UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period ended December 31, 1998
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number
0-22923
INTERNATIONAL ISOTOPES INC
(Exact name of registrant as specified in its charter)
Texas 74-2763837
(State of incorporation) (IRS Employer Identification Number)
3100 Jim Christal Rd.
Denton, Texas 76207
(Address of principal executive offices) (zip code)
940-484-9492
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
--------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE
Securities registered under Section 12(g) of the Exchange Act:
--------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (X) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
<PAGE>
As of March 30, 1999 the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant as determined by reference
to the closing price of Common Stock as reported on the Nasdaq Small Cap Market
System, was $36,646,778.
As of March 30, 1999 the number of shares of common stock, $.01 par value,
outstanding was 7,511,625 shares.
Documents Incorporated by Reference:
- --------------------------------------
The information called for by Part III is incorporated by reference to the
definitive proxy statement for the annual meeting of shareholders of the
Company, which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1998.
INTERNATIONAL ISOTOPES INC
FORM 10-K
TABLE OF CONTENTS
Page No.
Part I.
Item 1. Business .................................................. 3
Item 2. Properties ................................................ 20
Item 3. Legal Proceedings ......................................... 21
Item 4. Submission of Matters to a Vote of Securities-Holders ..... 21
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ........................... 21
Item 6. Selected Financial Data ................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 22
Item 7a. Quantitative and Qualitative Disclosure about Market Risk.. 27
Item 8. Consolidated Financial Statements.......................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 27
Part III.
Item 10. Directors and Executive Officers of Registrant ........... 27
Item 11. Executive Compensation ................................... 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management ......................................... 28
Item 13. Certain Relationships and Related Transactions ........... 28
Part IV.
Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K ................................ 28
Power of Attorney .................................................. 30
Signatures ......................................................... 30
2
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PART I
Except for the historical information contained herein, the matters
discussed in this Form 10-K are forward-looking statements that involve risks
and uncertainties, including the timely availability and acceptance of new
products, the impact of competitive products and pricing, the management of
growth and the other risks detailed herein, including, without limitation, the
risks discussed in this Item 1, "Business" and in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties.
Item 1. BUSINESS
General
International Isotopes Inc, a Texas corporation (the "Company" or "I3"),
is a developmental stage company that is planning to produce, market and
distribute a full range of products used in diagnostic and therapeutic nuclear
medicine, research and industry. Our strategy is to rapidly establish a position
in the market as the first U.S. based independent commercial manufacturer of a
broad range of radioisotopes, pharmaceutical grade radioisotopes and finished
radiopharmaceuticals, including medical devices (on a contract or joint venture
basis) for the nuclear medicine industry. We are also engineering
instrumentation and products for the radiation therapy and medical imaging
markets.
There are no current significant U.S. suppliers of commercial
radioisotopes or pharmaceutical-grade radioisotopes and, primarily due to
commitments of existing government-owned facilities, there is no consistent
domestic commercial supplier of promising new radioisotopes for use in research,
clinical trials and nuclear medicine. Further, many of the promising new
radioisotopes have short half-lives, less than 24 hours, necessitating
expeditious manufacture and distribution to hospitals, clinics and research
institutions. The Company calculates that, due to its central location near
major airports and its expected operating efficiencies, it will be able to serve
this market.
Radioisotopes are radiation emitting atoms that are indispensable
components of nuclear medicine diagnostics and in-the-body ("in vivo")
therapeutics. When a specifically selected radioisotope is attached or "tagged"
to one of a variety of pharmaceuticals, the resulting product is known as a
radiopharmaceutical. The pharmaceutical component acts as a carrier to seek out
targeted internal organs, tumor sites and/or cells for which it has a
predetermined natural affinity. In diagnostics, the radioisotope components
provide a signal as to the location of the attached pharmaceutical as it targets
the specific organ or site. This process, in turn, is captured by external
imaging equipment such as positron emission tomography ("PET") and single photon
emission computed tomography ("SPECT") cameras. In therapeutics, the
radioisotope component provides in vivo treatment of the targeted organ,
cancerous tumor and/or cancerous cell site through the emission of either
charged particles or photon radiation to locally treat the tumor site. In
therapeutic radiopharmaceutical "in vivo" applications, radioisotopes may also
be placed into the body at the site of a tumor as part of a medical device. This
process is known as permanent implants or remotely inserted and retractable
brachytherapy.
Radioisotopes are produced commercially either by an accelerator (a
linear accelerator or a cyclotron ) or a nuclear reactor. Accelerators are
machines that accelerate charged particles, generally protons, to bombard a
stable (non-radioactive) isotope target, causing a reaction such that the target
isotope is transformed into a radioactive isotope. A nuclear reactor produces
radioisotopes by bombarding a stable isotope target with neutrons.
Since our incorporation in November 1995 our operations have been
primarily concentrated in acquiring the proton linear accelerator ("LINAC") and
related assets, redesigning and reconfiguring the LINAC for production of
radioisotopes, acquiring land and designing and constructing facilities for the
production and distribution of radioisotopes, radiopharmaceuticals and
brachytherapy products. We have raised equity and debt capital , hired key
management and operational personnel, established production methods, marketing
arrangements, quality assurance and quality control, and distribution and
customer service, and entered into strategic alliances with medical and
pharmaceutical companies, universities and other institutions.
