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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
Commission File Number 0-26670
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NORTH AMERICAN SCIENTIFIC, INC.
(Name of small business issuer in its charter)
Delaware 51-0366422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20200 Sunburst Street, Chatsworth, CA 91311
(Address of principal executive offices)
(818) 734-8600
(Issuer's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share, together
with associated Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $5,839,000.
The number of shares of Registrant's Common Stock, $.01 par value,
outstanding as of January 11, 1999 was 6,787,975 shares. As of said date,
the aggregate market value of the voting stock held by non-affiliates of the
registrant (computed by reference to the closing sales price on such date)
was approximately $38,310,859.
Documents incorporated by reference: Proxy Statement for the Registrant's
1999 Annual Meeting of Stockholders, in Part III hereof.
Transitional Small Business Disclosure Format: Yes No X
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NORTH AMERICAN SCIENTIFIC, INC.
TABLE OF CONTENTS
FORM 10-KSB
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PAGE
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PART I
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ITEM 1 Description of Business . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. Description of Property . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . 15
ITEM 4A. Executive Officers of the Registrant. . . . . . . . . . . . . . 16
PART II
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ITEM 5. Market for Common Equity and Related Stockholder Matters . . . 16
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 17
ITEM 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . . 19-34
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . 35
PART III
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ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. . . . . . . 35
ITEM 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 35
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 12. Certain Relationships and Related Transactions. . . . . . . . . 35
ITEM 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 35
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Signatures
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ITEM 1. DESCRIPTION OF BUSINESS
CERTAIN MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-KSB ARE FORWARD
LOOKING AS THAT TERM IS DEFINED BY: (I) THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 (THE "1995 ACT") AND (II) RELEASES ISSUED BY THE SEC.
THESE STATEMENTS ARE BEING MADE PURSUANT TO THE PROVISIONS OF THE 1995 ACT
AND WITH THE INTENTION OF OBTAINING THE BENEFITS OF THE "SAFE HARBOR"
PROVISIONS OF THE 1995 ACT. THE COMPANY CAUTIONS INVESTORS THAT ANY FORWARD
LOOKING STATEMENTS MADE BY THE COMPANY ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, BUT NOT
LIMITED TO THE RISKS DETAILED HEREIN OR DETAILED FROM TIME TO TIME IN THE
COMPANY'S FILINGS WITH THE SEC.
Through its wholly-owned subsidiary North American Scientific, Inc., a
California corporation, North American Scientific, Inc., a Delaware
corporation (the "Company"), manufactures and markets a broad line of
low-level radiation sources and standards for medical, scientific and
industrial uses. The Company currently operates in two principal business
areas: (i) interstitial radioactive Iodine 125 ("I125") brachytherapy
sources, sometimes called "seeds", which are small, implantable radioactive
"pellets" used for the treatment of cancer and certain other diseases, and
(ii) radioactive "reference" sources, which are sealed devices containing
radioactive sources used to calibrate a variety of medical and commercial
equipment. The Company has been in the business of manufacturing radioactive
sources since 1990 and recently expanded its business strategy to include the
development of brachytherapy products. The Company has entered into
agreements with Mentor Corporation, a Delaware corporation ("Mentor"),
pursuant to which Mentor distributes I125 brachytherapy seeds, which are used
in the treatment of prostate cancer and which are manufactured by the
Company. Additionally, the Company has entered into a relationship with
RadioMed Corporation ("RadioMed"). The Company believes that RadioMed's
technology may prove useful by combining the Company's expertise in
radioactive source development with RadioMed's expertise in ion implantation
to identify and commercialize other novel medical products and services. In
addition, in October 1998 the Company entered into a letter of intent to
acquire Theseus Imaging Corp., a Delaware corporation ("Theseus"). Theseus is
a development stage company which has been engaged in the development of a
new generation of in vivo radiopharmaceutical imaging agents designed to
provide images that assess the biological responses of individual patients,
thereby guiding the selection of appropriate therapies in such diseases as
cancer, organ transplantation and inflammatory conditions. The Company was
originally incorporated under the Company Act of British Columbia, Canada, in
1987 and became a Delaware corporation on April 20, 1995.
INTERSTITIAL BRACHYTHERAPY SOURCE BUSINESS
In June 1997, the Company was granted 510(k) marketing approval from the U.S.
Food and Drug Administration ("FDA") for an I125 radioactive brachytherapy
source which is designed for use in the treatment of prostate cancer in a
brachytherapy procedure referred to as "seeding." In this brachytherapy
procedure, a number of radioactive sources (currently either I125 or
Palladium 103 ("Pd103")) are inserted into the prostate, using thin, hollow
needles, to treat cancerous prostatic tissue. Brachytherapy continues to gain
acceptance from the urological community as a safe and effective treatment
for patients with early stage prostate cancer. Also in June 1997, the
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Company entered into an exclusive worldwide sales and marketing relationship
with Mentor for its I125-based brachytherapy products for the treatment of
prostate cancer. On January 5, 1998, the Company and Mentor formally launched
the Company's brachytherapy product under the trade name of IoGold-TM-.
Mentor is a leading provider of urology products in the United States and
markets the product through its existing urology sales force, as well as
through brachytherapy specialists. The Company has filed for U.S. patent
protection on its brachytherapy product design.
Prostate cancer is the most prevalent form of cancer in men in the United
States. The American Cancer Society estimates that 317,000 new cases of
prostate cancer were diagnosed in the United States in 1996 and that in
excess of 40,000 deaths are attributable to prostate cancer each year. The
cost of medical treatment in the United States for patients with prostate
cancer is estimated to be approximately $3 billion annually. Currently, the
most common treatment for prostate cancer is radical prostatectomy ("RP"), an
invasive surgical procedure. Although effective, this therapy is costly
(estimated to cost between $20,000 and $30,000), generally requires a two or
three day hospital stay with several weeks of recovery time, and often
results in undesired side effects, such as impotence and incontinence. A
brachytherapy procedure, on the other hand, is estimated to cost
approximately $10,000 - $15,000, is performed on an outpatient basis under
local anesthesia with a two or three day recovery period, and has been shown
to have a considerably lower incidence of negative side effects.
The Company intends to expand its brachytherapy product line to include a
Pd103 -based brachytherapy seed intended for use in prostate and other
cancers, as well as radioactive, biocompatible devices for therapeutic
applications. In July 1998, the Company was granted 510(k) marketing
approval for its Pd103 -based brachytherapy seed.
MENTOR RELATIONSHIP
Mentor, a publicly traded company (NMS - "MNTR"), is based in Minneapolis,
Minnesota. According to Mentor's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998, Mentor had total sales for that year of $215.3
million. On June 16, 1997, the Company entered into an exclusive worldwide
distribution agreement with Mentor to market and sell I125 brachytherapy
sources for the treatment of prostate cancer, which are marketed by Mentor
under its trade name IoGold-TM-. Under the terms of the five-year agreement,
Mentor is responsible for all sales and marketing activities, including the
education and training of urologists, radiation oncologists and other
personnel involved in the use of brachytherapy seeds. The Company
manufactures and ships the brachytherapy seeds in exchange for a fixed
percentage of the sales price received by Mentor, subject to an agreed upon
minimum transfer price.
The Company believes that the alliance with Mentor will provide for
accelerated market penetration and increased sales of I125 brachytherapy
sources without the need for developing a comprehensive sales, marketing and
product training staff, while allowing the Company to focus on the
manufacturing and development of additional brachytherapy products and other
radioactive source materials. The Company is developing additional
brachytherapy sources utilizing different isotopes, including Pd103. Under
the terms of the alliance, Mentor has begun negotiations with the Company
with respect to the distribution of Pd103 brachytherapy seeds. If the
Company and Mentor are successful in negotiating terms on Pd103 brachytherapy
sources, the Company believes Mentor will hold a significant marketing
advantage over other radioactive seed distributors due to the breadth of its
product line. The Company believes Mentor is the preferred distribution
partner due to Mentor's reputation in the marketplace as a knowledgeable
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urology distribution organization. Mentor currently distributes a broad line
of urology products through its dedicated sales force which targets
urologists and radiation oncologists for the brachytherapy line.
PRACSYS RELATIONSHIP
On February 6, 1998, the Company entered into agreements with PracSys Corp.,
a privately held Massachusetts corporation ("PracSys"), pursuant to which (i)
PracSys will manufacture and sell to the Company two particle accelerators
(the "Systems") to be used in the production of Pd103 as well as other
isotopes, and (ii) PracSys will operate the Systems to produce required
isotopes for an initial two-year period that is renewable at the Company's
election. In addition to fixed payments for the Systems, PracSys will
receive a fee for operating the systems and also will be entitled to a
"royalty" on the Company's sales of these products which incorporate isotopes
produced using the Systems.
In addition, the Company and PracSys entered into an Exclusivity and Purchase
Agreement pursuant to which the Company was granted certain exclusivity
rights with regard to the PracSys technology.
RADIATION CALIBRATION AND REFERENCE SOURCE BUSINESS
Radioactivity is a natural physical property. Each radioactive isotope
("radioisotope") radiates energy characteristic to that specific isotope.
