**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended April 30, 2003**

 

**or**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**Commission File Number 0-26670**

 

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**NORTH AMERICAN SCIENTIFIC, INC.**

(Exact name of registrantas 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.

 

ý  Yes   o  No

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

o  Yes   ý  No

 

The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as of May27, 2003 was 10,245,918 shares.

 

 

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**NORTHAMERICAN SCIENTIFIC, INC.**

**Index**

 

 
| **Part I  – Financial Information**                                                           |
|----------------------------------------------------------------------------------------------------|
|                                                                                               |
| **Item 1.**                                                                                        | **Financial Statements** |
|                                                                                               |   |
| Consolidated Balance Sheets  as of April 30, 2003 and October 31, 2002                             |
| Consolidated  Statements of Operations for the three and six months ended April 30, 2003  and 2002 |
| Consolidated  Statements of Cash Flows for the six months ended April 30, 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  4.**                                                                                       | **Submissions  of Matters to a Vote of Security Holders** |
|                                                                                               |   |
| **Item 6.**                                                                                        | **Exhibits and  Reports on Form 8-K** |
|                                                                                               |
| **Signatures**                                                                                     |
|                                                                                               |
| **Certifications**                                                                                 |

 

2

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**NORTHAMERICAN SCIENTIFIC, INC.**

 

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                                                            |   | **April 30,  2003** |       | **October  31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                                                                                                                                                                            |   | **(Unaudited)**     |       |                   |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| **Assets**                                                                                                                                                                                                      |   |                |       |                   |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Current assets                                                                                                                                                                                                  |   |                |       |                   |   |
| Cash and cash  equivalents                                                                                                                                                                                      |   | $                   | 2,194,000  |                   | $      | 2,708,000 |   |
| Marketable  securities                                                                                                                                                                                          |   | 30,536,000          |       | 36,144,000             |   |
| Accounts  receivable                                                                                                                                                                                            |   | 1,943,000           |       | 2,416,000              |   |
| Inventories                                                                                                                                                                                                     |   | 668,000             |       | 596,000                |   |
| Income taxes  receivable                                                                                                                                                                                        |   | —              |       | 1,006,000              |   |
| Prepaid expenses  and other current assets                                                                                                                                                                      |   | 1,601,000           |       | 833,000                |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Total current assets                                                                                                                                                                                            |   | 36,942,000          |       | 43,703,000             |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Non-current  marketable securities                                                                                                                                                                              |   | 21,297,000          |       | 17,093,000             |   |
| Equipment and  leasehold improvements                                                                                                                                                                           |   | 3,259,000           |       | 3,264,000              |   |
| Goodwill                                                                                                                                                                                                        |   | 3,659,000           |       | 3,659,000              |   |
| Licenses and  patents                                                                                                                                                                                           |   | 355,000             |       | 469,000                |   |
| Deferred income  taxes                                                                                                                                                                                          |   | 844,000             |       | 844,000                |   |
| Other assets                                                                                                                                                                                                    |   | 22,000              |       | 103,000                |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Total assets                                                                                                                                                                                                    |   | $                   | 66,378,000 |                   | $      | 69,135,000 |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                   |   |                |       |                   |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Current  liabilities                                                                                                                                                                                            |   |                |       |                   |   |
| Accounts payable                                                                                                                                                                                                |   | $                   | 1,168,000  |                   | $      | 1,109,000 |   |
| Accrued expenses                                                                                                                                                                                                |   | 3,759,000           |       | 3,125,000              |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Total current  liabilities                                                                                                                                                                                      |   | 4,927,000           |       | 4,234,000              |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Commitments and  contingencies                                                                                                                                                                                  |   |                |       |                   |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Stockholders’  equity                                                                                                                                                                                      |   |                |       |                   |   |
| Preferred stock,  $.01 par value, 2,000,000 shares authorized; no shares issued or outstanding                                                                                                                  |   | —              |       | —                 |   |
| Common stock,  $.01 par value, 40,000,000 shares authorized; 10,263,418 and 10,250,136  shares issued and 10,244,418 and 10,250,136 shares outstanding as of April  30, 2003 and October 31, 2002, respectively |   | 103,000             |       | 103,000                |   |
| Additional  paid-in capital                                                                                                                                                                                     |   | 74,060,000          |       | 73,929,000             |   |
| Treasury stock,  at cost – 19,000 common shares                                                                                                                                                            |   | (129,000            | )          | —                 |   |
| Accumulated  deficit                                                                                                                                                                                            |   | (12,583,000         | )          | (9,131,000             | )      |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Total  stockholders’ equity                                                                                                                                                                                |   | 61,451,000          |       | 64,901,000             |   |
|                                                                                                                                                                                                            |   |                |       |                   |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                |   | $                   | 66,378,000 |                   | $      | 69,135,000 |   |

 

Seecondensed notes to the consolidated financial statements.