In May 1996, for approximately $2.9 million, we acquired, through
competitive bid from the State of Texas the equipment, proprietary designs and
certain intellectual property rights comprising the LINAC. This was part of the
U.S. government's 53 mile Superconducting Super Collider ("SSC ") project. The
State of
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Texas had acquired all of the SSC project's land, facilities, equipment
and intellectual property from the U.S. government as part of a settlement among
the State of Texas, the U.S. government and the DOE following Congress's
termination of the SSC project in 1994. The LINAC has been redesigned and
reconfigured, and is being installed in the Company's newly constructed
Radioisotope Production Facility to produce an energy level and beam intensity
calculated to produce radioisotopes at substantially lower unit cost and five
times the volume of the commercial proton cyclotron accelerators that are
currently in use in the United States.
We are conducting final installation and commission for operation of the
Radioisotope Production Facility and the LINAC in conformity with the Company's
redesign and reconfiguration. We will produce the most commonly used
radioisotopes, radiochemicals, radiopharmaceuticals and the emerging potentially
superior diagnostic and therapeutic pharmaceutical grade radioisotopes which can
only be accelerator-produced with the high energy (70 MeV) and the 1.0mA beam
intensity of the LINAC.
We completed our initial public offering of $20,700,000 of Common Stock
in August 1997 and September 1997. Net proceeds from this offering totaled
$17,708,839. In 1998, through Texas State Bank, we have refinanced construction
and other real estate loans in the amount of $15,000,000, established a
$5,000,000 revolving receivable line credit and obtained $5,000,000 in equipment
lease financing. From December 1998 through February 1999 we closed a private
placement of securities resulting in additional equity of $9,500,000 in 1998 and
$1,614,750 through February of 1999, net of commissions and expenses. Prior to
our public offering, the Company had funded its operations through a combination
of loans, private equity financing and the sale to third parties of excess
equipment and tools acquired in connection with the LINAC assets.
Our 35,000 square foot building housing the Radioisotope Production
Facility was completed in September 1998. The Radioisotope Production Facility
is located on 20 acres of land the Company acquired in a 500-acre high
technology biomedical research industrial park located in Denton, Texas, known
as the "North Texas Research Center." We have also completed a 27,000 square
foot building housing the Administration, Manufacturing and Service Facility for
servicing the LINAC, construction of production equipment and manufacturing of
the medical instrumentation and camera scanners. In addition we have constructed
a 25,000 square foot finished radiopharmaceutical production suite in the
Radiopharmaceutical Manufacturing Facility and have also remodeled the separate
12,000 square foot building located at this site for installation of the
Cyclotron used in the production of short-lived isotopes and certain research
isotopes.
The North Texas Research Center and other facilities are strategically
located adjacent to a principal highway approximately 24 miles from the
Dallas/Fort Worth International Airport and approximately 14 miles from Alliance
Industrial Airport. The radioisotopes and radiopharmaceuticals we manufacture
will be packaged for immediate transport by same day or overnight carriers,
which have distribution hubs at these airports. Most radioisotopes used in
nuclear medicine have limited half-lives and the proximity of the Company's
facilities to these airports will enable us to deliver our radioisotopes and
radiopharmaceuticals to most locations in the United States within 4 hours to 24
hours of production.
Industry Overview and Target Markets
Cancer is the leading cause of death in the United States after heart
disease. According to the American Cancer Society, an estimated 1.2 million
persons were diagnosed with the disease in 1998. Worldwide, there are more than
200 drug products currently under development for both cancer diagnostics and
treatment according to the Frost & Sullivan (F & S) 1997 Report. Many of these
are radiopharmaceuticals that require specific radioisotopes, which we expect
the LINAC to produce.
According to a report by the Committee on Biomedical Isotopes of the
Institute of Medicine-National Academy of Sciences entitled "Isotopes for
Medicine and Life Sciences (the "IOM Report"), nuclear medicine was estimated to
be a $7 to $10 billion industry in the United States in 1995. According to the F
& S 1997 Report, the U.S. diagnostic radiopharmaceutical segment, in which the
Company plans to participate, was estimated at $666 million in 1998, increasing
at a 12% compound annual rate, which would result in an approximately $935
million U.S. market for diagnostic radiopharmaceuticals by the year 2001. The
IOM Report also states that one out of every three hospital patients in the
United States undergoes a procedure involving the use of radioisotopes for
diagnosis or therapy and more than 13 million diagnostic medical procedures
employing radioisotopes are performed annually. Based on the 13 million
diagnostic medical procedures and the projected 12% compound annual growth rate
thereof, the Company estimates that there will be approximately 21 million
diagnostic medical procedures employing radioisotopes performed in the United
States by the year 2001. The US market represents approximately 50% of the world
market which provides a current total market of $1.37 billion.
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Market reports indicate that the in vivo therapeutics
radiopharmaceutical segment of nuclear medicine, in which the Company is also
executing plans to participate, will grow at a substantially higher rate based
on anticipated FDA approvals of a number of monoclonal antibodies, peptides and
other pharmaceutical carriers, currently in clinical trials, for in vivo
therapeutic treatment of various forms of cancer, including primary and
secondary tumors, metastasized sites and various organ disorders. In vivo
therapeutic doses of radioisotopes (measured in millicuries) administered to a
patient are generally ten to 100 times greater than diagnostic doses, as
illustrated by various new drug applications filed with the FDA. Accordingly,
they will generate proportionally greater revenues. The 1997 F & S Report
supports the Company's belief. It predicts that the therapeutic
radiopharmaceutical market will grow from $48 million in 1996 to $681 million in
2001.
In addition, according to the 1997 report by Technology Marketing Group
(TMG), approximately 490,000 therapeutic medical procedures employing
radioisotopes were performed in the United States in 1995 with each such
procedure requiring multiple therapeutic treatments, resulting in more than one
million therapeutic treatments employing radioisotopes. The F & S 1997 Report
projects that the world market for therapeutic radiopharmaceuticals used in
oncology will grow at a compound annual rate of 69.7%, which should result in
over ten million therapeutic medical procedures employing radioisotopes being
performed in the United States by the year 2001.