Radiation detection instruments monitor the emitted radiation from a given
sample (i.e., soil, air, water, etc.) to identify and quantify the
radioisotopes present in that sample. In order to determine a particular
instrument's efficiency, an accurately measured and contained amount of a
radioactive isotope is required to serve as a calibration reference standard.
Each type of sample being monitored by an instrument typically requires a
radiation source standard of identical form and geometry to the sample.
The Company's principal products in this business are its radiation sources
and standards, which are used in a variety of areas for calibration,
measurement, analysis and control.
a. STANDARDS FOR NUCLEAR MEDICINE
Nuclear medicine is practiced at over 5,000 U.S. hospitals. Consistent
performance of imaging and calibration instrumentation is crucial to
successful diagnostic and patient management and cannot be maintained without
extensive calibration programs. The Company supplies many of the required
types of calibration standards.
b. STANDARDS FOR CALIBRATION AND REFERENCE
The Company manufactures both catalog products and customized products for
commercial laboratories serving the environmental sector. Calibration
standards are critical for accurate environmental analysis of unknown samples
collected in the field. Moreover, the Company's products have a variety of
industrial uses, ranging from measuring the thickness of materials and
gauging fluid levels to electronics stabilization and calibration.
The Company makes standards available to various organizations, including
certain government agency contractors and laboratories. These standards are
often designed to meet special requirements, customized configurations or
special processing services.
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The Company's commercial customers include federal and state governmental
agencies, leading medical equipment manufacturers and nuclear utilities, and
private organizations. The Company's radiation sources are sold through a
select group of representatives and distributors in North America, Europe and
the Far East. The Company supports its products with a full product catalog,
advertising and telemarketing and through trade shows. The Company engages
in direct selling to end users and also sells to equipment manufacturers for
inclusion in their product lines.
Radioisotopes are purchased from government or commercial facilities around
the world or are manufactured by irradiation of target materials at
commercially available sites. The Company often processes and purifies these
isotopes in its laboratories. Once purified, these materials are further
processed, contained and calibrated by the Company.
RADIOMED RELATIONSHIP
On October 7, 1997, the Company and RadioMed entered into a strategic
alliance which created the first entity in North America intended to provide
ion implantation of radioisotopes in commercially viable quantities.
RadioMed is a privately-held company which was organized to specialize in ion
implantation of radioactive elements into therapeutic devices for the
delivery of site-specific, low level radiation.
RadioMed's proprietary technology allows for the implantation of a
radioactive element into virtually any substrate. A substrate is "activated"
by implanting charged, radioactive elements which have been accelerated to
speeds capable of penetrating the surface of the substrate, thereby fixing
the radioactive element at the molecular level. Nonradioactive ion
implantation is currently used to create hybrid materials for a variety of
medical, commercial and industrial applications. Radiation has long been
used as a therapy to control rapidly proliferating cells, such as cancer.
However, the inability to effectively administer radiation to a specific area
and thereby control the amount of tissue destroyed has limited its
therapeutic applications. With the recent advances in site-specific drug
delivery technologies, many companies are evaluating the possibility of
developing medical devices using radiation therapy. Management believes that
certain disease conditions (e.g., restenosis and certain localized cancers)
may best be treated by implantable, biocompatible radioactive devices and
that RadioMed's proprietary ion implantation capabilities may provide a
superior platform from which to develop novel, site-specific radiation
therapy products. The alliance requires the Company to perform and oversee
the ion implantation services and to receive payments from RadioMed for all
such services.
THESEUS TRANSACTION
In October 1998, the Company signed a letter of intent to acquire Theseus.
Theseus was established to develop and commercialize nuclear medicine
diagnostic agents useful in imaging the response in therapeutic
interventions. The aggregate consideration to be paid by the Company in the
merger is $3,000,000, payable at the Company's option in cash, stock, or a
combination thereof. As of January 1999, Theseus is developing two products,
Apomate-TM- and Leukomate-TM-, using technology which is the subject of third
party license agreements.
Pending completion of the transaction, the Company anticipates advancing
Theseus up to $3.5 million in operating funds to be used to complete phase II
activities for Apomate-TM- and
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Leukomate-TM-, and for other operating and research purposes. Advances made
prior to closing will be in the form of convertible notes secured by Theseus'
intellectual property.
Apomate-TM- is a product that allows imaging of cellular apoptosis in
treated tumors, autoimmune disease and organ transplant rejection in a living
body. Apoptosis is a type of death cells undergo after chemotherapy or
radiation treatment, and due to autoimmune disease or organ transplant
rejection. Apomate-TM- presents an opportunity to replace the use of tissue
biopsies with a noninvasive imaging procedure to diagnose the effectiveness
of treatment. Cancer patients who are responding to treatment are expected to
show an increased uptake of Apomate-TM-. Organ transplant patients who are
experiencing transplanted organ rejection also are expected to show an
increased uptake of Apomate-TM-. Apomate-TM- therefore offers opportunities
to aid clinicians in the selection of effective treatments for cancer and
organ transplantation.
As of October 1998, breast cancer, non-small cell lung cancer, ENT cancer,
lymphoma and acute cardiac transplant rejection were identified as target
applications for Apomate-TM-. Apomate-TM- is the subject of an FDA-approved
Drug Master File. Theseus is proceeding to make Apomate-TM- under Good
Manufacturing Practice guidelines for Phase II and Phase III clinical trials.
Leukomate-TM- is a product that allows for the tracking of activated white
blood cell distribution to areas of inflammation and injury in a living body.
Inflammation may occur due to disease such as diseases of the bowel,
obstruction of coronary or cerebral arteries resulting in "hot spots", or
physical injury to the human body. Leukomate-TM- therefore offers
opportunities in managing therapy for acute and chronic inflammation.
As of October 1998, noninfectious enteritis and colitis, intestinal
diverticulitis, acute myocardial infarction, appendicitis, and occult
infection were identified as target applications for Leukomate-TM-. A draft
Investigational New Drug application has been prepared for Leukomate-TM-.
GOVERNMENT REGULATION
FDA REGULATION
The manufacture and sale of the Company's products are subject to stringent
government regulation in the U.S. and other countries. The FDA and other
governmental approval and clearances are subject to continual review, and
later discovery of previously unknown problems may result in restrictions on
a product's marketing, or withdrawal of the product from the market. The
commercial distribution in the U.S. of any new products developed by the
Company will be dependent upon obtaining the prior approval or clearance of
the FDA, which can take many years and entail significant costs. The Company
has received 510(k) marketing approval from the FDA for the I125 product and
with respect to a Pd103-based brachytherapy seed. In countries where the
Company's products are not currently approved, the use or sale of the
Company's products may require approval by government agencies comparable to
the FDA. The process of obtaining such approvals may be lengthy, expensive
and uncertain. The Company is also required to adhere to applicable FDA
regulations for current Good Manufacturing Practices ("GMP"), including
extensive record keeping and reporting and periodic inspections of its
manufacturing facilities. Similar requirements are imposed by foreign
governmental agencies.
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NRC AND CALIFORNIA DEPARTMENT OF HEALTH
The Company's manufacturing operations involve the manufacturing and
processing of radioactive materials, which are subject to stringent
regulation. The Company operates under a license issued by the California
Department of Health which is renewable every eight years. The Company has
recently received a renewal of its license for its North Hollywood facility
and expects to be issued a license for its new Chatsworth facility at the
appropriate time. California is one of the "Agreement States" which are so
named because the Nuclear Regulatory Commission ("NRC") has granted such
states regulatory authority over radioactive material manufacturers provided
such states have regulatory standards meeting or exceeding the standards
imposed by the NRC. Most users of the Company's products are required to
possess licenses issued by the state in which they reside (if they are
Agreement States) or the NRC. Use licenses are also required by some of the
foreign jurisdictions in which the Company may seek to market its products.
COMPETITION
The Company's brachytherapy business is subject to intense competition. The
Company's competitors in its brachytherapy seed business include Nycomed
Amersham PLC, which manufactures and sells I125 brachytherapy sources, and
Theragenics Corporation, which manufacturers and sells Pd103 brachytherapy
sources through a sales and marketing relationship with Indigo Medical, Inc.,
a subsidiary of Johnson & Johnson. In addition to competition from other
manufacturers of I125-based products which currently exist and new entrants
into the market, other products using alternative technologies may continue
to be developed which will compete with the Company's brachytherapy products.
The radiation reference source business is also subject to intense
competition. The Company's competitors in this industry include AEA
Technology PLC and Dupont. The Company believes that these companies have a
dominant position in the market for radiation reference source products.
The Company believes that it competes favorably in its targeted markets with
these and its other competitors on the basis of price, diversity of product
line, customer service, quality and delivery time.
RESEARCH AND DEVELOPMENT
The Company's research and development expenses were $196,000 and $72,000 for
the fiscal years ended October 31, 1998 and 1997, respectively. During the
1998 fiscal year, the Company devoted significant time and effort to its I125
brachytherapy and proposed Pd103 line of products, including necessary
facility expansion. During fiscal 1999, the Company expects to continue to
focus research and development efforts in its medical therapeutics business
as well as its radiation reference source business.
