**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended January 31, 2003**

** **

**CommissionFile Number 0-26670**

 

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**NORTH AMERICAN SCIENTIFIC, INC.**

(Exactname of registrant as specified in its charter)

** **

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

 

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

ýYes     oNo

 

The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as of March 7,2003 was 10,254,418 shares.

 

 

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**Index**

 
| **Part  I – Financial Information** |                                                                                            |
|------------------------------------------|-------------------------------------------------------------------------------------------------|
| **Item  1.**                             | **Financial  Statements**                                                                       |   |   |
|                                     |                                                                                            |
|                                     | Consolidated Balance Sheets  as of January 31, 2003 and October 31, 2002                        |   |
|                                     |                                                                                            |   |   |
|                                     | Consolidated  Statements of Operations for the three months ended January 31, 2003 and 2002     |   |
|                                     |                                                                                            |   |   |
|                                     | Consolidated  Statements of Cash Flows for the three months ended January 31, 2003 and 2002     |   |
|                                     |                                                                                            |   |   |
|                                     | Condensed  Notes to the Consolidated Financial Statements                                       |   |   |
|                                     |                                                                                            |
| **Item  2.**                             | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |   |
|                                     |                                                                                            |
| **Item  3.**                             | **Quantitative  and Qualitative Disclosures about Market Risk**                                 |   |   |
|                                     |                                                                                            |   |   |
| **Item 4.**                              | **Controls and  Procedures**                                                                    |   |   |
|                                     |                                                                                            |
| **Part II – Other Information**     |                                                                                            |
|                                     |                                                                                            |   |   |
| **Item 6.**                              | **Exhibits and  Reports on Form 8-K**                                                           |   |   |
|                                     |                                                                                            |
| **Signatures**                           |                                                                                            |   |
|                                          |                                                                                                 |  |  |  |  |

 

2

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                            |   | **January  31,  2003** |       | **October  31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|--------|
|                                                                                                                                                                            |   | **(Unaudited)**        |       |                   |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| **Assets**                                                                                                                                                                      |   |                   |       |                   |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Current assets                                                                                                                                                                  |   |                   |       |                   |   |
| Cash and cash equivalents                                                                                                                                                       |   | $                      | 2,713,000  |                   | $      | 2,708,000 |   |
| Marketable securities                                                                                                                                                           |   | 27,559,000             |       | 36,144,000             |   |
| Accounts receivable                                                                                                                                                             |   | 1,960,000              |       | 2,416,000              |   |
| Inventories                                                                                                                                                                     |   | 794,000                |       | 596,000                |   |
| Income taxes receivable                                                                                                                                                         |   | —                 |       | 1,006,000              |   |
| Prepaid expenses and other current assets                                                                                                                                       |   | 1,384,000              |       | 833,000                |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Total current assets                                                                                                                                                            |   | 34,410,000             |       | 43,703,000             |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Non-current marketable securities                                                                                                                                               |   | 25,737,000             |       | 17,093,000             |   |
| Equipment and leasehold improvements                                                                                                                                            |   | 3,419,000              |       | 3,264,000              |   |
| Goodwill                                                                                                                                                                        |   | 3,659,000              |       | 3,659,000              |   |
| Licenses and patents                                                                                                                                                            |   | 361,000                |       | 469,000                |   |
| Deferred income taxes                                                                                                                                                           |   | 844,000                |       | 844,000                |   |
| Other assets                                                                                                                                                                    |   | 103,000                |       | 103,000                |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Total assets                                                                                                                                                                    |   | $                      | 68,533,000 |                   | $      | 69,135,000 |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                  |   |                   |       |                   |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Current liabilities                                                                                                                                                             |   |                   |       |                   |   |
| Accounts payable                                                                                                                                                                |   | $                      | 940,000    |                   | $      | 1,109,000 |   |
| Accrued expenses                                                                                                                                                                |   | 3,634,000              |       | 3,125,000              |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Total current liabilities                                                                                                                                                       |   | 4,574,000              |       | 4,234,000              |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Commitments and contingencies                                                                                                                                                   |   |                   |       |                   |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Stockholders’ equity                                                                                                                                                       |   |                   |       |                   |   |
| Preferred stock, $.01 par value, 2,000,000 shares authorized; no  shares issued                                                                                                 |   | —                 |       | —                 |   |
| Common stock, $.01 par value, 40,000,000 shares authorized;  10,263,418 and 10,250,136 shares issued and outstanding as of January 31,  2003 and October 31, 2002, respectively |   | 103,000                |       | 103,000                |   |
| Additional paid-in capital                                                                                                                                                      |   | 74,014,000             |       | 73,929,000             |   |
| Accumulated deficit                                                                                                                                                             |   | (10,158,000            | )          | (9,131,000             | )      |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Total stockholders’ equity                                                                                                                                                 |   | 63,959,000             |       | 64,901,000             |   |
|                                                                                                                                                                            |   |                   |       |                   |   |
| Total liabilities and stockholders’ equity                                                                                                                                 |   | $                      | 68,533,000 |                   | $      | 69,135,000 |   |

 

See condensed notes tothe consolidated financial statements.