 

3

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**ConsolidatedStatements of Operations**

**(Unaudited)**

 
|                                                                       |   | **Three  Months Ended  April 30,** |             | **Six Months  Ended  April 30,** |   |
|----------------------------------------------------------------------------|--------|------------------------------------|------------------|----------------------------------|--------|
|                                                                       |   | **2003**                           |             | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Net sales                                                                  |   | $                                  | 2,904,000        |                             | $      | 4,957,000 |   | $ | 8,045,000 |   | $ | 9,893,000 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Cost of goods  sold                                                        |   | 1,412,000                          |             | 1,870,000                        |   | 3,255,000 |   | 3,641,000 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Gross profit                                                               |   | 1,492,000                          |             | 3,087,000                        |   | 4,790,000 |   | 6,252,000 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Selling, general  and administrative expenses                              |   | 3,030,000                          |             | 1,639,000                        |   | 5,445,000 |   | 2,864,000 |   |
| Research and  development                                                  |   | 1,813,000                          |             | 2,139,000                        |   | 3,770,000 |   | 4,369,000 |   |
| Write-off of  licenses and equipment                                       |   | —                             |             | 2,714,000                        |   | — |   | 2,714,000 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Loss from  operations                                                      |   | (3,351,000                         | )                | (3,405,000                       | )      | (4,425,000 | ) | (3,695,000 | ) |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Interest and  other income, net                                            |   | 926,000                            |             | 466,000                          |   | 1,284,000 |   | 956,000 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Loss before  provision for income taxes                                    |   | (2,425,000                         | )                | (2,939,000                       | )      | (3,141,000 | ) | (2,739,000 | ) |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Provision for  income taxes                                                |   | —                             |             | 1,939,000                        |   | — |   | 2,013,000 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle           |   | (2,425,000                         | )                | (4,878,000                       | )      | (3,141,000 | ) | (4,752,000 | ) |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Cumulative  effect of change in accounting principle (Note 5)         |   | —                             |             | —                           |   | (311,000 | ) | — |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Net loss                                                                   |   | $                                  | (2,425,000  | )                                | $      | (4,878,000 | ) | $ | (3,452,000 | ) | $ | (4,752,000 | ) |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Loss per share:                                                            |   |                               |             |                             |   |   |   |   |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Basic                                                                      |   |                               |             |                             |   |   |   |   |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Loss per share  before cumulative effect of change in accounting principle |   | $                                  | (.24             | )                                | $      | (.48 | ) | $ | (.31 | ) | $ | (.47 | ) |
| Cumulative  effect of change in accounting principle                       |   | $                                  | —           |                             | $      | — |   | $ | (.03 | ) | $ | — |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Net loss                                                                   |   | $                                  | (.24             | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Diluted                                                                    |   |                               |             |                             |   |   |   |   |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Loss per share  before cumulative effect of change in accounting principle |   | $                                  | (.24             | )                                | $      | (.48 | ) | $ | (.31 | ) | $ | (.47 | ) |
| Cumulative  effect of change in accounting principle                       |   | $                                  | —           |                             | $      | — |   | $ | (.03 | ) | $ | — |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Net loss                                                                   |   | $                                  | (.24             | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Shares used in  per share calculations:                                    |   |                               |             |                             |   |   |   |   |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Basic                                                                      |   | 10,251,968                         |             | 10,189,762                       |   | 10,254,106 |   | 10,182,357 |   |
|                                                                       |   |                               |             |                             |   |   |   |   |   |
| Diluted                                                                    |   | 10,251,968                         |             | 10,189,762                       |   | 10,254,106 |   | 10,182,357 |   |

 

Seecondensed notes to the consolidated financial statements.

 

4

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**ConsolidatedStatements of Cash Flows**

 
|                                                                                       |   | **Six Months  Ended  April 30,** |       |
|--------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                                       |   | **2003**                         |       | **2002** |   |
|                                                                                       |   | **(Unaudited)**                  |       |
|                                                                                       |   |                             |       |   |   |
| Cash flows from  operating activities:                                                     |   |                             |       |   |   |
| Net loss                                                                                   |   | $                                | (3,452,000 | ) | $ | (4,752,000 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                             |       |   |   |
| Cumulative  effect of change in accounting principle                                       |   | 311,000                          |       | — |   |
| Depreciation and  amortization                                                             |   | 458,000                          |       | 485,000 |   |
| Non-cash stock  compensation expense                                                       |   | 47,000                           |       | — |   |
| Provision for  doubtful accounts                                                           |   | 39,000                           |       | — |   |
| Write-off of  licenses and equipment                                                       |   | 105,000                          |       | 2,714,000 |   |
| Gain on sale of  non-marketable securities                                                 |   | (600,000                         | )          | — |   |
| Deferred income  taxes                                                                     |   | —                           |       | 2,013,000 |   |
| Changes in  assets and liabilities:                                                        |   |                             |       |   |   |
| Accounts  receivable                                                                       |   | 434,000                          |       | (114,000 | ) |
| Inventories                                                                                |   | (72,000                          | )          | (123,000 | ) |
| Prepaid expenses  and other assets                                                         |   | (496,000                         | )          | (34,000 | ) |
| Accounts payable                                                                           |   | 59,000                           |       | 56,000 |   |
| Accrued expenses                                                                           |   | 235,000                          |       | 33,000 |   |
| Income taxes  receivable                                                                   |   | 1,006,000                        |       | 307,000 |   |
|                                                                                       |   |                             |       |   |   |
| Net cash  provided by (used in) operating activities                                       |   | (1,926,000                       | )          | 585,000 |   |
|                                                                                       |   |                             |       |   |   |
| Cash flows from  investing activities:                                                     |   |                             |       |   |   |
| Proceeds from  sale of marketable securities                                               |   | 11,882,000                       |       | 10,341,000 |   |
| Purchases of  marketable securities                                                        |   | (10,477,000                      | )          | (11,238,000 | ) |
| Proceeds from  sale of non-marketable securities                                           |   | 408,000                          |       | — |   |
| Purchase of  licenses                                                                      |   | —                           |       | (75,000 | ) |
| Capital  expenditures                                                                      |   | (356,000                         | )          | (188,000 | ) |
|                                                                                       |   |                             |       |   |   |
| Net cash  provided by (used in) investing activities                                       |   | 1,457,000                        |       | (1,160,000 | ) |
|                                                                                       |   |                             |       |   |   |
| Cash flows from  financing activities:                                                     |   |                             |       |   |   |
| Purchases of  common stock as treasury stock                                               |   | (129,000                         | )          | — |   |
| Proceeds from  exercise of stock options and stock purchase plan                           |   | 84,000                           |       | 109,000 |   |
|                                                                                       |   |                             |       |   |   |
| Net cash  provided by (used in) financing activities                                       |   | (45,000                          | )          | 109,000 |   |
|                                                                                       |   |                             |       |   |   |
| Net decrease in  cash and cash equivalents                                                 |   | (514,000                         | )          | (466,000 | ) |
|                                                                                       |   |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                          |   | 2,708,000                        |       | 3,084,000 |   |
|                                                                                       |   |                             |       |   |   |
| Cash and cash  equivalents at end of period                                                |   | $                                | 2,194,000  |   | $ | 2,618,000 |   |