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PATENTS AND PROPRIETARY TECHNOLOGY
The Company holds rights to an issued U.S. patent on a radioisotope-based
device for site localization during biopsy procedures. The Company has also
filed for patent protection on its radioactive brachytherapy source design.
The Company also relies to a significant degree on trade secrets, proprietary
know-how and technological advances that are either not patentable or that
the Company chooses not to patent. The Company seeks to protect non-patented
proprietary information, in part, by confidentiality agreements with
suppliers, employees and consultants.
EMPLOYEES
As of January 11, 1999, the Company had a total of 35 employees. Of that
number, 21 employees are engaged in manufacturing, five employees are in
quality assurance, two employees are in sales and marketing and seven
employees are in finance and administrative positions. None of the Company's
employees are represented by a labor union. The Company has experienced no
work stoppages and believes that its employee relations are good.
BUSINESS -- RISK FACTORS
EARLY STAGE OF PRODUCT COMMERCIALIZATION
Certain of the Company's products are in an early stage of development and
commercialization. The Company's core business historically has involved the
manufacture and distribution of low-level radiation sources and reference
standards for use in medical imaging, environmental measurement and
instrument calibration procedures. However, the Company has recently
broadened its line of products to include products involved in medical
therapeutics. In particular, the Company expects future revenues to be
generated from sales of its existing I125 and proposed Pd103 brachytherapy
sources, both of which have received 510(k) clearance from the FDA. I125 is
being marketed to physicians by Mentor under Mentor's trade name IoGold-TM-,
and is being used by physicians for the treatment of prostate cancer. The
Company received FDA approval for the Pd103 brachytherapy product on July 2,
1998. The success of the IoGold-TM- product will be dependent, to a large
extent, on the efforts of Mentor, which is the exclusive worldwide
distributor of the product. The Company's long-term growth may be
significantly affected by whether it and its partners will be able to
successfully market and distribute the existing I125 brachytherapy product,
or other similar products the Company may develop, to a large portion of the
medical community. The timeframe necessary to accomplish this objective may
be long and uncertain, and the development and production of additional
medical therapeutic products, including products utilizing Pd103, may require
even longer development and clinical trial periods than the Company has
experienced with the I125 brachytherapy product. There can be no assurance
that the Company's products in development will prove to be safe and
effective in clinical trials under applicable regulatory guidelines, and
clinical trials may identify significant technical or other obstacles that
must be overcome prior to obtaining necessary regulatory or reimbursement
approvals. There can be no assurance that the Company will be able to
manufacture a Pd103 brachytherapy product at an acceptable cost and
appropriate quality, that the Company will be able to develop other new
products, obtain regulatory approval for such products in a cost-effective
manner or that the Company will be able to increase sales in its target
markets. Any failure by the Company to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
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DEPENDENCE ON MARKETING ALLIANCE
The Company has only limited experience marketing and selling its
products. On June 16, 1997, the Company entered into a five-year marketing
and exclusive distribution agreement with Mentor, pursuant to which Mentor
markets and distributes the Company's I125 brachytherapy product under
Mentor's trade name IoGold-TM-. As a result, sales of the I125 brachytherapy
product are dependent on the marketing efforts of Mentor. Mentor is
marketing IoGold-TM- through brachytherapy specialists as well as through its
established sales force, which is currently dedicated to sales of Mentor's
existing urology product line. This sales force intends to market the
product to urologists and radiation oncologists on a worldwide basis. In
addition, Mentor also intends to be actively involved in the education and
training of physicians in the procedures for the use of IoGold-TM-. Since
the introduction of the product, the Company has derived significant revenues
from the sales of IoGold-TM-, and it expects that sales of IoGold-TM- will
continue to constitute a significant percentage of its net sales in the
foreseeable future. Any failure by Mentor to successfully market IoGold-TM-
or other products that are manufactured by the Company and distributed by
Mentor, or to successfully educate and/or train physicians in the use of the
product, could have a material adverse effect on the Company's sales of
IoGold-TM- and consequently on the business, operating results and financial
condition of the Company. Subject to agreement on applicable terms, Mentor
also will have the exclusive marketing and distribution rights to the
Company's Pd103 -based brachytherapy seeds. However, the Pd103 product is
under development and no revenues have been received from its sale.
If the Company does not maintain its relationship with Mentor, or if the
Company introduces new products for which Mentor does not act as the
distributor, the Company may need to develop third party distribution
channels and/or its own direct sales force, which could be time consuming and
require significant resources, and there can be no assurance that the Company
would be successful. The Company's failure to do so could have a material
adverse effect upon its business, operating results and financial condition.
In the event that Mentor fails to achieve certain performance targets in
specified territories, the Company may terminate Mentor's exclusive
distribution rights in such territory or territories, in which case Mentor
may have the right to independently manufacture and distribute a I125 -based
brachytherapy product. The loss of the Mentor relationship could also result
in the Company's inability to market its I125 brachytherapy products under
the IoGold-TM- trade name. Any such inability could also have a material
adverse effect on the Company's business, operating results and financial
condition.
UNCERTAINTY OF MARKET ACCEPTANCE OF BRACHYTHERAPY SOURCES
Ultrasound guided transperineal seeding, currently the most prevalent seeding
technique practiced by physicians, is a relatively new treatment method for
prostate cancer which currently has a lower level of market penetration than
RP. There can be no assurance that brachytherapy will gain significant market
acceptance among physicians, patients and health care payors. The success of
the Company's existing I125 and proposed Pd103 brachytherapy products will
depend on maintaining and increasing favorable perceptions by patients,
doctors, health care payors and medical researchers regarding the safety,
efficacy and cost effectiveness of the product. Management believes that
recommendations by physicians and health care payors will be essential to
increase market acceptance of seeding, and there can be no assurance that any
such recommendations will be obtained. Physicians in the U.S. or elsewhere
will not recommend seeding unless they individually conclude, based on
clinical data and other factors, that it is an
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attractive alternative to traditional methods of prostate cancer treatment,
of which RP and external beam radiation therapy ("EBRT") are the most
commonly used. RP has a long history as the treatment of choice for
early-stage, localized prostate cancer, and many physicians have been trained
in this procedure. EBRT has experienced some negative results, which could
create an unfavorable public perception of radiation treatment for prostate
cancer in general, and could adversely affect public acceptance of seeding.
In addition, although Mentor has been granted worldwide distribution rights
to the Company's I125 brachytherapy sources to be marketed under Mentor's
trade name IoGold-TM-, physicians in many countries, including most European
countries, do not currently aggressively treat prostate cancer. The failure
of the brachytherapy technique in general, or of IoGold-TM- in particular, to
gain acceptance among physicians, patients and/or health care payors in the
U.S. or elsewhere could have a material adverse effect on the business,
operating results and financial condition of the Company.
MARKET PRICE FLUCTUATIONS
The Company has recently experienced significant variability in the market
price and the trading volume of its Common Stock. In addition, the
securities markets from time to time experience significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Announcements of delays in the Company's testing and development
schedules, technological innovations or new product introductions by the
Company or its competitors, developments or disputes concerning patents or
proprietary rights, regulatory developments in the U.S. and foreign
countries, public concern as to the safety of products containing radioactive
compounds, and economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Common Stock and the Company
may experience further volatility in the market price and trading volume of
the Common Stock.
MANAGEMENT OF GROWTH
The Company's business has grown significantly over the past several years.
However, there can be no assurance that the Company will continue to grow.
If growth does occur, there can be no assurance the Company will be effective
in managing such future growth, in expanding its facilities and operations or
in retaining additional qualified personnel. In particular, the Company has
significantly increased its production capacity in order to produce
brachytherapy products. This expansion of production capacity has included
the leasing of a new production facility and a significant increase in the
number of employees dedicated to that production. Furthermore, pursuant to
the Company's agreements with RadioMed, the Company has established an ion
implantation facility at the Company's North Hollywood, California location.
Any failure to effectively manage growth, expand its operations or attract
and retain qualified personnel to meet such growth could have a material
adverse effect on the Company's business, operating results and financial
condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's results of operations have historically varied from quarter to
quarter and the Company expects that further variability may continue to
occur and may be significant. In the past, operating results have varied as
a result of a number of factors, including the size and timing of customer
orders, the timing of the introduction and customer acceptance of new
products or product enhancements by the Company or its competitors, changes
in pricing
9
<PAGE>
policies by the Company or its competitors, research and development
expenditures, certain non-operational expenses and changes in general
economic conditions. Future variability in the Company's results of
operations may result from the changes in the Company's business disclosed in
this Annual Report on Form 10-KSB, in particular due to continued sales of
IoGold-TM-, and any future sales of a Pd103 - based product, through the
Company's relationship with Mentor.
COMPETITION
The radiation source industry is highly competitive. The Company competes
with several national and international companies which are substantially
larger and have greater technical, sales, marketing and financial resources
than the Company. The Company has no experience in human therapeutic
products and competes against companies with greater experience in this
sector. Developments by any of these companies or advances by medical
researchers at universities, government research facilities or private
research laboratories could render the Company's products obsolete.
