“the Act”). FSP 106-1 also requires certain disclosures pendingfurther consideration of the underlying accounting issues. The guidance in FSP106-1 is effective for interim or annual financial statements with fiscal yearsending after December 7, 2003. We do not believe that FSP 106-1 will havea material impact on the our financial position, results of operations or cashflows.

 

In March 2004, the EITF reached a consensus on Issue 03-1, “TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments” (“EITF 03-1”). EITF 03-1 requires disclosures on investments in anunrealized loss position. The disclosures are designed to help financialstatement users analyze a company’s unrealized losses and to enable them tobetter understand the basis for any management conclusion that the impairmentis temporary. Quantitative and qualitative disclosures for investmentsaccounted for under FASB Statement No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” are effective for the first annualreporting period ending after December 15, 2003. All new disclosuresrelated to cost method investments are effective for the annual reporting periodsending after June 15, 2004. Comparative information for the periods priorto the period of initial application is not required. We do not believe thatEITF 03-1 will have a material impact on the our financial position, results ofoperations or cash flows. We do not believe that EITF 03-1 will have a materialimpact on the our financial position, results of operations or cash flows.

 

In April 2004, the FASB issued FASB Staff Position 129-1,“Disclosure Requirements under FASB Statement No. 129, Disclosure ofInformation about Capital Structure, Relating to Contingently ConvertibleFinancial Instruments,” (“FSP 129-1”). FSP 129-1 states that FASB Statement 129“Disclosure of Information about Capital Structure” (“Statement 129”) appliesto all contingently convertible securities, including those containingcontingent conversion requirements that have not been met and are not otherwiserequired to be included in the computation of diluted earnings per share inaccordance with FASB Statement No. 128, “Earnings per Share.”Paragraph 4 of Statement 129 requires the disclosure of significant termsof the conversion features of the contingently convertible security to enableusers of financial statements to understand the circumstances of thecontingency and the potential impact of conversion. Disclosures are to indicatewhether the shares that would be issued if the contingently convertiblesecurities were converted are included in the calculation of diluted earningsper share, and the reasons why or why not. The guidance in FSP 129-1 iseffective immediately upon posting of the final FSP 129-1 to the FASB websiteand applies to all existing and newly created securities. We do not believethat FSP 129-1 will have a material impact on the our financial position, resultsof operations or cash flows.

 

## **Item3.**                     Quantitativeand Qualitative Disclosures about Market Risk

 

Information about market risks for the three months endedApril 30, 2004, does not differ materially from that discussed under Item7A of the registrant’s Annual Report on Form 10-K for the fiscal year endedOctober 31, 2003.

 

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## **Item4.**                     Controls and Procedures

 

(a)  Evaluation of DisclosureControls and Procedures

 
| As required by Rule 13a-15(b) under  the Securities and Exchange Act of 1934 (the “Exchange Act”), we have carried  out an evaluation, under the supervision and with the participation of our  management, including our Chief Executive Officer (“CEO”) and our Interim  Chief Financial Officer (“CFO”), of the effectiveness, as of the end of the  fiscal quarter covered by this report, of the design and operation of our  “disclosure controls and procedures” as defined in Rule 13a-15(e)  promulgated by the SEC under the Exchange Act. Based upon that evaluation, our  CEO and our CFO concluded that our disclosure controls and procedures, as of  the end of such fiscal quarter, were adequate and effective to ensure that  information required to be disclosed by us in the reports that we file or  submit under the Exchange Act is recorded, processed, summarized and reported  within the time periods specified in the Commission’s rules and forms. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(b)  Changes in InternalControls

 
| There have been no significant changes in  our internal controls over financial reporting or in other factors that could  significantly affect our internal controls over financial reporting  subsequent to the date of the evaluation referred to above. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**PART II – OTHER INFORMATION**

 

The Company was not required to report theinformation pursuant to Items 1 through 6 of Part II of Form 10-Q except asfollows:

 

## **Item6.**                     Exhibits andReports on Form 8-K

 

(a)          Exhibits.

 
| **Exhibits  No.** |   | **Title** |
|-------------------|--------|-----------|
|              |   |      |
|              | 31.1   |      | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|              |   |      |   |
|              | 31.2   |      | Certification  of Interim Chief Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|              |   |      |   |
|              | 32.1   |      | Certification  of Chief Executive Officer and Interim Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

19

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(b) Reports onForm 8-K.

 

On February 6, 2004, we filed a report on Form 8-K to announce theresignation of Alan Edrick as our Senior Vice President and Chief FinancialOfficer, and the appointment of Erik Johnson as our Chief Accounting Officerand Interim Chief Financial Officer.

 

On February 27, 2004, we furnished a report on Form 8-K (date ofearliest event reported February 25, 2004) for the purpose of furnishingour press release and announcing our financial results for the quarter endedJanuary 31, 2004.

 

On March 5, 2004, we filed a report on Form 8-K (date of earliestevent reported March 2, 2004) to announce that we had entered into aSecond Amendment to the Agreement and Plan of Merger with NOMOS Corporation.

 

On March 22, 2004, we filed a report onForm 8-K to announce the signing of the Agency Agreement with NOMOSCorporation.

 

On April 30, 2004, we filed a report onForm 8-K (date of earliest event reported April 28, 2004) for the purposeof announcing the signing of The First Amendment to the Rights Agreement withU.S. Stock Transfer Corporation.

 

**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 theundersigned thereunto duly authorized.

 

 
|               | NORTH AMERICAN SCIENTIFIC, INC. |
|--------------------|---------------------------------|
|               |                            |   |
|               |                            |   |
| June 10, 2004 | By:                             | /s/ L. Michael Cutrer |   |
|               |                            | Name: | L. Michael Cutrer |
|               |                            | Title: | President and |
|               |                            |   | Chief Executive Officer |
|               |                            |   | (Principal Executive Officer) |
|               |                            |   |
|               |                            |   |
| June 10, 2004 | By:                             | /s/ Erik L. Johnson |   |
|               |                            | Name: | Erik L. Johnson |
|               |                            | Title: | Interim Chief Financial Officer and  Chief Accounting Officer (Principal  Financial and Accounting Officer) |
|                    |                                 |  |  |  |  |

 

20

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