 

3

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**ConsolidatedStatements of Operations**

** **

 
|                                                                      |   | **Three  Months Ended  January 31,** |       |
|---------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                      |   | **2003**                             |       | **2002** |   |
|                                                                      |   | **(Unaudited)**                      |       |
|                                                                      |   |                                 |       |   |   |
| Net sales                                                                 |   | $                                    | 5,141,000  |   | $ | 4,936,000 |   |
|                                                                      |   |                                 |       |   |   |
| Cost of goods sold                                                        |   | 1,843,000                            |       | 1,772,000 |   |
|                                                                      |   |                                 |       |   |   |
| Gross profit                                                              |   | 3,298,000                            |       | 3,164,000 |   |
|                                                                      |   |                                 |       |   |   |
| Selling, general and administrative expenses                              |   | 2,415,000                            |       | 1,224,000 |   |
| Research and development                                                  |   | 1,957,000                            |       | 2,230,000 |   |
|                                                                      |   |                                 |       |   |   |
| Loss from operations                                                      |   | (1,074,000                           | )          | (290,000 | ) |
|                                                                      |   |                                 |       |   |   |
| Interest and other income, net                                            |   | 358,000                              |       | 490,000 |   |
|                                                                      |   |                                 |       |   |   |
| Income (loss) before provision for income taxes                           |   | (716,000                             | )          | 200,000 |   |
|                                                                      |   |                                 |       |   |   |
| Provision for income taxes                                                |   | —                               |       | 74,000 |   |
|                                                                      |   |                                 |       |   |   |
| Income (loss) before cumulative effect of change in accounting  principle |   | (716,000                             | )          | 126,000 |   |
|                                                                      |   |                                 |       |   |   |
| Cumulative effect of change in accounting principle (Note 6)              |   | (311,000                             | )          | — |   |
|                                                                      |   |                                 |       |   |   |
| Net income (loss)                                                         |   | $                                    | (1,027,000 | ) | $ | 126,000 |   |
|                                                                      |   |                                 |       |   |   |
| Earnings (loss) per share:                                                |   |                                 |       |   |   |
|                                                                      |   |                                 |       |   |   |
| Basic                                                                     |   |                                 |       |   |   |
|                                                                      |   |                                 |       |   |   |
| Income (loss) before cumulative effect of change in accounting  principle |   | $                                    | (.07       | ) | $ | .01 |   |
| Cumulative effect of change in accounting principle                       |   | (.03                                 | )          | — |   |
|                                                                      |   |                                 |       |   |   |
| Net income (loss)                                                         |   | $                                    | (.10       | ) | $ | .01 |   |
|                                                                      |   |                                 |       |   |   |
| Diluted                                                                   |   |                                 |       |   |   |
|                                                                      |   |                                 |       |   |   |
| Income (loss) before cumulative effect of change in accounting  principle |   | $                                    | (.07       | ) | $ | .01 |   |
| Cumulative effect of change in accounting principle                       |   | (.03                                 | )          | — |   |
|                                                                      |   |                                 |       |   |   |
| Net income (loss)                                                         |   | $                                    | (.10       | ) | $ | .01 |   |
|                                                                      |   |                                 |       |   |   |
| Weighted average number of shares outstanding:                            |   |                                 |       |   |   |
|                                                                      |   |                                 |       |   |   |
| Basic                                                                     |   | 10,256,171                           |       | 10,175,193 |   |
|                                                                      |   |                                 |       |   |   |
| Diluted                                                                   |   | 10,256,171                           |       | 10,760,790 |   |

 

See condensed notes to the consolidated financial statements.

 

4

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**ConsolidatedStatements of Cash Flows**