Furthermore, since the introduction of IoGold-TM-certain companies have
announced their intention to develop I125 brachytherapy products. If demand
for treatment of prostate cancer increases, additional companies with
substantially greater financial resources than the Company, as well as more
extensive experience in research and development, the regulatory approval
process and manufacturing and marketing, may develop seeding treatments and
products that are similar to the Company's I125 brachytherapy products. There
can be no assurance that such future competition will not have a material
adverse effect on the Company's business, operating results and financial
condition. In addition to competition from other manufacturers of I125 based
products, products using alternative technologies, including Pd103, may
continue to be developed which will compete with the Company's existing and
proposed products.
DEPENDENCE ON KEY CUSTOMERS
Two of the Company's customers accounted for 62% of the Company's total
revenues in the 1998 fiscal year. Significant customers may continue to
account for a substantial percentage of the Company's sales in both its
reference source and brachytherapy source businesses in the future. In
particular, the Company expects that Mentor will continue to be a significant
customer in the future through the distribution of the IoGold-TM- product.
There can be no assurance that any such customers will maintain their volume
of business with the Company. A loss of the Company's sales to such customers
could have a material adverse effect on the Company's business, operating
results and financial condition.
EFFECT OF REIMBURSEMENT POLICIES
A substantial percentage of the patients treated for prostate cancer in the
U.S. are covered by Medicare and, consequently, the costs of prostate cancer
treatment are subject to Medicare's prescribed rates of reimbursement.
Medicare reimbursement amounts for seeding are currently significantly less
than for RP. Although seeding requires less physician time than RP,
reimbursement amounts, when combined with physician familiarity with RP, may
provide disincentives for urologists to perform seeding. There can be no
assurance that (i) current or future limitations or requirements for
reimbursement by Medicare or other third party payors for prostate cancer
treatment will not materially adversely affect the market for the IoGold-TM-
product, (ii) health administration authorities outside the U.S. will provide
reimbursement at
10
<PAGE>
acceptable levels or at all or (iii) any such reimbursement will continue at
rates that enable the Company to maintain prices at levels sufficient to
realize an appropriate return. The non-occurrence of any such factors could
have a material adverse effect on the business, operating results and
financial condition of the Company.
GOVERNMENT REGULATION
The manufacture, sale and distribution of the Company's products are subject
to stringent government regulation. U.S. and foreign governmental approvals
and clearances can take many years, entail significant costs, and be subject
to continual review, and later discovery of previously unknown problems may
result in restrictions on a product's marketing or withdrawal of the product
from the market. Thus, the process of obtaining such approvals may be
lengthy, expensive and uncertain. There can be no assurance that the
necessary approvals for the marketing of the Company's products in other
markets will be obtained on a timely basis or at all. The Company is also
required to adhere to applicable FDA and foreign regulations for current Good
Manufacturing Practices ("GMP"), including extensive record keeping and
reporting and periodic inspections of its manufacturing facilities.
The Company's manufacturing operations are subject to stringent regulation.
The Company operates under a license issued by the California Department of
Health which is renewable every eight years The Company has recently received
a renewal of its license on its North Hollywood facility and expects to be
issued a license for its new Chatsworth facility at the appropriate time. Use
licenses are also required by some of the foreign jurisdictions in which the
Company may seek to market its products. There can be no assurance that
current licenses held by the Company for its manufacturing operations will
remain in force or that additional licenses required for the Company's
operations will be issued. There also can be no assurance that the Company's
customers will receive or retain the radioactive materials licenses required
to possess and use the Company's products, or that delays in the granting of
such licenses will not hinder the Company's ability to market its products.
Requirements imposed by government regulation result in greater financial
costs and uncertainty associated with the disposal of radioactive waste.
There can be no assurance that the imposition of such requirements and the
costs and regulatory restrictions associated with disposal of waste will not
adversely affect the Company's business, operating results and financial
condition.
Any failure to obtain and maintain regulatory approvals, licenses and permits
could significantly delay the Company's marketing efforts. Furthermore,
changes in or interpretations of existing regulations, or the adoption of new
restrictive regulations, could adversely affect either the obtaining or
timing of future regulatory approvals. Failure to comply with applicable
regulatory requirements could result in, among other things, significant
fines, suspension of approvals, seizures or recalls of products, operating
restrictions or criminal prosecution and could materially adversely affect
the Company's business, operating results and financial condition.
NEED FOR FUTURE CAPITAL
The Company's capital requirements have been and are expected to continue to
be significant. In particular, significant funds have been and will continue
to be necessary to fund expansion of the IoGold-TM- product and to set up a
manufacturing capability for the production of ion implantation devices
pursuant to the Company's manufacturing and supply agreement with RadioMed.
In addition, significant funds are also expected to be required to fund the
establishment of
11
<PAGE>
production capacity for Pd103 seeds. Management believes the Company's
existing capital resources and future operating cash flows will be sufficient
to fund the Company's planned expansion over the next 24 months. However,
the Company may require further capital for the purchase of complementary
businesses, technologies or products. The Company's capital requirements
will depend on numerous factors, including the time and cost involved in
expanding production capacity, the cost involved in protecting the
proprietary rights of the Company and the time and expense involved in
obtaining required regulatory approval to market IoGold-TM- in new markets or
similar approvals for new products, including Pd103-based products, the
Company may develop.
INTELLECTUAL PROPERTY RIGHTS; DEPENDENCE ON TRADE SECRETS
The Company's success will depend, in part, on its ability to obtain, assert
and defend patent rights, protect trade secrets and operate without
infringing the proprietary rights of others. There can be no assurance that
rights under patents held by, or licensed to, the Company will provide it
with competitive advantages or that others will not independently develop
similar products or design around or infringe the patents or other
proprietary rights owned by or licensed to the Company. In addition, there
can be no assurance that any patent obtained or licensed by the Company will
be held to be valid and enforceable if challenged by another party.
There can be no assurance that patents have not been issued or will not be
issued in the future that conflict with the Company's patent rights or
prevent the Company from marketing its products. Such conflicts could result
in a rejection of the Company's or its licensors' patent applications or the
invalidation of patents, which could have a material adverse effect on the
Company's business, operating results and financial condition. In the event
of such conflicts, or in the event the Company believes that competitive
products infringe patents to which the Company holds rights, the Company may
pursue patent infringement litigation or interference proceedings against, or
may be required to defend against litigation or proceedings involving,
holders of such conflicting patents or competing products. There can be no
assurance that the Company will be successful in any such litigation or
proceeding, and the results and cost of such litigation or proceeding may
materially adversely affect the Company's business, operating results and
financial condition. In addition, if patents that contain dominating or
conflicting claims have been or are subsequently issued to others, and such
claims are ultimately determined to be valid, the Company may be required to
obtain licenses under patents or other proprietary rights of others. No
assurance can be given that any licenses required under any such patents or
proprietary rights would be made available on terms acceptable to the
Company, if at all. If the Company does not obtain such licenses, it could
encounter delays or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed.
The Company relies to a significant degree on trade secrets, proprietary
know-how and technological advances that are either not patentable or that
the Company chooses not to patent. The Company seeks to protect non-patented
proprietary information, in part, by confidentiality agreements with
suppliers, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others. The disclosure to third parties of proprietary non-patented
information could have a material adverse effect on the Company's business,
operating results and financial condition.
12
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent on the personal efforts of
key technical and senior management personnel, principally L. Michael Cutrer,
its President and Chief Executive Officer. The Company does not have an
employment agreement with Mr. Cutrer. The Company believes that its future
success will depend in large part upon its ability to attract and retain
highly-skilled technical, managerial and marketing personnel and is likely to
require the further expansion of its management level personnel. Competition
for radiation source industry personnel can be intense, and the availability
of capable personnel may be limited; thus, their services could be difficult
to obtain or replace. There can be no assurance that the Company will be
successful in attracting and retaining the personnel it requires to develop
and market new and enhanced products and to conduct its operations
successfully. Any inability to attract and retain such personnel could have
a material adverse effect on the Company's business, operating results and
financial condition.
RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company's success depends on its ability to
continue to enhance its existing product lines, to develop and introduce in a
timely manner new products that take advantage of technological advances and
to respond promptly to customers' requirements. There can be no assurance
that the Company's current level and scope of research and development
spending will be adequate, that the Company will be successful in developing
and marketing enhancements to its existing products or new products on a
timely basis, or that its new products will adequately address the changing
needs of the marketplace. Failure by the Company in any of these areas could
materially and adversely affect the Company's business, operating results and
financial condition.
LIMITED NUMBER OF SUPPLIERS
The Company is dependent upon a limited number of outside unaffiliated
suppliers for its radioisotopes. The Company's principal suppliers are
Nordion International, Inc. and the Los Alamos National Laboratory. The
Company also utilizes overseas isotope manufacturers. To date, the Company
has generally been able to obtain the required radioisotopes for its products
as needed. The Company believes that it will be able to continue to obtain
required radioisotopes from these or other sources, although there can be no
assurance thereof. The delay or unavailability of radioisotopes could have a
material adverse effect on the Company's production and sales levels and
consequently upon its business, operating results and financial condition.