The radiation therapy industry is estimated by the 1997 TMG Report to be
a $19 billion market with 90% of the procedures accomplished with external
photon radiation sources. The use of permanent implant brachytherapy devices,
such as the Company's iodine-125 brachytherapy seeds, is rapidly expanding in
usage for localized internal radiation therapy, especially in prostate cancer.
The 1998 Radiation Oncology Census Summary Report issued by TMG reported the
number of patients treated with iodine-125 seeds increased 131% from 1995 to
1997.
We will market radioisotopes, pharmaceutical grade radioisotopes,
finished radiopharmaceuticals and medical devices for use in nuclear medicine to
(i) pharmaceutical companies, including the radioisotope producing companies
engaged in creating radiopharmaceuticals by coupling radioisotopes with carrier
drugs; (ii) radiopharmacies that prepare individual radiopharmaceutical dosages
per prescription and also distribute radiopharmaceuticals); (iii) hospitals,
clinics, physicians and licensed technicians that produce radiopharmaceutical
dosages for patients; (iv) university medical research centers; and (v)
industrial users.
Products
We are initiating manufacturing, marketing and distribution plans to
provide a full spectrum of products for the radiopharmaceutical industry by
manufacturing and/or developing radioisotopes, including radiochemicals and
radiopharmaceutical grade radiochemicals; finished radiopharmaceuticals; medical
devices; turnkey accelerator facilities; and a high-resolution medical imaging
camera. We will also provide radiochemicals for research and industrial
applications.
Radioisotopes and Radiochemicals
We will produce a full line of radioisotopes using a 42 MeV cyclotron,
our LINAC, and the reactor that is under contract to our Idaho subsidiary. We
are also establishing a network of accelerators and reactors around the world to
provide additional radioisotopes and to provide back-up capabilities. These
radioisotopes will be sold directly by our sales and marketing staff. We have
held discussions with many potential customers and have compiled an extensive
database of their requirements. In addition, we intend to use the Internet to
inform customers of the availability, quantity and delivery of radioisotopes we
expect to produce. The following table provides an overview of the radioisotope
and pharmaceutical grade radiochemical products, their intended use and the
estimated market size for each product:
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Estimated Annual
Radioisotope Product Use Market ($000)
------------ ----------- ---------------
Thallium-201 Myocardial perfusion imaging $ 125,000
Strontium-89 Bone Pain Palliation $ 10,000
FDG/F-18 Cancer diagnosis $ 22,000
Iodine-123 Thyroid cancer diagnosis $ 150,000
Gallium-67 Cancer and inflammation diagnosis $ 5,000
Strontium-82 Heart function diagnosis $ 2,000
Copper-64 Imaging for cancer and metabolic
disorders $ 2,000
Iodine-125 Prostate cancer therapy $ 15,000
Palladium-103 Prostate cancer therapy $ 26,000
Germanium-68 PET camera calibration source $ 1,000
Cobalt-57 Gamma camera calibration source $ 3,000
Iridium-192 Industrial radiography, brachytherapy
sources $ 3,000
Cobalt-60 Tumor irradiation $ 2,000
Strontium-89 Bone pain palliation $ 1,000
Nickel-63 Gas chromatograph detector unit $ 200
Barium-133 Transmission source for gamma camera $ 200
Cobalt-60
recycling Industrial radiation devices $ 100
Hot cell services Radioactive material examination $ 2,000
------------
$ 371,500
============
Our International Isotopes Idaho Inc subsidiary produces and sells
reactor-produced materials. These products are used in industrial, research and
medical applications. In addition to bulk radioisotopes, the Idaho facility
provides a wide variety of hot cell services, including inspection, photography,
and destructive and non-destructive testing of highly radioactive equipment.
Finished Radiopharmaceuticals
We have completed the construction of a 25,000 square feet finished
radiopharmaceutical production suite within our Radiopharmaceutical
Manufacturing Facility. This facility was designed to manufacture
radiopharmaceutical products. Some products, such as radiolabeled monoclonal
antibodies, can not be sterilized with an autoclave because the high temperature
in the autoclave would destroy the antibodies. These products require
ultra-clean filling operations. The facility is designed to handle these
products and includes processing equipment for cleaning and sterilizing
components and filling in aseptic conditions.
The Radiopharmaceutical Manufacturing Facility will be used to
manufacture products on a contract-manufacturing or joint venture basis and to
produce a full line of finished radiopharmaceutical products. It is expected
that in most cases the finished products will be manufactured by the Company and
marketed by third parties. One example of this type of an arrangement is the
agreement signed with Bracco Diagnostics in which Bracco will market and sell
the finished radiopharmaceutical for the diagnosis of heart disease. The Company
is in active discussions with a number of companies to act as their contract
manufacturer. Our approach to finished radiopharmaceutical production is to
partner with clients and share in the risk of product introduction and in the
profit of the products when fully introduced to the market. Arrangements may be
structured as joint ventures, long-term agreements, alliances with one or more
companies or straight contract manufacturing in order to reliably provide
quality products and services.