 

Seecondensed notes to the consolidated financial statements.

 

5

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**NORTHAMERICAN SCIENTIFIC, INC.**

** **

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

 

**Note 1 – Consolidated FinancialStatements**

 

*Basisof 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 considersnecessary for a fair presentation of the Company’s financial position, resultsof operations 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 ofEstimates*

 

In the normal course of preparing the financial statements in conformitywith generally accepted accounting principles in the United States of America,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and reported amounts ofrevenue and expenses during the reporting period.  Actual results could differ from those amounts.

 

*Accountingfor Stock-based Compensation*

 

The Companyaccounts for its stock option awards to employees and directors using theintrinsic value method of accounting in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations.  The Companyhas provided additional disclosures required by Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation.”

 

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 haselected to continue to account for its stock-based compensation using theintrinsic value method of accounting according to the provisions of APB OpinionNo. 25.

 

6

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

 
|                                          |   | **Three  Months Ended  April 30,** |       | **Six Months  Ended  April 30,** |   |
|-----------------------------------------------|--------|------------------------------------|------------|----------------------------------|--------|
|                                          |   | **2003**                           |       | **2002**                         |   | **2003** |   | **2002** |   |
|                                          |   |                               |       |                             |   |   |   |   |   |
| Net loss, as reported                         |   | $                                  | (2,425,000 | )                                | $      | (4,878,000 | ) | $ | (3,452,000 | ) | $ | (4,752,000 | ) |
| Less: total stock-based compensation (1)      |   | (506,000                           | )          | (569,000                         | )      | (1,126,000 | ) | (1,100,000 | ) |
|                                          |   |                               |       |                             |   |   |   |   |   |
| Net loss, as adjusted                         |   | $                                  | (2,931,000 | )                                | $      | (5,447,000 | ) | $ | (4,578,000 | ) | $ | (5,852,000 | ) |
|                                          |   |                               |       |                             |   |   |   |   |   |
| Basic and diluted loss per share, as reported |   | $                                  | (.24       | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |
| Basic and diluted loss per share, as adjusted |   | $                                  | (.29       | )                                | $      | (.53 | ) | $ | (.45 | ) | $ | (.57 | ) |

 

----

(1) As determined under the fair value method.

 

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

 

**Note 2 – Inventories**

 

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

 
|            |   | **April 30,  2003** |    | **October  31,  2002** |   |
|-----------------|--------|---------------------|---------|------------------------|--------|
|            |   |                |    |                   |   |
| Raw materials   |   | $                   | 495,000 |                   | $      | 459,000 |   |
| Work in process |   | 61,000              |    | 42,000                 |   |
| Finished goods  |   | 112,000             |    | 95,000                 |   |
|            |   |                |    |                   |   |
|            |   | $                   | 668,000 |                   | $      | 596,000 |   |

 

7

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**Note 3 – Net Loss per Share**

 