PRODUCTS LIABILITY; INSURANCE COVERAGE
The Company's business is subject to product liability risks inherent in the
testing, manufacturing and marketing of products containing radioisotopes. To
date, no product liability claims have been asserted against the Company.
However, there can be no assurance that such claims will not arise in the
future based on past, present or future services or products offered by the
Company. The Company maintains product liability and general liability
insurance. The Company's product liability and general liability policy is
provided on a claims made basis and is subject to annual renewal. There can
be no assurance that liability claims will not exceed the
13
<PAGE>
scope of coverage or limits of such policies or that such insurance will
continue to be available on commercially reasonable terms or at all. If the
Company does not or cannot maintain sufficient liability insurance, its
ability to market its products may be significantly impaired. In addition,
product liability claims, as well as negative publicity arising out of such
claims, could have a material adverse effect on the business, operating
results and financial condition of the Company.
HAZARDOUS MATERIALS
The Company's manufacturing processes and research and development efforts
involve the controlled use of hazardous materials. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any such
liability could have a material adverse effect on the Company's business,
operating results and financial condition.
UNCERTAINTY RELATED TO HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. The Company anticipates
that Congress, state legislatures and the private sector will continue to
review and assess alternative health care delivery and payment systems.
Potential approaches that have been considered include mandated basic health
care benefits, controls on health care spending through limitations on the
growth of private purchasing groups, price controls and other fundamental
changes to the health care delivery system. Legislative debate is expected
to continue in the future, and market forces are expected to demand reduced
costs. The Company cannot predict what impact the adoption of any federal or
state health care reform measures, future private sector reform or market
forces may have on its business, operating results and financial condition.
EFFECT OF CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS; AUTHORIZATION AND
DISCRETIONARY ISSUANCE OF PREFERRED STOCK
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could delay the removal of incumbent directors and could make more difficult
a merger, tender offer or proxy contest involving the Company, even if such
events would be beneficial to the interests of the stockholders. For
example, the Company is currently authorized to issue 2,000,000 shares of
Preferred Stock, par value $0.01 per share ("Preferred Stock"), without any
vote or further action by the Company's stockholders. The Preferred Stock,
no shares of which are currently outstanding, is issuable in one or more
series with such rights, preferences, maturity dates and similar matters as
the Board of Directors of the Company may from time to time determine. The
Company is also subject to Section 203 of the Delaware General Corporation
law which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in a broad range of business ventures with any "interested
stockholder" for a period of three years from the date such stockholder
became an interested stockholder.
14
<PAGE>
YEAR 2000 COMPLIANCE.
Based on a recent assessment, the Company believes that it will not be
required to modify or replace significant portions of its software in order
to address its Year 2000 issue. The Company has initiated formal
communications with its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to those third
parties' failure to remediate their Year 2000 issue. The Company has so far
received no indication that its, or any material third party's, systems will
not be Year 2000 compliant. In addition, the cost to the Company of its Year
2000 compliance program have not been, and are not expected to be, material.
Consequently, the Company does not expect the Year 2000 issue to be material
to the Company. However, there can be no assurance that the systems of other
companies will be converted timely, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems
would not have a material adverse effect on the Company.
Item 2. DESCRIPTION OF PROPERTY
The Company currently occupies approximately 16,200 square feet of office,
manufacturing, engineering, warehouse, and research and development
laboratory space in North Hollywood, California. The property is subject to a
three-year lease that expires on December 31, 2001.
In addition, the Company occupies approximately 24,000 square feet of space
in Chatsworth, California which the Company intends to utilize for similar
purposes. The term of the lease is five years and expires in November 2003.
The Company has an option to extend the lease for an additional five-year
term.
The Company believes its manufacturing and distribution facilities are
adequate, suitable and of sufficient capacity to support its current
operations.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended October 31, 1998.
15
<PAGE>
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Irwin J. Gruverman 65 Chairman
L. Michael Cutrer 43 President and
Chief Executive Officer
Alan I. Edrick 31 Chief Financial Officer
</TABLE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market (the
"Nasdaq NMS") under the symbol "NASI" since February 12, 1998. Prior to that
time, the Company's Common Stock was traded on the Nasdaq OTC Bulletin Board
under the same symbol. The following table sets forth the high and low
closing prices for the Common Stock during the periods indicated.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter $ 1.88 $ 1.25
Second Quarter $ 2.30 $ 1.08
Third Quarter $ 5.42 $ 2.42
Fourth Quarter $ 16.83 $ 5.08
<CAPTION>
FISCAL 1998
-----------
<S> <C> <C>
First Quarter $ 16.33 $ 12.50
Second Quarter $ 25.58 $ 15.53
Third Quarter $ 30.50 $ 12.25
Fourth Quarter $ 12.00 $ 3.94
</TABLE>
On April 30, 1998, the Company announced a three-for-two stock split in the
form of a common stock dividend, which was distributed to stockholders of
record on April 20, 1998. All share data and numbers of common shares
contained in this Form 10-KSB have been retroactively adjusted to reflect the
stock split.
As of January 11, 1999, the Company had approximately 69 record holders and
estimates that it had approximately 2,250 beneficial owners of it's Common
stock.
The Company has never paid cash dividends on its Common Stock and does not
expect to declare or pay any cash dividends in the foreseeable future.
16
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANLYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements contained herein and the notes thereto
RESULTS OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
NET SALES. Net sales increased $2,458,000, or 73%, to $5,839,000 for the
year ended October 31, 1998 from $3,381,000 for the year ended October 31,
1997. The increase in net sales was primarily due to the inclusion of
revenues from the brachytherapy source product line, which was introduced in
January 1998.
GROSS PROFIT. Gross profit increased $1,622,000 or 106% to $3,159,000 for
the year ended October 31, 1998 from $1,537,000 for the year ended October
31, 1997. Gross profit as a percentage of sales increased from 45% to 54%
during this period. The increase in gross profit as a percentage of sales
was primarily attributable to the inclusion of revenues from the
brachytherapy product line in fiscal 1998 which yield greater gross margins
than the Company's reference source product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $765,000, or 70%, to $1,859,000
for the year ended October 31, 1998 from $1,094,000 for the year ended
October 31, 1997. SG&A expenses increased primarily due to the following:
(i) the Company added staff to focus on its product sales, to improve gross
margins and to develop capabilities for new product lines and (ii) other
general and administrative expenses were increased to support the growth of
the Company.
RESEARCH AND DEVELOPMENT. Research and development efforts increased in
fiscal 1998, with such expenditures totaling $196,000 during this period
compared to $72,000 in the corresponding 1997 period. The increase was due
primarily to development efforts associated with new product lines. Such
expenditures are expected to increase in future periods.
INCOME FROM OPERATIONS. Income from operations increased $733,000 to
$1,104,000 for the year ended October 31, 1998, from $371,000 for the year
ended October 31, 1997. This increase is a result of a combination of the
factors described above.
INTEREST INCOME. Interest income increased $585,000 to $635,000 for the year
ended October 31, 1998 from $50,000 for the year ended October 31, 1997.
This increase resulted primarily from the investment of funds received from
the Company's November 1997 private placement.
NET INCOME. Net income increased $823,000 to $1,099,000 for the year ended
October 31, 1998 from $276,000 for the year ended October 31, 1997. The
increase is a result of the factors described above.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had cash and investments in marketable
securities aggregating approximately $11.2 million and working capital of
$12,554,000. The increase in the Company's working capital during the year
ended October 31, 1998 was primarily the result of the private placement of
800,000 shares of its Common Stock in November 1997, which resulted in net
proceeds to the Company of approximately $13.3 million. For the year ended
October 31, 1998, net cash provided by operating activities was approximately
$0.4 million. Cash used in investing activities for capital expenditures,
investments in marketable securities and advances on construction of
equipment totaled approximately $13.4 million during the year ended October
31, 1998. The capital expenditures primarily related to projects designed to
increase manufacturing capacity for the new brachytherapy source line.
Net cash provided by financing activities during fiscal 1998 was
approximately $13.5 million and consisted primarily of proceeds from the
private placement and the exercise of stock options and warrants.
The Company is authorized to purchase on the open market up to $1.5 million
of the Company's common stock. No such shares were repurchased as of October
31, 1998.
To date, the Company's short term liquidity needs have generally consisted of
operating capital to finance growth in inventories, trade accounts receivable
and new product development as well as to take advantage of strategic
investments in related businesses. The Company has satisfied these needs
primarily through a combination of private equity financings and from cash
generated by operations. The Company has no long-term debt or a need for a
line of credit or similar arrangement with a bank. Management anticipates
that its existing cash resources will be sufficient to fund its planned
expansion over the next 24 months, although additional funding may be
required to fund the acquisition of complementary businesses, technologies or
products.
