<PAGE>
2,500,000 SHARES
[NORTH AMERICAN SCIENTIFIC, INC. LOGO]
COMMON STOCK
$17.875 PER SHARE
--------------------------------------------------------------------------------
North American Scientific, Inc. is offering for sale 2,320,000 shares and the
selling stockholders identified in this prospectus are offering 180,000 shares.
We will not receive any of the proceeds from the sale of shares by the selling
stockholders.
Our common stock is listed on the Nasdaq National Market under the symbol
"NASI." On December 13, 2000, the last reported sale price of our common stock
on the Nasdaq National Market was $18.9375 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Price to the public............................ $17.875 $44,687,500
Underwriting discount.......................... $ 1.073 $ 2,681,250
Proceeds to NASI............................... $16.587 $38,481,800
Proceeds to the selling stockholders........... $16.803 $ 3,024,450
</TABLE>
We have granted an over-allotment option to the underwriters. Under this option,
the underwriters may elect to purchase a maximum of 375,000 additional shares
from us within 30 days following the date of this prospectus to cover
over-allotments.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
UBS WARBURG LLC
LEERINK SWANN & COMPANY
The date of this prospectus is December 14, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 16
Common Stock Market Data.................................... 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 25
Management.................................................. 42
Principal and Selling Stockholders.......................... 43
Related Party Transactions.................................. 44
Description of Capital Stock................................ 45
Underwriting................................................ 47
Legal Matters............................................... 49
Experts..................................................... 49
Where You Can Find More Information......................... 49
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------------
The underwriters are offering the shares subject to various conditions and may
reject all or any part of any order.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND THE REPORTS INCORPORATED BY
REFERENCE IN THIS PROSPECTUS.
OVERVIEW
We design, develop and produce innovative radioisotopic products for the
treatment and diagnosis of disease. Since 1990, we have applied our expertise in
radioisotopes to develop and market products for medical, environmental,
research and industrial applications. In 1998, we introduced our first
therapeutic product, a sealed implantable iodine-based brachytherapy device, or
seed, and in 1999, we introduced our palladium-based brachytherapy seed. Both
seeds are used primarily for treating prostate cancer. Prostate cancer is a
disease which costs approximately $5 billion to treat and which is newly
diagnosed in 180,000 men in the United States annually. In fiscal 1999, our
revenue derived from sales of our brachytherapy seeds was approximately
$10 million. We believe that we are the third largest manufacturer of
brachytherapy seeds for the treatment of prostate cancer in the world and the
only manufacturer of both iodine and palladium brachytherapy seeds.
To complement our core competency in radioisotopic medical products, we recently
acquired Theseus Imaging Corporation, a developer of drugs containing
radioactive elements known as radiopharmaceuticals. Theseus' leading product
candidate, Apomate, an IN VIVO nuclear medicine imaging agent, is in Phase II
clinical trials for two indications: assessing the location and extent of heart
attack damage and detecting heart transplant rejection. In addition, Apomate is
in Phase I clinical trials for determining early response to cancer treatment.
We believe that Apomate will allow clinicians to make more effective therapeutic
decisions which will improve patient care management in these areas.
We focus our product development activities primarily on high value, high growth
medical products that address large potential markets. We plan to utilize our
expertise to identify new medical product opportunities, introduce product line
extensions and collaborate with other companies to develop and commercialize new
products.
OUR PRODUCTS
BRACHYTHERAPY SEEDS
Prostate cancer is the second most prevalent form of cancer in men in the United
States and is the second most common cause of cancer death in men of all ages.
The brachytherapy seeding procedure is an outpatient procedure in which a
radiation oncologist or urologist using thin, hollow needles inserts between 60
and 120 seeds into the prostate gland through the perineum (the area between the
scrotum and rectum). We believe that the use of brachytherapy for the treatment
of prostate cancer has grown over 100% from 1996 to 1999 due to its benefits
relative to other therapies, including:
- lower incidence of impotence and incontinence
- faster recovery times
- lower cost
- comparable ten-year survival rates
Our brachytherapy seeds for prostate cancer are distributed by Mentor
Corporation under the trademarks IoGold and PdGold. Since the commercial
introduction of our brachytherapy product line, our consolidated revenue has
grown substantially, from $3.4 million prior to introduction in fiscal 1997 to
$12.8 million in fiscal 1999, an increase of 278%.
APOMATE
Apomate is an imaging agent that targets dying cells. Cell death occurs in two
ways. The first, apoptosis, is a condition in which cells progress through a
series of biochemical events which lead to their destruction by white blood
cells acting as scavenger cells. The second, necrosis, is
3
<PAGE>
a condition in which the cell's membrane breaks open and spills the contents of
the cell into the surrounding environment leading to inflammation. Apoptosis and
necrosis are characteristics of certain medical conditions, such as heart
attack, organ transplant rejection and the response to cancer treatment. By
localizing at the site of such cell death, Apomate has the potential for
providing diagnostic and prognostic information about those medical conditions.
We believe the potential markets for Apomate are large and include: assessing
location and extent of heart attack damage, detecting heart transplant rejection
and determining early response to cancer treatment.
- ASSESSING THE LOCATION AND EXTENT OF IRREVERSIBLY DAMAGED HEART MUSCLE. There
are approximately five million hospital or emergency room admissions annually
in the United States for the purpose of ruling out a heart attack. Existing
diagnostic tests such as an electrocardiogram, or ECG, and enzyme studies are
definitive in diagnosing approximately 1.5 million of these cases but not so
in the remaining 3.5 million patients. Unlike existing radiopharmaceutical
agents, Apomate may be useful in distinguishing acute heart tissue damage
from chronic disease or previous heart attack scar. In seven out of seven
patients studied, researchers in Europe detected localization of the Apomate
imaging agent in the same areas of heart damage indicated by ECG tests. Based
on these positive clinical studies, we filed an Investigational New Drug
application, or IND, with the U.S. Food and Drug Administration, or FDA, to
conduct Phase II multi-center clinical trials of Apomate imaging as an
adjunct in the diagnosis of heart attack. These trials began in
November 2000. We believe that Apomate imaging could be useful in making a
definitive diagnosis of, or ruling out, heart attack. Consequently, we
believe the use of Apomate may reduce hospital costs by permitting some
patients to be discharged earlier.
- DETECTING HEART TRANSPLANT REJECTION. There are approximately 2,300 heart
transplants performed annually in the United States, with each patient
subsequently undergoing up to 15 biopsy procedures in the first year after
the transplant in order to assess the adequacy of immunosuppression
medication. In our Phase I clinical trials totaling 49 patients, Apomate
correctly imaged 86% of patients exhibiting cardiac transplant rejection and
100% of those without rejection. We are currently conducting Phase II trials
for this indication. In addition, Apomate has received orphan drug
designation from the FDA for the diagnosis of heart transplant rejection.
Orphan drug status provides for U.S. marketing exclusivity for seven years
upon marketing approval by the FDA. The status also provides certain tax
benefits and will exempt us from certain FDA application fees. We believe, if
approved, Apomate would represent the only non-invasive diagnostic procedure
that can assess the adequacy of immunosuppression medication in this
population.
- DETERMINING EARLY RESPONSE TO CANCER TREATMENT. There are approximately
400,000 patients who undergo chemotherapy annually. Normally, it takes weeks
or months of repeated cancer treatment until any tumor size change can be
measured. This lengthy evaluation period can be particularly troublesome
because the side effects of chemotherapy are felt in 100% of the treated
population. In clinical trials, Apomate appears to predict clinical response
to chemotherapy in non-small cell lung cancer when administered 24 to
72 hours after the first course of treatment. We believe that Apomate will
allow for rapid identification of ineffective treatment, thereby reducing
exposure to unnecessary toxicity and allowing for more timely alternative
treatment.
OUR STRATEGY
Our objective is to continue to strengthen our position as a leading developer
of radioisotopic products and technologies. The key elements of our strategy
include:
- Expanding our worldwide brachytherapy business
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- Establishing Apomate as a diagnostic standard for clinical and research
applications
- Leveraging our core competency in radioisotopic products to identify
additional product opportunities
- Forming strategic collaborations to support development and commercialization
of our products
- Establishing a broad intellectual property portfolio
THESEUS ACQUISITION
On October 13, 2000, we acquired Theseus, by means of a merger. Theseus will
operate as our wholly-owned subsidiary. Theseus was introduced to us by
Dr. Allan Green and Irwin Gruverman, who founded Theseus and are two of our
directors. Dr. Green and Mr. Gruverman have been involved in the nuclear
medicine field since 1974 and 1965, respectively, and were involved in the
original development of Thallium Tl-201 for regional perfusion imaging of the
heart, and with the development program that led to the introduction of
Cardiolite, one of the world's leading radiopharmaceuticals now being marketed
by DuPont Corporation.
Theseus' stockholders and option holders received a total of 345,665 shares of,
or options to purchase for nominal consideration, our common stock in exchange
for 100% of Theseus' outstanding common stock and options. In connection with
the acquisition, Theseus has retained its obligations, including approximately
$8 million owed to us with respect to loans we made to Theseus from time to time
since 1998. In connection with the Theseus acquisition, we expect to record in
our fourth fiscal quarter ended October 31, 2000, a one-time charge for
in-process research and development of between $11 million and $12 million. We
also expect that we will incur ongoing clinical trial and development costs
related to Apomate, totaling an estimated $20 million over the next two to three
years.
OTHER INFORMATION
We were originally incorporated under the Company Act of British Columbia,
Canada, in 1987 and became a Delaware corporation on April 20, 1995. Our
principal executive offices are located at 20200 Sunburst Street, Chatsworth,
California 91311. Our telephone number is (818) 734-8600. Our website can be
found at WWW.NASI.NET. We do not consider, or intend for, information found on
our website to constitute a part of this prospectus.
Apomate and Prospera are our trademarks. All other product names, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
5
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THE OFFERING
<TABLE>
<S> <C>
Common stock offered by NASI................................ 2,320,000 shares
Common stock offered by the selling stockholders............ 180,000 shares
Common stock to be outstanding after the offering........... 9,678,702 shares
Use of proceeds............................................. We intend to use the net proceeds
from this offering to fund
clinical trials related to
Apomate; to expand our clinical
trial and preclinical research;
for potential acquisitions of
complementary technologies,
products or companies; and for
general corporate purposes.
Nasdaq National Market symbol............................... NASI
</TABLE>
The number of shares of common stock to be outstanding after the offering as
shown in the table above is based on the actual number of shares outstanding as
of December 13, 2000 and includes 310,665 shares of common stock issued for the
acquisition of Theseus on October 13, 2000. The number of shares of common stock
outstanding, excludes:
- 596,455 shares of common stock issuable upon exercise of options outstanding
as of December 13, 2000 at a weighted average exercise price of $6.96 per
share
- 96,000 shares of common stock issuable upon exercise of warrants outstanding
as of December 13, 2000 with an exercise price of $14.41 per share
- 250,000 shares reserved for issuance under our employee stock purchase plan
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Net sales........................................ $3,381 $5,839 $12,767 $8,878 $12,891
Cost of goods sold............................... 1,844 2,680 4,594 3,261 4,296
------ ------ ------- ------ -------
Gross profit................................... 1,537 3,159 8,173 5,617 8,595
Operating expenses:
Research and development....................... 72 196 287 240 264
Selling, general and administrative............ 1,094 1,859 3,060 2,236 2,583
------ ------ ------- ------ -------
Total operating expenses......................... 1,166 2,055 3,347 2,476 2,847
------ ------ ------- ------ -------
Income from operations........................... 371 1,104 4,826 3,141 5,748
Interest and other income........................ 50 635 611 429 833
------ ------ ------- ------ -------
Income before provision for income taxes......... 421 1,739 5,437 3,570 6,581
Provision for income taxes....................... 145 640 2,068 1,362 2,469
------ ------ ------- ------ -------
Net income....................................... $ 276 $1,099 $ 3,369 $2,208 $ 4,112
====== ====== ======= ====== =======
Diluted earnings per share....................... $ .05 $ .16 $ .47 $ .31 $ .55
====== ====== ======= ====== =======
Diluted shares used in per share calculation..... 5,372 7,024 7,203 7,183 7,467
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 2000
----------------------------------
(unaudited)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities......... $11,495 $11,568 $50,050
Working capital.......................................... 13,032 11,719 50,201
Total assets............................................. 28,537 30,802 69,284
Long-term obligations.................................... -- 2,500 2,500
Total stockholders' equity............................... 26,962 25,885 64,367
</TABLE>
The pro forma balance sheet data in the table above reflects the acquisition of
Theseus consummated on October 13, 2000 as if effective on July 31, 2000. The
pro forma as adjusted balance sheet data above gives effect to the sale of
2,320,000 shares of our common stock in this offering at the public offering
price of $17.875 per share, after deducting the underwriting discount and our
estimated offering expenses.
7
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS BEFORE DECIDING TO
INVEST IN THE SHARES.
OUR RECENT ACQUISITION OF THESEUS AND THE RESULTING CHANGES TO OUR CORE BUSINESS
INVOLVE CONSIDERABLE RISK AND MAY THREATEN OUR FUTURE PROFITABILITY AND
VIABILITY.
On October 13, 2000, we acquired Theseus, a developer of proprietary
radiopharmaceutical products to enhance the medical management of various
conditions, including heart attack, heart transplant rejection and cancer,
pursuant to an amended and restated merger agreement dated September 22, 2000.
Under the merger agreement, a newly formed, wholly-owned subsidiary was merged
into Theseus, with the result that Theseus is now one of our wholly-owned
subsidiaries.
Through Theseus, we have acquired product candidates which we plan to develop
and expand into a core focus of our future business. Such an expansion and shift
in our business involves considerable risk. Our ability to integrate Theseus
into our business and succeed in developing and marketing these new product
candidates will be affected by the following factors:
- The use of radiopharmaceuticals for imaging cell death is a new and unproven
technology and may not receive acceptance among healthcare providers, payors
or patients
- Clinical trials with respect to these products may not be successful and we
may not receive government approval in a timely manner or at all. If such
approval can be obtained, we do not expect to receive FDA approval for
Apomate in connection with detecting heart transplant rejection until 2002 at
the earliest, and, thereafter, for assessing the location and extent of
irreversibly damaged heart muscle and determining early response to cancer
treatment
- Any resulting products may not achieve market acceptance or compete
successfully against existing or future diagnostic products intended for
similar purposes
- We expect future investment in development and commercialization of the
Theseus products to have a significant negative impact on our earnings,
including an estimated $20 million of expenses over the next two to three
years for ongoing clinical trial and development costs related to Theseus'
principal product candidate, Apomate
OUR ABILITY TO COMMERCIALIZE PRODUCT CANDIDATES IS SUBJECT TO UNCERTAINTY
RELATED TO CLINICAL TRIALS.
Before obtaining regulatory approval for the commercial sale of Apomate or any
other product candidates, we must demonstrate through preclinical studies and
clinical trials that such product candidates are safe and efficacious for use in
each indication. The results from preclinical testing and early clinical trials
may not predict results that will be obtained in large-scale clinical trials,
and there can be no assurance that our clinical trials will demonstrate the
safety and effectiveness of any of our product candidates or will lead to
marketable products. A number of companies have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. We,
the FDA or other regulatory authorities may suspend or terminate clinical trials
at any time. In addition, there can be no assurance that any of our product
candidates will obtain FDA or other regulatory approval for any indication or
that an approved product will be capable of being produced in commercial
quantities at reasonable cost and successfully marketed.
In particular, although we anticipate finalizing the composition of and
suppliers for our Apomate kit within the first half of 2001, if we are delayed
or unable to determine the final Apomate product candidate we intend to take to
market within such time period, we may be unable to proceed on schedule with
further
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clinical trials for any indications. In addition, the FDA has indicated that
clinical trial data we present from an adequate and well-controlled study
suitable for supporting a marketing application, often referred to as a pivotal
study, for any indication may not be accepted if Apomate's composition changes
significantly. As a result, any delay caused by implementing the final
manufacturing process for the Apomate kit may delay the commercialization of
Apomate.
In addition, the rate at which we complete clinical trials depends upon, among
other things, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
protocol, the proximity of patients to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment may result in
increased costs, program delays, or both.
There can be no assurance that any of our clinical trials will be completed
successfully within any specified time period, or at all. There also can be no
assurance that the results from any of these clinical trials will warrant
commencing further clinical trials or taking a product candidate to market.
IF WE FAIL TO MAINTAIN EXISTING MARKETING ALLIANCES OR ARE UNABLE TO ENTER INTO
NEW ALLIANCES WHEN NECESSARY, COMMERCIALIZATION OF CERTAIN OF OUR PRODUCTS MAY
BE DELAYED OR PREVENTED.
We do not have a dedicated sales and marketing force and currently do not have
the ability to market and sell any of our products in commercial quantities
without entering into marketing relationships with others. We have limited
experience marketing and selling our brachytherapy products, which in fiscal
1999 accounted for approximately 77% of our revenue, and do not have experience
marketing and selling those products in commercial quantities. On June 16, 1997,
we entered into a five-year marketing and exclusive distribution agreement with
Mentor, whereby Mentor agreed to market and distribute our Iodine-125 and
Palladium-103 brachytherapy seeds for prostate cancer. As a result, sales of
those products depend on the marketing efforts of Mentor. Through its sales
force, Mentor markets the products to urologists, radiation oncologists and
medical physicists and is involved in educating and training physicians in the
procedures for using the products.
Mentor did not meet its 1999 performance target with respect to sales of PdGold.
We believe that it is unlikely that Mentor will meet its 2000 target. However,
Mentor's shortfall has been decreasing over the life of the contract, and we
believe that Mentor is making sufficient efforts to cure its performance
deficiencies with respect to PdGold.
If at any time, we become dissatisfied with Mentor's efforts to remedy any
contractual shortfall, or if the shortfall worsens or does not improve, we may
elect to terminate Mentor's right of exclusivity subject to certain curing
provisions set forth in our contract with Mentor. If Mentor's right of
exclusivity is terminated, we may be unable to develop other distribution
relationships or establish an internal sales and marketing force.
If we terminate our relationship with Mentor because Mentor fails to meet its
performance targets, we may be unable to market certain of our products under
Mentor's proprietary trademarks.
Additionally, we may rely on marketing alliances to commercialize other products
we develop, including Apomate and other nuclear medicine products. As a result,
we will need to develop third-party distribution relationships and/or create our
own direct sales force in order to market our products in the future. We may not
be successful in developing other distribution relationships when necessary and
we may be unable to develop our own sales force because of the significant costs
and dedication of resources involved.
IF WE FAIL TO MAINTAIN OUR COMPETITIVE POSITION IN KEY PRODUCT AREAS, WE MAY
LOSE SIGNIFICANT SOURCES OF REVENUE.
Our brachytherapy business is subject to intense competition. Our primary
competitors in the brachytherapy seed business include Nycomed Amersham PLC,
which manufactures and sells Iodine-125 brachytherapy seeds, and Theragenics
9
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Corporation, which manufacturers and sells Palladium-103 brachytherapy seeds
directly and through relationships with Prostate Services of America, Inc.,
Nycomed Amersham PLC, Imagyn Medical Technologies and Indigo Medical, Inc., a
subsidiary of Johnson & Johnson. Several companies have begun to sell seeds and
others have announced their intention to market brachytherapy products, which
would result in increased competition. In addition, other products using
alternative technologies may be developed which would compete with our
brachytherapy products. For example, if treatment methods such as cryosurgery or
hormone therapy gain acceptance among healthcare providers, patients and payors,
or if new technologies such as gene modification emerge to become leading
treatment standards as alternatives to traditional therapies, we may lose market
share for our brachytherapy seeds or may find that our products are rendered
non-competitive or obsolete by such market shifts and technological
developments.