The following table provides a market overview of the some of the
finished radiopharmaceutical products under discussion:
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<TABLE>
<CAPTION>
Estimated Annual
Isotope(s) Used Product Use Market ($000)
--------------- ----------- -----------------
<S> <C> <C>
Iodine-131 Non-Hodkins lymphoma therapy $ 200,000
Iodine-123 Parkinson's disease diagnosis $ 96,000
Rhenium-188, Phosphorus-32,
Yttrium-90, Iridium-192 Prevention of coronary restenosis $ 342,000
Holmium-166 Multiple myeloma therapy $ 137,000
------------
$ 775,000
============
</TABLE>
In March 1999 the Company entered into an agreement with GammaPlus, LLC
to form a limited liability company called GammaPlus DFW, LLC to manufacture and
sell Fluorine-18/FDG in the Dallas/Fort Worth area. During the second quarter of
1999, we will provide the venture with $50,000 cash and Fluorine-18 produced in
our accelerator and processing facility. We own a minority interest in the
venture but will receive 50% of the net profit.
Medical Devices
We began manufacturing an FDA 510 (k ) approved and patented iodine-125
brachytherapy seed widely used in prostate cancer therapy in March 1999. This
product is marketed under an exclusive agreement with Imagyn Medical
Technologies. The agreement grants Imagyn an exclusive, worldwide license to
market the brachytherapy seeds provided minimum sales levels are attained.
Estimates for the 1999 U.S. prostate brachytherapy market range from $175
million to $225 million. We are investing in an automated production facility
that will allow us to support 20-30% of that market demand, although there can
be no assurance we will be able to capture this percentage of the market. We
also intend to manufacture a palladium-103 brachytherapy seed using our LINAC
and the same production technology as that used in the iodine-125 seed
production.
Other Products
Foreign countries have expressed enough interest to cause the Company
also to plan on providing turnkey accelerator facilities for the production and
processing of radiochemicals and radiopharmaceuticals. This product includes a
LINAC, a radiochemistry production facility and a finished radiopharmaceutical
manufacturing facility as a turnkey complex to provide radioisotopes,
pharmaceutical grade radiochemicals and radiopharmaceuticals for marketing in
strategic world regions. These regions include Europe, the Pacific Rim, Asia and
other locations. Marketing will be accomplished through joint ventures with
local pharmaceutical companies and governmental entities.
We also intend, under an exclusive worldwide license with Hospital
Finance Corporation, and the University of Texas Southwestern Medical Center, to
complete development of a high-resolution medical imaging camera, key components
of which are patented. Marketing of the medical cameras is anticipated on a
joint venture basis with medical instrumentation companies currently marketing
products for diagnostic medicine.
The Company intends to continue to enter into formal relationships with
universities and medical institutions in the southwestern United States and
elsewhere to assist in the research and development of radioisotopes and
radiopharmaceuticals in exchange for exclusive commercial rights to the
developed technology. We intend to employ these developments in our own product
lines or license the technology to other pharmaceutical or medical
instrumentation companies, which possess a larger market presence.
Customer Service and Distribution
We have established a customer service department and order entry
function to support our current and future products. Customer orders are
processed with an integrated computer system with links to finance, production
planning, manufacturing, purchasing and distribution. A flexible system has been
designed to accommodate a wide range of marketing arrangements with partner
companies. Orders can be received from the product end-users, or through a
partner's customer service operation.
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The customer service function will receive orders by toll-free
telephone, fax, e-mail or a direct electronic interface with a marketing
partner. Order acknowledgments, shipment confirmations and other customer
reports can be transmitted electronically and automatically to the marketing
partner. We plan to establish a full e-commerce capability on our web site, so
that orders can be received and processed directly from the Internet.
An elaborate distribution network has been established to ensure
reliable delivery of time-sensitive products. Contracts have been negotiated
with courier services such as FedEx and UPS and dedicated computer systems for
each carrier have been installed on the Company's premises. These computer
systems have been integrated with the Company's system so that customer and
order information is automatically transferred to the carrier computers. A
procedure is in place to track shipments to their destinations, and to provide
this information to customers.
A network of specialty air couriers has also been established for
specific delivery requirements. This provides 24-hour, 7-days a week service for
raw material radioisotopes shipped into the company's facilities for further
processing, and for finished goods shipped to end-user customers. A ground
transport network is being established for less time-sensitive products, for
local deliveries and for inter-site transport.
Distribution staff is certified for the transport of dangerous goods
under regulations of the Department of Transportation ("DOT") and the
International Air Transport Association ("IATA"). Shipping facilities and
procedures are all designed to comply with applicable DOT and IATA requirements.
Both the customer service and the distribution operations are being
designed to eventually accommodate a volume of more than 1,000 orders and
shipments per day.
Supply of Raw Materials
Enriched stable isotopes, which are used as targets (i.e. bombarded with
protons or neutrons to produce radioisotopes), constitute the principal raw
materials required for the manufacture of accelerator-produced radioisotopes.
The principal United States source for enriched stable isotopes has been the DOE
Oak Ridge National Laboratory in Oak Ridge, Tennessee, which relies on
Congressional funding for continuing production. Last fall the U.S. government
announced it may discontinue operation of the Calutron at the Oak Ridge
facility; however, a substantial inventory of enriched stable isotopes still
exists and plans are in process to privatize the marketing and sale of this
inventory to U.S. users for continuing operations. Suitable enriched isotopes
are available from Russia, Israel and The Netherlands and other foreign sources.
The energy and current of the LINAC are sufficient to produce most radioisotopes
from non-enriched stable isotopes, which are in abundant supply. The production
process will require various proprietary chemical separation techniques that
will produce additional cost, although these costs may be offset in part by
reduced cost of raw materials. We have been able to purchase enriched stable
isotopes from the DOE's inventory and from other companies in sufficient
quantities to meet our current needs.