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

 
|                                           |   | **Three  Months Ended  April 30,** |       | **Six Months  Ended  April 30,** |   |
|------------------------------------------------|--------|------------------------------------|------------|----------------------------------|--------|
|                                           |   | **2003**                           |       | **2002**                         |   | **2003** |   | **2002** |   |
|                                           |   |                               |       |                             |   |   |   |   |   |
| Net loss                                       |   | $                                  | (2,425,000 | )                                | $      | (4,878,000 | ) | $ | (3,452,000 | ) | $ | (4,752,000 | ) |
|                                           |   |                               |       |                             |   |   |   |   |   |
| Weighted average  shares outstanding - Basic   |   | 10,251,968                         |       | 10,189,762                       |   | 10,254,106 |   | 10,182,357 |   |
| Dilutive effect  of stock options              |   | —                             |       | —                           |   | — |   | — |   |
|                                           |   |                               |       |                             |   |   |   |   |   |
| Weighted average  shares outstanding - Diluted |   | 10,251,968                         |       | 10,189,762                       |   | 10,254,106 |   | 10,182,357 |   |
|                                           |   |                               |       |                             |   |   |   |   |   |
| Basic loss per  share                          |   | $                                  | (.24       | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |
| Diluted loss per  share                        |   | $                                  | (.24       | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |

 

Stock options to purchase 2,303,184 and 1,970,331 common shares for thethree months ended April 30, 2003, and 2002, respectively, and 2,308,096 and1,913,058 common shares for the six months ended April 30, 2003 and 2002,respectively, were not included in the computation of diluted earnings pershare because their effect would have been anti-dilutive.

 

**Note 4 – Comprehensive Loss**

 

The components of comprehensive loss are as follows:

 
|                                              |   | **Three  Months Ended  April 30,** |       | **Six Months  Ended  April 30,** |   |
|---------------------------------------------------|--------|------------------------------------|------------|----------------------------------|--------|
|                                              |   | **2003**                           |       | **2002**                         |   | **2003** |   | **2002** |   |
|                                              |   |                               |       |                             |   |   |   |   |   |
| Net loss                                          |   | $                                  | (2,425,000 | )                                | $      | (4,878,000 | ) | $ | (3,452,000 | ) | $ | (4,752,000 | ) |
|                                              |   |                               |       |                             |   |   |   |   |   |
| Other  comprehensive loss:                        |   |                               |       |                             |   |   |   |   |   |
| Unrealized loss  on securities available for sale |   | —                             |       | (4,000                           | )      | — |   | (32,000 | ) |
|                                              |   |                               |       |                             |   |   |   |   |   |
| Total comprehensive  loss                         |   | $                                  | (2,425,000 | )                                | $      | (4,882,000 | ) | $ | (3,452,000 | ) | $ | (4,784,000 | ) |

 

**Note 5 – Asset Retirement Obligations**

 

During 2003, the Company adopted SFAS No. 143, “Accounting for AssetRetirement Obligations” for recording future decommissioning costs related toits leased manufacturing and research facilities.  Under SFAS No. 143, a future retirement obligation is recorded atpresent value by discounting the Company’s estimated future asset retirementobligation using the Company’s estimated credit-adjusted borrowing rate.  The resultant capitalized costs are recordedas part of equipment and leasehold improvements and are amortized ratably overthe term of the leased facilities.  Theasset retirement obligation has been recorded in accrued expenses and will beadjusted to fair value over the remaining lease term as an accretionexpense.  On November 1, 2002, theCompany adopted SFAS No. 143 and recorded a liability for asset

 

8

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retirement obligations of $383,000, increased net equipment andleasehold improvements by $72,000 and recognized a charge of $311,000 which isreported in the caption “Cumulative effect of change in accounting principle.”

 

Had the asset retirement obligations been recognized in previous periodsas presented by SFAS No. 143, the Company’s net loss per share would have beenas follows:

 
|                                          |   | **Three  Months Ended  April 30,** |       | **Six Months  Ended  April 30,** |   |
|-----------------------------------------------|--------|------------------------------------|------------|----------------------------------|--------|
|                                          |   | **2003**                           |       | **2002**                         |   | **2003** |   | **2002** |   |
|                                          |   |                               |       |                             |   |   |   |   |   |
| Net loss, as reported                         |   | $                                  | (2,425,000 | )                                | $      | (4,878,000 | ) | $ | (3,452,000 | ) | $ | (4,752,000 | ) |
| Amortization and accretion expense            |   | —                             |       | (8,000                           | )      | — |   | (16,000 | ) |
|                                          |   |                               |       |                             |   |   |   |   |   |
| Net loss, as adjusted                         |   | $                                  | (2,425,000 | )                                | $      | (4,886,000 | ) | $ | (3,452,000 | ) | $ | (4,768,000 | ) |
|                                          |   |                               |       |                             |   |   |   |   |   |
| Basic and diluted loss per share, as reported |   | $                                  | (.24       | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |
| Basic and diluted loss per share, as adjusted |   | $                                  | (.24       | )                                | $      | (.48 | ) | $ | (.34 | ) | $ | (.47 | ) |

 

**Note 6 – Write-off of Licenses andEquipment**

 

Results of operations for the three and six months ended April 30, 2002include a charge of $2,714,000 to reflect the total write-off of abandonedlicenses and related equipment associated with technology licensed from thirdparties for the development of the Company’s ApomateTM technology platform. In 2001,the Company licensed additional technology and patent rights from a third partyfor the development of an improved version of its kit, or Hynic-Annexin V.  During the second quarter of 2002, theCompany decided to exclusively pursue the development of its subsequentlicensed Hynic-Annexin V technology and to write-off the prior technology.