Our radiation reference source business also is subject to intense competition.
Our competitors in this industry include AEA Technology PLC and Eckert & Ziegler
AG. We believe that these companies have a dominant position in the market for
radiation reference source products.
Currently, the leading imaging technologies include computer tomography, or CT,
scanning and magnetic resonance imaging, or MRI, both of which image changes in
the anatomy of organs and other tissue. Our Apomate product candidate images
apoptosis and necrosis at the cellular level; however, there can be no assurance
that alternative technologies will not be developed which have superior imaging
capabilities to Apomate or which become more widely accepted as imaging
standards.
In addition, many of our competitors are substantially larger and have greater
sales, marketing and financial resources than we do. Developments by any of
these or other companies or advances by medical researchers at universities,
government facilities or private laboratories could render our products
obsolete. Moreover, companies with substantially greater financial resources
than us, as well as more extensive experience in research and development, the
regulatory approval process, manufacturing and marketing, may be in a better
position than we are to seize market opportunities created by technological
advances in our industry.
THE INNOVATIVE NATURE OF APOMATE AND OTHER PRODUCTS UNDER DEVELOPMENT RAISES
QUESTIONS AS TO WHETHER THE MARKET WILL ACCEPT SUCH PRODUCTS.
The success of our products will depend on our ability to foster and maintain
favorable perceptions among patients, doctors, healthcare payors and medical
researchers regarding the safety, efficacy and cost effectiveness of these
products. This is particularly true with respect to Apomate. Healthcare
providers and payors may not accept gamma imaging of cell death through the use
of Apomate as a viable alternative to traditional methods for assessing heart
attack, heart transplant rejection, response to cancer treatment or the effects
of other diseases involving cellular death. If our products do not receive
acceptance among physicians, patients and healthcare payors in the United States
or elsewhere, we may be unable to market and sell these products.
IF WE ARE UNABLE TO ACQUIRE SUFFICIENT SUPPLIES FROM KEY SUPPLIERS THAT IN SOME
CASES MAY BE THE ONLY SOURCE OF RAW MATERIALS, OUR ABILITY TO DELIVER OUR
PRODUCTS TO THE MARKET MAY BE IMPEDED.
We depend upon a limited number of outside unaffiliated suppliers for our
radioisotopes. Our principal suppliers are Nordion International, Inc. and
certain companies in Russia. We also utilize other commercial isotope
manufacturers located in the United States and overseas. To date, we have been
able to obtain the required radioisotopes for our products without any
significant delays or interruptions. Currently, we rely exclusively upon Nordion
International for our supply of the Palladium-103 isotope; if Nordion
International ceases to supply our needs, there may not be adequate alternative
sources of supply.
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IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR TECHNOLOGY OR ENFORCE OUR PATENTS WE
MAY LOSE A SIGNIFICANT ADVANTAGE OVER OUR COMPETITORS.
Our success depends in part on our ability to obtain and enforce patent
protections for our products and operate without infringing on the proprietary
rights of third parties. We hold rights to issued U.S. patents on a
radioisotope-based device for site localization during breast biopsy procedures
and a laser welded closure method for our brachytherapy seeds. The patents
expire in 2014 and 2018, respectively. We have also filed for patent protection
on our radioactive brachytherapy seed design. Our Theseus subsidiary has also
in-licensed patents and technology for which patents are pending related to
Apomate. The scope and extent of patent protection for our products is uncertain
and frequently involves complex legal and factual questions. The breadth of the
claims allowed in patents relating to biotechnology applications or their
enforceability cannot be predicted, and patent litigation can be expensive and
time consuming. No assurance can be given that pending patent applications will
be approved or that any issued patents will provide competitive advantages for
our products. Costly litigation might be necessary to protect our patents or to
determine the scope and validity of third-party proprietary rights, and it is
possible that we will not have the required resources to pursue such litigation
or to protect our patent rights. An adverse outcome in litigation with respect
to the validity of any of our patents could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require us to cease using a product or technology.
In addition, there can be no assurance that patents have not been issued or will
not be issued in the future that conflict with our patent rights or prevent us
from marketing our products. Such conflicts could result in a rejection of our
licensors' patent applications or the invalidation of patents. Furthermore, if
patents that contain dominating or conflicting claims have been or are
subsequently issued to others, and such claims are ultimately determined to be
valid, we may be required to obtain licenses under patents or other proprietary
rights of others. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to us, or at all. If we do not obtain such licenses, we could encounter delays
or find that we are unable to develop, manufacture or sell products requiring
such licenses.
We also rely on trade secrets and proprietary know-how that we seek to protect,
in part, through confidentiality agreements with our collaborators, customers,
employees and consultants. It is possible that these agreements will be breached
or that they will not be enforceable in every instance, and that we will not
have adequate remedies for any such breach. Furthermore, enforcing a claim
alleging the infringement of trade secrets would be expensive and time
consuming, making the outcome uncertain. It is also possible that our trade
secrets will become known or independently developed by competitors. If we are
unsuccessful in protecting our proprietary technology, we may lose a fundamental
component of our competitive advantage.
WE DEPEND ON SEVERAL KEY LICENSES FOR OUR APOMATE PRODUCT CANDIDATE. IF WE LOSE
OUR RIGHTS UNDER ANY OF THESE LICENSES, OUR ABILITY TO MARKET AND SELL APOMATE
MAY BE JEOPARDIZED.
We license certain technology rights related to Apomate from several entities.
We are obligated to pay such entities royalties, milestone payments and other
payments in exchange for such licenses and we rely on such parties' intellectual
property rights to protect our proprietary interests in Apomate. Currently, we
owe one of our licensors approximately $2.5 million, which is due in
August 2001. If we or our licensors breach any of the terms of these license
agreements, or if we are unable to pay amounts owed to our licensors when they
become due, we may lose the right to use such technology. If such an event
occurs, we may be unable to market and sell Apomate.
In addition, we are aware of other third party rights relating to Apomate. We
believe we have good and sufficient defenses against any possible infringement
claims. Nevertheless, should a court rule against us, we may be prohibited from
marketing Apomate unless we obtain a license
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from such third party which, if available at all, may require us to make
substantial royalty or other payments.
If we are unable to obtain a license from such third party or if we lose rights
to use technology related to Apomate under any of our current license
agreements, we may be unable to market and sell Apomate.
EXTENSIVE GOVERNMENT REGULATION OF OUR INDUSTRY HAS HAD, AND WILL CONTINUE TO
HAVE, A SIGNIFICANT IMPACT ON OUR BUSINESS.
The manufacture and sale of our brachytherapy and other products are subject to
stringent government regulation in the United States and other countries. Our
products are subject to FDA and other governmental approval and continual
review, and future discovery of previously unknown problems may result in
restrictions on a product's marketing or withdrawal of the product from the
market. The commercial distribution in the United States of any new products we
develop will depend upon obtaining the prior approval or clearance of the FDA,
which can take many years and entail significant costs, and we have limited
experience in filing or pursuing applications necessary to gain regulatory
approvals. In countries where our products are not currently approved, the use
or sale of our products may require approval by local government agencies with
missions comparable to the FDA's. The process of obtaining any such approval may
be lengthy, expensive and uncertain. We are also required to adhere to
applicable FDA regulations for current Good Manufacturing Practices, including
extensive record keeping and reporting and periodic inspections of our
manufacturing facilities. Similar requirements are imposed by foreign
governmental agencies.
REIMBURSEMENT POLICIES BY MEDICARE AND OTHER THIRD-PARTY PAYORS HAVE A
SIGNIFICANT IMPACT ON OUR BUSINESS.
A substantial percentage of the patients treated for prostate cancer in the
United States are covered by Medicare and, consequently, the costs of prostate
cancer treatment are subject to Medicare's prescribed rates of reimbursement.
Medicare reimbursement amounts for seeding are currently significantly less than
for radical prostatectomy, or RP. Although seeding generally requires less
physician time than RP, lower reimbursement amounts, when combined with
physician familiarity with RP, may create disincentives for urologists to
perform seeding. There can be no assurance that:
- current or future limitations on, or requirements for reimbursement by,
Medicare or other third-party payors for prostate cancer treatment will not
materially adversely affect the market for our products
- health administration authorities outside the United States will provide
reimbursement at acceptable levels or at all
- any such reimbursement will continue at rates that enable us to maintain
prices at levels sufficient to realize an appropriate return
Also, we, our distributors and healthcare providers performing brachytherapy
seeding procedures are subject to state and federal fraud and abuse laws
prohibiting kickbacks and, in the case of physicians, patient self-referrals. We
may be subjected to civil and criminal penalties if we or our agents violate any
of these prohibitions.
In addition, from time to time, significant attention is placed on reforming the
healthcare system in the United States. Any future changes in Medicare and other
third-party payor reimbursement which may result from healthcare reform or
deficit reduction legislation would likely place downward pressure on prices.
Future reimbursement policies may also affect the commercial acceptance of
products we develop, including Apomate. A number of legislative proposals have
been introduced in Congress and state legislatures in recent years that would
effect major reforms of the healthcare system and otherwise reduce healthcare
spending. Because of the uncertainties surrounding the nature, timing and extent
of any such reimbursement changes, audits and reform initiatives, we are unable
to predict the effects of any such matters on our business.
12
<PAGE>
WE USE RADIOACTIVE MATERIALS WHICH ARE SUBJECT TO STRINGENT REGULATION AND WHICH
MAY SUBJECT US TO LIABILITY IF ACCIDENTS OCCUR.
We manufacture and process radioactive materials which are subject to stringent
regulation. We operate under licenses issued by the California Department of
Health which are renewable every eight years. We received a renewal of our
license for our North Hollywood facility in 1998 and we were issued a license
for our Chatsworth facility in March 1999. California is one of the "Agreement
States," which are so named because the Nuclear Regulatory Commission, or NRC,
has granted such states regulatory authority over radioactive materials,
provided such states have regulatory standards meeting or exceeding the
standards imposed by the NRC. Most users of our products must obtain licenses
issued by the state in which they reside (if they are Agreement States) or the
NRC. Use licenses are also required by some of the foreign jurisdictions in
which we may seek to market our products.
Although we believe that our safety procedures for handling and disposing of
these radioactive materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, we
could be held liable for any damages that result.
WE DEPEND UPON KEY PERSONNEL FOR OUR CONTINUED GROWTH AND DEVELOPMENT. LOSS OF
SUCH KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our success is largely dependent on the personal efforts of key technical and
senior management personnel, including L. Michael Cutrer, our Chief Executive
Officer and President, and Dr. Allan M. Green, President of Theseus. We do not
have an employment agreement with Mr. Cutrer. We believe that our future success
will depend in large part upon our ability to attract and retain highly-skilled
technical, managerial and marketing personnel and is likely to require the
expansion of our management level personnel. Competition for radioisotopic
industry personnel can be intense, and the availability of capable personnel may
be limited; thus, their services could be difficult to obtain or replace. There
can be no assurance that we will be successful in attracting and retaining the
personnel we require to develop and market new and enhanced products and to
conduct our operations successfully.
In addition, we have limited knowledge and experience with respect to the
development of Apomate and other related product candidates of our subsidiary,
Theseus. To date, we have relied and expect to rely heavily on the skill,
knowledge and expertise of Dr. Green in developing and commercializing our
Apomate product candidate. As the President of Theseus, Dr. Green will continue
to have significant responsibility for Apomate and potentially other
radiopharmaceuticals we develop. We currently have only a two-year employment
agreement with Dr. Green.
OUR STOCK PRICE HAS EXPERIENCED SUBSTANTIAL VOLATILITY, WHICH MAY AFFECT YOUR
ABILITY TO LIQUIDATE YOUR INVESTMENT.
The market price of our common stock has been and may continue to be extremely
volatile. For example, the high and low sales price of our common stock has
fluctuated during the past twelve months between $6.88 per share and $34.00 per
share and may continue to fluctuate. Therefore, particularly if you have a
short-term investment horizon, this volatility may affect your ability to sell
our stock at a price that is acceptable to you. Market price fluctuations in our
stock may be due to a variety of factors (in addition to general market or
economic conditions) including, without limitation:
- new product introductions and the success or failure of such products
- the purchasing practices of our customers
- changes in the degree of competition for our products
- the announcement of technological innovations or new commercial products by
us or our competitors
- acquisitions that we may pursue
- changes in governmental regulation affecting our business environment
13
<PAGE>
- regulatory issues, including FDA approval and compliance with FDA or other
agency regulations
- the issuance of new patents or other proprietary rights and the expiration or
invalidation of existing patent or proprietary rights
- earnings announcements
- the loss of key personnel
- the inability to acquire sufficient supplies of finished products or raw
materials
- litigation or similar proceedings and/or threats thereof
- publicity regarding actual or potential clinical results with respect to
products we are developing
- political developments or proposed legislation in the healthcare industry
These and similar factors have had and could in the future have a significant
impact on the market price of our common stock. Some companies that have had
volatile market prices for their securities have been subject to securities
class action suits filed against them. If a suit were to be filed against us,
regardless of the outcome or the merits of the action, it could result in
substantial costs and a diversion of our management's attention and resources.
WE HAVE BROAD DISCRETION IN USING THE NET PROCEEDS WE RECEIVE FROM THIS OFFERING
AND, IF WE DO NOT ALLOCATE THESE PROCEEDS WISELY, YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT.
We plan to use the net proceeds we receive from this offering to expand our
clinical trials and preclinical research, with a particular emphasis on Apomate
and related imaging product candidates we are developing through Theseus, for
potential acquisitions of complementary technologies, products or companies and
for general corporate purposes. Although we estimate the development costs of
Apomate to be $20 million over the next two to three years, the use of the
remaining proceeds will be subject to the discretion of our management. We may
change the allocation of these proceeds in response to economic or industry
developments or changes. Our Board of Directors and management can determine to
spend the proceeds from this offering in ways with which you may not agree. We
cannot guarantee that the proceeds will be invested to yield a favorable return.
WE MAY EXPERIENCE FLUCTUATIONS IN QUARTERLY OPERATING RESULTS DUE TO LIMITED
SEASONALITY.
Our brachytherapy product lines may experience some variability in revenue due
to seasonality. This is primarily due to three major holidays occurring in our
first fiscal quarter and the apparent reduction in the number of procedures
performed during summer months, which could affect our third fiscal quarter
results.
INVESTORS SHOULD NOT LOOK TO DIVIDENDS AS A SOURCE OF INCOME.
We have not paid any cash dividends since inception. In addition, we do not
anticipate paying cash dividends in the foreseeable future. Consequently, any
economic return to a stockholder will be derived, if at all, from appreciation
in the price of our stock, and not as a result of dividend payments.
WE ARE AUTHORIZED TO ISSUE, WITHOUT STOCKHOLDER APPROVAL, ONE OR MORE PREFERRED
SERIES OF STOCK, WHICH MAY GIVE OTHER STOCKHOLDERS DIVIDEND, CONVERSION, VOTING
AND LIQUIDATION RIGHTS, AMONG OTHER RIGHTS, WHICH MAY BE SUPERIOR TO YOUR RIGHTS
AS A COMMON STOCKHOLDER.
Our Board of Directors has the authority to issue, without vote or action by the
stockholders, shares of preferred stock in one or more series, and has the
ability to fix the rights, preferences, privileges and restrictions of any such
series. Any series of preferred stock could provide dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences or other rights superior to the rights of our common stockholders.
Our Board of Directors has no present intention of issuing any such preferred
series, but reserves the right to do so in the future.
14
<PAGE>
AS PART OF OUR BUSINESS STRATEGY, WE INTEND TO PURSUE TRANSACTIONS THAT MAY
CAUSE US TO EXPERIENCE SIGNIFICANT CHARGES TO EARNINGS THAT MAY ADVERSELY AFFECT
OUR STOCK PRICE AND FINANCIAL CONDITION.
We regularly review potential transactions related to technologies, product
candidates or product rights and businesses complementary to our business. Such
transactions could include mergers, acquisitions, strategic alliances, licensing
agreements or co-promotion agreements. Our recent acquisition of Theseus is an
example of such a transaction. We advanced approximately $8 million to Theseus
prior to the merger and expect to record a one-time charge related to the
Theseus transaction of between $11 million and $12 million. We also expect
Theseus to require significant continuing investment as we integrate it into our
business. In the future, we may choose to enter into such transactions at any
time. Depending upon the nature of any transaction, we may experience a charge
to earnings which could be material.
WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE AND WE MAY BE UNABLE TO OBTAIN
CAPITAL ON TERMS FAVORABLE TO US, OR AT ALL.
Our capital requirements have been and are expected to continue to be
significant. We expect our existing capital resources and future operating cash
flows to be sufficient for at least the next 12 months. We expect that ongoing
clinical trial and development costs related to Apomate may total approximately
$20 million over the next two to three years. However, we may require further
capital for the purchase of complementary businesses, technologies or products.
Our capital requirements will depend on numerous factors, including the time and
cost involved in expanding production capacity, the cost involved in protecting
our proprietary rights and the time and expense involved in obtaining required
regulatory approvals for new products we may develop or acquire. If we are
unable to obtain additional capital on favorable terms or at all, we may be
forced to curtail or cease operations.
THE TESTING, MARKETING AND SALE OF OUR PRODUCTS INVOLVE THE RISK OF PRODUCT
LIABILITY CLAIMS BY CONSUMERS AND OTHER THIRD PARTIES, AND INSURANCE AGAINST
SUCH POTENTIAL CLAIMS IS EXPENSIVE.
Our business is subject to product liability risks inherent in the testing,
manufacturing and marketing of products containing radioisotopes. To date, no
product liability claims have been asserted against us. However, there can be no
assurance that such claims will not arise in the future based on past, present
or future services or products we offer. We maintain product liability and
general liability insurance with a limit in the aggregate amount of $2 million
with additional umbrella insurance coverage of $10 million; however, there can
be no assurance that liability claims will not exceed the scope of coverage or
limits of such policies or that such insurance will continue to be available on
commercially reasonable terms or at all. If we do not or cannot maintain
sufficient liability insurance, our ability to market our products may be
significantly impaired. In addition, product liability claims, as well as
negative publicity arising out of such claims, could have a material adverse
effect on our business, operating results and financial condition.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus and in the documents we have filed
with the Securities and Exchange Commission, or SEC, which we have referenced
under "Where You Can Find More Information" on page 49 contains forward-looking
statements within the meaning of the federal securities laws. Forward-looking
statements represent our management's judgment regarding future events. These
forward-looking statements include, among others, statements about our plans,
objectives, expectations and intentions and other statements contained in this
prospectus that are not historical facts. These statements may be found under
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this prospectus and in the other documents filed
with the SEC.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "shall," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although some
forward-looking statements are expressed differently. An investment in our
securities involves certain risks and uncertainties that could affect our future
financial results. You should be aware that our actual results could differ
materially from those contained in the forward-looking statements due to a
number of factors, including:
- failure to successfully commercialize our products
- failure to develop new products
- competitive factors
- general economic conditions
- ability to enter into future collaborative agreements
- failure to achieve positive results in clinical trials
- uncertainty regarding our patents and patent rights
- governmental regulation
- technological change
There may be events in the future that we are not able to predict accurately or
over which we have no control. You should also consider carefully the statements
under "Risk Factors" and other sections of this prospectus and in the other
documents filed with the SEC, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements. You should be aware that the occurrence of the events described in
"Risk Factors" and elsewhere in this prospectus and in the other documents filed
with the SEC could materially and adversely affect our business, operating
results and financial condition.