 
|                                                                                      |   | **Three  Months Ended  January 31,** |       |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                      |   | **2003**                             |       | **2002** |   |
|                                                                                      |   | **(Unaudited)**                      |       |
| Cash flows from operating activities:                                                     |   |                                 |       |   |   |
| Net income (loss)                                                                         |   | $                                    | (1,027,000 | ) | $ | 126,000 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |                                 |       |   |   |
| Cumulative effect of change in accounting principle                                       |   | 311,000                              |       | — |   |
| Depreciation and amortization                                                             |   | 219,000                              |       | 251,000 |   |
| Deferred income taxes                                                                     |   | —                               |       | 74,000 |   |
| Write-off of licenses                                                                     |   | 105,000                              |       | — |   |
| Changes in assets and liabilities                                                         |   |                                 |       |   |   |
| Accounts receivable                                                                       |   | 456,000                              |       | 168,000 |   |
| Inventories                                                                               |   | (198,000                             | )          | (202,000 | ) |
| Prepaid expenses and other assets                                                         |   | (551,000                             | )          | 22,000 |   |
| Accounts payable                                                                          |   | (169,000                             | )          | 228,000 |   |
| Accrued expenses                                                                          |   | 110,000                              |       | (198,000 | ) |
| Income taxes receivable                                                                   |   | 1,006,000                            |       | (1,000 | ) |
|                                                                                      |   |                                 |       |   |   |
| Net cash provided by operating activities                                                 |   | 262,000                              |       | 468,000 |   |
|                                                                                      |   |                                 |       |   |   |
| Cash flows from investing activities:                                                     |   |                                 |       |   |   |
| Proceeds from sale of marketable securities                                               |   | 7,703,000                            |       | 5,390,000 |   |
| Purchases of marketable securities                                                        |   | (7,762,000                           | )          | (5,863,000 | ) |
| Capital expenditures                                                                      |   | (283,000                             | )          | (58,000 | ) |
|                                                                                      |   |                                 |       |   |   |
| Net cash used in investing activities                                                     |   | (342,000                             | )          | (531,000 | ) |
|                                                                                      |   |                                 |       |   |   |
| Cash flows from financing activities:                                                     |   |                                 |       |   |   |
| Proceeds from exercise of stock options and stock purchase plan                           |   | 85,000                               |       | 64,000 |   |
|                                                                                      |   |                                 |       |   |   |
| Net cash provided by financing activities                                                 |   | 85,000                               |       | 64,000 |   |
|                                                                                      |   |                                 |       |   |   |
| Net increase in cash and cash equivalents                                                 |   | 5,000                                |       | 1,000 |   |
|                                                                                      |   |                                 |       |   |   |
| Cash and cash equivalents at beginning of period                                          |   | 2,708,000                            |       | 3,084,000 |   |
|                                                                                      |   |                                 |       |   |   |
| Cash and cash equivalents at end of period                                                |   | $                                    | 2,713,000  |   | $ | 3,085,000 |   |
|                                                                                      |   |                                 |       |   |   |
| Supplemental disclosure of cash flow information:                                         |   |                                 |       |   |   |
|                                                                                      |   |                                 |       |   |   |
| Income taxes paid                                                                         |   | $                                    | —     |   | $ | 1,000 |   |
| Interest paid                                                                             |   | $                                    | —     |   | $ | — |   |

 

See condensed notesto the consolidated financial statements.

 

5

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

 

**Note 1 –Consolidated Financial Statements**

 

*Basis of Presentation*

 

The accompanying consolidated financial statements of North AmericanScientific, Inc (the “Company”) are unaudited, other than the consolidatedbalance sheet at October 31, 2002, and reflect all material adjustments,consisting only of normal recurring adjustments, which management considerednecessary for a fair statement of the Company’s financial position, results ofoperations and cash flows for the interim periods.  The results of operations for the current interim period are notnecessarily indicative of the results to be expected for the entire fiscalyear.

 

These consolidated financial statements have been prepared inaccordance with the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnotes normally included in financial statements prepared in accordance withgenerally accepted accounting principles in the United States of America havebeen condensed or omitted pursuant to these rules and regulations.  These consolidated financial statementsshould be read in conjunction with the consolidated financial statements andthe notes thereto included in the Company’s Form 10-K, as filed with theSecurities and Exchange Commission for the year ended October 31, 2002.

 

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

 

*Use of Estimates*

 

In the normal course ofpreparing the financial statements in conformity with generally acceptedaccounting principles in the United States of America, management is requiredto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and reported amounts of revenue and expenses duringthe reporting period.  Actual resultscould differ from those amounts.

 

*Accounting for Stock-based Compensation*

 

The Company maintains a stock option plan under which the Company maygrant incentive stock options and non-qualified stock options to employees,consultants, and non-employee directors.

 

The Company applies Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  The Company has provided additionaldisclosures required by Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation.”  The Company accounts for stock issued to non-employees inaccordance with the provisions of SFAS No. 123 and Emerging Issues Task Force(“EITF”) No. 96-18.

 

On December 31, 2002, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition andDisclosure,” which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about theeffects of stock-based compensation, which the Company has adopted as ofNovember 1, 2002.  The Company willcontinue to account for its stock-based compensation according to theprovisions of APB Opinion No. 25.