 

**Note 7 – Deferred Income Taxes**

 

The Company continually reviews the adequacy of the valuation allowanceof its net deferred tax assets in accordance with the provisions of SFAS No.109.  The Company’s net deferred taxassets include substantial amounts of net operating loss and tax creditcarryforwards. Failure to achieve forecasted taxable income would affect theultimate realization of the net deferred tax assets.  There can be no assurance that in the future there would not beincreased competition or other factors that may result in a decline in margins,loss of market share or technological obsolescence. In addition, the Companyexpects to incur significant expenses for the next several years for ongoingclinical trials and development of Hynic-Annexin V.  Due to these uncertainties, the Company recorded an additionalvaluation allowance of approximately $1.9 million during the three months endedApril 30, 2002.

 

**Note 8 – Commitments andContingencies**

 

In October 2002, Mentor Corporation (“Mentor”) filed suit in LosAngeles Superior Court against the Company alleging breach of the exclusivemarketing and distribution agreement arising out of the Company’s newlyinitiated direct sales efforts for Prospera® Pd-103.  Mentor also alleges that the Company breached the agreement bymarketing its Prospera® I-125 seeds while still subject to the agreement, forsales after the expiration of the agreement. Mentor’s suit further alleges that the Company has misappropriatedpurported trade secrets and that the Company has engaged in unfaircompetition.  Mentor has soughtunspecified monetary damages and injunctive relief.  In October 2002, Mentor was denied a temporary restrainingorder.  In November 2002, Mentor wasdenied a preliminary injunction, and in December 2002, Mentor lost a Motion forReconsideration on the preliminary injunction. In January 2003, the Company filed a responsive pleading, as well ascounterclaims against

 

9

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Mentor seeking monetary damages for breach of contract,misappropriation of confidential information and trade secrets, trade libel,intentional and negligent misrepresentation, unfair competition, and violationof the Lanham Act.

 

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 case is currently set for trial in March 2004.

 

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.

###### ** **

###### **Item 2.  Management’s Discussion and Analysis of Financial Condition and Resultsof 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 develop, produce, and sell innovative radioisotopic products,including brachytherapy seeds and radiopharmaceuticals, principally for thetreatment and diagnosis of disease. Since 1990, we have applied our expertise in radioisotopes to developand market products for medical, environmental, research and industrialapplications.

 

From 1998 to January 2003, our brachytherapy seeds were distributedunder an exclusive agreement with Mentor Corporation (“Mentor”).  In January 2003, the agreement with Mentorterminated and we began to market and sell our brachytherapy products directlyto health care providers.  Futurerevenues and gross profit relating to our brachytherapy products will depend onseveral factors, including our ability to successfully directly market anddistribute our brachytherapy products and to successfully withstand pricingpressure from competition and price containment pressure from Medicarereimbursement limits for brachytherapy procedures.

 

In October 2000, we acquired Theseus Imaging Corporation, a developerof proprietary radiopharmaceuticals, to enhance the medical management ofpatients with cancer, heart disease or other medical conditions.  We expect to continue to incur significantclinical trial and development costs over

 

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the next several years related to Hynic-Annexin V, our principalradiopharmaceutical product candidate, especially as we expand our clinicaltrials in Europe and, if approved by the FDA, initiate our clinical trials inthe U.S. In addition, upon receipt of applicable approvals from regulatoryagencies, we expect to incur substantial expenses in connection with thecommercial launch of this product.

 

**Resultsof Operations**

 

**Second Quarter of Fiscal 2003Compared to Second Quarter of Fiscal 2002**

 

**Netsales.**  Net salesdecreased $2,053,000, or 41%, to $2,904,000 for the three months ended April 30,2003 from $4,957,000 for the three months ended April 30, 2002.  Sales during the quarter ended April 30,2003 were affected by the following: (i) a decline in unit sales associated with the transition to the directmarketing and sale of our brachytherapy products upon the conclusion in January2003 of our previous distribution agreement with Mentor, and (ii) although our average selling prices increasedas a result of eliminating our primary distributor, the industry witnessed asignificant reduction in average selling prices to end users of brachytherapyseeds as a result of a highly competitive pricing environment and pricecontainment pressure arising from Medicare reimbursement limits.  Thus, although we captured the distributormargin overall average selling prices to end users of our brachytherapyproducts decreased significantly. Revenues from our non-therapeuticlines remained consistent between periods.

 

**Grossprofit.**  Gross profitdecreased $1,595,000, or 52%, to $1,492,000 for the three months ended April30, 2003 from $3,087,000 for the three months ended April 30, 2002.  Gross profit as a percent of sales decreasedfrom 62% to 51% during this period.  Thedecrease in gross profit as a percentage of sales was primarily due to reducedeconomies of scale associated with brachytherapy revenues due to a reduction inthe volume of unit sales experienced as we transitioned to a direct salesinitiative in January 2003 and a change in our product mix.

 

**Selling,general and administrative expenses. **Selling,general and administrative (“SG&A”) expenses increased $1,391,000, or 85%,to $3,030,000 for the three months ended April 30, 2003 from $1,639,000 for thethree months ended April 30, 2002. The increase is primarily attributed to thedevelopment of a direct sales and marketing force for our brachytherapyproducts and increased legal expenses associated with the Mentor litigation.