We use data and industry forecasts throughout this prospectus, which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this information.
16
<PAGE>
COMMON STOCK MARKET DATA
Since February 12, 1998, our common stock has been traded on the Nasdaq National
Market under the symbol "NASI". For all periods shown below prior to February
1998, our common stock traded on the OTC Bulletin Board. The following table
sets forth, for the periods indicated, the high and low sales prices for our
common stock, as reported on the Nasdaq National Market or the OTC Bulletin
Board.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997
First Quarter............................................. $ 1.33 $ 0.83
Second Quarter............................................ 2.88 1.08
Third Quarter............................................. 6.00 2.29
Fourth Quarter............................................ 17.17 5.08
1998
First Quarter............................................. $17.00 $11.92
Second Quarter............................................ 26.33 14.50
Third Quarter............................................. 32.00 11.13
Fourth Quarter............................................ 13.38 3.63
1999
First Quarter............................................. $13.25 $ 6.25
Second Quarter............................................ 9.38 5.28
Third Quarter............................................. 11.50 5.75
Fourth Quarter............................................ 10.00 6.88
2000
First Quarter............................................. $14.75 $ 7.50
Second Quarter............................................ 34.00 11.50
Third Quarter............................................. 24.88 15.38
Fourth Quarter............................................ 31.75 16.50
</TABLE>
On December 13, 2000, the closing price of our common stock on the Nasdaq
National Market was $18.9375 per share. On December 13, 2000, there were
approximately 76 stockholders of record of our common stock.
17
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 2,320,000 shares of common stock we are
offering, will be approximately $38.5 million. If the underwriters fully
exercise the over-allotment option, the net proceeds of the shares sold by us
will be approximately $44.8 million. "Net proceeds" are what we expect to
receive after deducting the underwriting discount and paying other expenses of
the offering. We will not receive any proceeds from the sale of shares by the
selling stockholders.
We intend to use the net proceeds of this offering primarily for:
- funding clinical trials and seeking regulatory approvals for Apomate of
approximately $20 million
- expanding our clinical trial and preclinical research concerning other future
potential products
- acquiring complementary technologies, products or companies
- general corporate purposes
The timing and amount of our actual expenditures are subject to change and will
be based on many factors, including:
- competitive, technological, market and other developments
- the rate of progress of our research and development programs
- the results of our clinical trials
- the time and costs of obtaining regulatory approvals
- cash flow from our operations
- our ability to establish and maintain collaborative relationships
- costs incurred in obtaining and enforcing patent and other proprietary rights
Although we may use a portion of the net proceeds for potential acquisitions and
licensing opportunities that are complementary to our business, we currently
have no agreements for any prospective acquisitions or licensing opportunities.
We reserve the right, at the sole discretion of our Board of Directors, to
reallocate our use of proceeds in response to these and other factors. Until we
use the net proceeds of this offering, we intend to invest the funds in
short-term, interest bearing, investment grade securities.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We anticipate that we
will retain our earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
in the foreseeable future. We issued to holders of record of our common stock as
of April 20, 1998 a stock dividend consisting of two shares of our common stock
for every three shares issued and outstanding as of that date. All figures in
this prospectus are adjusted to take into account the share dividend.
18
<PAGE>
CAPITALIZATION
The following table shows:
- our actual capitalization on July 31, 2000
- our pro forma capitalization on July 31, 2000 reflecting the October 13, 2000
acquisition of Theseus
- our pro forma as adjusted capitalization on July 31, 2000, assuming the
completion of the offering at the public offering price of $17.875 per share,
less the underwriting discount and estimated offering expenses associated
with this offering
<TABLE>
<CAPTION>
JULY 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current portion............... $ -- $ 2,500 $ 2,500
Stockholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding........... -- -- --
Common stock, $0.01 par value; 40,000,000 shares
authorized; 6,920,477 shares issued and outstanding,
actual; 7,231,142 shares issued and outstanding, pro
forma; and 9,581,142 shares issued and outstanding,
pro forma as adjusted................................. 69 72 96
Additional paid-in capital.............................. 18,655 29,006 67,464
Retained earnings....................................... 8,238 (3,193) (3,193)
------- ------- -------
Total stockholders' equity........................ 26,962 25,885 64,367
------- ------- -------
Total capitalization.............................. $26,962 $28,385 $66,867
======= ======= =======
</TABLE>
The number of shares of common stock in this table excludes:
- 551,577 shares of common stock issuable upon exercise of options outstanding
as of July 31, 2000
- 96,000 shares of common stock issuable upon exercise of warrants outstanding
as of July 31, 2000
- 250,000 shares reserved for issuance under our employee stock purchase plan
- 26,250 shares of common stock issuable upon exercise of options in connection
with the Theseus acquisition
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our selected historical data. You should carefully read
the financial statements included in the reports incorporated by reference in
this prospectus, including the notes to the financial statements included in
those reports. The selected data in this section is not intended to replace the
financial statements.
We derived the statement of income data for the years ended October 31, 1997,
1998 and 1999 and balance sheet data as of October 31, 1998 and 1999 from the
audited consolidated financial statements included in the reports incorporated
by reference in this prospectus. We derived the statement of income data for the
nine months ended July 31, 1999 and 2000 and the balance sheet data as of
July 31, 2000 from our unaudited consolidated financial statements included in
the reports incorporated by reference in this prospectus. We derived the
statement of income data for the years ended October 31, 1995 and 1996 and the
balance sheet data as of October 31, 1995, 1996 and 1997 from our audited
consolidated financial statements which are not included or incorporated by
reference in this prospectus. We believe that the unaudited historical financial
statements contain all adjustments needed to present fairly the information
included in those financial statements and that the adjustments made consist
only of normal recurring adjustments. Historical results are not necessarily
indicative of results that may be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Net sales..................................... $1,843 $3,063 $3,381 $5,839 $12,767 $ 8,878 $12,891
Cost of goods sold............................ 929 1,534 1,844 2,680 4,594 3,261 4,296
------ ------ ------ ------ ------- ------- -------
Gross profit.................................. 914 1,529 1,537 3,159 8,173 5,617 8,595
Operating expenses:
Research and development.................... -- 15 72 196 287 240 264
Selling, general and administrative......... 723 870 1,094 1,859 3,060 2,236 2,583
------ ------ ------ ------ ------- ------- -------
Total operating expenses...................... 723 885 1,166 2,055 3,347 2,476 2,847
------ ------ ------ ------ ------- ------- -------
Income from operations........................ 191 644 371 1,104 4,826 3,141 5,748
Interest and other income..................... 35 20 50 635 611 429 833
------ ------ ------ ------ ------- ------- -------
Income before provision for income taxes...... 226 664 421 1,739 5,437 3,570 6,581
Provision for income taxes.................... 95 251 145 640 2,068 1,362 2,469
------ ------ ------ ------ ------- ------- -------
Net income.................................... $ 131 $ 413 $ 276 $1,099 $ 3,369 $ 2,208 $ 4,112
====== ====== ====== ====== ======= ======= =======
Basic earnings per share...................... $ .03 $ .09 $ .06 $ .17 $ .49 $ .32 $ .60
====== ====== ====== ====== ======= ======= =======
Diluted earnings per share.................... $ .03 $ .09 $ .05 $ .16 $ .47 $ .31 $ .55
====== ====== ====== ====== ======= ======= =======
Basic shares used in per share calculation.... 4,444 4,475 4,592 6,436 6,800 6,796 6,872
Diluted shares used in per share
calculation................................. 4,603 4,819 5,372 7,024 7,203 7,183 7,467
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------------------------------- JULY 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $ 516 $ 892 $1,623 $11,220 $ 9,662 $11,495
Working capital...................................... 991 1,271 2,126 12,615 11,204 13,032
Total assets......................................... 1,291 2,000 3,673 18,903 23,838 28,537
Total stockholders' equity........................... 1,116 1,528 3,228 17,987 22,366 26,962
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL INFORMATION
INCLUDED IN THIS PROSPECTUS AND THE FINANCIAL STATEMENTS AND THE REPORTS
INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
OVERVIEW
We design, develop and produce innovative radioisotopic products, including
brachytherapy seeds and radiopharmaceuticals, for the treatment and diagnosis of
disease. Since 1990, we have applied our expertise in radioisotopes to develop
and market products for medical, environmental, research and industrial
applications.
In 1997, we received approval from the FDA for commercial distribution of our
first brachytherapy seed for use in any solid localized tumor. In January 1998,
we launched IoGold, our first seed for the treatment of prostate cancer, through
a distribution relationship with Mentor. In April 1999, we launched our second
seed, PdGold, also for the treatment of prostate cancer thereby making us the
first company to manufacture both seeds using the two most commonly used
isotopes. We currently recognize approximately 81% of our consolidated revenues
from these two product lines.
On October 13, 2000, we acquired Theseus, a developer of proprietary
radiopharmaceuticals to enhance the medical management of heart attack, heart
transplantation and cancer. In connection with the acquisition, we issued
345,665 shares of, or options to purchase for nominal consideration, our common
stock to Theseus' shareholders. Theseus has retained its obligations, including
approximately $8 million owed to us with respect to loans we made to Theseus
from time to time since 1998. In connection with the Theseus acquisition, we
expect to record in our fourth fiscal quarter ended October 31, 2000 a one-time
charge for in-process research and development of between $11 million and
$12 million. We expect to incur approximately $20 million in ongoing clinical
trial and development costs over the next two to three years related to Theseus'
principal product candidate, Apomate. In addition, we expect to incur
substantial expenses associated with the launch of Apomate if we receive
marketing approval from the FDA.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2000 COMPARED TO NINE MONTHS ENDED JULY 31, 1999
NET SALES. Net sales increased $4,013,000, or 45%, to $12,891,000 for the nine
months ended July 31, 2000 from $8,878,000 for the nine months ended July 31,
1999. The increase in net sales was due to the increase in revenues generated
from our brachytherapy product lines. Sales of our non-therapeutic lines
remained consistent between periods.
GROSS PROFIT. Gross profit increased $2,978,000 or 53% to $8,595,000 for the
nine months ended July 31, 2000 from $5,617,000 for the nine months ended
July 31, 1999. Gross profit as a percent of sales increased from 63% to 67%
during this period. The increase in gross profit as a percentage of sales was
primarily attributable to the significant proportionate increase in revenues
from our brachytherapy product lines in the first nine months of fiscal 2000,
which yield greater gross margins than our non-therapeutic product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative, or SG&A, expenses increased $347,000, or 16%, to $2,583,000 for
the nine months ended July 31, 2000 from $2,236,000 for the nine months ended
July 31, 1999. SG&A as a percent of net sales decreased to 20% for the nine
months ended July 31, 2000 from 25% for the same period in 1999. SG&A expenses
increased primarily due to the following: (i) an increase of $150,000 in
salaries and related costs as we added a significant number of administrative
personnel throughout fiscal 1999 and have continued to do so
21
<PAGE>
into fiscal 2000 to support our growth and (ii) other general and administrative
expenses including insurance ($78,000) and depreciation ($190,000) increased as
a result of our expansion. These increases were partially offset by a reduction
in certain other expenses which were individually insignificant.
RESEARCH AND DEVELOPMENT. Research and development efforts continued through the
nine months ended July 31, 2000 with such expenditures totaling $264,000 during
this period compared to $240,000 in the corresponding 1999 period.
INTEREST AND OTHER INCOME. Interest and other income increased $404,000 to
$833,000 for the nine months ended July 31, 2000 from $429,000 for the nine
months ended July 31, 1999 due to the following: (i) we realized a pre-tax gain
of $119,000 related to the disposition of 7,680 shares of RadioMed, a privately
held company, and (ii) a change in the composition of our investment portfolio.
NET INCOME. Net income increased $1,904,000 to $4,112,000 for the nine months
ended July 31, 2000 from $2,208,000 for the nine months ended July 31, 1999. The
increase is a result of the factors described above.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998
NET SALES. Net sales increased $6,928,000, or 119%, to $12,767,000 for the year
ended October 31, 1999 from $5,839,000 for the year ended October 31, 1998. The
increase in net sales was due primarily to the increase in revenues generated
from the Iodine-125 brachytherapy product line and sales of the Palladium-103
brachytherapy product line which was introduced in April 1999. Sales of the
non-therapeutic lines decreased approximately $304,000 due to increased
competition.
GROSS PROFIT. Gross profit increased $5,014,000 or 159% to $8,173,000 for the
year ended October 31, 1999 from $3,159,000 for the year ended October 31, 1998.
Gross profit as a percent of net sales increased from 54% to 64% during this
period despite an increase of $105,000 in inventory reserves attributable to
obsolescence. The increase in gross profit as a percentage of net sales was
primarily attributable to the significant proportionate increase in revenues
from the Iodine-125 brachytherapy product line in fiscal 1999 which yielded
greater gross margins than our non-therapeutic product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,201,000, or 65%, to $3,060,000 for the year
ended October 31, 1999 from $1,859,000 for the year ended October 31, 1998. SG&A
as a percent of net sales decreased to 24% for the year ended October 31, 1999
from 32% for the same period in 1998. SG&A expenses increased primarily due to
the following: (i) an increase of $672,000 in salaries and related costs as we
added a significant number of administrative personnel throughout the year ended
October 31, 1998 and continuing into the year ended October 31, 1999 to support
our growth, (ii) an increase of $88,000 in rent as we leased a new facility in
September 1998 that houses new product development and corporate offices and
(iii) other general and administrative expenses including insurance ($70,000)
and depreciation ($131,000) increased as a result of our expansion.
RESEARCH AND DEVELOPMENT. Research and development expenditures totaled $287,000
during the year ended October 31, 1999 compared to $196,000 for the year ended
October 31, 1998. The increase was due primarily to development efforts
associated with new product lines.
INTEREST AND OTHER INCOME. Interest and other income remained relatively
consistent between periods decreasing $24,000 to $611,000 for the year ended
October 31, 1999 from $635,000 for the year ended October 31, 1998.
NET INCOME. Net income increased $2,270,000 to $3,369,000 for the year ended
October 31, 1999 from $1,099,000 for the year ended October 31, 1998. The
increase is a result of the factors described above.
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FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
NET SALES. Net sales increased $2,458,000, or 73%, to $5,839,000 for the year
ended October 31, 1998 from $3,381,000 for the year ended October 31, 1997. The
increase in net sales was primarily due to the inclusion of revenues from the
Iodine-125 brachytherapy source product line, which was introduced in
January 1998.
GROSS PROFIT. Gross profit increased $1,622,000 or 106% to $3,159,000 for the
year ended October 31, 1998 from $1,537,000 for the year ended October 31, 1997.
Gross profit as a percentage of net sales increased from 45% to 54% during this
period. The increase in gross profit as a percentage of net sales was primarily
attributable to the inclusion of revenues from the Iodine-125 brachytherapy
product line in fiscal year 1998 which yielded greater gross margins than our
non-therapeutic product lines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $765,000, or 70%, to $1,859,000 for the year
ended October 31, 1998 from $1,094,000 for the year ended October 31, 1997. SG&A
expenses increased primarily due to the following: (i) an increase of $262,000
in salaries and related costs as we added staff to focus on our product sales,
to improve gross margins and to develop capabilities for new product lines and
(ii) other general and administrative expenses including insurance ($75,000),
advertising ($54,000) and legal fees ($67,000) increased as a result of our
expansion.
RESEARCH AND DEVELOPMENT. Research and development efforts increased in fiscal
year 1998, with such expenditures totaling $196,000 during this period compared
to $72,000 in the corresponding 1997 period. The increase was due primarily to
development efforts associated with new product lines.
INTEREST INCOME. Interest income increased $585,000 to $635,000 for the year
ended October 31, 1998 from $50,000 for the year ended October 31, 1997. This
increase resulted primarily from the investment of funds received from our
November 1997 private placement.
NET INCOME. Net income increased $823,000 to $1,099,000 for the year ended
October 31, 1998 from $276,000 for the year ended October 31, 1997. The increase
is a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
To date, our short-term liquidity needs have generally consisted of operating
capital to finance growth in inventories, trade accounts receivable, new product
development, capital expenditures and strategic investments in related
businesses. We have satisfied these needs primarily through a combination of
private placement of our common stock and from cash generated by operations. We
do not currently have a line of credit or similar arrangements with a bank. At
July 31, 2000, we had cash and investments in marketable securities aggregating
approximately $11.5 million and working capital of $13.0 million.
We receive cash from the exercise of stock options. Proceeds from the exercise
of stock options and their related tax benefits will vary from period to period
based upon, among other factors, fluctuations in the market value of our stock
relative to the exercise price of such options.
We are authorized to purchase up to $1.5 million of our common stock on the open
market. No such shares have been repurchased as of November 21, 2000.
The primary objectives for our investment portfolio are liquidity and safety of
principal. Investments are made to achieve the highest rate of return to us,
consistent with these two objectives. We invest our excess cash in securities
with varying maturities to meet projected cash needs.
We believe that the net proceeds of this offering together with existing cash
and marketable securities and anticipated cash flow from operations will be
sufficient to support our planned expansion through
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at least the end of fiscal 2001. The amount of capital that we will need in the
future will depend on many factors including:
- costs related to research, development, clinical trials, license royalty
obligations, FDA approvals and commercialization of Apomate and other product
candidates
- market acceptance of our products
- levels of sales and marketing that will be required to launch our new
products and achieve and maintain a competitive position in the marketplace
- progress in and scope of our research and development activities
- levels of inventory and accounts receivable that we maintain
- our competitors' responses to our products
- level of capital expenditures
- acquisition and/or development of complementary businesses, technologies or
products
We anticipate incurring approximately $20 million of expenses with respect to
Apomate over the next two to three years for ongoing clinical trials and
development costs. An additional $2.5 million is payable to NeoRx Corporation in
August of 2001 pursuant to our license of patent rights and technology related
to Apomate, with additional milestone payments of up to $4 million throughout
the life of the contract.
The manufacture of our linear accelerators has not been completed. We are
currently investigating what the costs will be to complete the accelerators and
anticipate that such costs will approximate $3 million. We believe the
construction of these machines will be completed in fiscal 2002.
We anticipate that our available cash and the proceeds of this offering will
provide sufficient funds to cover these costs. In addition, these costs related
to Apomate may be reduced if we enter into any strategic partnerships related to
Apomate.
Future capital requirements will also depend on the extent to which we acquire
or invest in businesses, products and technologies. If we should require
additional financing due to unanticipated developments, additional financing may
not be available when needed or, if available, we may not be able to obtain this
financing on terms favorable to us or to our stockholders. Insufficient funds
may require us to delay, scale back or eliminate some or all of our research and
development programs. If additional funds are raised by issuing equity
securities, dilution to existing stockholders would result.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements." We will be required to adopt SAB 101 in fiscal 2001. We do not
expect this accounting pronouncement to have a material effect on our financial
position and results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or FAS 133, "Accounting for Derivative Instruments and Hedging
Activities." In May 1999, the FASB voted to delay the effective date of FAS 133
by one year. We will be required to adopt FAS 133 for fiscal year 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under FAS 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. We do not expect this accounting
pronouncement to have a material effect on our financial position and results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to some market risk through interest rates related to our
investment of our current cash, cash equivalents, marketable securities and
notes receivable. As these instruments mature and the funds are reinvested, we
are exposed to changes in market interest rates. We do not consider this risk to
be material. We manage this risk by continuing to evaluate the best investment
rates available for short-term investment-grade securities. We have not used
derivative financial instruments in our investment portfolio.