 

Had compensation cost for the Company’s stock options been recognizedbased upon the estimated fair

 

6

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value on the grant date under the fair value methodology prescribed bySFAS No. 123, as amended by SFAS No. 148, the Company’s net income (loss) andearnings (loss) per share would have been as follows:

 
|                                           |   | **Three  Months Ended  January 31,** |       |
|------------------------------------------------|--------|--------------------------------------|------------|
|                                           |   | **2003**                             |       | **2002** |   |
|                                           |   |                                 |       |   |   |
| Net income (loss), as reported                 |   | $                                    | (1,027,000 | ) | $ | 126,000 |   |
| Less: total stock-based compensation(1)        |   | (621,000                             | )          | (530,000 | ) |
| Net income (loss), as adjusted                 |   | $                                    | (1,648,000 | ) | $ | (404,000 | ) |
|                                           |   |                                 |       |   |   |
| Basic earnings (loss) per share, as reported   |   | $                                    | (.10       | ) | $ | .01 |   |
| Basic earnings (loss) per share, as adjusted   |   | $                                    | (.16       | ) | $ | (.04 | ) |
| Diluted earnings (loss) per share, as reported |   | $                                    | (.10       | ) | $ | .01 |   |
| Diluted earnings (loss) per share, as adjusted |   | $                                    | (.16       | ) | $ | (.04 | ) |

 

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(1) As determinedunder the fair value method.

 

The assumptions used to calculate the fair value of options granted areevaluated and revised, as necessary, to reflect market conditions and theCompany’s experience.

 

 

**Note 2 –Marketable Securities**

 

The Company invests excess cash in marketable securities consistingprimarily of commercial paper, corporate notes and bonds, U.S. Governmentsecurities and money market funds.

 

Debt securities that the Company has the positive intent and ability tohold to maturity are classified as “held-to-maturity” and reported at amortizedcost. Debt securities not classified as held-to-maturity and marketable equitysecurities are classified as either “trading” or “available-for-sale,” and arerecorded at fair value with unrealized gains and losses included in earnings orstockholders’ equity, respectively. All other equity securities are accountedfor using either the cost method or the equity method.

 

The Company continually reviews its investments to determine whether adecline in fair value below the cost basis is other than temporary. If thedecline in fair value is judged to be other than temporary, the cost basis ofthe security is written down to fair value and the amount of the write-down isincluded in the Consolidated Statements of Operations.

 

7

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**Note 3 –Inventories**

 

Inventories are valued atthe lower of cost or market as determined under the first-in, first-out method.Costs include materials, labor and manufacturing overhead. Inventories areshown net of applicable reserves and allowances. Inventories consist of thefollowing:

 
|            |   | **January  31,  2003** |    | **October  31,  2002** |   |
|-----------------|--------|------------------------|---------|------------------------|--------|
|            |   |                   |    |                   |   |
| Raw materials   |   | $                      | 589,000 |                   | $      | 459,000 |   |
| Work in process |   | 78,000                 |    | 42,000                 |   |
| Finished goods  |   | 127,000                |    | 95,000                 |   |
|            |   |                   |    |                   |   |
|            |   | $                      | 794,000 |                   | $      | 596,000 |   |

 

**Note 4 –Net Income (Loss) per Share**

 

Basic earnings (loss) pershare is computed by dividing the net income (loss) by the weighted averagenumber of shares outstanding for the period. Diluted earnings (loss) per shareis computed by dividing the net income (loss) by the sum of the weightedaverage number of common shares outstanding for the period plus the assumedexercise of all dilutive securities by applying the treasury stock methodunless such assumed exercises are anti-dilutive. The following table sets forththe computation of basic and diluted earnings (loss) per share:

 
|                                               |   | **Three  Months Ended  January 31,** |       |
|----------------------------------------------------|--------|--------------------------------------|------------|
|                                               |   | **2003**                             |       | **2002** |   |
|                                               |   |                                 |       |   |   |
| Net income (loss)                                  |   | $                                    | (1,027,000 | ) | $ | 126,000 |   |
|                                               |   |                                 |       |   |   |
| Weighted average shares outstanding – Basic   |   | 10,256,171                           |       | 10,175,193 |   |
| Dilutive effect of stock options                   |   | —                               |       | 585,597 |   |
|                                               |   |                                 |       |   |   |
| Weighted average shares outstanding – Diluted |   | 10,256,171                           |       | 10,760,790 |   |
|                                               |   |                                 |       |   |   |
| Basic earnings (loss) per share                    |   | $                                    | (.10       | ) | $ | .01 |   |
| Diluted earnings (loss) per share                  |   | $                                    | (.10       | ) | $ | .01 |   |

 

Stock options to purchase1,485,651 and 528,328 common shares for the three months ended January 31,2003, and 2002, respectively, were not included in the computation of dilutedearnings per share because their effect would have been anti-dilutive.