Manufacturing
In the fall of 1998, the Company completed construction of the building
housing its 20,000 square foot Radio-Chemistry suites and its 15,000 square foot
LINAC facility which comprises the Radioisotopes Production Facility, which is
expected to become fully operational in mid 1999. Although an earlier forecast
called for limited production in late 1998, we experienced delays of
approximately six months in initial LINAC operations due to vendor and other
problems related to several critical LINAC components. During these delays, we
continued to fine tune and put into operation those components not affected by
vendor delays. As a result, on March 2, 1999 the ion source and the
radio-frequency quadropole accelerator, two of the three major accelerator
subassemblies were successfully installed and tested. The installation of the
drift tube accelerators, the last major subassembly, will allow the completely
assembled accelerator to produce initial beam. All of the equipment required for
operation of the accelerator has now been received onsite and is being
installed. The Company intends to use production strategies that yield high
quantities of desired radioisotopes with minimal impurities.
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It is anticipated that the LINAC will eventually operate 24 hours per
day, six days per week on an annual basis and its reliability will be critical.
The production schedules are generally for eight-hour periods with processing
completed within two hours. The production of radioisotopes cannot be commenced
until regulatory approval has been obtained for the Radioisotope Production
Facility, which includes a review of the intended manufacturing process and
inspection for compliance with cGMP regulations. Authorization has been received
from the Texas Department of Health, Bureau of Radiation Control ("TDH-BRC")
that allows for limited operations of the LINAC. Further amendments to the
license will be required for full operations.
The 42 MeV Cyclotron accelerator obtained from M.D. Anderson Cancer
Center and leased from the University of North Texas has been installed in a
12,000 square foot facility for the production of short-lived radioisotopes. The
facility houses the accelerator, radiochemistry processing and operations that
are anticipated to function 6 days a week, 24 hours a day with production
schedules as short as two hours. In September 1998 the TDH-BRC issued a license
allowing for operation and testing of external beam on beam stop. In November
1998, the Cyclotron was successfully tested and produced a proton beam with
enough current to provide successful initial operations. In January 1999, we
received the license amendment for acceptance testing for production of limited
quantities of Thallium 201, a major radioisotope used in the diagnosis of heart
disease and cardiac function. Limited production runs were delayed from late
1998 to February 1999 because of the need for additional repairs and
modifications to the equipment and facilities as well as the length of time
needed for final certification. Accordingly, commercial production from the
Cyclotron has been delayed from early to mid 1999.
Construction of the Radiopharmaceutical Manufacturing Facility,
originally scheduled for completion in June, was delayed until September 1998
due to changes in our construction contractor's schedule. Accordingly,
certification, validation and full operation, originally anticipated in November
1998, was also delayed. Initial operation of the facility commenced in January
1999. Validation of the facility and validation of the equipment and processes
for the production of our I-125 brachytherapy seeds for the treatment of
prostate cancer were completed early in 1999. The facility will operate on a 24
hour a day basis, six days a week as needed to meet radioisotope and
radiochemical production schedules to coincide with radiopharmaceutical
production.
In December 1998 the TDH-BRC issued a sealed source safety evaluation
and license amendment which allows for the distribution of the I-125
brachytherapy seeds throughout the United States. In December 1998 and February
1999, we made shipments to Beta test sites for product evaluation.
Quality assurance and quality control will be performed according to
cGMP regulations. The Company intends to maintain a quality control ("QC") unit
that is responsible for the quality of all components, containers, in-process
materials, labeling and final radiochemical or radiopharmaceutical products. We
also intend to maintain a quality assurance unit responsible for reviewing and
controlling basic and training records and for the Company's compliance with
cGMP regulations. In-process materials will be tested for identity, strength,
quality and purity as appropriate and approved or rejected by the QC unit
before, during and after the production process. Materials stored for long
periods of time also will be subject to QC unit review.
Competition
Within the United States, there currently is no producer of a full range
of radioisotopes, pharmaceutical grade radiochemicals, finished
radiopharmaceuticals and medical devices for commercial sale to the nuclear
medicine industry. Currently, radioisotopes produced by a cyclotron accelerator
are manufactured in the United States principally by pharmaceutical companies
primarily for their own radiopharmaceutical products. We believe that hospitals,
medical institutions and universities also produce certain short-lived
radioisotopes utilizing small cyclotron accelerators, principally for their own
needs.
Presently, the most commonly used radioisotopes in the United States,
most of which the Company intends to commercially produce, are produced by
Dupont Pharmaceutical Co., Mallinckrodt Medical, Inc., Nycomed Amersham and
Theragenics, Inc., primarily for their own use, and by foreign manufacturers.
There is substantial competition in the medical imaging camera market.
The Company faces competition in the United States imaging market from a large
number of U.S. and foreign firms, including ADAC Laboratories Inc., GE Medical
Systems, Picker International Inc., Hitachi, Ltd., Siemens Medical Systems,
Inc., SMV Corporation, Toshiba Corp. and Trionix Research Laboratory, Inc., all
of which have significantly greater financial and technical resources and
production and marketing capabilities than the Company.
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Patents and Proprietary Rights
Since the founding of the Company, we have been both developing and
acquiring intellectual property in three major areas of technology. Since the
acquisition of the LINAC which was part of the US Government's Superconducting
Super Collider ("SSC") project, the Company has been redesigning, reconfiguring,
and making improvements to the LINAC in order for it to operate in a
multi-energy multi-targeting configuration at energy levels up to seventy
million electron volts ("70 MeV") and to be able to manufacture a large variety
of radioisotopes. We have also entered into a number of different joint
development programs with third parties in connection with both the design and
enhancement of the LINAC that includes exclusive rights to technology, know how,
designs and patents.