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BUSINESS
OVERVIEW
We design, develop and produce innovative radioisotopic products, including
brachytherapy seeds and radiopharmaceuticals, for the treatment and diagnosis of
disease. Since 1990, we have applied our expertise in radioisotopes to develop
and market products for medical, environmental, research and industrial
applications.
In 1996, we began to focus our product development activities primarily on high
value, high growth medical products that address large potential markets. We
focused our research and development efforts on radioisotopic products which are
useful in the diagnosis, management and treatment of diseases such as cancer and
heart disease. This initiative resulted in the development of our first two
therapeutic products, iodine-based and palladium-based implantable brachytherapy
seeds for the treatment of prostate cancer. These products are marketed under
the trademarks IoGold and PdGold, respectively, by Mentor Corporation, our
distributor for these products. Since the commercial introduction of IoGold in
January 1998, our brachytherapy business has grown substantially. We believe
that we are the third largest manufacturer in the world of brachytherapy seeds
for the treatment of prostate cancer and the only manufacturer of both iodine
and palladium brachytherapy seeds.
In addition to our internal development activities, we actively evaluate
products and technologies for in-licensing or acquisition. On October 13, 2000,
we acquired Theseus, a developer of proprietary radiopharmaceuticals to enhance
the medical management of heart attack, organ transplantation and cancer.
Theseus' primary product candidate is Apomate, an IN VIVO nuclear medicine
imaging agent that targets cells undergoing apoptosis or necrosis, two forms of
cell death that occur in certain circumstances. We intend for Apomate to provide
information that will allow clinicians to make better therapeutic decisions for
individual patients by monitoring the patient's response to treatment or disease
with increased sensitivity and speed.
Apomate is in Phase II trials for two indications: assessing the location and
extent of heart attack damage and detecting heart transplant rejection. We are
also completing Phase I trials for use of Apomate in determining early response
to chemotherapy. We believe that if Apomate is approved for the detection of
transplant rejection, it would represent the only non-invasive diagnostic
procedure that can assess the adequacy of immunosuppression medication in this
population. Apomate is also being studied for its potential to demonstrate the
location and extent of irreversibly damaged heart tissue in heart attack
patients and its ability to rapidly assess early response to chemotherapy in
cancer patients with lymphoma, non-small cell lung cancer and breast cancer.
STRATEGY
Our objective is to strengthen our position as a leading developer of
radioisotopic products and technologies. The key elements of our strategy
include:
- EXPANDING OUR WORLDWIDE BRACHYTHERAPY BUSINESS. We believe that substantial
growth opportunities exist for brachytherapy in the treatment of prostate
cancer. We were the first manufacturer to offer both iodine and palladium
brachytherapy seeds and we believe that this capability will continue to
provide us and Mentor with an advantage in being able to serve the entire
market for prostate brachytherapy seeds. Additionally, while we believe that
the United States today represents greater than 90% of the global
brachytherapy market, we also believe that international acceptance of
brachytherapy is growing and will work with Mentor to actively market our
products abroad.
- ESTABLISHING APOMATE AS A DIAGNOSTIC STANDARD FOR CLINICAL AND RESEARCH
APPLICATIONS. We plan to aggressively pursue clinical trials and market
Apomate for multiple indications to physicians and
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researchers directly and through scientific publications, clinical trials,
and scientific meetings. We believe Apomate's significant product advantages
will promote acceptance by physicians. In addition, we believe that both
pharmaceutical and biotechnology companies will advocate use of Apomate
because it may provide faster feedback on the effectiveness of therapeutic
products used in clinical trials, thus shortening product development
timelines.
- LEVERAGING OUR CORE COMPETENCY IN RADIOISOTOPIC PRODUCTS TO IDENTIFY
ADDITIONAL PRODUCT OPPORTUNITIES. We believe that radioisotopes represent a
compelling opportunity for future medical product development. In addition to
the clinical development of Apomate, we plan to use our existing expertise to
continue to identify new nuclear medicine product opportunities that address
large potential markets. We expect to conduct these activities through
internal efforts and in collaboration with other companies that may
contribute proprietary technologies or specific industry knowledge.
- FORMING STRATEGIC COLLABORATIONS TO SUPPORT DEVELOPMENT AND COMMERCIALIZATION
OF OUR PRODUCTS. We have an existing distribution relationship with Mentor
for our brachytherapy seeds. We may collaborate with other companies to
obtain funding and marketing support for our products and product candidates.
These collaborations may allow us to:
- obtain domestic and international marketing and sales expertise
- reduce product development costs
- develop a greater number of products
- ESTABLISHING A BROAD INTELLECTUAL PROPERTY PORTFOLIO. We have patents and
patent applications related to our brachytherapy products and licensed patent
and technology coverage for our Apomate product. As we expand into new areas
and diversify our business, we intend to build strong intellectual property
positions to maintain our competitive advantage.
OUR MEDICAL PRODUCTS
The table below identifies our principal medical products and product
candidates.
<TABLE>
PRODUCT DESCRIPTION INDICATION STATUS MARKETING RIGHTS
<S> <C> <C> <C> <C>
THERAPEUTIC
IoGold Brachytherapy Seeds Prostate Cancer Marketed Mentor
IODINE-125 BASED
PdGold Brachytherapy Seeds Prostate Cancer Marketed Mentor
PALLADIUM-103 BASED
Prospera Brachytherapy Seeds Ocular Melanoma Marketed NASI
IODINE-125 AND
PALLADIUM-103 BASED
DIAGNOSTIC
Apomate Radiopharmaceutical Heart Attack Damage Phase II Clinical Trials NASI
Apomate Radiopharmaceutical Heart Transplant Phase II Clinical Trials NASI
Rejection
Apomate Radiopharmaceutical Chemotherapy Response Phase I Clinical Trials NASI
</TABLE>
BRACHYTHERAPY SEEDS FOR PROSTATE CANCER
PROSTATE CANCER. The prostate gland, found only in men, is a small walnut-sized
gland surrounding the urethra, located under the bladder and in front of the
rectum. According to the American Cancer Society, prostate cancer is considered
a slow growing cancer relative to other types of cancer. Symptoms of prostate
cancer are often not noticed until the cancer has progressed past early stages
of the disease. A routine digital rectal examination is the most commonly used
test for identifying
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prostate cancer. Additionally, a blood test to detect a prostate specific
antigen, or PSA, has rapidly become an accepted means of detecting early-stage
prostate cancer. The PSA test, which is recommended for men over the age of 50,
determines the amount of prostate specific antigen contained in an examinee's
blood. Elevated levels of PSA are indicative of inflammation or cancerous cells
in the prostate. The emergence of PSA blood testing has greatly improved
physicians' ability to diagnose and treat early stage prostate cancer.
MARKET OPPORTUNITY. Prostate cancer is the second most prevalent form of cancer
in men in the United States and is the second most common cause of cancer death
in men of all ages. The American Cancer Society estimates that in 2000 more than
180,000 new cases of prostate cancer will be diagnosed in the United States and
approximately 32,000 deaths will be attributable to the disease. The cost of
medical treatment in the United States for patients with prostate cancer is
approximately $5 billion annually.
TREATMENT MODALITIES. There are several therapies available for the treatment of
prostate cancer. The following table compares the three leading modalities.
<TABLE>
EXTERNAL BEAM
BRACHYTHERAPY RADICAL PROSTATECTOMY RADIATION THERAPY
<S> <C> <C> <C>
Classification Outpatient--60-90 Inpatient--2-3 day Outpatient--7-8 week
minutes hospital stay therapy
Recovery Period 2-3 days 3-4 weeks Not applicable
Ten-Year Disease Free Survival Rate 64%-85% 47%-73% 13%-38%
Average Impotence Rate 10%-40% 60% 30%-40%
Average Incontinence Rate LESS THAN 2% 10%-40% 7%
Cost Per Procedure $10,000-$15,000 $18,000-$20,000 $13,000-$16,000
</TABLE>
BRACHYTHERAPY
OVERVIEW. Brachytherapy is a minimally invasive medical procedure in which
sealed radioactive sources are temporarily or permanently implanted into
cancerous tissue, delivering a therapeutically prescribed dose of radiation that
is lethal to the cancerous tissue. In the seeding procedure, 60 to 120
rice-sized, low-dose radioactive seeds, containing either Palladium-103 or
Iodine-125, are permanently implanted, usually by a radiation oncologist or
urologist, into the prostate to irradiate and destroy cancerous prostatic
tissue. The procedure involves inserting seeds through the perineum into the
prostate gland. Insertion of the seeds is performed under ultrasound guidance
that allows the physicians to view the prostate to ensure proper seed
implantation. A template, or grid, covers the perineum and is attached to the
ultrasound probe to facilitate correct needle placement. Implant needles loaded
with seeds are assigned to the appropriate template holes as indicated in the
treatment plan. Each needle is guided through the template and then through the
perineum to its predetermined position within the prostate under direct
ultrasound visualization. The seeds are implanted as the needle is withdrawn
from the prostate. When all seeds have been inserted, an x-ray or CT image is
viewed to verify seed placement.
Brachytherapy patients are typically treated on an out-patient basis, as the
entire procedure typically takes less than two hours and the patient generally
is permitted to go home the same day. Most patients are able to return to their
normal activities within two or three days following the procedure.
The use of brachytherapy to treat prostate cancer has grown significantly over
the past several years due to its advantages over other therapies, including
radical prostatectomy, or RP, and external beam radiation therapy, or EBRT.
Brachytherapy is the newest of the three primary techniques for the treatment of
prostate cancer. Only recently has ten-year survival data become available which
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demonstrates the comparability of brachytherapy treatment with surgery. We
believe that the increasing use of this technique reflects the growing awareness
in the medical community and among patients of this recently available
comparative data.
We believe that approximately 40,000 brachytherapy procedures were performed in
the United States in 1999, an increase of over 100% from 1996. A brachytherapy
procedure is performed at a low cost and on an outpatient basis under local or
general anesthesia. Brachytherapy usually results in lower incidences of
impotence and incontinence compared to other therapies, and faster recovery
times than RP. Moreover, studies show that the disease free survival rates
ten-years after brachytherapy treatment are comparable to RP. Brachytherapy may
be most effective for localized tumors treated in the early stages of the
disease. Therefore, we believe that the growing use of PSA tests will help
detect prostate cancer at an earlier stage and enhance the attractiveness of
brachytherapy as a treatment alternative.
OUR BRACHYTHERAPY PRODUCTS. We believe that we are the only manufacturer of both
iodine and palladium based brachytherapy seeds, the two most commonly used seeds
for the treatment of prostate cancer. These two products differ in the time each
takes to decay, and, consequently in the rate and intensity at which the
radiation dose is delivered. Because physicians may prefer either iodine or
palladium seeds, we believe that it is advantageous to offer both in order to
address the entire market. Both types of seeds are marketed under the trademarks
IoGold and PdGold by Mentor through its approximately 35-person urology sales
force. Although our products are primarily marketed in the United States, Mentor
is also selling our products in foreign countries. We anticipate receiving a CE
mark from the European Community by the end of this year which would enable
Mentor to market and sell our brachytherapy seeds in Europe as well.
- IOGOLD. In January 1998, we launched our first FDA-approved brachytherapy
source, an Iodine-125 based seed, used primarily for the treatment of
prostate cancer. Each seed consists of a laser welded biocompatible titanium
capsule the size of a grain of rice, containing Iodine-125 absorbed onto four
resin beads. The capsule also contains two inactive gold beads that serve as
markers for x-ray or CT imaging to identify the source location within the
prostate. The iodine in IoGold has a half life of 59 days and, therefore,
IoGold has a less intensive but longer energy dose than the Palladium-103
seed.
- PDGOLD. In April 1999, we introduced our second FDA-approved brachytherapy
source, a Palladium-103 based seed, also used primarily for the treatment of
prostate cancer. Each palladium seed consists of a similar laser welded
biocompatible titanium capsule containing Palladium-103 absorbed onto four
resin beads. The capsule also contains two inactive gold beads that serve as
markers for x-ray or CT imaging to identify the source location within the
prostate. The palladium in PdGold has a half life of 17 days and, therefore,
PdGold has a more intensive but shorter energy dose than the Iodine-125 seed.
OTHER TREATMENT MODALITIES
RADICAL PROSTATECTOMY. Currently the most common treatment option, radical
prostatectomy, or RP, is an invasive surgical procedure in which the entire
prostate gland is removed. RP is performed under general anesthesia and
typically includes a hospital stay of several days for patient observation and
recovery.
This procedure is often associated with high rates of impotence, incontinence
and operative morbidity. For instance, a study published in the Journal of the
American Medical Association in January 2000 reported that approximately 60% of
men who had received RP reported erectile dysfunction as a result of the
surgery. The same report found that approximately 40% of the patients studied
reported at least occasional incontinence. New bilateral nerve-sparing
techniques are currently being used more frequently in order to address these
side effects, but these techniques require a high degree of surgical skill. RP
is typically more expensive than other common treatment modalities.
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EXTERNAL BEAM RADIATION THERAPY. External beam radiation therapy, or EBRT, one
of the first minimally invasive alternatives to RP, allows patients to receive
treatment on an outpatient basis at a significantly lower cost than RP. EBRT
involves directing a beam of radiation from outside the body at the prostate
gland to destroy cancerous tissue. The course of treatment takes anywhere from
seven to eight weeks for the tumor to receive the total dose of radiation
prescribed to kill the tumor.
Studies have shown, however, that the ten-year disease free survival rates with
treatment through EBRT are not comparable to the disease free survival rates of
RP or brachytherapy. In addition, because the radiation beam travels through the
body, affecting healthy and cancerous tissue alike, other side effects are
associated with EBRT. For instance, rectal wall damage caused by the radiation
beam is a noted negative side effect. Recent data suggests that between 30% and
40% of the patients who undergo EBRT suffer problems with erectile dysfunction
after treatment.
While EBRT directs one single large beam at the prostate, a new technique, known
as Intensity Modulated Radiation Therapy, or IMRT, is designed to spare healthy
tissue by directing many very small beams to the cancerous tissue, all with
varying levels of intensity. IMRT has not yet gained widespread use and does not
yet have long-term clinical data supporting better efficacy rates or lower
incidences of side effects.
OTHER TREATMENTS. Cryosurgery, a procedure in which tissue is frozen to destroy
tumors, is another treatment option for prostate cancer. Currently, this
procedure is not widely used, although promising treatment outcomes have been
reported. Without temperature sensing probes that direct precisely where the
tumor has formed, tissue freezing may be non-selective. Consequently, diseased
and healthy tissue may be destroyed at the same rate. Cryosurgery typically
requires a one to two day hospital stay and is associated with higher rates of
impotence than brachytherapy.
Other treatments include hormone therapy and chemotherapy, which may be used to
reduce the size of cancerous tumors. However, these treatments are not intended
to ultimately cure a patient of prostate cancer. Instead, such treatment choices
are made by physicians in an attempt to extend patients' lives if the cancer has
reached an advanced stage or as ancillary treatment methods used in conjunction
with other treatment mechanisms. Common side effects of hormone therapy are
impotence, decreased libido and development of breasts, and common side effects
of chemotherapy are nausea, hair loss and fatigue.
"Watchful waiting," while not a treatment, is recommended by some physicians in
certain circumstances based on the severity and growth rate of the disease, as
well as upon the age and life expectancy of the patient. Physicians who choose
watchful waiting are frequently seeking to avoid the negative side effects
associated with RP or other treatment modalities. Through careful monitoring of
PSA levels and close examination for advancing symptoms of prostate cancer,
physicians are able to choose more active treatments at a later date.
APOMATE
Nuclear medicine imaging involves injecting a radioisotope into the patient's
body, detecting the signal emitted by the radioisotope with a gamma camera and
then creating an image of the target area, usually through the use of a
computer. A radioisotope, such as Technetium Tc-99m, is sometimes coupled with a
carrier molecule that binds on a selective basis with targeted tissues. Nuclear
medicine imaging is unique in that it documents organ function and structure, in
contrast to diagnostic radiology, which is based upon anatomy. Nuclear medicine
imaging procedures often identify abnormalities very early in the progression of
a disease, long before some medical problems are detected using other diagnostic
tests. The Society of Nuclear Medicine estimates that 10 to 12 million nuclear
medicine imaging examinations or therapeutic procedures are performed in the
United States each year.
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Apomate is a kit consisting of multiple components for the preparation of
Technetium Tc-99m labeled Annexin-V, a human protein produced by recombinant
techniques. It is administered intravenously and is intended for the IN VIVO
imaging of apoptosis and necrosis, using standard nuclear medicine imaging
procedures.
Apoptosis was once of interest only in a few specialized fields of biology, but
is now recognized as a central feature of heart attack, organ transplant
rejection and cancer treatment. During apoptosis, several physiologic stimuli
may trigger a cellular set of processes that result in an orderly
self-destruction and disposal of the cell without breaking open the cell
membrane. This process can be induced by disease, such as in transplant
rejection or heart attack, or can be purposely induced as the result of certain
forms of cancer therapy, including chemotherapy and radiotherapy. Unlike
apoptosis, necrosis is a disorganized nonphysiologic process characterized by
physical disruption of the cell membrane. Necrosis can be caused by mechanical,
thermal, electrical or noxious chemical injury and by profound hypoxia (a
deficiency in the amount of oxygen reaching body tissues), ischemia (a decrease
in the blood supply to a bodily organ, tissue, or part caused by constriction or
obstruction of the blood vessels), or respiratory poisons. In a normal healthy
cell, membrane integrity is maintained by a series of controlled biochemical
processes. Initial stages of apoptosis and necrosis show the maintenance of the
cell membrane in apoptosis (Figure 1) and the breakdown of cell membrane
integrity in necrosis (Figure 2).
[GRAPHIC] [GRAPHIC]
Figure 1 Figure 2
(Apoptosis) (Necrosis)
During apoptosis the loss of a particular enzyme, translocase, allows a molecule
known as phosphatidylserine, or PS, which is normally only found on the inside
of the membrane to migrate to the outer surface of the cell membrane (Figure 3).
As soon as PS is expressed on the surface of the cell it becomes accessible as a
binding target site for Apomate (Figure 4).
[GRAPHIC] [GRAPHIC]
Figure 3 Figure 4
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Cells dying from necrosis have membrane disruption typically with cell swelling
(Figure 5). Although PS does not migrate to the outer surface of the cell
membrane during necrosis, the loss of membrane integrity allows Apomate to enter
the cell via membrane openings and bind to PS on the inner leaflet of the cell
membrane (Figure 6).
[GRAPHIC] [GRAPHIC]
Figure 5 Figure 6
Once Apomate binds to PS, standard nuclear medicine imaging techniques are used
to produce an image of cell death associated with either apoptosis or necrosis.
Apomate is currently in clinical trials for imaging apoptosis and necrosis to
determine the location and extent of damage in heart attack, to image heart
transplant rejection and to assess early response to cancer treatment. We
believe that Apomate will allow clinicians to make better therapeutic decisions
for individual patients by monitoring the patient's condition or response to
treatment with greater sensitivity and speed.