YEAR 2000 COMPLIANCE. The Year 2000 issue arises from the fact that most
computer software programs have been written using two digits rather than
four to represent a specific year. Any computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Based on a recent assessment,
the Company believes that it will not be required to modify or replace
significant portions of its software in order to address its Year 2000
issues. The Company has initiated formal communications with its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their Year 2000
issues. The Company has so far received no indication that its, or any
material third party's, systems will not be Year 2000 compliant. In
addition, the cost to the Company of its Year 2000 compliance program have
not been, and are not expected to be, material. Consequently, the Company
does not expect the Year 2000 issue to be material to the Company. However,
there can be no assurance that the systems of other companies will be
converted timely, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
The foregoing is a Year 2000 readiness disclosure entitled to protection as
provided in the Year 2000 Information and Readiness Disclosure Act.
18
<PAGE>
Item 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . 20
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statement of Changes in Stockholders' Equity. . . . . . . . . 23
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 25
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
North American Scientific, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of North American Scientific, Inc. and its subsidiary at October 31,
1998 and 1997, and the results of their operations and of their cash flows
for each of the two years in the period ended October 31, 1998, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
Costa Mesa, California
January 11, 1999
20
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,119,000 $ 1,596,000
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,101,000 27,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,323,000 430,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 731,000 378,000
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 106,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 196,000 34,000
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,470,000 2,571,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163,000 500,000
Equipment and leasehold improvements, net. . . . . . . . . . . . . . . . . . . . 1,587,000 346,000
Advances on construction of equipment. . . . . . . . . . . . . . . . . . . . . . 2,289,000 -
Deposits and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,000 256,000
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,903,000 $3,673,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 338,000 $ 364,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000 81,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376,000 -
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 916,000 445,000
----------- -----------
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; 6,787,975 and
5,176,051 shares issued and outstanding as of October 31, 1998
and 1997, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,000 34,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 17,162,000 3,515,000
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . 757,000 (321,000)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 17,987,000 3,228,000
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . $18,903,000 $ 3,673,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,839,000 $ 3,381,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,680,000 1,844,000
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,159,000 1,537,000
------------ ------------
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . 1,859,000 1,094,000
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,000 72,000
------------ ------------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,104,000 371,000
Interest and other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 635,000 50,000
------------ ------------
Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . 1,739,000 421,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 640,000 145,000
------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,099,000 $ 276,000
------------ ------------
------------ ------------
Earnings per share
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .17 $ .06
------------ ------------
------------ ------------
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .16 $ .05
------------ ------------
------------ ------------
Weighted average number of common and
common equivalent shares outstanding
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,435,588 4,591,614
------------ ------------
------------ ------------
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,023,650 5,372,398
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
---------------------- Paid-in Earnings Stockholders
Shares Amount Capital (Deficit) Other Equity
--------- --------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996. . . . 4,474,801 $ 29,000 $ 2,105,000 ($ 597,000) ($ 9,000) $ 1,528,000
Issuance of common stock . . . . . 375,000 3,000 968,000 - - 971,000
Issuance of warrants . . . . . . . - - 135,000 - - 135,000
Common stock issued upon
exercise of stock options . . . . 176,250 1,000 145,000 - - 146,000
Common stock issued upon
exercise of warrants. . . . . . . 150,000 1,000 162,000 - - 163,000
Net income . . . . . . . . . . . . - - - 276,000 - 276,000
Foreign currency translation
adjustment. . . . . . . . . . . . - - - - 9,000 9,000
--------- --------- ------------ ----------- ---------- ------------
Balance at October 31, 1997. . . . 5,176,051 34,000 3,515,000 (321,000) - 3,228,000
Issuance of common stock under
private placement . . . . . . . . 1,200,000 8,000 13,186,000 - - 13,194,000
Common stock issued upon
exercise of stock options . . . . 336,924 4,000 265,000 - - 269,000
Common stock issued upon
exercise of warrants. . . . . . . 75,000 1,000 80,000 - - 81,000
Effect of common stock dividend. . - 21,000 - (21,000) - -
Tax benefit related to exercise
of stock options. . . . . . . . . - - 116,000 - - 116,000
Net income . . . . . . . . . . . . - - - 1,099,000 - 1,099,000
--------- --------- ------------ ----------- ---------- ------------
Balance at October 31, 1998. . . . 6,787,975 $ 68,000 $ 17,162,000 $ 757,000 $ - $ 17,987,000
--------- --------- ------------ ----------- ---------- ------------
--------- --------- ------------ ----------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,099,000 $ 276,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 227,000 53,000
Tax benefit of stock option exercises. . . . . . . . . . . . . . . . 116,000 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 27,000
Changes in assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . (903,000) 253,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (353,000) (234,000)
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . 106,000 (106,000)
Prepaid expenses and other assets . . . . . . . . . . . . . . . . (362,000) (118,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (26,000) 187,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 121,000 (58,000)
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 376,000 (155,000)
------------ -----------
Net cash provided by operating activities. . . . . . . . . . 411,000 125,000
------------ -----------
Cash flows from investing activities:
Advances on construction of equipment . . . . . . . . . . . . . . . . . (2,289,000) -
Net purchases of marketable securities . . . . . . . . . . . . . . . . . (9,074,000) (1,000)
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (663,000) (500,000)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (1,406,000) (180,000)
------------ -----------
Net cash used in investing activities . . . . . . . . . . . (13,432,000) (681,000)
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . 13,544,000 1,279,000
------------ -----------
Net cash provided by financing activities . . . . . . . . . 13,544,000 1,279,000
------------ -----------
Effect of foreign currency translation on cash . . . . . . . . . . . . . . - 7,000
------------ -----------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 523,000 730,000
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . 1,596,000 866,000
------------ -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 2,119,000 $ 1,596,000
------------ -----------
------------ -----------
Supplemental disclosure of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 1,000
------------ -----------
------------ -----------
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,000 $ 407,000
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
North American Scientific, Inc. manufactures and markets a line of low-level
radiation sources and reference standards for medical, scientific and
industrial uses. The Company operates in a single business segment with its
primary products being (i) brachytherapy sources for the treatment of
prostate cancer and (ii) radioactive reference sources used to calibrate a
variety of medical and commercial equipment. References to the "Company"
include both the parent company and its subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the reporting period. Actual
results could differ from those estimates.
STOCK SPLIT
Effective April 20, 1998, the Company effected a 3-for-2 stock split in the
form of a common stock dividend. The par value of the Company's common stock
was unchanged. All common stock information set forth in the consolidated
financial statements and notes thereto has been retroactively adjusted to
reflect the stock split.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market as determined under the
first-in, first-out method. Costs include materials, labor and manufacturing
overhead.
MARKETABLE SECURITIES
The Company considers its marketable securities "available-for-sale" as
defined in Statement of Financial Accounting Standards ("SFAS") No. 115.
There were no material realized or unrealized gains or losses nor any
material differences between cost and estimated fair values. Fair value is
determined to be par plus accrued interest or based on asking prices as
quoted by independent brokers at October 31, 1998.
25
<PAGE>
NOTES RECEIVABLE
Notes receivable consists of convertible debt securities of three separate
private companies. The Company accounts for its notes receivable in
accordance with SFAS No. 115 and considers these notes as
"available-for-sale". As of October 31, 1998, there were no material realized
or unrealized gains or losses recorded with respect to the notes. These
companies are in the early stage of development and management believes that
cost approximates fair value. The three companies' stock are not actively
traded on a public exchange, therefore management's assessment of fair value
was supported by valuations performed by independent appraisers.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 3-15 years
Leasehold improvements Lesser of the useful life or term of
lease
</TABLE>
Maintenance and repair costs are expensed as incurred, while improvements are
capitalized. Gains or losses resulting from the disposition of assets are
included in income.
The Company assesses potential impairments to its long-lived assets, on an
exception basis, when there is evidence that events or changes in
circumstances have made recovery of the asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net
cash flows is less than the carrying amount of the asset. No such impairment
losses have been recognized by the Company.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment and the Company
provides currently for estimated discounts, rebates and product returns and
the cost to repair or replace products under the warranty provisions in
effect at the time of sale.
STOCK OPTION PLAN
The Company accounts for stock options using the intrinsic value method, as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock issued to Employees". The disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation", have been included in Note 7.
NET INCOME PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", in the first quarter
of fiscal 1998. SFAS No. 128 requires the Company to present basic and
diluted earnings per share on the face of the statement of income. Basic
earnings per share is computed by dividing the net income by the weighted
average number of shares outstanding for the period.
26
<PAGE>
Diluted earnings per share is computed by dividing the net income by the sum
of the weighted average number of common shares outstanding for the period
plus the assumed exercise of all dilutive securities by applying the treasury
stock method. The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended
October 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 1,099,000 $ 276,000
------------ ------------
------------ ------------
Weighted average shares outstanding (basic) 6,435,588 4,591,614
Dilutive effect of stock options and warrants 588,062 780,784
------------ ------------
Diluted shares outstanding 7,023,650 5,372,398
------------ ------------
------------ ------------
Basic earnings per share $ .17 $ .06
Diluted earnings per share $ .16 $ .05
</TABLE>
INCOME TAXES
The Company accounts for income taxes utilizing an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. In estimating future
tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax law or rates.