In addition, the Company has acquired and developed technology in
connection with its program to manufacture radiopharmaceutical products. For
example, it has acquired an exclusive license from Dr. Roger Good and EndoTech,
Inc. to certain patents and related technical know-how relating to radioactive
seeds for use as temporary or permanent implants in the brachytherapy treatment
of cancer. A joint development effort with Imagyn Technologies, Inc, has made
further improvements to the brachytherapy seed technology potentially
patentable.
Additional patents are planned in developing new imaging technology
based upon the preexisting imaging technology it had previously licensed. For
example, the company has entered into a sponsored research agreement with the
University of Texas Southwest Medical Center at Dallas to develop advanced
medical imaging systems based upon existing patented and non-patented technology
of International Isotopes and UT Southwest.
These programs have resulted in the development of inventions,
improvements, discoveries and know-how which the Company protects through
relying on a combination of patent, copyright, trademark and trade secret laws
and through the use of confidentiality agreements with employees, independent
contractors and the party developers. The Company has already filed a number of
patent applications in connection with the improvements to the LINAC and is in
the process of preparing additional patent applications on other LINAC
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improvements that will be filed in the future. The Company is also preparing a
patent application on an invention relating to a potential brachytherapy
product. The Company has also filed trademark applications for protecting its
trademarks, " INTERNATIONAL ISOTOPES" and "I3" in numerous countries around the
world. We will continue to protect our intellectual assets through an aggressive
patent and copyright policy.
Government Regulation
The Company has obtained various permits from the Texas Department of
Health Bureau of Radiation Control (TDH/BRC) to use sources of radiation. These
include (1) radioactive material licenses (a) to manufacture and distribute
radiochemicals and radiopharmaceuticals and to perform acceptance testing on the
Cyclotron and associated components; and (b) to develop imaging systems; (2)
Registrations to (a) perform acceptance testing on the LINAC and associated
components and facilities; and (b) operate various lasers; and (3) a Radioactive
Sealed Source and Device (SSD) Registry sheet for the iodine-125 Brachytherapy
Source. The SSD Registry sheet is required for regulatory agencies to authorize
medical facilities to receive and use the IS-125 source. In addition, the
Company has received a 510(k) from the United States Food and Drug Agency (FDA)
to allow medical use of the iodine-125 brachytherapy Source and has received
permits from the TDH Bureau of Food, Drug and Medical Devices to manufacture and
distribute medical products in Texas.
Regulation of Radioisotope Production and Radioactive Waste. The
manufacture of radioisotopes and radiopharmaceuticals is subject to extensive
federal and state regulation. Prior to commencing operations, approval of our
Radioisotope Production Facility and the Radiopharmaceutical Manufacturing
Facility must be obtained from the TDH-BRC and, prior to transporting
radiopharmaceuticals across state lines, from the FDA. In addition, the DOT
regulates the quantity and method of shipment of radioactive materials, and sets
specifications with respect to the class of shipping containers used. The
Radioisotope Production Facility and the Radiopharmaceutical Facility will be
subject to continual inspection for compliance with cGMP regulations, which
require that the Company manufacture radioisotopes and maintain manufacturing,
testing and quality control records in a prescribed manner. Since the
Radioisotope Facility and the Radiopharmaceutical Facility will not handle
"special nuclear materials" (i.e. nuclear fuels and weapons grade uranium,
thorium and plutonium) and, therefore, will not be designated as a "fixed
nuclear facility," we will not be subject to regulation by the United States
Nuclear Regulatory Commission (the "NRC") or the DOE except in the International
Isotopes Idaho operations. Texas Department of Health and FDA regulations
provide that a radioisotope production facility may not be used for any purpose
other than the production and distribution of radioisotopes,
radiopharmaceuticals and medical devices.
We will be required to file a Drug Master File ("DMF") with the FDA for
each radioisotope proposed to be produced and used in radiopharmaceutical
products. Radioisotopes delivered to pharmaceutical companies for coupling with
drug carriers to create their own proprietary radiopharmaceuticals generally
will be covered by NDAs filed by the respective pharmaceutical company, which
will make reference to our applicable DMF. The DMF is a compilation of
information relating to the proposed product, required by the FDA, to determine
the identity, purity, strength and manufacturing documentation used for the
product and also contains analytical methods documentation and compliance with
established specifications. The DMF does not contain any clinical information,
but becomes a part of the customer's NDA. In some cases, it may be necessary for
the customer to generate clinical data for the radiopharmaceutical incorporating
the radioisotope. The Company is currently negotiating with various
pharmaceutical companies to manufacture radioisotopes under their existing
NDA's, the success of which cannot be assured.
Pursuant to the Low Level Radioactive Waste Policy Act of 1980, states
are required to assure the safe disposal of mildly radioactive materials. The
disposal of radioactive waste is regulated in Texas by the Texas Natural
Resources Conservation Commission ("TNRCC"), which enforces federal regulations
promulgated by the NRC and the EPA and its own regulations. Regulatory issues
arising from the handling, retention and disposal of solid and liquid
radioactive waste are governed by the Texas Regulations for the Control of
Radiation. Radioactive waste produced by us will fall into the category of
low-level radioactive waste as the production and processing of radioisotopes
generate a certain amount of low-level, solid radioactive waste. Most of this
waste will be in the form of used laboratory expendables, such as latex gloves
and absorbent paper used to protect laboratory counter tops from direct exposure
to spilled materials. Most radioactive material handled by the Company is
short-lived and will be held for decay until it is indistinguishable from
background radiation. It will then be appropriately disposed of as
non-radioactive waste. Some radioactive material will be disposed of through the
usual commercial channels used by universities, medical institutions and
industrial users of radioactive materials. Texas Regulations permit a limited
amount of specified radioisotopes, generally those with half-lives of less than
300 days and which have decayed through ten half-lives, to be disposed of by
transport to a commercial municipal waste facility.