HEART ATTACK AND CORONARY ARTERY DISEASE
Coronary artery disease, or CAD, is one of the most common medical problems,
affecting approximately 25% of all Americans. CAD is characterized by the
buildup of cholesterol-laden deposits called plaque in the interior of blood
vessels supplying blood to the heart. The heart requires a constant supply of
oxygen-rich blood to function normally. As plaque in the coronary arteries
increases in size, it can reduce blood flow to a region of the heart causing
pain, known as angina. If the cholesterol deposits in the coronary arteries
totally block the flow of blood, part of the heart muscle can infarct, or die.
Severe instances of infarctions are more commonly known as a heart attack. While
ECG, and clinical laboratory tests for damage to the heart muscle have been
enormously helpful, there is still much ambiguity in distinguishing a new
infarction from old heart damage in patients with known coronary artery disease.
ECG changes may be due to pre-existing damage and enzymes may not be sensitive
enough to make a definitive diagnosis. It is often difficult to distinguish
cardiac causes of chest pain or shortness of breath from gastrointestinal or
musculoskeletal problems.
Apomate imaging in patients with known heart attacks has shown positive images
with definite areas of increased uptake of the imaging agent in the areas of the
heart known to have had a blockage of blood flow. When a blockage occurs in a
coronary blood vessel, a region of the heart normally supplied with blood by
this vessel is injured and may die. Recent studies have shown that muscle cells
in the heart can begin dying within 15 minutes of oxygen deprivation and may
also be injured in the first few minutes after the return of blood flow in
patients whose clots are dissolved by drugs or who undergo emergency
angioplasty. Apomate's ability to localize in areas of apoptosis and necrosis
suggest that this imaging procedure may be useful in demonstrating the total
volume of irreversibly damaged heart muscle. The Apomate studies should allow a
definitive diagnosis of the location and extent of the heart damage to be made.
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Moreover, we believe that Apomate may distinguish previously damaged heart
tissue from freshly injured tissue in patients with known cardiovascular
disease. Current regional perfusion imaging agents such as Thallium Tl-201 and
Cardiolite cannot always distinguish past heart tissue damage from fresh injury.
MARKET POTENTIAL. There are approximately five million hospital or emergency
room admissions annually in the United States for the purpose of ruling out a
heart attack. ECG and clinical laboratory studies are definitive in diagnosing
approximately 1.5 million heart attack cases. We believe that Apomate imaging of
these patients following intervention will provide valuable information as to
the extent of damaged tissue. The remaining 3.5 million patients are not
definitively diagnosed with a heart attack but, nevertheless, are often required
to stay overnight in the hospital for observation. We believe that Apomate
imaging could be useful in making a definitive diagnosis of or ruling out heart
attack or ischemic heart damage due to temporary reduction of blood flow to the
heart in these patients if nuclear imaging becomes a routine procedure in the
emergency room. Consequently, we believe the use of Apomate may reduce hospital
costs by permitting some patients to be discharged earlier.
CLINICAL TRIALS. A preliminary peer-reviewed publication demonstrating the
localization of Technetium Tc-99m-labeled Annexin V in patients with heart
attacks was published in the Lancet, a leading British medical journal. In this
study, which used an experimental laboratory preparation similar to Apomate, six
of seven patients with heart attacks had images demonstrating areas of heart
uptake consistent with known heart tissue damage. Subsequently, these
researchers using Apomate in seven additional patients with heart attacks have
shown localization of Apomate in ECG-indicated areas of heart tissue damage in
all cases. We expect Phase II trials for heart attack to be concluded at the end
of the second quarter of calendar 2001; we expect Phase III trials to begin in
the third quarter of 2001, end in the third quarter of 2002 and enroll 200 to
300 subjects.
Based on those positive results, we filed an IND application with the FDA to
conduct multi-center clinical trials of Apomate imaging as an adjunct in the
diagnosis of heart attack. These trials began in November 2000. We expect to
study 50 to 100 patients with known heart attacks in Phase II trials which will
compare Apomate imaging to standard enzyme and ECG tests as well as to Thallium
Tl-201 imaging. We expect these trials, to be carried out at five to ten U.S.
centers specializing in the management of heart disease.
HEART TRANSPLANT REJECTION
A serious concern following a heart transplant is rejection of the donor heart.
The body's immune system is designed to protect the body from infection. Without
medical intervention, the immune system recognizes the transplanted organ as a
foreign body and attempts to destroy it through a process known as rejection. If
no medication is given to a transplant recipient, the host white blood cells
attack the donor heart, thereby causing apoptotic cell death in the transplanted
organ. To prevent rejection of the new heart, patients receive medication that
suppresses the body's immune system. Physicians must carefully administer the
dose of immunosuppressive drugs, such as cyclosporin, to allow the immune system
to fight infection and still protect the new heart from being rejected. Patients
must take these immunosuppressant drugs for the rest of their lives.
Transplant patients are monitored for signs of rejection by repeated heart
catheterization during which a small piece of heart tissue is biopsied and
examined in the laboratory under a microscope for signs of rejection, a
procedure known as histopathological examination. This biopsy procedure is
invasive and can be painful, involving advancement of a catheter through a vein
to the heart and the "snipping off" of a piece of tissue for microscopic
examination. Based on the results of the biopsy, a physician may adjust the
prescribed level of immunosuppressive drugs.
In initial human trials, Apomate has been found to concentrate in areas of cell
death, thus providing an early warning of this disorder.
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MARKET POTENTIAL. There are approximately 2,300 heart transplants performed
annually in the United States. Each heart transplant recipient may undergo up to
15 biopsy procedures in the first year after the transplant in order to assess
the adequacy of immunosuppression medication required to prevent rejection of
the new heart. After the first year, biopsies are typically performed one to
four times annually.
CLINICAL TRIALS. In patients experiencing heart rejection, the cells of the new
heart are dying as a result of the apoptotic process. Preclinical results to
date have demonstrated the ability of Apomate to bind to dying heart cells in
rejecting heart transplant recipients. Nuclear medicine images obtained using
standard instrumentation available in U.S. hospitals clearly demonstrated
localization of Apomate in patients with biopsy-confirmed transplant rejection
in Phase I clinical trials. This demonstrates the potential for non-invasive
nuclear medicine imaging of early signs of rejection. Thus, Apomate is
anticipated to provide equivalent information to a biopsy through a non-invasive
imaging procedure. We have also been granted Orphan Drug status for this
indication by the FDA. We believe that the ability to replace an invasive
surgical procedure with a non-invasive imaging procedure at a lower cost
represents a sizeable market opportunity.
In June 2000, we presented peer-reviewed data to the Society of Nuclear Medicine
from our Phase I trial of Apomate in heart transplant rejection which was
conducted in 27 patients who were undergoing routine surveillance heart
biopsies, the standard diagnostic test for post-transplant patients. Based on
these results, we initiated expanded Phase II clinical trials in August 2000.
As of September 30, 2000, 49 patients have received Apomate for the evaluation
of heart transplant rejection. Seven patients showed rejection when biopsied and
Apomate imaging was positive in six of those patients. The other 42 subjects did
not show transplant rejection when biopsied. Importantly, the results of the
Apomate study were negative in these patients, indicating that Apomate may be an
effective non-invasive alternative to biopsy. We prepared an extensive summary
of safety data related to this application which supports the safety of Apomate
and submitted it to the FDA. The FDA has approved a "readministration" protocol
allowing all previous subjects to continue to be imaged in future trials and all
future study subjects to receive multiple doses of Apomate to follow the
adequacy of their immunosuppressive medication on an ongoing basis.
Clinical trials are currently continuing in five of the leading U.S. heart
transplant centers to optimize Apomate imaging and to correlate imaging results
with biopsy findings. We expect Phase II trials for heart transplant rejection
to be completed by the end of the second quarter of 2001; we expect Phase III
trials to begin by the third quarter of 2001, to end by the end of the first
quarter of 2002 and enroll about 200 subjects.
CANCER TREATMENT
Many cancer treatments including, radiotherapy, chemotherapy or immunotherapy,
are intended to kill tumor cells. Apomate has been shown in early clinical
trials to image IN VIVO tumors responding to treatment by binding to
apoptosis-specific membrane markers that appear as soon as one to two hours
after effective treatment.
Normally, it takes weeks or months of repeated dosing with cancer drugs until
response to treatment is evaluated by observation of tumor size changes. This
long evaluation period can be particularly troublesome because, for example,
although approximately 25% to 40% of breast cancer patients with recurrent
disease respond to the first-line treatment, the side effects of the drug are
felt in 100% of the treated population. Consequently, an imaging agent with the
ability to quickly measure patient response to cancer therapy should be in great
demand. This would allow for rapid identification of ineffective treatments
thereby avoiding negative side effects in circumstances where the patient
receives no benefit.
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We believe that Apomate, as a prognostic tool for cancer, provides several
potential benefits to patients, physicians and pharmaceutical and biotechnology
companies by:
- enabling evaluation of individual patient responses to cancer drugs, as soon
as a few hours after administration of an effective agent
- reducing unnecessary treatment costs
- saving critical time by avoiding ineffective treatments
- improving clinical outcomes
- more efficiently stratifying cancer patients in clinical trials into
responders and nonresponders to therapeutic regimens
- providing pharmaceutical and biotechnology companies with more timely
information to enable them to shorten the time to develop new therapeutic
agents
MARKET POTENTIAL. According to the National Cancer Institute, approximately
1.2 million individuals in the United States are diagnosed with cancer each
year, of which approximately 400,000 will undergo chemotherapy. Many additional
patients with recurrent disease enter chemotherapy programs each year. We
believe that Apomate imaging will dramatically enhance the choice of particular
therapies, since no diagnostic tool in use today gives clinicians such rapid,
direct and detailed evidence as to whether a particular treatment is effective.
Another potential market for Apomate is in human clinical trials for new cancer
drugs and cancer treatment regimens under development. Because the evaluation
endpoint of tumor stabilization or shrinkage takes many weeks or months to
evaluate, the patients are typically given their maximum tolerated dose for the
period of time required to see physical evidence of tumor shrinkage. We believe
that Apomate may shorten this period significantly, and thus reduce development
time for new therapeutic agents.
CLINICAL TRIALS. As of September 30, 2000, we completed the Phase I clinical
trials, in which we conducted 69 Apomate imaging studies in 35 cancer patients.
Subjects with positive uptake of Apomate post-treatment showed clinically
meaningful responses to treatment. In the subjects with lung cancer in this
initial trial, those who did not show Apomate uptake post-treatment, suggesting
no tumor cell death, showed no clinical response to treatment. Thus, Apomate
appears to predict clinical response to treatment in non-small cell lung cancer
when administered 24 hours after the first course of cancer treatment. Some of
the breast cancer patients who did not show increased Apomate uptake 24 hours
after their first chemotherapy dose did show a partial response to treatment.
In addition, studies in lymphoma patients have shown significant increases in
Apomate shortly after treatment. We believe that Apomate uptake post-treatment
may be useful as a prognostic sign of good treatment response. Conversely, lack
of post-treatment Apomate uptake may indicate a poor prognosis and suggest the
need for more aggressive intervention, such as bone marrow transplant in
conjunction with high dose chemotherapy.
We expect Phase II trials for lymphoma to begin in the first quarter of 2001 and
to continue through the third quarter of 2001. We expect Phase III trials for
the use of Apomate to determine prognosis and response to treatment in lymphoma
patients to begin in the fourth quarter of 2001, to end by the end of 2002 and
enroll about 200 subjects.
OTHER PRODUCTS
By utilizing our expertise in the design, development and manufacturing of
radioisotopic products, we have developed or jointly developed the following
additional products.
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PROSPERA
Intraocular melanoma, or a tumor occurring inside the eye, is a relatively rare
malignancy which accounts for approximately 1,500 new cases each year in the
United States. The two most common means of treating this condition are
brachytherapy or enucleation, or the removal of the eye.
In April 2000, we introduced a line of high activity brachytherapy seeds under
the trademark Prospera for use in the treatment of ocular melanoma and other
solid tumor applications. Prospera is used with the ultimate goal of destroying
the tumor while saving the eye. Prospera seeds are available in both Iodine-125
seeds and Palladium-103 seeds. We directly market Prospera to ophthalmologists
and medical physicists. The number of cases presenting annually will limit
Prospera sales for this application, but we view it as a natural extension of
our brachytherapy business and as a service to the oncology community.
BRIGADE
Vascular restenosis is defined as the renarrowing of a treated coronary artery
to less than 50% of its normal diameter. It often occurs within six months of a
revascularization procedure such as coronary artery bypass graft surgery or
percutaneous transluminal coronary angioplasty, or PTCA, as a result of the
arterial trauma. In 1997, physicians performed approximately 447,000 PTCA
procedures in the United States and approximately a total of 1,000,000
procedures were performed world-wide. Restenosis is the major limitation of
PTCA, occurring in approximately 30% to 50% of the procedures. PTCA may be
performed with or without deployment of a coronary stent which reduces
restenosis rates to approximately 15% to 30%.
In January 2000, we announced a collaboration with EndoSonics Corporation to
develop a beta radiation catheter for treatment of coronary restenosis.
EndoSonics was subsequently acquired by JoMed N.V., a European developer and
manufacturer of cardiology products, in September 2000. EndoSonics plans to use
this catheter in connection with its "steerable" intravascular radiation therapy
system called BRIGADE to aid in the treatment of cardiovascular disease by
delivering radiation to the site of a treated blockage in a coronary artery to
decrease the likelihood of restenosis. The beta radiation delivered to the
coronary artery can reduce the proliferative cell growth that causes renarrowing
of the vessel. Unlike other beta radiation catheters currently in clinical
trials, BRIGADE incorporates directional radiation capability and ultrasound
imaging which allows for visualization of the area and accurate distance
measurement critical to dose delivery. This allows for delivery of a high dose
to affected areas while minimizing dose to other areas of the vessel in a single
device to allow for more accurate radiation therapy to the affected part of the
diseased artery.
In April 2000, EndoSonics received its Investigation Device Exemption from the
FDA to begin clinical trials of the device, which is being developed in
conjunction with the Cleveland Clinic Foundation. EndoSonics is primarily
responsible for funding this program, and we have not incurred any significant
costs related to this project to date.
CALIBRATION AND REFERENCE SOURCE PRODUCTS
Radiation detection instruments monitor the radiation emitted from a given
sample, such as soil, air or water, to identify and quantify the radioisotopes
present in that sample. In order to determine a particular instrument's
efficiency, an accurately measured and contained amount of a radioactive isotope
is required to serve as a calibration reference standard. Each type of sample
being monitored by an instrument typically requires a radiation source standard
of identical form and geometry to the sample. We manufacture radiation sources
and reference standards, which are used in a variety of areas for calibration,
measurement, analysis and control. Our customers include leading medical
equipment manufacturers, universities, hospitals and government agencies.
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MENTOR RELATIONSHIP
We have an exclusive worldwide distribution agreement with Mentor to market and
sell IoGold and PdGold brachytherapy seeds for the treatment of prostate cancer.
We originally entered into a five-year agreement with Mentor, effective
January 1998, covering IoGold brachytherapy seeds. Subsequently, in
February 1999, we amended the agreement to include provisions providing for
Mentor's exclusive worldwide marketing and distribution rights with regard to
PdGold seeds. The term of the agreement for both IoGold and PdGold seeds expires
in 2003, subject to a one-time option held by Mentor to extend the exclusive
agreement for an additional three years. Under the agreement Mentor is
responsible for all sales and marketing activities, including the education and
training of urologists, radiation oncologists, medical physicists and other
personnel involved in the use of brachytherapy seeds. The agreement also
provides us the right to terminate Mentor's exclusivity with respect to any
product for which Mentor fails to achieve target market share requirements in
certain designated geographic areas, subject to certain curing provisions
whereby Mentor can maintain exclusivity. Mentor may terminate the agreement if
we terminate Mentor's exclusive marketing and distribution rights, or if we
commit a material breach and fail to cure. Furthermore, Mentor is entitled to
stop marketing PdGold if its gross margin on the product falls below a certain
threshold set forth in the contract. We do not believe that Mentor has cause to
terminate the agreement, nor do we believe that Mentor's gross margin on the
product is below the minimum expressed in the agreement.
Mentor did not meet its 1999 performance target with respect to sales of PdGold.
We believe that it is unlikely that Mentor will meet its 2000 target. However,
Mentor's shortfall has been decreasing over the life of the contract, and we
believe that Mentor is making sufficient efforts to cure its performance
deficiencies with respect to PdGold.
We do not consider Mentor to have breached the contract as a result of the
contractual shortfall which presently exists. However, if at any time, we become
dissatisfied with Mentor's efforts to remedy any contractual shortfall, or if
the shortfall worsens or does not improve, we may elect to terminate Mentor's
right of exclusivity subject to certain curing provisions set forth in our
contract with Mentor. If Mentor's right of exclusivity is terminated, we may be
unable to develop other distribution relationships or establish an internal
sales and marketing force.
This alliance with Mentor has provided us with the ability to leverage Mentor's
sales and marketing capability as an established leader in urology while
allowing us to focus on our plans for diversification into other areas. Mentor
currently distributes IoGold and PdGold through its approximately 35-person
urology sales force which targets urologists, radiation oncologists and medical
physicists for the brachytherapy line.
INTELLECTUAL PROPERTY
We believe that patents and other proprietary rights are vital to our business.
It is our policy to seek appropriate patent protection both in the United States
and abroad for our proprietary technology and to enter into license agreements
with various companies to obtain patent rights from them to develop and
potentially sell products which use the compounds and technologies protected by
those patents.
We currently hold one U.S. patent relating to brachytherapy. In December 1999,
we received a patent for a laser welded closure device which will expire in
2018. Additionally, we recently applied to extend our patent protection
internationally with the European Patent Office. We also filed an application
for patent protection in August 1997 on our radioactive brachytherapy source
design. This application is still pending. No patent protection is afforded
while the application is pending before the United States Patent Office,
however, the application is maintained in secrecy so that trade secret status is
maintained.
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Our Theseus subsidiary has exclusively licensed Apomate technology for IN VIVO
imaging of cell death from certain entities that have pending patents with
respect to this technology.
The Apomate technology is licensed to Theseus under the following arrangements:
- Theseus is a party to a license agreement with Stanford University dated
April 1, 1998, and amended June 1, 1999, relating to the license of a patent
application for techniques for imaging cell death IN VIVO. The agreement does
not contain a predetermined termination date, but may be terminated by
Theseus at any time upon 30 days written notice to Stanford. Stanford may
terminate the Agreement if Theseus is in breach of the terms of the
agreement, subject to a 30-day cure period following notice of the breach.
Theseus has agreed to pay Stanford a royalty based upon the amount of
licensed product sold. Additionally, Theseus has agreed to certain
predetermined milestone payments over the life of the agreement which are not
material in nature. Theseus' obligation to pay royalties continues until the
latter of ten years, if no licensed patent issues, or for so long as Theseus
by its activities would infringe a valid claim of an unexpired licensed
patent of Stanford. In connection with this agreement Theseus previously
granted capital stock to Stanford which converted into 1,008 shares of our
common stock as a result of the Theseus merger. The U.S. government has
reserved a non-exclusive license with respect to the patents covered by these
agreements, although we do not believe these license rights will result in
any commercially meaningful competition with our Apomate product.
- Theseus entered into an agreement with the University of Washington on
June 8, 1999, whereby Theseus has licensed technology relating to a patent
application covering methods and composition for imaging cell death IN VIVO.