 

8

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**Note 5 –Comprehensive Income (Loss)**

 

The components ofcomprehensive income (loss) are as follows:

 
|                                                                                 |   | **Three  Months Ended  January 31,** |       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                 |   | **2003**                             |       | **2002** |   |
|                                                                                 |   |                                 |       |   |   |
| Net income (loss)                                                                    |   | $                                    | (1,027,000 | ) | $ | 126,000 |   |
| Other comprehensive income (loss):  Unrealized loss on securities available-for-sale |   | —                               |       | (28,000 | ) |
|                                                                                 |   |                                 |       |   |   |
| Total comprehensive income (loss)                                                    |   | $                                    | (1,027,000 | ) | $ | 98,000 |   |

 

**Note 6 –Asset Retirement Obligations**

 

During the quarter endedJanuary 31, 2003, the Company adopted SFAS No. 143, “Accounting for AssetRetirement Obligations” for recording future decommissioning costs related toits leased manufacturing and research and development facilities.  Under SFAS No. 143, a future retirementobligation is recorded at present value by discounting the Company’s estimatedfuture asset retirement obligation using the Company’s estimated credit-adjustedborrowing rate.  The resultantcapitalized costs are recorded as part of equipment and leasehold improvementsand are amortized ratably over the term of the leased facilities.  The asset retirement obligation has beenrecorded in accrued expenses and will be adjusted to fair value over the leaseterm as an accretion expense.  OnNovember 1, 2002, the Company adopted SFAS No. 143 and recorded an assetretirement obligation of $383,000, net capitalized costs of $72,000 and acumulative effect of an accounting change of $311,000.

 

The pro forma net income (loss) for the three months ended January 31,2003 and 2002, had SFAS No. 143 been adopted on November 1, 2001 is as follows:

 
|                                                     |   | **Three  Months Ended  January 31,** |     |
|----------------------------------------------------------|--------|--------------------------------------|----------|
|                                                     |   | **2003**                             |     | **2002** |   |
|                                                     |   |                                 |     |   |   |
| Net income (loss), as reported                           |   | $                                    | (716,000 | ) | $ | 126,000 |   |
| Amortization and accretion expense                       |   | —                               |     | (8,000 | ) |
|                                                     |   |                                 |     |   |   |
| Net income (loss), as adjusted                           |   | $                                    | (716,000 | ) | $ | 118,000 |   |
|                                                     |   |                                 |     |   |   |
| Basic and diluted earnings (loss) per share, as reported |   | $                                    | (.07     | ) | $ | .01 |   |
| Basic and diluted earnings (loss) per share, as adjusted |   | $                                    | (.07     | ) | $ | .01 |   |

 

**Note 7 –Commitments and Contingencies**

 

In October 2002, Mentor Corporation (“Mentor”) filed suit in LosAngeles Superior Court against the Company alleging breach of the exclusive marketingand distribution agreement arising out of the Company’s direct sales effortsfor Prospera® Pd-103.  Mentor alsoalleges that the Company breached the contract by marketing its Prospera® I-125seeds while still subject to the agreement, for sales after the expiration ofthe agreement.  Mentor’s suit furtheralleges that the Company has misappropriated purported trade secrets and thatthe Company has engaged in unfair competition. Mentor has sought

 

9

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unspecified monetary damages and injunctive relief.  In October 2002, Mentor was denied atemporary restraining order.  InNovember 2002, Mentor was denied a preliminary injunction, and in December2002, Mentor lost a Motion for Reconsideration on the preliminaryinjunction.  In January 2003, theCompany filed a responsive pleading, as well as counterclaims against Mentorseeking monetary damages for breach of contract, misappropriation ofconfidential information and trade secrets, trade libel, intentional andnegligent misrepresentation, unfair competition, and violation of the LanhamAct.

 

The Company believes that it has meritorious defenses against Mentor’sclaims and intends to vigorously contest them. While it is not possible topredict the outcome of the lawsuit discussed above, the Company believes thatcosts associated with the lawsuit will not have a material adverse impact onits consolidated financial position or liquidity, but may be material to theconsolidated results of operations of any one period.

 

The Company is also subject to other legalproceedings, claims and litigation arising in the ordinary course ofbusiness.  While the outcome of thesematters is currently not determinable, management does not expect that theultimate costs to resolve these matters will have a material adverse effect onthe Company’s consolidated financial position, results of operations, or cashflows.

 

10

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**Item 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

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

 

**Overview**

 

We design, develop,produce, and sell innovative radioisotopic products, including brachytherapyseeds and radiopharmaceuticals, principally for the treatment and diagnosis ofdisease.  Since 1990, we have appliedour expertise in radioisotopes to develop and market products for medical,environmental, research and industrial applications.

 

From 1998 to January2003, our brachytherapy seeds were distributed under an exclusive agreementwith Mentor Corporation (“Mentor”).  InJanuary 2003, the agreement with Mentor terminated and we began to market andsell our brachytherapy products directly to health care providers.  Future revenues and gross profit relating toour brachytherapy products will depend on several factors, including ourability to successfully directly market and distribute our brachytherapyproducts and to successfully withstand pricing pressure from competition andprice containment pressure from Medicare reimbursement limits for brachytherapyprocedures.  We also anticipate asignificant increase in expenses going forward as we further develop our salesand marketing infrastructure.