 

**Researchand development. **Researchand development (“R&D”) expenses decreased $326,000, or 15%, to $1,813,000for the three months ended April 30, 2003 from $2,139,000 for the three monthsended April 30, 2002.  These costsprimarily represent our continued investment in our Hynic-Annexin V productcandidate. The decrease in research and development spending is primarily due toa decrease in manufacturing costs partially offset by increased R&Dpersonnel and facility costs. All of our research and development costs areexpensed as incurred. We anticipate incurring significant costs in the futureas we initiate our clinical trials in the United States and expand our clinicaltrials in Europe.  Our R&D spendingreflects our belief that to maintain our competitive position in a marketcharacterized by rapid rates of technological advancement, we must continue toinvest significant resources in new product development, as well as continue toenhance existing products.

 

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**Write-off of licenses and equipment**.  Results of operations for the three monthsended April 30, 2002 include a charge of $2,714,000 to reflect the totalwrite-off of abandoned licenses and related equipment associated withtechnology licensed from third parties for the development of our initialApomateTM technologyplatform. In 2001 we licensed additional technology and patent rights from athird party for the development of an improved version of our kit, orHynic-Annexin V.  During the secondquarter of 2002, we decided to exclusively pursue the development of oursubsequent licensed Hynic-Annexin V technology and to write-off the priortechnology.

 

**Interestand other income, net. **Interestand other income increased $460,000, or 99%, to $926,000 for the three monthsended April 30, 2003 from $466,000 for the three months ended April 30, 2002.This increase reflects a gain on sale of $600,000 resulting from the sale ofour remaining shares of RadioMed Corporation, a privately held company, whichwas partially offset by lower interest income as a result of a general declinein the effective yield of our portfolio of marketable securities consistentwith the general decline in interest rates during the period.

 

**Provision for income taxes.**   Results of operations for the three monthsended April 30, 2002 included a provision for income taxes of $1,939,000,whereas we did not recognize a benefit for the loss during the three monthsended January 31, 2003.  Due to theuncertainty of our ability to recognize the future benefit of certain deferredtax assets, we recorded a valuation allowance of approximately $1.9 million inthe quarter ended April 30, 2002 and have not recorded any additional incometax benefits for losses incurred since April 30, 2002.

 

**Six Months Ended April 30, 2003Compared to Six Months Ended April 30, 2002**

 

**Netsales.**  Net salesdecreased $1,848,000, or 19%, to $8,045,000 for the six months ended April 30,2003 from $9,893,000 for the six months ended April 30, 2002.  The decrease in net sales was due to thetransition associated with directly marketing and selling our brachytherapyproducts upon the conclusion in January 2003 of our previous distributionagreement with Mentor. Our brachytherapy product sales accounted forapproximately 73% of our revenues for the six months ended April 30, 2003.  Revenues from our non-therapeutic linesremained consistent between periods.

 

**Grossprofit.**  Gross profitdecreased $1,462,000, or 23%, to $4,790,000 for the six months ended April 30,2003 from $6,252,000 for the six months ended April 30, 2002.  Gross profit as a percent of sales decreasedfrom 63% to 60% during this period.  Thedecrease in gross profit as a percentage of sales was primarily due to reducedeconomies of scale in our fiscal second quarter associated with brachytherapyrevenues due to a reduction in unit volume as we transitioned to a direct salesinitiative in January 2003 and a change in our product mix.

 

**Selling,general and administrative expenses. **SG&Aexpenses increased $2,581,000, or 90%, to $5,445,000 for the six months endedApril 30, 2003 from $2,864,000 for the six months ended April 30, 2002. Theincrease is primarily attributed to the development of a direct sales andmarketing force for our brachytherapy products and increased legal expensesassociated with the Mentor litigation.

 

**Researchand development. **Researchand development costs decreased $599,000, or 14% to $3,770,000 for the sixmonths ended April 30, 2003 from $4,369,000 for the six months ended April 30,2002.  These costs primarily representour continued investment in our Hynic-Annexin V product candidate. The decreasein research and development spending is primarily due to a decrease in  manufacturing costs partially offset byincreased R&D personnel costs and increased R&D facility costs. All ofour research and development cost are expensed as incurred. We anticipateincurring significant costs in the future as we initiate our clinical trials inthe Unites States and expand our clinical trials in

 

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Europe.  Our R&D spendingreflects our belief that to maintain our competitive position in a marketcharacterized by rapid rates of technological advancement, we must continue toinvest significant resources in new product development, as well as continue toenhance existing products.

 

**Write-off of licenses and equipment**.  Results of operations for the six monthsended April 30, 2002 include a charge of $2,714,000 to reflect the totalwrite-off of abandoned licenses and related equipment associated withtechnology licensed from third parties for the development of our initialApomateTM technologyplatform. In 2001 we licensed additional technology and patent rights from athird party for the development of an improved version of our kit, orHynic-Annexin V.  During the secondquarter of 2002, we decided to exclusively pursue the development of oursubsequent licensed Hynic-Annexin V technology and to write-off the priortechnology.