The Agreement has no termination date, but may be terminated by Theseus upon
30 days written notice to Washington. Washington may terminate the agreement
if Theseus is in breach of the terms of the agreement, subject to a 30-day
cure period following notice of breach. Theseus has agreed to pay Washington
a royalty based upon the amount of licensed product sold, and to make certain
other milestone payments upon designated events over the life of the
agreement which are not material in nature. Theseus' obligation to pay
royalties continues until the latter of ten years, if no licensed patent
issues, or for so long as Theseus by its activities would infringe a valid
claim of an unexpired licensed patent of Washington. In connection with this
agreement Theseus previously granted capital stock to Washington which
converted into 2,121 shares of our common stock as a result of the Theseus
merger. The U.S. government has reserved a non-exclusive license with respect
to the patents covered by these agreements, although we do not believe these
license rights will result in any commercially meaningful competition with
our Apomate product.
- Theseus is a party to a license agreement with NeoRx Corporation dated
August 7, 1998, and amended August 7, 1999. Under this agreement, Theseus has
an exclusive license of patent rights and technology relating to the chemical
composition of the Annexin imaging agents, and a nonexclusive license of
patent rights and technology relating to the attachment of radioactive
elements to Annexin. This agreement runs until the last to occur of the
expiration of any patents covered by the agreement or ten years after the
first commercial sale to a third party of the licensed product following
regulatory approval. Theseus has agreed to pay NeoRx certain royalties based
upon the amount of licensed product sold, and such obligation continues in
effect until the agreement terminates. The termination provisions of this
agreement provide that if a default remains uncured for a period of 90 days
(or 15 days in the case of a default relating to the payment of money), then
the non-defaulting party has the right to terminate the agreement by written
notice to the other party. Theseus previously made a $500,000 payment to
NeoRx and has an additional obligation to pay NeoRx $2.5 million in
August of 2001. Theseus is also obligated to make up to $4.0 million of
additional milestone payments upon the occurrence of certain events. In
connection with this agreement Theseus previously granted capital stock to
NeoRx which converted into 17,500 shares of our common stock as a result of
the Theseus merger.
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In addition, we have in-licensed additional technology governing composition of
matter and use of Apomate.
In July 1997, we were granted a patent on a radioisotope-based device for site
localization during biopsy procedures, which expires in 2014.
We also rely upon unpatented trade secrets and improvements, unpatented know-how
and continuing technological innovation to develop and maintain our competitive
position. Our policy is to enter into confidentiality agreements with our
employees, consultants and vendors, and we generally control access to our
proprietary information.
COMPETITION
Our brachytherapy business is subject to intense competition. Our primary
competitors in the brachytherapy seed business include Nycomed Amersham PLC,
which manufactures and sells Iodine-125 brachytherapy seeds, and Theragenics
Corporation, which manufacturers and sells Palladium-103 brachytherapy seeds
directly and through marketing relationships with Prostate Services of America,
Inc., Nycomed Amersham PLC, Imagyn Medical Technologies and Indigo Medical, Inc,
a subsidiary of Johnson & Johnson. Several additional companies have begun to
sell seeds and a number of others have announced their intention to market
brachytherapy products.
For the indications currently being evaluated in clinical trials for Apomate,
established methods of patient evaluation exist and must be considered "gold
standards" of treatment. To our knowledge, no radiopharmaceutical product
comparable to Apomate currently exists, nor, to our knowledge, is any
substantially similar product currently in development. The competition which
Apomate could potentially encounter will be physician acceptance and adoption of
a new diagnostic and management tool designed to replace well-established
procedures. It is also possible that Positron Emission Tomography, or PET,
techniques could be used to study patient response to anti-tumor treatment or
heart tissue damage. Radiopharmaceuticals, such as Thallium Tl-201 and DuPont
Corporation's Cardiolite, are used to show abnormalities of blood flow to heart
tissue. However, such agents do not directly image damage to heart tissue.
The competition in the intravascular brachytherapy market is intense. Novoste
Corporation, Guidant Corporation and Cordis, a division of Johnson & Johnson,
are leaders in the field and we believe that at least one of our competitors
will have a commercialized product to market well ahead of us. We also believe
that other companies such as Boston Scientific, Radiance Medical Systems and
U.S. Surgical are developing similar products. The delivery methods and the type
of radiation vary among the different companies.
The radiation reference source business is also subject to intense competition.
Our competitors in this industry include AEA Technology PLC and Eckert & Ziegler
AG. We believe that these companies have a dominant position in the market for
radiation reference source products.
We believe that we compete favorably in our targeted markets with these and our
other competitors on the basis of price, diversity of product line, customer
service, quality and delivery time.
Many of the companies named above against whom we compete are substantially
larger than us and have greater technical, sales, marketing and financial
resources. Developments by any of these or other companies or advances by
medical researchers at universities, government research facilities or private
research laboratories could render our products obsolete. Therefore, additional
companies with substantially greater financial resources than we have, as well
as more extensive experience in research and development, the regulatory
approval process and manufacturing and marketing, may develop seeding treatments
and products that are similar to our brachytherapy products.
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GOVERNMENT REGULATION
Our research and development activities and the manufacturing and marketing of
our radioisotope products are subject to the laws, regulations, guidelines and
regulatory clearances and approvals of governmental authorities in the United
States and other countries in which our products will be marketed. Specifically,
in the United States, the FDA regulates, among other things, new product
clearances and approvals to establish the safety and efficacy of these products.
Governments in other countries have similar requirements for testing and
marketing. In the United States, in addition to FDA regulations, we are also
subject to other federal laws, including, the Occupational Safety and Health Act
and the Environmental Protection Act, and we are also subject to certain state
laws.
U.S. REGULATORY PROCESS
Approval of new medical devices and biological products is a lengthy procedure
leading from development of a new product through preclinical and clinical
testing. This process takes a number of years and the expenditure of significant
resources. There is a shorter FDA review and clearance process, the premarket
notification process, or the 510(k) process, whereby a company can market
certain medical devices that can be shown to be substantially equivalent to
other legally marketed devices. We have been able to market some of our products
through the 510(k) process.
Regardless of how our product candidates are regulated, the Federal Food, Drug,
and Cosmetic Act and other federal statutes and regulations govern or influence
the research, testing, manufacture, safety, labeling, storage, record keeping,
approval, distribution, use, reporting, advertising and promotion of such
products. Noncompliance with applicable requirements can result in civil
penalties, recall, injunction or seizure of products, refusal of the government
to approve or clear product approval applications, disqualification from
sponsoring, or conducting clinical investigations, prevent us from entering into
government supply contracts, withdrawal of previously approved applications and
criminal prosecution.
In October 1997, we received 510(k) clearance from the FDA to market IoGold. In
July 1998, we received 510(k) clearance from the FDA to market PdGold.
Clinical trials of Apomate are ongoing in the United States under three IND
exemptions. Apomate is in Phase II clinical trials as a possible diagnostic
adjunctive tool for imaging heart tissue damage, specifically to identify the
location and extent of heart attack damage, as well as an adjunct in the
diagnosis of a heart attack and in imaging heart transplant rejection. Apomate
is in Phase I clinical trials for imaging response to chemotherapy, specifically
in lymphoma, breast cancer with metastases, and in non-small cell lung cancer.
We intend to file a biologic license application, or BLA, and have been granted
Orphan Drug status for Apomate for imaging heart transplant rejection.
We are collaborating with EndoSonics to develop a beta radiation catheter which
EndoSonics plans to use in connection with its intravascular radiation therapy
system called the BRIGADE. In April 2000, EndoSonics was allowed to proceed with
a Phase I clinical trial of the device under an Investigational Device
Exemption. We believe that the product will be regulated as a Class III medical
device and will require submission of a premarket approval application.
We are required to be registered as a medical device manufacturer with the FDA.
As such, we will be inspected on a routine basis by the FDA for compliance with
the FDA's quality system regulations and current Good Manufacturing Practice
regulations, among other things. These regulations require that we and any of
our contract manufacturers design, manufacture and service products and maintain
documents in a prescribed manner with respect to manufacturing, testing,
distribution, storage, design control and service activities. Modifications or
enhancements that could significantly affect the safety or effectiveness of a
device or that constitute a major change to the intended use of the device
require a new 510(k) notice for any product modification. We may be prohibited
from marketing the modified product until the 510(k) notice is cleared by the
FDA.
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The Medical Device Reporting regulation requires that we provide information to
the FDA on deaths or serious injuries alleged to be associated with the use of
its devices, as well as product malfunctions that are likely to cause or
contribute to death or serious injury if the malfunction were to recur. Labeling
and promotional activities are regulated by the FDA and, in some circumstances,
by the Federal Trade Commission.
For certain of our products under development which may be regulated as
biologics, the FDA requires:
- preclinical laboratory and animal testing
- submission to the FDA of an IND application which must be effective prior to
the initiation of human clinical studies
- adequate and well-controlled clinical trials to establish the safety and
efficacy of the product for its intended use
- submission to the FDA of a BLA
- review and approval of the BLA as well as inspections of the manufacturing
facility by the FDA prior to commercial marketing of the product
The FDA's IND and post-approval report regulations require that we provide
information to the FDA on deaths or serious injuries alleged to be associated
with the use of our products, as well as increases in the frequency or severity
of the occurrence of adverse effects. Labeling and promotional activities are
regulated by the FDA and, in some circumstances, by the Federal Trade
Commission.
FOREIGN REGULATORY PROCESS
In order to sell our products within the European community, we must comply with
the European Commission's medical device directive. We anticipate receiving a CE
mark on our brachytherapy products for prostate cancer by the end of this year.
The CE mark is recognized worldwide as an essential European regulatory approval
and will enable us to expand our sales and distribution of the products
throughout Europe. We have filed an IND exemption in Canada for Apomate. It is
being investigated as an imaging agent for early response to cancer
chemotherapy. We have also filed a CTX application with the Medicines Control
Agency in the United Kingdom for this product. It is being investigated as an
imaging agent for early response to cancer chemotherapy and determination of
heart attack damage.
OTHER REGULATION
In addition to FDA regulation, certain of our activities are regulated by, and
require approvals from, other federal and state agencies. For example, we
operate under a license issued by the California Department of Health which is
renewable every eight years. We received a renewal of our license for our North
Hollywood facility in 1988 and were issued a license for our Chatsworth facility
in March 1999. We are also subject to a routine inspection by the California
Department of Health Services, for compliance with good manufacturing practice
requirements and other applicable regulations. Violation or alleged violation of
these regulations may result in government action ranging from warning letters
to criminal prosecution. Companies who violate these regulations are also
subject to large civil penalties. Moreover, our use, management and disposal of
certain radioactive substances and wastes are subject to regulation by several
federal and state agencies depending on the nature of the substance or waste
material. We believe that we are in compliance with all federal and state
regulations for this purpose.
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MANUFACTURING
We manufacture all of our brachytherapy products at our North Hollywood,
California and Chatsworth, California facilities. We manufacture our calibration
and reference source products in our North Hollywood, California facility. The
equipment used to manufacture our products is purchased from a variety of
suppliers. Additionally, we have developed an in-house capability to both build
and repair certain equipment used in the manufacturing of our products. We
consider our manufacturing equipment to be in good condition.
The principal component in our products are radioisotopes. Additionally we use a
variety of materials for encapsulation or containment of the radioisotopes.
Radioactive materials are available from a limited number of government and
private suppliers. Encapsulation and containment materials are available from
commercial suppliers in the United States and internationally.
The components of the Apomate kit are manufactured by third parties under
contract with Theseus. We believe current manufacturing arrangements will
provide sufficient kits to allow completion of clinical trials and to satisfy
demand for first year commercial distribution of the product. We conduct audits
of our third party manufacturers to ensure they comply with the FDA's current
Good Manufacturing Practice regulations.
EMPLOYEES
As of December 13, 2000, we had a total of 52 full-time employees. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and believe that our employee relations are good.
PROPERTIES
We are headquartered in the Los Angeles, California metropolitan area where we
occupy two properties totaling approximately 40,000 square feet. These
facilities are used for office, manufacturing, engineering, warehouse and
research and development. We believe our manufacturing and distribution
facilities are adequate, suitable and of sufficient capacity to support our
current operations. The lease on our North Hollywood facility expires in
December, 2001. The lease on our Chatsworth facility expires in November 2003,
but we have a five-year renewal option. In addition, we have a six-month lease
on a facility in Los Alamos, New Mexico, expiring in May, 2001.
41
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding our directors,
executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
L. Michael Cutrer......................... Chief Executive Officer, President and
44 Director
Alan I. Edrick............................ 33 Chief Financial Officer
Dr. Allan M. Green........................ 56 President of Theseus and Director
Irwin J. Gruverman........................ 67 Chairman of the Board of Directors
Larry Berkin(1)(2)........................ 64 Director
Michael C. Lee(1)(2)...................... 50 Director
</TABLE>
---------------------------
(1) Denotes member of our audit committee.
(2) Denotes member of our compensation committee.
L. MICHAEL CUTRER has been our President and Chief Executive Officer and a
Director since November 27, 1989. From 1982 to 1989, Mr. Cutrer was a Manager of
Isotope Products Laboratory, Inc., a radioisotope manufacturing company, where
he was responsible for industrial product manufacturing, research and
development.
ALAN I. EDRICK joined us in May 1998 as Chief Financial Officer. From 1989 to
1998, Mr. Edrick worked at Price Waterhouse LLP, most recently holding the
position of Senior Manager, Capital Markets.
DR. ALLAN M. GREEN has been one of our directors since May 1996 and President of
Theseus since 1997. From 1990 to the present, Dr. Green has been Vice President,
Pharmaceutical/Biomedical Products for ML Strategies, Inc. ML Strategies, Inc.
is the consulting affiliate of the law firm of Mintz Levin Cohn Ferris Glovsky
and Popeo PC, to which Dr. Green is of counsel. Dr. Green served as President of
the Biotechnology Data Group in Cambridge, Massachusetts from 1986 to 1990 and
as a consultant to many major pharmaceutical companies and investors in the
pharmaceutical industry. Dr. Green served as Medical Director of New England
Nuclear, a radioactive materials business, from 1975 to 1981. Dr. Green is the
author of many scientific papers in biochemistry and drug development.
Dr. Green is Chairman of ATP Inc., a consulting partnership including ML
Strategies, Inc., and Medacorp, Inc., an affiliate of Leerink Swann and Company.
Dr. Green is a director of Neurochem, Inc., Select Therapeutics, Inc. and Argil
Management, Inc.
IRWIN J. GRUVERMAN has been our Chairman of the Board and a Director since
December 31, 1989. Since 1990, Mr. Gruverman has been General Partner in G&G
Diagnostics Limited Partnership II, a venture capital limited partnership.
Mr. Gruverman founded and has been the Chief Executive Officer and a director of
MFIC Corporation, a company that manufactures process devices for pharmaceutical
and other manufacturing uses, since 1982. Mr. Gruverman served as Executive Vice
President of New England Nuclear, a radioactive materials business, during the
later years of his tenure from 1961 to 1981. Mr. Gruverman also serves as a
director of InVitro International, Inc. and Fiberchem International, Inc.
LARRY BERKIN has been one of our directors since May 1996 and has been a
certified public accountant with Berkin Accountancy Corp., a company he founded,
since 1968. His practice focuses primarily on management and taxation, including
providing advice on operations, finances, investments, negotiations, real estate
and taxes.
MICHAEL C. LEE has been one of our directors since May 1996 and has been the
President and Chief Executive Officer of Progressive Technology Partners, a
private investment firm, since 1999. Prior thereto, Mr. Lee was the President
and Chief Executive Officer of East Coast Food Products, Inc., a food
distribution company, since 1976.
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of December 13, 2000 for:
- each person or group of affiliated persons we know to be the beneficial owner
of more than 5% of our common stock
- each of our directors
- each of our named executive officers
- all of our current directors and executive officers as a group
The number of shares shown includes the shares of common stock which the person
will have the right to acquire within 60 days of December 13, 2000. In
calculating the percentage ownership, all shares which the identified person
will have the right to acquire within 60 days of December 13, 2000 upon the
exercise of vested stock options are deemed to be outstanding for the purpose of
computing the percentage of shares owned by such person, but are not deemed to
be outstanding for the purpose of computing the percentage of shares owned by
any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER THE
BEFORE THE OFFERING NUMBER OF SHARES OFFERING
---------------------------- TO BE SOLD IN THE --------------------
NAME AND ADDRESS(1) NUMBER OF SHARES PERCENT OFFERING SHARES PERCENT
------------------- ---------------- --------- ----------------- --------- --------
<S> <C> <C> <C> <C> <C>
L. Michael Cutrer.................... 578,000(2) 7.6% 60,000 518,000 5.2%
Alan I. Edrick....................... 101,084(3) 1.4 30,000 71,084 0.7
Dr. Allan M. Green................... 231,583(4) 3.1 30,000 201,583 2.1
Irwin J. Gruverman................... 525,321(5) 7.1 50,000 475,321 4.9
Larry Berkin......................... 339,200(6) 4.6 -- 339,200 3.5
Michael C. Lee....................... 205,950(7) 2.8 10,000 195,950 2.0
All directors and executive officers
as a group (6 persons)............. 1,981,138 25.3 180,000 1,801,138 17.7
</TABLE>
---------------------------
(1) This table is based upon information supplied by our officers, directors,
and principal stockholders and by Schedules 13D and 13G filed with the SEC.
Except where indicated, the address of each five percent stockholder is c/o
the company, 20200 Sunburst Street, Chatsworth, CA 91311. Applicable
percentages are based on 7,328,702 shares of company common stock
outstanding, adjusted as required.
(2) Includes 293,000 shares subject to outstanding options which are deemed
exercisable. Excludes 53,583 shares owned by the reporting person's spouse,
as to which the reporting person disclaims beneficial ownership.
(3) Consists of 101,084 shares subject to outstanding options which are deemed
exercisable.
(4) Includes 32,500 shares subject to outstanding options which are deemed
exercisable.
(5) Includes 36,000 shares held by G&G Diagnostics Limited Partnership, a
Delaware limited partnership, of which the reporting person is the sole
general partner and 40,000 shares subject to outstanding options which are
deemed exercisable. Excludes 20,000 shares owned by the reporting person's
spouse, as to which the reporting person disclaims beneficial ownership.
(6) Includes 262,200 shares in investment funds to which the reporting person is
trustee. Includes 24,000 shares held by the reporting person for his minor
sons. Also includes 7,500 shares subject to outstanding options which are
deemed exercisable. Excludes 1,700 shares owned by reporting person's
spouse, as to which the reporting person disclaims beneficial ownership.
(7) Includes 40,000 shares subject to outstanding options which are deemed
exercisable.
43
<PAGE>
RELATED PARTY TRANSACTIONS
THESEUS ACQUISITION
On October 13, 2000, we acquired Theseus through a merger. Theseus is now our
wholly-owned subsidiary. Theseus' shareholders and option holders received a
total of 345,665 shares of, or options to purchase for nominal consideration,
our common stock in exchange for 100% of Theseus' outstanding common stock and
options.
Dr. Allan M. Green, one of our directors, was the chairman of the Board of
Directors, president and a significant stockholder of Theseus. Irwin J.
Gruverman, our chairman of the board, was a director and significant stockholder
of Theseus. Dr. Green and Mr. Gruverman took no part in the deliberations of our
Board of Directors with respect to the proposed Theseus transaction, which
actions were approved by a unanimous vote of the disinterested members of our
board. Dr. Green previously held approximately 38% of the outstanding common
stock of Theseus, and received 132,583 shares of our common stock pursuant to
the terms of the merger. Mr. Gruverman previously held approximately 14% of the
outstanding common stock of Theseus, and received 49,721 shares of our common
stock pursuant to the terms of the merger.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 40,000,000 shares of common stock, $.01 par value per
share, and 2,000,000 shares of preferred stock, $.01 par value per share.