 

In October 2000, weacquired Theseus Imaging Corporation, a developer of proprietaryradiopharmaceuticals, to enhance the medical management of patients withcancer, heart disease or other medical conditions.  We expect to continue to incur significant clinical trial anddevelopment costs over the next several years related to Hynic-Annexin V, ourprincipal radiopharmaceutical product candidate, especially as we initiate andexpand our clinical trials in the U.S. and Europe. In addition, upon receipt ofapplicable approvals from regulatory agencies, we expect to incur substantialexpenses in connection with the commercial launch of this product.

 

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**Resultsof Operations**

 

**ThreeMonths Ended January 31, 2003 Compared to Three Months Ended January 31, 2002**

 

**Net sales.** Net sales increased $205,000, or 4%, to $5,141,000 for the three monthsended January 31, 2003 from $4,936,000 for the three months ended January 31,2002.  The increase in net sales was dueto the increase in revenues generated from our brachytherapy product lines,which accounted for 80% of our sales for the three months ended January 31,2003.  In connection with the transitionto the direct sales and marketing of our brachytherapy products, we anticipatethat sales are likely to decrease in the near term.

 

**Gross profit.**  Gross profit increased $134,000 or 4% to $3,298,000 for the threemonths ended January 31, 2003 from $3,164,000 for the three months endedJanuary 31, 2002.  Gross profit as apercent of sales remained constant at 64% for the three months ended January31, 2003 and 2002, respectively. However, our future gross profit may be adversely affected by a decreasein sales volume as we continue to directly market our brachytherapy seedscoupled with industry wide pricing pressure.

 

**Selling, general and administrative expenses(“SG&A”). **SG&Aincreased $1,191,000 or 97%, to $2,415,000 for the three months ended January31, 2003, from $1,224,000 for the three months ended January 31, 2002. Theincrease is primarily attributed to the development of a direct sales andmarketing force for our brachytherapy products, increased legal expensesassociated with the Mentor litigation, and increased operating expensesassociated with the development of Hynic-Annexin V.

 

**Research and development. **Research and development (“R&D”) costs decreased$273,000 or 12%, to $1,957,000 for the three months ended January 31, 2003,from $2,230,000 for the three months ended January 31, 2002. These costsprimarily represent our continued investment in our Hynic-Annexin V productcandidate. The decrease in research and development spending is primarily dueto a decrease in  manufacturing costspartially offset by increased R&D personnel costs, and increased R&Dfacility costs. All of our research and development cost are expensed asincurred. We anticipate incurring significant costs in the future as weinitiate and expand our clinical trials in Europe and the United States.  Our R&D spending reflects our beliefthat to maintain our competitive position in a market characterized by rapidrates of technological advancement, we must continue to invest significantresources in new product development, as well as continue to enhance existingproducts.

 

**Interest and other income, net. **Interest and other income decreased $132,000,or 27% to $358,000 for the three months ended January 31, 2003 from $490,000for the three months ended January 31, 2002. This decrease was a result of a decline in the effective yield on ourportfolio of marketable securities consistent with the general decline ininterest rates throughout 2002.

 

**Provision for income taxes.  **Results of operations for the three months endedJanuary 31, 2002 included a provision for income taxes of $74,000, whereas wedid not recognize a benefit for the loss during the three months ended January31, 2003.  Due to the uncertainty of ourability to recognize the future benefit of additional deferred tax assets, we havenot recorded additional income tax benefits for the loss during the threemonths ended January 31, 2003.

 

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**Critical Accounting Policies**

 

The preparation of financial statements and related disclosures inconformity with generally accepted accounting principles in the United Statesof America requires management to make judgments, assumptions and estimatesthat affect the amounts reported in the Consolidated Financial Statements andaccompanying notes. Note 1 to the Consolidated Financial Statements in ourAnnual Report on Form 10–K for the year ended October 31, 2002, describesthe significant accounting policies and methods used in the preparation of theConsolidated Financial Statements. Estimates are used for, but not limited to,the accounting for revenue recognition, allowance for doubtful accounts,goodwill and long-lived asset impairments, loss contingencies, and taxes.Actual results could differ substantially from these estimates. The following criticalaccounting policies are impacted significantly by judgments, assumptions andestimates used in the preparation of the Consolidated Financial Statements.

 

*RevenueRecognition*

 

We apply the provisions of SEC Staff Accounting Bulletin (“SAB”) No.101, “Revenue Recognition in Financial Statements” which provides guidance onthe recognition, presentation and disclosure of revenue in financialstatements.  SAB No. 101 outlines thebasic criteria that must be met to recognize revenue and provides guidance forthe disclosure of revenue recognition policies.  In general, we recognize revenue related to our product saleswhen (i) persuasive evidence of an arrangement exists, (ii) delivery hasoccurred, (iii) the fee is fixed or determinable, and (iv) collectibility isreasonably assured.