 

**Interestand other income. **Interestand other income increased $328,000, or 34%, to $1,284,000 for the six monthsended April 30, 2003 from $956,000 for the six months ended April 30, 2002.This increase reflects a gain on sale of approximately $600,000 resulting fromthe sale of our remaining shares of RadioMed Corporation, a privately heldcompany, which was partially offset by lower interest income as a result of ageneral decline in the effective yield of our portfolio of marketablesecurities consistent with the general decline in interest rates in the period.

 

**Provision for income taxes.**   Results of operations for the six monthsended April 30, 2002 included a provision for income taxes of $2,013,000,whereas we did not recognize a benefit for the loss during the six months endedApril 30, 2003.  Due to the uncertaintyof our ability to recognize the future benefit of additional deferred tax assets,we recorded a valuation allowance of approximately $2.0 million in the quarterended April 30, 2002 and have not recorded any additional income tax benefitsfor losses incurred since April 30, 2002.

 

**CriticalAccounting 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, describes thesignificant accounting policies and methods used in the preparation of the ConsolidatedFinancial Statements. Estimates are used for, but not limited to, theaccounting for revenue recognition, allowance for doubtful accounts, goodwilland long-lived asset impairments, loss contingencies, and taxes. Actual resultscould 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 price is fixed or determinable, and (iv) collectibility isreasonably assured.

 

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*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.

 

*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.

 

**Liquidityand 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 cash generated byoperations, public offerings and from private placements of our commonstock.  We do not currently have a lineof credit or similar arrangements with a bank.

 

At April 30, 2003, we had cash and investments in marketable securitiesaggregating approximately $54.0 million and working capital of $32.0 million.Working capital does not include $21.3 million of our marketable securitiesthat are classified as non-current assets since the maturities of thesemarketable debt instruments are beyond a one year period.

 

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For the six months ended April 30, 2003, net cash used in operatingactivities was approximately $1.9 million compared to net cash provided byoperating activities of $0.6 million for the prior year period. Net cashprovided by investing activities totaled approximately $1.5 million during thesix months ended April 30, 2003, compared to net cash used in investingactivities of $1.2 million for the prior year period.

 

During the six months ended April 30, 2003, we received approximately$84,000 from the exercise of stock options and the sale of shares under ouremployee stock purchase plan compared to $109,000 for the same period in 2002.  Proceeds from the exercise of stock options,employee stock purchase plan, and their related tax benefits will vary fromperiod to period based upon, among other factors, fluctuations in the marketvalue of our stock relative to the exercise price of such options.

 

We are authorized to purchase up to $10 million of our common stock onthe open market under our share repurchase program.  During the three months ended April 30, 2003, we purchased 19,000shares of our common stock at a total cost of $129,000.

 

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 to research,development, clinical trials, license fees, royalty obligations, regulatoryapprovals and commercialization relating to our Hynic-Annexin V productcandidate and other product candidates

 

•      the further development of asales and marketing force for our brachytherapy seed products as we transitionfrom our exclusive distribution agreement with Mentor to direct sales andmarketing

 

•      levels of sales and marketingthat will be required to launch new products and achieve and maintain acompetitive position in the marketplace for both existing and new products

 

•      market acceptance of ourproducts

 

•      levels of inventory andaccounts receivable that we maintain

 

•      competitors’ responses toour products

 

•   level of capital expenditures

 

•      acquisition and/ordevelopment 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.

 

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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 $654,000, $308,000 and$14,000, respectively.

 

In addition we have minimum commitments for various contract serviceswith unrelated parties that are provided over a one to three year period,totaling approximately $1.4 million. We have contractual rights to terminateour payment obligations on approximately $0.6 million of such agreementswith 30 to 90 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.

 

**RecentAccounting Pronouncements**

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement nullifies EmergingIssues Task Force (“EITF”) Issue No. 94-3,  “Liability  Recognition for Certain  Employee Termination  Benefits  and Other Costs to Exit an Activity (including   Certain   Costs Incurred  in  a Restructuring).” This statement requires companies to recognize costsassociated with exit or disposal activities when they are incurred rather thanat the date of a commitment to an exit or disposal plan. SFAS No. 146 is to beapplied prospectively to exit or disposal activities initiated after December31, 2002. Adoption ofthis statement did not have a material impact on our consolidated financialstatements.

 

In February 2003, FASB issued EITF Issue No. 00-21, “RevenueArrangements with Multiple Deliverables.” EITF Issue No. 00-21 requires revenuearrangements with multiple deliverables to be divided into separate units of accounting.If the deliverables in the arrangement meet certain criteria, arrangementconsideration should be allocated among the separate units of accounting basedon their relative fair values. Applicable revenue recognition criteria shouldbe considered separately for separate units of accounting. The guidance in EITFIssue No. 00-21 is effective for revenue arrangements entered into in fiscalperiods beginning after June 15, 2003. We are currently in the process of reviewing EITF Issue No. 00-21.

 

###### **Item 3.    Quantitativeand Qualitative Disclosures About Market Risk**

 

Information about market risks for the three months ended April 30,2003 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.

 

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

 

a.             Evaluation ofdisclosure controls and procedures.