RECLASSIFICATIONS
Certain reclassifications of previously reported amounts have been made to
conform to the current period's presentation.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents, collateralized notes
receivable and accounts receivable which are not collateralized. The
Company's policy is to invest its cash with highly rated financial
institutions in order to limit the amount of credit exposure. The Company's
customers are financially sound corporations operating in a variety of
industries. The Company's credit losses have been within management's
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
is required to adopt SFAS 130 for its fiscal year ending October 31, 1999.
The Company does not expect the adoption of this pronouncement to have a
material impact on its reported consolidated financial condition or results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information Reporting" (SFAS 131). SFAS 131
establishes standards for the way
27
<PAGE>
publicly-held companies report information about operating segments as well
as disclosures about products and services, geographic areas and major
customers. The Company is required to adopt SFAS 131 for its fiscal year
ending October 31, 1999. The Company does not expect the adoption of this
pronouncement to have a material effect on its reported consolidated
financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement establishes a
new model for accounting for derivatives and hedging activities. Under SFAS
133, all derivatives must be recognized as assets and liabilities and
measured at fair value. The Company is required to adopt SFAS 133 for its
fiscal year ending October 31, 2000. The Company does not expect the
adoption of this pronouncement to have a material effect on its reported
consolidated financial condition or results of operations.
NOTE 2 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 606,000 $ 367,000
Work in process 16,000 4,000
Finished goods 109,000 7,000
----------- -----------
$ 731,000 $ 378,000
----------- -----------
----------- -----------
</TABLE>
NOTE 3 - NOTES RECEIVABLE:
The Company has a $500,000 secured subordinated convertible note (the Note)
from RadioMed Corporation (RadioMed). The Note bears interest at 10% per
annum and matures on October 7, 2007. The Note may be converted at the
Company's election at any time prior to the maturity date into Series A
Preferred Stock of RadioMed at a price of $500 per share subject to
adjustment. However, the Note will be automatically converted into such
shares upon the consummation of a public offering by RadioMed or at the
maturity date. Interest is not due until the earlier of conversion of the
Note or the maturity date. The Note is secured by a first lien on RadioMed's
physical assets and proprietary technology as defined in the security
agreement, subject to certain subordination.
The Company entered into an exclusive supply agreement with RadioMed whereby
the Company will supply 100% of RadioMed's North American requirements for
certain ion implantation products for so long as the Company holds at least
50% of the original value of the Note or equivalent dollar value in stock and
for one year thereafter.
On October 7, 1998 the Company signed a letter of intent to acquire Theseus
Imaging Corporation, a developmental stage company. The purchase price of $3
million is to be paid in Company stock and/or cash, at the Company's option.
The acquisition date will not be prior to May 1, 1999 unless an earlier date
is mutually agreed upon. The Company has also agreed to provide financing to
Theseus up until the acquisition date in an amount not
28
<PAGE>
expected to exceed $3.5 million. This financing is in the form of
convertible notes bearing interest at the prime rate plus 1%. These notes
are convertible into common stock of Theseus at the Company's option. These
notes are due and payable or must be converted no later than September 30,
1999. The notes are secured by a first priority interest in Theseus' right,
title and interest in the collateral as defined in the Security Agreement,
which consists primarily of certain licensing agreements. As of October 31,
1998, the Company had convertible notes outstanding of $463,000. In the
event NASI does not pursue the acquisition, it is not obligated to convert
the notes.
The Company has a $200,000 secured convertible note from a manufacturing
company. The convertible note bears interest at 6% per annum and matures on
June 19, 1999 with a one-year extension option. The note may be converted at
any time at the Company's election into equity securities of the
manufacturing company. Interest is not due until the earlier of conversion
of the note or the maturity date. The note is secured by certain licenses
and intellectual property rights.
NOTE 4 - ADVANCES ON CONSTRUCTION OF EQUIPMENT:
In February 1998, the Company entered into agreements with PracSys Corp., a
privately held Massachusetts corporation (PracSys), pursuant to which PracSys
(i) will manufacture and sell to the Company two particle accelerators to be
used in the production of certain isotopes related to the Company's
brachytherapy product line and (ii) will operate the machines to produce the
isotopes for an initial two-year period. The agreements call for total
payments to PracSys of approximately $2.7 million. As of October 31, 1998,
disbursements to PracSys under these agreements totaled approximately $2.3
million. In addition, PracSys will receive a service fee and also will be
entitled to a royalty on the Company's sales of products which incorporate
isotopes produced using the accelerators.
NOTE 5 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
October 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Furniture, fixtures and equipment $ 1,583,000 $ 467,000
Leasehold improvements 460,000 168,000
----------- ----------
2,043,000 635,000
Less: Accumulated depreciation and amortization (456,000) (289,000)
----------- ----------
$ 1,587,000 $ 346,000
----------- ----------
----------- ----------
</TABLE>
29
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
The Company leases office and manufacturing space under non-cancelable
operating lease agreements. Future minimum lease payments are subject to
annual adjustment for increases in the Consumer Price Index.
At October 31, 1998, future minimum rental payments under all operating
leases are as follows:
<TABLE>
<S> <C>
1999 $ 277,000
2000 277,000
2001 277,000
2002 196,000
2003 and thereafter 195,000
-----------
$ 1,222,000
-----------
-----------
</TABLE>
Total rent expense for the years ended October 31, 1998 and 1997 was $113,000
and $97,000, respectively.
The Company is subject to legal proceedings and claims that arise in the
normal course of its business. The Company believes these proceedings will
not have a material adverse effect on the financial position or results of
operations of the Company.
NOTE 7 - STOCKHOLDERS' EQUITY:
PRIVATE PLACEMENT
In November 1997, the Company completed a private placement of 800,000 shares
of its common stock to certain institutional investors. The net proceeds to
the Company from the sale were approximately $13.2 million.
STOCKHOLDERS RIGHTS PLAN
In October 1998, the Board of Directors of the Company implemented a rights
agreement to protect stockholders rights in the event of a proposed takeover
of the Company. In the case of a triggering event, each right entitles the
Company's stockholders to buy, for $80, $160 worth of common stock for each
share of common stock held. The rights will become exercisable only if a
person or group acquires, or commences a tender offer to acquire, 15% or more
of the Company's common stock. The rights, which expire in October 2008, are
redeemable at the Company's option for $0.001 per right. The Company also
has the ability to amend the rights, subject to certain limitations.
30
<PAGE>
PREFERRED STOCK
The Company has authorized the issuance of 2,000,000 shares of preferred
stock; however, no shares have been issued. The designations, rights, and
preferences of any preferred stock that may be issued will be established by
the Board of Directors at or before the time of such issuance.
STOCK OPTIONS
The Company's 1996 Stock Option Plan provides for the issuance of incentive
stock options to employees of the Company and non-qualified options to
employees, directors and consultants of the Company with exercise prices
equal to the fair market value of the Company's stock on the date of grant.
Certain options are immediately exercisable while other options vest over a
period ranging from two to four years. The options expire ten years from the
date of grant. Certain options are subject to cancellation in the event of
termination of employment.
The following table summarizes option activity:
<TABLE>
<CAPTION>
Options Weighted Avg.
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
Balance at October 31, 1996 551,250 $ 0.68
Granted 375,750 1.15
Canceled or expired - -
Exercised (176,250) 0.68
--------
Balance at October 31, 1997 750,750 0.92
Granted 191,125 14.42
Canceled or expired (58,187) 11.87
Exercised (336,924) 0.80
--------
Balance at October 31, 1998 546,764 $ 5.00
-------- --------
-------- --------
</TABLE>
There were 231,125 and 336,562 options exercisable with weighted average
exercise prices of $3.13 and $0.76 at October 31, 1998, and 1997,
respectively. The weighted-average fair value of options granted during the
year ended October 31, 1998 was $5.83.
31
<PAGE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 35% 80%
Risk-free interest rate 5.7% 6.4%
Expected lives 5 years 5 years
</TABLE>
The following table summarizes significant option groups outstanding at
October 31, 1998 and related weighted average exercise price and remaining
contractual life information as follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
Weighted Avg.
Range of Remaining Wghtd Avg.
Exercise Contractual Exercise
Prices Shares Life (Years) Price
------ ------ ------------ -----
<S> <C> <C> <C>
$0.67 - $1.96 371,639 8.02 $ 0.97
$3.94 - $7.63 95,125 9.78 4.50
$23.50-$24.54 80,000 9.42 24.28
------- ---- --------
546,764 8.53 $ 5.00
-------
-------
</TABLE>
Had compensation cost for the Company' option plans been determined based on
the fair value at the grant dates, as prescribed by SFAS No. 123, net income
and net income per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Net income:
As reported $ 1,099,000 $ 276,000
Pro forma $ 532,000 $ 99,800
Earnings Per Share:
As reported basic $ .17 $ .06
As reported diluted $ .16 $ .05
Pro forma basic $ .08 $ .02
Pro forma diluted $ .08 $ .02
</TABLE>
Because the determination of the fair value of all options granted includes
an expected volatility factor in addition to the factors described in the
preceding paragraph and, because additional option grants are expected to be
made each year, the above pro forma disclosures are not representative of pro
forma effects of reported net income for future years.