 

*Allowancefor Doubtful Accounts*

 

The allowance for doubtful accounts is based on our assessment of thecollectibility of specific customer accounts and the aging of the accountsreceivable. If there was a deterioration of a major customer’s creditworthiness or actual defaults are higher than our historical experience, ourestimates of the recoverability of amounts due us could be overstated whichcould have an adverse impact on our financial results.

 

*Goodwill*

 

We perform goodwill impairment tests on an annual basis and betweenannual tests in certain circumstances. In response to changes in industry andmarket conditions, we may strategically realign our resources and considerrestructuring, disposing of, or otherwise exiting businesses, which couldresult in an impairment of goodwill.

 

*Impairmentof Long-lived Assets*

 

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

 

*LegalContingencies*

 

We record liabilities related to pending litigation when an unfavorableoutcome is probable and we can reasonably estimate the amount of the loss.  We have not recorded liabilities for ourpending litigation because of the uncertainties related to assessing both theamount and the probable outcome of those claims.  We regularly evaluate current information available to determinewhether such a liability should be recorded.

 

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*DeferredTaxes*

 

We account for income taxes using the liability method. Deferred taxesare determined based on the differences between the financial statement and taxbases of assets and liabilities, using enacted tax rates in effect for the yearin which the differences are expected to reverse. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amountsexpected to be realized.

 

**Liquidity and Capital Resources**

 

To date, our short-term liquidity needs have generally consisted ofoperating capital to finance growth in inventories, trade accounts receivable,new product research and development, capital expenditures and strategicinvestments in related businesses.  Wehave satisfied these needs primarily through a combination of public offeringsand private placements of our common stock and from cash generated byoperations.  We do not currently have aline of credit or similar arrangements with a bank.

 

At January 31, 2003, we had cash and investments in marketablesecurities aggregating approximately $56.0 million and working capital of $29.8million. Working capital does not include $25.7 million of our marketablesecurities that are classified as non-current assets since the maturities ofthese marketable debt instruments are beyond a one year period.

 

For the three months ended January 31, 2003, net cash provided byoperating activities was approximately $262,000 compared to $468,000 for theprior year period. Net cash used in investing activities totaled approximately$342,000 during the three months ended January 31, 2003, compared to $531,000for the prior year period.

 

During the three months ended January 31, 2003, we receivedapproximately $85,000 from the exercise of stock options and the sale of sharesunder our employee stock purchase plan compared to $64,000 for the same periodin 2002.  Proceeds from the exercise ofstock options, employee stock purchase plan, and their related tax benefitswill vary from period to period based upon, among other factors, fluctuationsin the market value of our stock relative to the exercise price of suchoptions.

 

We are authorized to repurchase up to $10 million of our common stockon the open market.  No such shares havebeen repurchased as of January 31, 2003.

 

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

 

We believe our current cash and marketable securities and anticipatedcash flow from operations will be sufficient to support our operations andplanned expansion for the foreseeable future. However, the amount of capital that we will need in the future willdepend on many factors including:

 

•                  costs related toresearch, development, clinical trials, license fees, royalty obligations,regulatory approvals and commercialization of our Hynic-Annexin V productcandidate and other product candidates

 

•                  the furtherdevelopment of a sales and marketing force for our brachytherapy seed productsas we transition from our exclusive distribution agreement with Mentor todirect sales and marketing

 

•                  levels of salesand marketing that will be required to launch our new products and achieve andmaintain a competitive position in the marketplace for both existing and newproducts

 

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•                  marketacceptance of our products

 

•                  progress in andscope of our research and development activities

 

•                  levels ofinventory and accounts receivable that we maintain

 

•                  competitors’responses to our products

 

•                  level of capitalexpenditures

 

•                  acquisitionand/or development of complementary businesses, technologies or products

 

We anticipate incurring significant expenses with respect to ourHynic-Annexin V product candidate over the next several years for clinicaltrials and development costs. Significant milestone payments to third partiesare payable throughout the life of the contracts associated with our licensesof patent rights of technology related to our Hynic-Annexin V productcandidate.

 

We anticipate that available cash will provide sufficient funds tocover the above costs.  In addition, thecosts related to Hynic-Annexin V may be reduced if we enter into strategicpartnerships related to Hynic-Annexin V.

 

We lease facilities and equipment under non-cancelable operating leaseagreements. Future minimum lease payments are subject to annual adjustment forincreases in the Consumer Price Index. Future minimum lease payments under alloperating leases in each of the next three years are $672,000, $296,000, and$12,000, respectively.

 

We have minimum commitments for various contract services withunrelated parties totaling approximately $1.5 million. The agreementsprovide for various payments to be made over a one to three year period asservices are provided. We have contractual rights to terminate our paymentobligations on approximately $1.2 million of such agreements with 30 to90 day notification.