 

Within the 90-day periodprior to the filing of this report, an evaluation was carried out under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), ofthe effectiveness of our disclosure controls and procedures.  Based on that evaluation, the CEO and CFOhave concluded that the Company’s disclosure controls and procedures areeffective to ensure that information required to be disclosed by the Company inreports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

b.             Changes in internalcontrols.

 

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.  Since no significant deficiencies or material weaknesses werediscovered during such the evaluation, no corrective actions were taken.

** **

**PART II – OTHER INFORMATION**

 

We were not required to report the information pursuant to Items 1through 6 of Part II of Form 10-Q except as follows:

 

###### **Item 4.    Submissionof Matters to a Vote of Security Holders**

 

On March 28, 2003, we held our 2003 Annual Meeting of Stockholders.  The following persons were elected asdirectors to hold office until the 2004 Annual Meeting of Stockholders: IrwinJ. Gruverman, L. Michael Cutrer, Dr. Jonathan P. Gertler, Dr. Allan M. Green,Mitchell H. Saranow and Dr. Gary N. Wilner. The number of shares cast for, withheld and abstained with respect toeach of the nominees were as follows:

 

| **Nominee** |   | **For**   |   | **Withheld** |   | **Abstained** |   |
|-------------|--------|-----------|--------|--------------|--------|---------------|--------|
| Gruverman   |   | 9,677,444 |   | 365,987      |   | —        |   |
| Cutrer      |   | 9,632,338 |   | 411,093      |   | —        |   |
| Gertler     |   | 9,631,888 |   | 411,543      |   | —        |   |
| Green       |   | 9,632,317 |   | 411,114      |   | —        |   |
| Saranow     |   | 9,634,368 |   | 409,063      |   | —        |   |
| Wilner      |   | 9,633,288 |   | 410,143      |   | —        |   |

 

The stockholders voted to approve our 2003 Non-Employee Director’sEquity Compensation Plan.  A total of9,218,991 shares were cast for the adoption of the proposal, 796,128 shareswere cast against this proposal, and 28,312 shares abstained.

 

The stockholders also voted to approve the ratification of theselection of PricewaterhouseCoopers LLP as our independent accountants for thefiscal year ending October 31, 2003.  Atotal of 9,801,010 shares were cast for the adoption of the proposal, 231,601shares were cast against this proposal, and 10,820 shares abstained.

 

There were no broker non-votes on either matter.

 

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## **Item 6.    Exhibitsand Reports on Form 8-K**

 

(a)               Exhibits.

 
| **Exhibit No.** |   | **Title**                                                                                                                 |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                      |
| 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 havebeen filed during the quarter for which this report is filed.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|         |   | NORTH AMERICAN SCIENTIFIC, INC. |
|--------------|--------|---------------------------------|
|         |   |                            |
|         |   |                            |
| May 27, 2003 |   | By:                             | /s/ L. Michael Cutrer |
|         |   |                            | Name: | L. Michael Cutrer |
|         |   |                            | Title: | President and |
|         |   |                            |   | Chief Executive Officer |
|         |   |                            |   | (Principal Executive Officer) |
|         |   |                            |
|         |   |                            |
| May 27, 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****PURSUANT TO**

**SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, L. Michael Cutrer, certify that:

 
| 1.     |   | I have reviewed this quarterly 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 fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.     |   | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.     |   | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                            |   | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                            |   | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   |   | c)                                                                                                                                                                                                                                                                                                                                                                                            |   | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
| 5.     |   | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                            |   | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                            |   | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                          |
| 6.     |   | The registrant’s other certifying officers and I  have indicated in this quarterly report whether there were significant  changes in internal controls or in other factors that could significantly  affect internal controls  subsequent to the date of our most recent evaluation, including any  corrective actions with regard to significant deficiencies and material  weaknesses. |

 
| Date: May 27, 2003                     |
|----------------------------------------|
|                                   |
| /s/ L. Michael Cutrer                  |   |
| L. Michael Cutrer                      |
| President and Chief  Executive Officer |

 

19

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I, Alan I. Edrick, certify that:

 
| 1.     |   | I have reviewed this quarterly 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 fact or omit to state a material  fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the  period covered by this quarterly report;                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.     |   | Based on my knowledge, the financial statements, and  other financial information included in this quarterly report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  quarterly report;                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.     |   | The registrant’s other certifying officers and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                           |   | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this quarterly report is  being prepared; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                           |   | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this quarterly report (the “Evaluation Date”); and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   |   | c)                                                                                                                                                                                                                                                                                                                                                                                           |   | presented in this quarterly report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 5.     |   | The registrant’s other certifying officers and I  have disclosed, based on our most recent evaluation, to the registrant’s  auditors and the audit committee of registrant’s board of directors (or  persons performing the equivalent functions):                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | a)                                                                                                                                                                                                                                                                                                                                                                                           |   | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   |   | b)                                                                                                                                                                                                                                                                                                                                                                                           |   | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 6.     |   | The registrant’s other certifying officers and I  have indicated in this quarterly report whether there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant deficiencies and  material weaknesses. |

 
| Date: May 27, 2003                                 |
|----------------------------------------------------|
|                                               |
| /s/ Alan I. Edrick                                 |   |
| Alan I. Edrick                                     |
| Senior Vice President and  Chief Financial Officer |

 

20

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