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The production of radioisotopes at the Radioisotope Production Facility
will include the chemical separation of radioisotopes. This may lead to the
production of a mixture of low-level radioactive materials, water, organic
solvents and inorganic salts. As is common practice, the Company will hold such
materials on-site for a period of time until the radioisotopes decay to stable
isotopes, at which time the materials can be moved off-site for disposal by
commercial waste handlers. Liquids resulting from the processing of radioactive
products or from the washing down of hot cells or other decontamination
procedures will be stored in the Radioisotope Production Facility. The purpose
of such storage is to provide for on-site decay to levels of activity where it
is permissible to dispose of the liquids through discharge into the sewerage
system. It is calculated that its storage capacity will be sufficient to permit
the holding of radioactive material until the products decay to negligible
levels.
Regulation of Proposed Medical Imaging Camera. Our proposed medical
imaging camera as well as our medical devices is subject to extensive federal
and state regulation. The proposed products will be regulated as medical devices
and require pre-market clearance by the FDA. Pursuant to the Medical Device
Amendments of May 1976, the FDA classifies medical devices in commercial
distribution as a Class I, Class II or Class III device. This classification
scheme is based on the controls necessary to reasonably ensure the safety and
effectiveness of the medical devices. Class I devices are those devices whose
safety and effectiveness can reasonably be ensured through general controls,
such as adequate labeling, pre-market notification and adherence to the cGMP
regulations. Class II devices are those devices whose safety and effectiveness
can reasonably be assured through the use of special controls, such as
performance standards, post-market surveillance, patient registries and FDA
guidelines. Class III devices are generally devices, which support or sustain
human life or present a potential risk for illness or injury. FDA regulations
include "emission computed tomography systems" as Class II devices, which are
defined as devices intended to detect the location and distribution of gamma-ray
and positron-emitting radioisotopes in the body and produce cross-sectional
images through computer reconstruction of the data. Accordingly, we believe that
our proposed medical imagining camera will be classified as a Class II device.
Regulation of Brachytherapy Devices. We are also registered as a medical
device manufacturer for brachytherapy devices with the FDA. As such, the Company
may be inspected from time to time by the FDA for compliance with cGMP
regulations. These regulations require that we manufacture our products and
maintain our documents in a prescribed manner with respect to manufacturing,
testing and control activities. Further, we will be required to comply with
various FDA requirements for labeling, reporting, malfunction and misuse
associated with the use of our devices, as well as product malfunctions that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits an approved device from being
marketed for unapproved applications.
Other Regulations. In the event the Company enters into agreements with
suppliers to acquire neutron-produced research and therapeutic radioisotopes or
accelerator-produced radioisotopes for distribution by us, we will be subject to
regulations of the Texas Department of Health regarding the handling of
radioactive materials, but we believe we will not be subject to regulation by
the NRC or any other agency for the accelerator production of the radioisotopes,
including attendant radioactive waste in connection with such production, which
will be the responsibility of the contracting supplier.
Any radiopharmaceuticals developed under arrangements between the
Company and medical institutions and universities will require, prior to sale,
approval of the FDA, which has established mandatory procedures and standards
for the clinical testing, manufacture and marketing of therapeutic and
diagnostic products. This process is protracted and costly, and involves
preclinical animal studies, the filing of an investigational new drug
application, human clinical trials and the approval of a new drug application
which will be the responsibility of the pharmaceutical company licensed under
the development. We will also will be subject to regulation by the EPA, the
TNRCC and OSHA with respect to the radioactive content of water and air
discharges and the handling and disposal of radioactive waste. We intend to
comply with all such laws and regulations and construct our facilities and
maintain operations to prevent effluents in order not to pose any unusual
hazards to nearby residents, employees or visitors.
Product Liability and Insurance
The use of our radioisotopes in radiopharmaceuticals and in clinical
trials and the use of our proposed medical imaging camera may expose us to
potential product liability which is inherent in the testing, manufacture,
marketing and sale of human diagnostic and therapeutic products. In addition,
the failure to effect timely delivery of radioisotopes may cause a delay in a
scheduled test or procedure or result in the functional loss of radioactivity of
the radioisotope, thereby exposing us to potential liability. We currently have
product
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liability insurance and intend to increase coverage of product liability
insurance prior to commencing production of any finished radiopharmaceuticals,
pharmaceutical grade radioisotopes or radioisotopes and prior to the manufacture
and sale of medical imaging cameras. However there can be no assurance we will
be able to obtain or maintain such insurance on acceptable terms or that any
insurance obtained will provide adequate coverage. Claims or losses in excess of
any liability insurance coverage we ultimately obtain could have a material
adverse effect on our business.
Employees
As of February 28, 1999, we had 97 full-time employees, consisting of
thirteen executive officers, 77 additional production, scientific and
professional personnel and 7 administrative personnel. Staffing plans for 1999
include hiring approximately fifteen to twenty more people, which will include
employees for radioisotope and radiopharmaceutical production, health and
safety, development of international projects, product distribution and customer
service, and radiopharmaceutical marketing. We believe our relationship with our
employees is good. None of our employees are represented by a union and there
have been no work stoppages to date.
Risk Factors
Limited Operating History. During 1996 we acquired major equipment for
radioisotope production and in 1997 completed our initial public equity funding,
established a management team and hired key personnel. In 1998 we acquired and
constructed facilities, acquired equipment for production, established
procedures for current good manufacturing practices (cGMP) and obtained
regulatory approvals for initial manufacturing and distribution. The Company has
not generated significant sales during this development period and we do not
expect to generate significant sales until mid 1999 at the earliest. Sales are
dependent on the activities and success of our marketing partners. We have
encountered delays due to weather, vendors and facilities certification and may
continue to experience additional delays and unexpected costs related to
continuing facilities construction, development, initiating manufacturing
production, marketing, distribution, regulatory matters and other unforeseen
difficulties. We cannot assure you when we will achieve suitable profitability.