COMMON STOCK
As of December 13, 2000, there were 7,328,702 shares of common stock outstanding
that were held by approximately 76 stockholders of record. Holders of common
stock are entitled to one vote per share for the election of directors and all
other matters submitted to a vote of our stockholders. Subject to the rights of
any holders of preferred stock which may be issued in the future, the holders of
common stock are entitled to share ratably in such dividends as may be declared
by our Board of Directors out of funds legally available therefor. In the event
of our dissolution, liquidation or winding up, holders of common stock are
entitled to share ratably in all assets remaining after payment of all
liabilities and liquidation preferences of any preferred stock. Holders of
common stock have no preemptive, subscription, redemption, conversion rights or
similar rights. Our Certificate of Incorporation does not provide for cumulative
voting rights with respect to the election of directors. All outstanding common
stock is, and the common stock to be issued in connection with this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority, without action by the stockholders, to
designate and issue preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, which may be greater than the
rights of the common stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until our Board of Directors determines the specific rights of the
holders of this preferred stock. However, the effects might include, among other
things:
- restricting dividends on the common stock
- diluting the voting power of the common stock
- impairing the liquidation rights of the common stock
- delaying or preventing a change in control of the company without further
action by the stockholders
No shares of preferred stock are outstanding and we have no present plans to
issue any shares of preferred stock.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, known as the Anti-Takeover Law, regulating corporate takeovers.
The Anti-Takeover Law prevents certain Delaware corporations from engaging,
under certain circumstances, in a "business combination" (which includes a
merger or sale of more than 10% of the corporation's assets) with any
"interested stockholder" (a stockholder who acquired 15% or more of the
corporation's outstanding voting stock without the prior approval of the
corporation's Board of Directors) for three years following the date that such
stockholder became an "interested stockholder." A corporation may "opt out" of
the Anti-Takeover Law, which we have not done.
45
<PAGE>
STOCKHOLDERS RIGHTS PLAN
In October 1998, we adopted a rights plan for the purpose of protecting the
holders of our common stock in the event of an attempted takeover by a third
party that has not been approved by our Board of Directors. On October 22, 1998,
we declared a dividend distribution of one right for each outstanding share of
common stock outstanding on October 22, 1998. All shares of common stock issued
since this date have also had a right issued for them. In the case of certain
triggering events, each right entitles the holder of common stock to purchase,
upon exercise of the right, a number of shares of common stock having a market
value of two times the exercise price of the rights.
Generally, the rights are not exercisable until such time as a person or group
has announced it has acquired or obtained the right to acquire fifteen percent
or more of our common stock, commenced a tender or exchange offer to purchase
fifteen percent or more of our common stock or upon certain other events. The
rights plan may be amended by us without the approval of the holders of common
stock. Prior to becoming exercisable, we may redeem the rights at any time for
nominal consideration. The rights expire on October 22, 2008. One right will be
issued for each share of common stock issued in connection with this offering.
TRANSFER AGENT
The Transfer Agent for our common stock is U.S. Stock Transfer Corporation.
Their address is 1745 Gardena Avenue, Suite 200, Glendale, California 91204.
Their phone number is (818) 502-1404.
46
<PAGE>
UNDERWRITING
We and the selling stockholders have agreed to enter into an underwriting
agreement with the underwriters named below. CIBC World Markets Corp., UBS
Warburg LLC and Leerink Swann & Company are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
CIBC World Markets Corp..................................... 1,292,500
UBS Warburg LLC............................................. 822,500
Leerink Swann & Company..................................... 235,000
Adams, Harkness & Hill, Inc................................. 75,000
A.G. Edwards & Sons, Inc.................................... 75,000
---------
Total............................................... 2,500,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The underwriters do not intend to use any means of distributing or delivering
prospectuses other than by hand or the mails and do not intend to use any form
of prospectus other than printed prospectuses.
The shares should be ready for delivery on or about December 19, 2000 against
payment in immediately available funds. The representatives have advised us and
the selling stockholders that the underwriters propose to offer the shares
directly to the public at the public offering price that appears on the cover
page of this prospectus. In addition, the representatives may offer some of the
shares to other securities dealers at such price less a concession of $0.64 per
share. The underwriters may also allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to other dealers. After the shares
are released for sale to the public, the representatives may change the offering
price and other selling terms at various times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 375,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the public offering price that
appears on the cover page of this prospectus, less the underwriting discount. If
this option is exercised in full, the total price to the public will be
$48.2 million, and the total proceeds to us will be $44.8 million. The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
47
<PAGE>
The following table provides information regarding the amount of the discount we
and the selling stockholders will pay to the underwriters:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH FULL
EXERCISE OF EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- ---------------------- ----------------------
<S> <C> <C> <C>
NASI................................ $1.0725 $2,488,200 $2,890,388
Selling Stockholders................ $1.0725 $ 193,050 $ 193,050
Total.......................
</TABLE>
We will pay all of our and the selling stockholders' expenses associated with
the offering, excluding the underwriting discount, which expenses we estimate to
be approximately $500,000.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
We, our officers and directors, the selling stockholders and some other
stockholders have agreed to a 90-day "lock up" with respect to 1,390,854 shares
of common stock and other securities that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that for
a period of 90 days following the date of this prospectus, we and such persons
may not offer, sell, pledge or otherwise dispose of these securities without the
prior written consent of CIBC World Markets Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- Stabilizing transactions--The representatives may make bids or purchases for
the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions--The underwriters may
sell more shares of our common stock in connection with this offering than
the number of shares than they have committed to purchase. This
over-allotment creates a short position for the underwriters. This short
sales position may involve either "covered" short sales or "naked" short
sales. Covered short sales are short sales made in an amount not greater than
the underwriters' over-allotment option to purchase additional shares in this
offering. The underwriters may close out any covered short position either by
exercising their over-allotment option or by purchasing shares in the open
market. To determine how they will close the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market, as compared to the price at which they may
purchase shares through the over-allotment option. Naked short sales are
short sales in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that, in the open market after pricing, there may be downward
pressure on the price of the shares that could adversely affect investors who
purchase shares in this offering.
- Penalty bids--If the representatives purchase shares in the open market in a
stabilizing transaction or syndicate covering transaction, they may reclaim a
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
- Passive market making--Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject to
limitations, until the time, if ever, at which a stabilizing bid is made.
Similar to other purchase transactions, the underwriters' purchases to cover the
syndicate short sales or to stabilize the market price of our common stock may
have the effect of raising or maintaining
48
<PAGE>
the market price of our common stock or preventing or mitigating a decline in
the market price of our common stock. As a result, the price of the shares of
our common stock may be higher than the price that might otherwise exist in the
open market. The imposition of a penalty bid might also have an effect on the
price of the shares if it discourages resales of the shares.
Neither we nor the underwriters makes any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for us by
D'Ancona & Pflaum LLC. Mr. Allan J. Reich, a Managing Member of D'Ancona &
Pflaum LLC, beneficially owns 58,250 shares of our common stock. Other members
of D'Ancona & Pflaum LLC beneficially own additional shares of our common stock,
which ownership is not material. Certain legal matters will be passed upon for
the underwriters by McDermott, Will & Emery.
EXPERTS
The consolidated financial statements as of October 31, 1999 and 1998 and for
each of the three years in the period ended October 31, 1999, included in this
prospectus or incorporated in this prospectus by reference to the Annual Report
on Form 10-K for the year ended October 31, 1999 and the audited historical
financial statements of Theseus Imaging Corporation included on page F-1 of
North American Scientific, Inc.'s Form 8-K dated October 19, 2000 have been so
incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Information regarding us, including historical financial statements and detailed
descriptions of our business, is included in documents other than this
prospectus. We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy reports, statements or other information about us at prescribed rates on
file at the Securities and Exchange Commission's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference rooms. You may also find our Securities and Exchange Commission
filings through commercial document retrieval services and the web site
maintained by the Securities and Exchange Commission at HTTP://WWW.SEC.GOV.
This prospectus is part of a registration statement on Form S-3 that we filed
with the SEC and omits certain information contained in the registration
statement as permitted by the SEC. Whenever a reference is made in this
prospectus to any contract or other document of NASI the reference may not be
complete and you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or document. You can obtain a
copy of the registration statement from the SEC at the street address or
Internet site listed in the above paragraph.
The SEC allows us to "incorporate by reference" into this prospectus the
information we have filed with them. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be a part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Section 13(a),
49
<PAGE>
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the
initial filing of the registration that contains this prospectus and prior to
the time that we sell all the securities offered by this prospectus:
- Annual Report on Form 10-K for the fiscal year ended October 31, 1999
- Quarterly Report on Form 10-Q for the quarter ended January 31, 2000
- Quarterly Report on Form 10-Q for the quarter ended April 30, 2000
- Quarterly Report on Form 10-Q for the quarter ended July 31, 2000
- Current Report on Form 8-K dated October 19, 2000, as amended on a Current
Report on Form 8-K/A dated November 22, 2000
- The description of our common stock as contained in our Form 10-SB filed
August 22, 1995, File No. 0-26670, including any amendment or report filed
for the purposes of updating such description
A copy of these filings will be provided to you at no cost if you request them
by writing or telephoning us at the following address:
Investor Relations
North American Scientific, Inc.
20200 Sunburst Street
Chatsworth, California, 91311
Tel: 818-734-8600
Fax: 818-734-5200
You should rely only on the information provided or incorporated by reference in
this prospectus or any prospectus supplement. We have not authorized anyone to
provide you with information that is different. We are not making an offer of
these securities in any jurisdiction where the offer is not permitted. You
should not assume that the information in this prospectus is accurate as of any
date other than the date of the prospectus.
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statement of Changes in Stockholders' Equity... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
North American Scientific, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
North American Scientific, Inc. and its subsidiary at October 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended October 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
COSTA MESA, CALIFORNIA
DECEMBER 21, 1999
F-2
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------- JULY 31,
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 2,119,000 $ 1,443,000 $ 3,353,000
Marketable securities.............................. 9,101,000 8,219,000 8,142,000
Accounts receivable, net........................... 1,323,000 1,983,000 1,212,000
Inventories........................................ 731,000 552,000 827,000
Prepaid expenses and other current assets.......... 196,000 365,000 959,000
----------- ----------- -----------
Total current assets......................... 13,470,000 12,562,000 14,493,000
----------- ----------- -----------
Notes receivable................................... 1,163,000 4,162,000 6,189,000
Equipment and leasehold improvements, net.......... 1,587,000 3,743,000 3,600,000
Construction in progress........................... 2,289,000 2,826,000 3,687,000
Deposits and other assets.......................... 394,000 545,000 568,000
----------- ----------- -----------
Total assets................................. $18,903,000 $23,838,000 $28,537,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................... $ 338,000 $ 568,000 $ 899,000
Accrued expenses................................... 202,000 627,000 562,000
Income taxes payable............................... 315,000 163,000 --
----------- ----------- -----------
Total current liabilities.................... 855,000 1,358,000 1,461,000
Deferred income taxes................................ 61,000 114,000 114,000
----------- ----------- -----------
Total liabilities............................ 916,000 1,472,000 1,575,000
----------- ----------- -----------
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares
Authorized; no shares issued....................... -- -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 6,787,975, 6,828,887 and 6,920,477
shares issued and outstanding as of October 31,
1998, 1999 and July 31, 2000 (unaudited)
respectively....................................... 68,000 68,000 69,000
Additional paid-in capital........................... 17,162,000 18,172,000 18,655,000
Retained earnings.................................... 757,000 4,126,000 8,238,000
----------- ----------- -----------
Total stockholders' equity................... 17,987,000 22,366,000 26,962,000
----------- ----------- -----------
Total liabilities and stockholders' equity... $18,903,000 $23,838,000 $28,537,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales......................... $3,381,000 $5,839,000 $12,767,000 $8,878,000 $12,891,000
Cost of goods sold................ 1,844,000 2,680,000 4,594,000 3,261,000 4,296,000
---------- ---------- ----------- ---------- -----------
Gross profit.................. 1,537,000 3,159,000 8,173,000 5,617,000 8,595,000
Research and development.......... 72,000 196,000 287,000 240,000 264,000
Selling, general and
administrative.................. 1,094,000 1,859,000 3,060,000 2,236,000 2,583,000
---------- ---------- ----------- ---------- -----------
Total operating expenses...... 1,166,000 2,055,000 3,347,000 2,476,000 2,847,000
---------- ---------- ----------- ---------- -----------
Income from operations............ 371,000 1,104,000 4,826,000 3,141,000 5,748,000
Interest and other income......... 50,000 635,000 611,000 429,000 833,000
---------- ---------- ----------- ---------- -----------
Income before provision for income
taxes........................... 421,000 1,739,000 5,437,000 3,570,000 6,581,000
Provision for income taxes........ 145,000 640,000 2,068,000 1,362,000 2,469,000
---------- ---------- ----------- ---------- -----------
Net income........................ $ 276,000 $1,099,000 $ 3,369,000 $2,208,000 $ 4,112,000
---------- ---------- ----------- ---------- -----------
Earnings per share:
Basic........................... $ .06 $ .17 $ .49 $ .32 $ .60
========== ========== =========== ========== ===========
Diluted......................... $ .05 $ .16 $ .47 $ .31 $ .55
========== ========== =========== ========== ===========
Weighted average number of shares
outstanding:
Basic........................... 4,591,614 6,435,588 6,800,129 6,795,660 6,872,402
========== ========== =========== ========== ===========
Diluted......................... 5,372,398 7,023,650 7,203,264 7,183,188 7,467,303
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) OTHER EQUITY
--------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996........... 4,474,801 $29,000 $ 2,105,000 ($ 597,000) ($9,000) $ 1,528,000
Issuance of common stock.............. 375,000 3,000 968,000 -- -- 971,000
Issuance of warrants.................. -- -- 135,000 -- -- 135,000
Common stock issued upon exercise of
stock options....................... 176,250 1,000 145,000 -- -- 146,000
Common stock issued upon exercise of
warrants............................ 150,000 1,000 162,000 -- -- 163,000
Net income............................ -- -- -- 276,000 -- 276,000
Foreign currency translation
adjustment.......................... -- -- -- -- 9,000 9,000
--------- ------- ----------- ---------- ------- -----------
Balance at October 31, 1997........... 5,176,051 34,000 3,515,000 (321,000) -- 3,228,000
Issuance of common stock under private
placement........................... 1,200,000 8,000 13,186,000 -- -- 13,194,000
Common stock issued upon exercise of
stock options....................... 336,924 4,000 265,000 -- -- 269,000
Common stock issued upon exercise of
warrants............................ 75,000 1,000 80,000 -- -- 81,000
Effect of common stock dividend....... -- 21,000 -- (21,000) -- --
Tax benefit related to exercise of
stock options....................... -- -- 116,000 -- -- 116,000
Net income............................ -- -- -- 1,099,000 -- 1,099,000
--------- ------- ----------- ---------- ------- -----------
Balance at October 31, 1998........... 6,787,975 68,000 17,162,000 757,000 -- 17,987,000
Common stock issued upon exercise of
stock options....................... 40,912 -- 62,000 -- -- 62,000
Tax benefit related to exercise of
stock options....................... -- -- 948,000 -- -- 948,000
Net income............................ -- -- -- 3,369,000 -- 3,369,000
--------- ------- ----------- ---------- ------- -----------
Balance at October 31, 1999........... 6,828,887 68,000 18,172,000 4,126,000 -- 22,366,000
Common stock issued upon exercise of
stock options....................... 91,590 1,000 483,000 -- -- 484,000
Net income............................ -- -- -- 4,112,000 -- 4,112,000
--------- ------- ----------- ---------- ------- -----------
Balance at July 31, 2000
(Unaudited)......................... 6,920,477 $69,000 $18,655,000 $8,238,000 $ -- $26,962,000
========= ======= =========== ========== ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 276,000 $ 1,099,000 $ 3,369,000 $ 2,208,000 $ 4,112,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 53,000 227,000 375,000 262,000 543,000
Deferred income taxes................. -- 61,000 53,000 -- --
Tax benefit of stock option
exercises........................... -- 116,000 948,000 -- --
Other................................. 27,000 10,000 -- -- (119,000)
Changes in assets and liabilities:
Accounts receivable................. 253,000 (903,000) (660,000) (605,000) 771,000
Inventories......................... (234,000) (353,000) 179,000 89,000 (275,000)
Income taxes receivable............. (106,000) 106,000 -- -- --
Prepaid expenses and other assets... (118,000) (362,000) (351,000) (260,000) (681,000)
Accounts payable.................... 187,000 (26,000) 230,000 443,000 331,000
Accrued expenses.................... (58,000) 121,000 425,000 114,000 (65,000)
Income taxes payable................ (155,000) 315,000 (152,000) 542,000 (163,000)
---------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities...................... 125,000 411,000 4,416,000 2,793,000 4,454,000
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Construction in progress................ -- (2,289,000) (537,000) (465,000) (861,000)
Net sales/(purchases) of marketable
securities............................ (1,000) (9,074,000) 882,000 1,701,000 77,000
Notes receivable........................ (500,000) (663,000) (2,999,000) (2,135,000) (2,027,000)
Proceeds from sales of other assets..... -- -- -- -- 169,000
Capital expenditures.................... (180,000) (1,406,000) (2,500,000) (2,437,000) (386,000)
---------- ----------- ----------- ----------- -----------
Net cash provided by investing
activities.......................... (681,000) (13,432,000) (5,154,000) (3,336,000) (3,028,000)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................. 1,279,000 13,544,000 62,000 15,000 484,000
---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.......................... 1,279,000 13,544,000 62,000 15,000 484,000
---------- ----------- ----------- ----------- -----------
Effect of foreign currency translation on
cash.................................... 7,000 -- -- -- --
---------- ----------- ----------- ----------- -----------
Net increase/(decrease) in cash and cash
equivalents............................. 730,000 523,000 (676,000) (528,000) 1,910,000
Cash and cash equivalents at beginning of
period.................................. 866,000 1,596,000 2,119,000 2,119,000 1,443,000
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................. $1,596,000 $ 2,119,000 $ 1,443,000 $ 1,591,000 $ 3,353,000
========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid........................... $ 1,000 $ -- $ -- $ -- $ --
========== =========== =========== =========== ===========
Income taxes paid....................... $ 407,000 $ 73,000 $ 801,000 $ 821,000 $ 2,600,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
North American Scientific, Inc. manufactures and markets a line of radioisotopic
products for medical, scientific and industrial uses. The company operates in a
single business segment with its primary products being (i) brachytherapy seeds
for the treatment of prostate cancer and (ii) radioactive reference sources used
to calibrate a variety of medical and commercial equipment. References to the
"Company" include both the parent company and its subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the reporting period. Actual
results could differ from those estimates.
STOCK SPLIT
Effective April 20, 1998, the Company effected a 3-for-2 stock split in the form
of a common stock dividend. The par value of the Company's common stock was
unchanged. All common stock information set forth in the consolidated financial
statements and notes thereto has been retroactively adjusted to reflect the
stock split.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market as determined under the
first-in, first-out method. Costs include materials, labor and manufacturing
overhead.
The Company's products are subject to shelf-life expiration periods which are
carefully monitored by the Company. Provision is made for inventory items which
may not be sold because of expiring dates. The Company routinely reviews other
inventories for evidence of impairment of value and makes provision as such
impairments are identified.