32
<PAGE>
MENTOR AGREEMENT
In June 1997, the Company entered into an exclusive worldwide distribution
agreement with Mentor Corporation (Mentor) to market and sell certain
brachytherapy sources for the treatment of prostate cancer. Under the terms
of the five year agreement, Mentor is responsible for sales and marketing
activities. Pursuant to the agreement, Mentor purchased 375,000 shares of
the Company's common stock at $2.67 per share (the fair market value of the
common stock at the time of the agreement). In addition, the agreement
originally provided Mentor the right to purchase $2,000,000 of the Company's
preferred stock, however, during 1998 the agreement was amended to eliminate
this right.
COMMON STOCK WARRANTS
In fiscal 1997, the Company granted 150,000 warrants to a third party in
connection with a contract to provide investment banking services on behalf
of the Company over a five-year term. The warrants permitted the holder to
purchase a total of 150,000 shares of the Company's common stock at $1.63 per
share (the fair market value of the Company's common stock at the date of the
agreement). The holder exercised 100,000 of such warrants in fiscal 1997 and
the remaining 50,000 in fiscal 1998. The fair value of the warrants of
$135,000 at the grant date is reflected as other assets and additional
paid-in capital and is being amortized over the term of the agreement.
NOTE 8 - SALES TO MAJOR CUSTOMERS:
Revenues from customers that accounted for more than 10% of the Company's
consolidated revenues were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Customer A 9% 41%
Customer B 17 30
Customer C 45 -
---- ----
71% 71%
---- ----
---- ----
</TABLE>
NOTE 9 - INCOME TAXES:
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal $ 506,000 $ 130,000
State 134,000 15,000
--------- ---------
$ 640,000 $ 145,000
--------- ---------
--------- ---------
</TABLE>
33
<PAGE>
There are no significant temporary differences that would give rise to the
recognition of a deferred tax asset or liability. Accordingly, the Company
has not recorded a deferred tax provision.
A reconciliation of tax expense computed at the U.S. federal statutory rate
is as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Federal tax provision at U.S. statutory rate 34% 34%
State income taxes, net of federal benefit 5 4
Other, net (2) (4)
---- ----
37% 34%
---- ----
---- ----
</TABLE>
NOTE 10 - RETIREMENT PLAN:
The Company has a 401(k) retirement plan that allows eligible employees to
contribute up to 15% of their salary, subject to annual limits. The Company
provides a matching contribution of up to 3% of the eligible employees' gross
salaries and wages. Contributions to the plan in 1998 and 1997 were
immaterial.
34
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required under this Item is incorporated by reference to the
Company's definitive proxy statement pursuant to Regulation 14A to be filed
with the Commission no later than 120 days after the close of the Company's
fiscal year ended October 31, 1998.
Item 10. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference to the
Company's definitive proxy statement pursuant to Regulation 14A to be filed
with the Commission no later than 120 days after the close of the Company's
fiscal year ended October 31, 1998.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated by reference to the
Company's definitive proxy statement pursuant to Regulation 14A to be filed
with the Commission no later than 120 days after the close of the Company's
fiscal year ended October 31, 1998.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated by reference to the
Company's definitive proxy statement pursuant to Regulation 14A to be filed
with the Commission no later than 120 days after the close of the Company's
fiscal year ended October 31, 1998.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENTS
------------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant,
incorporated by reference to Exhibit 3(i) of the
Registrant's Registration Statement on Form 10-SB,
filed August 22, 1995.
3.2 Certificate of Amendment of the Registrant,
incorporated by reference to Exhibit 3.1 of the
Registrant's Quarterly Report on Form 10-QSB for the
quarterly period ended July 31, 1998.
35
<PAGE>
<CAPTION>
DESCRIPTION OF DOCUMENTS
------------------------
<S> <C>
3.3 Certificate of Domestication of the Registrant,
incorporated by reference to Exhibit 3(i)(a) of the
Registrant's Registration Statement on Form 10-SB,
filed August 22, 1995.
3.4 Bylaws of the Registrant, incorporated by reference to
Exhibit 3(ii) of the Registrant's Registration
Statement on Form 10-SB, filed August 22, 1995.
10.1 Lease Agreement dated November 30, 1995 between
Registrant and Abraham Stricks, incorporated by
reference to Exhibit 10.2 of the Registrant's Annual
Report on Form 10-KSB, filed January 29, 1998.
10.2 North American Scientific, Inc. Amended and Restated
1996 Stock Option Plan, incorporated by reference to
Exhibit 4.4 of the Registrant's Registration Statement
on Form S-8 (Registration No. 333-62631), filed August
31, 1998.
10.3 Agreement dated as of December 11, 1996 between the
Registrant and M.H. Meyerson & Co., Inc., incorporated
by reference to Exhibit 10.4 of the Registrant's
Registration Statement on Form 10-KSB filed January 21,
1997.
10.4 Stock Purchase Agreement dated as of June 16, 1997
between the Registrant and Mentor Corporation,
incorporated by reference to Exhibit 10.1 of the
Registrant's Firm 10-QSB, filed September 15, 1997.
10.5 Exclusive Marketing and Distribution Agreement dated as
of June 16, 1997 between the Registrant and Mentor
Corporation, incorporated by reference to Exhibit 10.2
of the Registrant's Form 10-QSB, filed September 15,
1997.
10.6 Exclusive Manufacturing and Supply Agreement dated as
of October 7, 1997 between the Registrant and RadioMed
Corporation, incor-porated by reference to Exhibit 10.1
of the Registrant's Form 8-K, filed October 9, 1997.
10.7 Note Purchase Agreement between the Registrant and
RadioMed Corporation, dated as of October 7, 1997,
incorporated by reference to Exhibit 10.2 of the
Registrant's Form 8-K filed October 9, 1997.
36
<PAGE>
<CAPTION>
DESCRIPTION OF DOCUMENTS
------------------------
<S> <C>
10.8 Stock Purchase Agreement dated as of November 10, 1997
among the Registrant and the investors identified
therein, incorporated by reference to Exhibit 10.1 of
the Registrant's Form 8-K filed November 24, 1997.
10.9 Purchase Contract dated February 6, 1998 between the
Registrant and PracSys Corp., incorporated by reference
to Exhibit 10.1 of the Registrant's Form 8-K filed
February 19, 1998.
10.10 Service Contract dated February 6, 1998 between the
Registrant and PracSys Corp., incorporated by reference
to Exhibit 10.2 of the Registrant's Form 8-K filed
February 19, 1998.
10.11 Exclusivity and Purchase Contract dated as of December
31, 1997, as amended February 6, 1998 between the
Registrant and PracSys Corp., incorporated by reference
to Exhibit 10.3 of the Registrant's Form 8-K filed
February 19, 1998.
10.12 Rights Agreement, incorporated by reference to
Exhibit 99.1 of the Registrant's Form 8-A, filed
October 16, 1998.
21.1 Subsidiaries of the Registrant, incorporated by
reference to Exhibit 21 of the Registrant's
Registration Statement on Form 10-SB, filed August 22,
1995.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
(b)Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended October 31, 1998.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH AMERICAN SCIENTIFIC, INC.
January 19, 1999 By: /s/ L. Michael Cutrer
---------------------------------
Name: L. Michael Cutrer
Title: President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on this 19th day of January, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Irwin J. Gruverman Chairman of the Board of Directors
- -----------------------------
Irwin J. Gruverman
/s/ L. Michael Cutrer
- ----------------------------- President, Chief Executive Officer and
L. Michael Cutrer Director (Principal Executive Officer)
/s/ Alan I. Edrick
- ----------------------------- Chief Financial Officer (Principal
Alan I. Edrick Financial and Accounting Officer)
/s/ Larry Berkin Director
- -----------------------------
Larry Berkin
/s/ Allan M. Green Director
- -----------------------------
Dr. Allan M. Green
/s/ Michael C. Lee Director
- -----------------------------
Michael C. Lee
</TABLE>
38
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-41165,
333-37341 and 333-63263) and in the Registration Statements on Form S-8
(Nos. 333-14373, 333-25973 and 333-62631) of North American Scientific, Inc.
of our report dated January 11, 1999 appearing on page 20 of this Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
January 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 2,119,000
<SECURITIES> 9,101,000
<RECEIVABLES> 1,323,000
<ALLOWANCES> 0
<INVENTORY> 731,000
<CURRENT-ASSETS> 13,470,000
<PP&E> 2,043,000
<DEPRECIATION> (456,000)
<TOTAL-ASSETS> 18,903,000
<CURRENT-LIABILITIES> 916,000
<BONDS> 0
0
0
<COMMON> 68,000
<OTHER-SE> 16,405,000
<TOTAL-LIABILITY-AND-EQUITY> 18,903,000
<SALES> 5,839,000
<TOTAL-REVENUES> 6,474,000
<CGS> 2,680,000
<TOTAL-COSTS> 1,859,000
<OTHER-EXPENSES> 196,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,739,000
<INCOME-TAX> 640,000
<INCOME-CONTINUING> 1,104,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,099,000
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