 

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

 

**Recent Accounting Pronouncements**

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”This statement nullifies (EITF) Issue No.  94-3,  “Liability Recognition for Certain Employee  Termination  Benefits and  Other Costs to Exit anActivity  (including   Certain  Costs  Incurred  in a  Restructuring).” Thisstatement requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. SFAS No. 146 is to be appliedprospectively to exit or disposal activities initiated after December 31, 2002.Adoption of this statement did not have a material impact on our consolidatedfinancial statements.

 

On December 31, 2002, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 148,

 

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“Accounting for Stock Based Compensation – Transition and Disclosure,”which amends SFAS No. 123.  SFAS No. 148requires more prominent and frequent disclosures about the effects ofstock-based compensation, which the Company has adopted as of November 1,2002.  The Company will continue toaccount for its stock-based compensation according to the provisions of APBOpinion No. 25.  The Company adopted theamended disclosure requirements of SFAS No. 148, during the first quarterof fiscal 2003.

 

**Item 3. ****     Quantitative and QualitativeDisclosures about Market Risk**

 

Information about market risks for the three months ended January 31,2003 does not differ materially from that discussed under Item 7A of theregistrant’s Annual Report on Form 10-K for the fiscal year ended October 31,2002.

 

**Item 4. ****     Controls and Procedures**

** **

a.                                       Evaluationof disclosure controls and procedures.

 

The Company’s principal executive officer andprincipal financial officer, based on their evaluation within 90 days of the filingdate of this Form 10-Q, have concluded that the Company’s disclosure controlsand procedures (as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934 (the “Exchange Act”) are effective to ensurethat the information required to be disclosed by the Company in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission rules and forms.

 

b.                                      Changesin internal controls.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.  There were no significant deficiencies or material weaknesses,and therefore there were no corrective actions taken.

 

 

**PART II – OTHER INFORMATION**

 

The Company was not required to report the information pursuant toItems 1 through 6 of Part II of Form 10-Q except as follows:

 

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**Item 6.****           Exhibits and Reports onForm 8-K**

 
| (a)    | Exhibits.                                                                                  |
|--------|--------------------------------------------------------------------------------------------|
|   |
|   | **Exhibits  No.**                                                                          |   | **Title** |
|   |                                                                                       |   |   |
|   | 10.1                                                                                       |   | Employment Agreement, dated February 20, 2003, by  and between Elliot Lebowitz, Ph.D. and the Company. |
|   |                                                                                       |   |   |
|   | 99.1                                                                                       |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |                                                                                       |   |   |
|   | 99.2                                                                                       |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |
| (b)    | Reports on Form 8-K.                                                                       |
|   |
|   | No reports on Form 8-K have been filed during the  quarter for which this report is filed. |

 

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|          |   |   | NORTH AMERICAN  SCIENTIFIC, INC. |
|---------------|--------|--------|----------------------------------|
|          |   |   |                             |   |   |
|          |   |   |                             |   |   |
| March 7, 2003 |   | By:    | /s/ L. Michael Cutrer            |   |
|          |   |   | Name:                            | L. Michael Cutrer |
|          |   |   | Title:                           | President and |
|          |   |   |                             | Chief Executive Officer |
|          |   |   |                             | (Principal Executive  Officer) |
|          |   |   |                             |
|          |   |   |                             |
| March 7, 2003 |   | By:    | /s/ Alan I. Edrick               |   |
|          |   |   | Name:                            | Alan I. Edrick |
|          |   |   | Title:                           | Senior Vice President  and Chief Financial Officer |
|          |   |   |                             | (Principal Financial  and Accounting Officer) |
|               |        |        |                                  |  |  |  |  |

 

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**CERTIFICATIONS**

 

I, L. Michael Cutrer, certify that:

 

1.             I have reviewed thisquarterly report on Form 10-Q of North American Scientific, Inc.;

 

2.             Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)            designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)           evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c)            presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of registrant’sboard of directors (or persons performing the equivalent functions):

 

a)            all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)           any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: March 7, 2003                   |
|---------------------------------------|
|                                  |
| /s/ L. Michael Cutrer                 |   |
| L. Michael Cutrer                     |
| President and Chief Executive Officer |

 

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I, Alan I. Edrick, certify that:

 

1.             I have reviewed thisquarterly report on Form 10-Q of North American Scientific, Inc.;

 

2.             Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)            designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)           evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)            presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)            all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)           any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             The registrant’s othercertifying officers and I have indicated in this quarterly report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: March 7, 2003                               |
|---------------------------------------------------|
|                                              |
| /s/ Alan I. Edrick                                |   |
| Alan I. Edrick                                    |
| Senior Vice President and Chief Financial Officer |

 

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