MARKETABLE SECURITIES
The Company considers its marketable securities "available-for-sale" as defined
in Statement of Financial Accounting Standards, or SFAS, No. 115. There were no
material realized or unrealized gains or losses nor any material differences
between cost and estimated fair values. Fair value is
F-7
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
determined to be par plus accrued interest or based on asking prices as quoted
by independent brokers.
NOTES RECEIVABLE
Notes receivable consists of convertible debt securities of three separate
private companies. The Company accounts for its notes receivable in accordance
with SFAS No. 115 and considers these notes as "available-for-sale". As of
October 31, 1999, there were no material realized or unrealized gains or losses
recorded with respect to the notes. These companies are in the early stage of
development and management believes that cost approximates fair value. The three
companies' stocks are not actively traded on a public exchange, therefore
management's assessment of fair value was supported by valuations performed by
independent appraisers.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment..... 3-15 years
Lesser of the useful life or term of
Leasehold improvements................ lease
</TABLE>
Maintenance and repair costs are expensed as incurred, while improvements are
capitalized. Gains or losses resulting from the disposition of assets are
included in income.
The Company assesses potential impairments to its long-lived assets, on an
exception basis, when there is evidence that events or changes in circumstances
have made recovery of the asset's carrying value unlikely. If the sum of the
expected future undiscounted cash flows, without interest charges, is less than
the carrying value of the asset, an impairment loss is recognized as the excess
of the carrying value of the asset over its fair value.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment and the Company provides
currently for estimated discounts, rebates and product returns and the cost to
repair or replace products under the warranty provisions in effect at the time
of sale.
STOCK OPTION PLAN
The Company measures compensation expense for employees and directors for its
stock option plan using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value method had
been applied in measuring compensation expense. When options are issued to
consultants or other third parties, expense is determined under the fair value
method required by SFAS 123.
F-8
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME PER SHARE
Basic earnings per share is computed by dividing the net income by the weighted
average number of shares outstanding for the period.
Diluted earnings per share is computed by dividing the net income by the sum of
the weighted average number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities by applying the treasury stock
method. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
----------------------------------- -----------------------
1997 1998 1999 1999 2000
--------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income........................ $ 276,000 $1,099,000 $3,369,000 $2,208,000 $4,112,000
========= ========== ========== ========== ==========
Weighted average number of shares
outstanding -- Basic............ 4,591,614 6,435,588 6,800,129 6,795,660 6,872,402
Dilutive effect of stock options
and warrants.................... 780,784 588,062 403,135 387,528 594,901
--------- ---------- ---------- ---------- ----------
Diluted........................... 5,372,398 7,023,650 7,203,264 7,183,188 7,467,303
========= ========== ========== ========== ==========
Earnings per share
Basic............................. $ .06 $ .17 $ .49 $ .32 $ .60
========= ========== ========== ========== ==========
Diluted........................... $ .05 $ .16 $ .47 $ .31 $ .55
========= ========== ========== ========== ==========
</TABLE>
INCOME TAXES
The Company accounts for income taxes utilizing an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in its
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax law or rates.
RECLASSIFICATIONS
Certain reclassifications of previously reported amounts have been made to
conform to the current period's presentation.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents, collateralized notes receivable and
accounts receivable which are not collateralized. The Company's policy is to
invest its cash with highly rated financial institutions in order to limit the
amount of credit exposure. The Company's customers are financially sound
F-9
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
corporations operating in a variety of industries. Through July 31, 2000 the
Company's sales (and therefore accounts receivable) have been concentrated in a
small number of customers. The Company closely monitors the credit worthiness of
these customers and makes provision whenever there are indications of potential
credit losses. The Company's credit losses have been within management's
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", or SFAS 133. This statement establishes a
new model for accounting for derivatives and hedging activities. Under
SFAS 133, all derivatives must be recognized as assets and liabilities and
measured at fair value. The Company is required to adopt SFAS 133 for its fiscal
year ended October 31, 2000. The Company does not expect the adoption of this
pronouncement to have a material effect on its reported consolidated financial
condition or results of operations.
In December 1999, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 101, SAB 101, "Revenue Recognition in Financial
Statements." The Company will be required to adopt SAB 101 in fiscal 2001. The
Company does not expect this accounting pronouncement to have a material effect
on its financial position and results of operations.
INTERIM FINANCIAL INFORMATION
The financial information included in these consolidated financial statements as
of July 31, 2000 and for the nine month periods ended July 31, 1999 and
July 31, 2000 is unaudited but in the opinion of management includes all
adjustments necessary for a fair presentation of this information as of the
dates and for the periods indicated.
NOTE 2--INVENTORIES:
Inventories are shown net of applicable reserves and allowances:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JULY 31,
1998 1999 2000
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials................................. $606,000 $285,000 $604,000
Work in process............................... 16,000 166,000 65,000
Finished goods................................ 109,000 101,000 158,000
-------- -------- --------
$731,000 $552,000 $827,000
======== ======== ========
</TABLE>
NOTE 3--NOTES RECEIVABLE:
The Company has a $500,000 secured subordinated convertible note (the "Note")
from RadioMed Corporation, or RadioMed. The Note bears interest at 10% per annum
and had an original maturity date of October 7, 2007. The Note may be converted
at the Company's election at any time prior to
F-10
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 3--NOTES RECEIVABLE: (CONTINUED)
the maturity date into Series A Preferred Stock of RadioMed at a price of $500
per share subject to adjustment. However, the Note will be automatically
converted into such shares upon the consummation of a public offering by
RadioMed or at the maturity date. Interest is not due until the earlier of
conversion of the Note or the maturity date. The Note is secured by a first lien
on RadioMed's physical assets and proprietary technology as defined in the
security agreement, subject to certain subordination.
On December 4, 1999, the Company and RadioMed signed a settlement letter which
provided for, among other matters, the repayment of the principal amount of the
Note on or prior to March 31, 2000, and payment of the accrued interest on the
Note in the form of 20,000 shares of RadioMed Series A Convertible Preferred
Stock, $0.01 par value. Each of these provisions was satisfied in accordance
with the settlement letter in the second quarter of fiscal year 2000.
On October 21, 1999 the Company signed a definitive agreement to acquire Theseus
Imaging Corporation, a developmental stage company, in a stock for stock
exchange. Under the terms of the Agreement, as amended in September 2000,
Theseus stockholders will receive up to 350,000 shares of, or options to
purchase, newly issued NASI common stock and certain royalty rights in exchange
for 100% of Theseus' common stock. The acquisition of Theseus is contingent upon
final due diligence, receipt of a financial fairness opinion from a qualified
independent third party and initial clinical results. The Company has also
agreed to provide financing to Theseus up until the acquisition date. This
financing is in the form of convertible notes bearing interest at the prime rate
plus 1%. These notes are convertible into common stock of Theseus at the
Company's option. These notes are due and payable or must be converted no later
than November 1, 2000. The notes are secured by a first priority interest in
Theseus' right, title and interest in the collateral as defined in the Security
Agreement, which consists primarily of certain licensing agreements. As of
July 31, 2000 and October 31, 1999 and 1998, the Company had convertible notes
outstanding of $5,989,000, $3,462,000 and $463,000, respectively.
The Company has a $200,000 secured convertible note from a manufacturing
company. The convertible note bears interest at 6% per annum and matured on
June 19, 2000. The note may be converted at any time at the Company's election
into equity securities of the manufacturing company. The Company is currently
evaluating its conversion option. The note is secured by certain licenses and
intellectual property rights.
NOTE 4--CONSTRUCTION IN PROGRESS:
In February 1998, the Company entered into agreements with PracSys Corp., a
Massachusetts corporation, or PracSys, pursuant to which PracSys would
(i) manufacture and sell to the Company two particle accelerators to be used in
the production of certain isotopes related to the Company's brachytherapy
product line and (ii) operate the machines to produce the isotopes for an
initial two-year period. The agreements called for total payments to PracSys of
approximately $2.7 million which were paid in full. As of October 31, 1998 and
1999, costs related to the construction of the machines totaled $2,289,000 and
$2,826,000, respectively, and are reported as construction in progress in the
consolidated balance sheets.
F-11
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 4--CONSTRUCTION IN PROGRESS: (CONTINUED)
During fiscal year 1999, a dispute arose between the Company and PracSys and
construction of the machines was halted (See Note 6). In December 1999, the
Company took possession of the machines and moved them to another location
pending conclusion of the project.
NOTE 5--EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- JULY 31,
1998 1999 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Furniture, fixtures and equipment....................... $1,583,000 $2,952,000 $ 3,228,000
Leasehold improvements.................................. 460,000 1,588,000 1,644,000
---------- ---------- -----------
Total........................................... 2,043,000 4,540,000 4,872,000
Less: Accumulated depreciation and amortization......... (456,000) (797,000) (1,272,000)
---------- ---------- -----------
$1,587,000 $3,743,000 $ 3,600,000
========== ========== ===========
</TABLE>
NOTE 6--COMMITMENTS AND CONTINGENCIES:
The Company leases office and manufacturing space under non-cancelable operating
lease agreements. Future minimum lease payments are subject to annual adjustment
for increases in the Consumer Price Index. Future minimum lease payments under
all operating leases in each of the next five years from fiscal 2000 to 2004 are
$277,000, $277,000, $196,000, $180,000 and $15,000, respectively. Total rent
expense for the years ended October 31, 1997, 1998 and 1999 was $97,000,
$113,000 and $265,000, respectively.
On August 11, 1999, PracSys initiated an arbitration proceeding against the
Company claiming breach of contract, breach of fiduciary duty and unfair and
deceptive trade practices. The Company denied PracSys' claims, and asserted
counterclaims against PracSys for breach of contract and fraud and
misrepresentation in connection with PracSys' failure to complete the
accelerators. On June 2, 2000, the arbitrator denied all damage claims by either
party in their entirety. Additionally, the arbitrator denied PracSys' claims
attempting to cancel the Company's ownership interest in PracSys and certain
other exclusivity and option rights granted to the Company. Although no
liability was found against the Company, the arbitrator did direct the Company
to pay certain of PracSys' legal and administrative expenses related to the
arbitration.
From time to time the Company is subject to legal proceedings and claims that
arise in the normal course of its business. The Company believes such
proceedings will not have a material adverse effect on the financial position or
results of operations of the Company.
F-12
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY:
PRIVATE PLACEMENT
In November 1997, the Company completed a private placement of 800,000 shares of
its common stock to certain institutional investors. The net proceeds to the
Company from the sale were approximately $13.2 million.
STOCKHOLDERS' RIGHTS PLAN
In October 1998, the Board of Directors of the Company implemented a rights
agreement to protect stockholders' rights in the event of a proposed takeover of
the Company. In the case of a triggering event, each right entitles the
Company's stockholders to buy, for $80, $160 worth of common stock for each
share of common stock held. The rights will become exercisable only if a person
or group acquires, or commences a tender offer to acquire, 15% or more of the
Company's common stock. The rights, which expire in October 2008, are redeemable
at the Company's option for $0.001 per right. The Company also has the ability
to amend the rights, subject to certain limitations.
PREFERRED STOCK
The Company has authorized the issuance of 2,000,000 shares of preferred stock;
however, no shares have been issued. The designations, rights and preferences of
any preferred stock that may be issued will be established by the Board of
Directors at or before the time of such issuance.
STOCK OPTIONS
The Company's 1996 Stock Option Plan provides for the issuance of incentive
stock options to employees of the Company and non-qualified options to
employees, directors and consultants of the Company with exercise prices equal
to the fair market value of the Company's stock on the date of grant. Certain
options are immediately exercisable while other options vest over a period
ranging from two to four years. The options expire ten years from the date of
grant. Certain options are subject to cancellation in the event of termination
of employment.
F-13
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVG.
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Balance at October 31, 1996........................... 551,250 $ 0.68
Granted............................................... 375,750 1.15
Canceled or expired................................... -- --
Exercised............................................. (176,250) 0.68
--------- ------
Balance at October 31, 1997........................... 750,750 0.92
Granted............................................... 191,125 14.42
Canceled or expired................................... (58,187) 11.87
Exercised............................................. (336,924) 0.80
--------- ------
Balance at October 31, 1998........................... 546,764 5.00
Granted............................................... 421,500 6.25
Canceled or expired................................... (17,702) 4.62
Exercised............................................. (40,912) 1.52
--------- ------
Balance at October 31, 1999........................... 909,650 5.74
Granted............................................... 516,000 14.24
Canceled or expired................................... (17,967) 7.91
Exercised............................................. (91,565) 5.21
--------- ------
Balance at July 31, 2000 (unaudited).................. 1,316,118 $ 8.89
========= ======
</TABLE>
There were 231,125, 415,744 and 551,577 (unaudited) options exercisable with
weighted average exercise prices of $3.13, $3.99 and $5.66 (unaudited) at
October 31, 1998, 1999 and July 31, 2000, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Dividend yield...................................... --% --% --%
Expected volatility................................. 80.0% 35.0% 40.0%
Risk-free interest rate............................. 6.4% 5.7% 5.2%
Expected lives...................................... 5 years 5 years 5 years
</TABLE>
F-14
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes significant option groups outstanding at
July 31, 2000 (unaudited) and related weighted average exercise price and
remaining contractual life information as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVG. AVG.
CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE EXERCISABLE PRICE
------------------------ --------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.67-$1.96 304,125 6.29 $ 0.98 257,437 $ 1.00
$3.94-$7.00 431,293 8.61 5.94 184,890 5.92
$7.94-$15.67 222,500 9.22 8.35 56,750 9.03
$16.75-$24.54 358,200 9.34 19.49 52,500 23.95
--------- -------
1,316,118 8.38 8.89 551,577 5.66
========= =======
</TABLE>
Had compensation cost for the Company's option plans been determined based on
the fair value at the grant dates, as prescribed by SFAS No. 123, net income and
net income per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported.......................................... $276,000 $1,099,000 $3,369,000
Pro forma............................................ $100,000 $ 532,000 $2,584,800
Earnings per share:
As reported basic.................................... $ .06 $ .17 $ .49
As reported diluted.................................. $ .05 $ .16 $ .47
Pro forma basic...................................... $ .02 $ .08 $ .38
Pro forma diluted.................................... $ .02 $ .08 $ .36
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of its options. The weighted
average estimated fair value of stock options granted during fiscal year 1998
and 1999 were $5.83 and $3.74 per share, respectively.
MENTOR AGREEMENT
In June 1997, the Company entered into an exclusive worldwide distribution
agreement with Mentor Corporation, or Mentor, to market and sell certain
brachytherapy seeds for the treatment of prostate cancer. Under the terms of the
five year agreement, Mentor is responsible for sales and marketing activities.
Pursuant to the agreement, Mentor purchased 375,000 shares of the Company's
common stock at $2.67 per share (a premium to the fair market value of the
common stock at the time of the
F-15
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY: (CONTINUED)
agreement). In addition, the agreement originally provided Mentor the right to
purchase $2,000,000 of the Company's preferred stock, however, during fiscal
year 1998 the agreement was amended to eliminate this right.
COMMON STOCK WARRANTS
In fiscal 1997, the Company granted 225,000 warrants to a third party in
connection with a contract to provide investment banking services on behalf of
the Company over a five-year term. The warrants permitted the holder to purchase
a total of 225,000 shares of the Company's common stock at $1.09 per share, or
the fair market value of the Company's common stock at the date of the
agreement. The holder exercised 150,000 of such warrants in fiscal 1997 and the
remaining 75,000 in fiscal 1998. The fair value of the warrants of $135,000 at
the grant date is reflected as other assets and additional paid-in capital and
is being amortized over the term of the agreement.
In fiscal 1998, the Company granted 96,000 warrants to another third party in
connection with a private placement of the Company's common stock at an exercise
price of $14.41 per share. These warrants have not been exercised.
NOTE 8--SALES TO MAJOR CUSTOMERS:
Revenues from customers that accounted for more than 10% of the Company's
consolidated revenues were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Customer A.................................................. 41% 9% --%
Customer B.................................................. 30 17 7
Customer C.................................................. -- 45 77
---- ---- ----
71% 71% 84%
==== ==== ====
</TABLE>
At October 31, 1999, amounts due from Customer C accounted for 76% of gross
trade receivables.
NOTE 9--INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal............................................... $130,000 $526,000 $1,727,000
State................................................. 15,000 53,000 288,000
-------- -------- ----------
145,000 579,000 2,015,000
-------- -------- ----------
Deferred:
Federal............................................... -- (20,000) 69,000
State................................................. -- 81,000 (16,000)
-------- -------- ----------
-- 61,000 53,000
-------- -------- ----------
$145,000 $640,000 $2,068,000
======== ======== ==========
</TABLE>
F-16
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 9--INCOME TAXES: (CONTINUED)
The temporary differences resulted in a net deferred tax liability consisting of
the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Depreciation and amortization............................... $141,000 $264,000
Accrued liabilities......................................... (27,000) (37,000)
Allowance for doubtful accounts............................. (8,000) (22,000)
Inventory reserve and capitalized inventory................. (17,000) (70,000)
Other....................................................... (28,000) (21,000)
-------- --------
$ 61,000 $114,000
======== ========
</TABLE>
A reconciliation of tax expense computed at the U.S. federal statutory rate is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal tax provision at U.S. statutory rate................ 34% 34% 34%
State income taxes, net of federal benefit.................. 4 5 3
Other, net.................................................. (4) (2) 1
----- ----- -----
34% 37% 38%
===== ===== =====
</TABLE>
NOTE 10--RETIREMENT PLAN:
The Company has a 401(k) retirement plan that allows eligible employees to
contribute up to 15% of their salary, subject to annual limits. Under these
plans, the Company makes certain contributions based upon the compensation of
eligible employees and makes additional matching contributions for those
employees who elect to contribute to the plan. The Company's expense for its
plans totaled $4,000, $7,000, and $87,000 for the years ended October 31, 1997,
1998, and 1999, respectively.
F-17
<PAGE>
NORTH AMERICAN SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION AFTER OCTOBER 31, 1999 IS UNAUDITED)
NOTE 11--SELECTED QUARTERLY FINANCIAL DATA:
The following table presents summarized unaudited quarterly financial data (in
thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1998 QUARTER QUARTER QUARTER QUARTER
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 819 $1,353 $1,809 $1,858
Gross profit........................................... 303 766 1,033 1,057
Net income............................................. 41 279 420 359
Diluted earnings per share............................. .01 .04 .06 .05
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1999 QUARTER QUARTER QUARTER QUARTER
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................................. $2,427 $3,007 $3,444 $3,889
Gross profit........................................... 1,518 1,912 2,187 2,556
Net income............................................. 510 717 981 1,161
Diluted earnings per share............................. .07 .10 .14 .16
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD
FISCAL 2000 QUARTER QUARTER QUARTER
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.............................................. $4,001 $4,440 $4,450
Gross profit........................................... 2,658 2,965 2,972
Net income............................................. 1,234 1,397 1,480
Diluted earnings per share............................. .17 .19 .20
</TABLE>
F-18
<PAGE>
--------------------------------------------------------------------------------
[NORTH AMERICAN SCIENTIFIC, INC. LOGO]
NORTH AMERICAN SCIENTIFIC, INC.
2,500,000 SHARES
COMMON STOCK
-------------------
PROSPECTUS
-------------------
December 14, 2000
CIBC WORLD MARKETS
UBS WARBURG LLC
LEERINK SWANN & COMPANY
------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