Future Capital Needs and Uncertainty of Additional Funding. In September
1998 we obtained a $15 million mortgage loan and a $5 million revolving line of
credit from Texas State Bank, and in December 1998 and January 1999 we raised
approximately $11.1 million through a private placement of our equity, net of
issuance costs. The Company is continuing efforts to raise additional funding
through the private placement of its securities. As of April 15, 1999 the
Company has received commitments of $7,000,000 from certain officers, directors
and other individuals for equity or bridge financing. However, we will need
substantial additional funds to enter into joint ventures, expand finished
pharmaceutical manufacturing, increase radioisotope production, continue
research and development relating to the application of our technology, and
complete the FDA approval process for our manufacturing and processing
facilities. We plan to use a substantial portion of current funds:
o for general administration and overhead, including salaries and
consulting fees,
o to repay debt in accordance with its terms,
o to initiate production and commercialize our products,
o to apply for regulatory approval (if any) of our proposed products,
o to develop and test pre-radioisotope production methods and chemical
separation techniques,
o to support joint ventures, and
o to conduct additional development activities.
We intend to seek additional capital through public or private sales of
our securities, including equity or debt securities, in order to fund our
activities. We may not be able to obtain adequate funds, whether through
financial markets or collaborative arrangements with strategic partners or from
other sources, on acceptable terms when needed. If we are unable to secure
sufficient funds, we may have to delay, scale back or eliminate
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certain or all of our research and development programs or license third parties
to commercialize products or technologies that we would otherwise seek to
develop ourselves. This would adversely affect our long-term profitability.
Accumulated Deficit; Anticipated Losses. From inception (in November
1995) through December 31, 1998 we had generated $2,920,032 in revenues and had
accumulated a deficit in the amount of $10,724,811, which includes non-cash
compensation charges of approximately $2,400,000. The products scheduled for
manufacturing and distribution may require significant development and testing
activities that, together with projected general and administrative expenses,
may cause operating losses for the near future. We cannot assure you that our
manufacturing, marketing, distribution and development activities will be
successful, or that any proposed medical diagnostic and therapeutic products
will generate net operating income.
Debt Financing; Security Interest in Assets. The $5 million line of
credit noted above will be available to us to the extent we are able to generate
future accounts receivable from the sale of our products. The $15 million loan
is secured by substantially all of our assets and subjects us to numerous
restrictive covenants, financial and otherwise. If we default on the loan, the
bank would be entitled to exercise certain remedies including taking possession
of and selling our land, facilities, equipment, and intellectual property.
Uncompleted LINAC. Our LINAC design is based on advanced designs of the
linear accelerators at the Brookhaven National Laboratory and the Los Alamos
National Laboratory, but the LINAC's configuration differs from such linear
accelerators in that it:
o is configured to operate at a significantly lower energy level (70MeV
as compared to 200MeV and 800MeV, respectively),
o utilizes modern computer technology, electronics and particle
accelerating structure,
o produces a higher beam intensity for radioisotope production (1.0mA as
compared to 0.1mA to 0.15mA, respectively), and
o utilizes beams of protons that can be extracted at three (3) different
energy levels and at variable intensities directed to six (6) targets,
to produce multiple radioisotopes simultaneously rather than one
radioisotope at a time.
We have not tested the fully assembled LINAC to produce radioisotopes.
Certain sub assemblies and components have been successfully tested and are
being assembled, but we cannot assure you that the fully assembled tests will be
successful and that the LINAC will operate as designed. Delays in the operation
of the LINAC or its inability to operate as designed would adversely affect our
business plan and require us to purchase radioisotopes from other sources.
Facilities Risk. We have expended approximately $35 million procuring
production equipment, designing and constructing our Radioisotope Production
Facility, Radiopharmaceutical Manufacturing Facility and Cyclotron facility and
acquiring our International Isotopes Idaho operations. Federal and state
governmental authorities have granted a majority of the necessary approvals for
operations, however, we cannot assure you that each or any of these facilities
will obtain all applicable and necessary governmental approvals, permits,
licenses and validation. If such approvals, permits, licenses and/or validation
are not obtained, we cannot assure you that our facilities will be able to
operate as intended or will produce products that are marketable. In the event
that any or all of these facilities do not become operational for any reason, we
will have expended substantial sums without any significant return on our
shareholders' investment and our financial condition and operations will be
materially adversely affected.
Limited Sources for Raw Materials. Enriched stable isotopes, which are
used as targets (i.e. they are bombarded with protons in accelerators or
neutrons in reactors to produce radioisotopes), constitute the principal raw
materials required for the manufacture of radioisotopes. The principal United
States source for enriched stable isotopes is the Oak Ridge National Laboratory
in Oak Ridge, Tennessee, which relies on government funding for continuing
production. Enriched stable isotopes are also currently available from the
Netherlands, Russia, Israel,
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China and other foreign sources. Failure to obtain an adequate supply of
enriched stable isotopes could materially adversely impact our ability to
manufacture radioisotopes. The energy and current of the LINAC are sufficient to
produce most radioisotopes from non-enriched stable isotopes, which are abundant
in supply. Production processes utilizing non-enriched stable isotopes will
require various proprietary chemical separation techniques and may be less cost
effective. Although we have developed many of these techniques, we have not been
able to test them all and some or all may be unsuccessful.
Technology Probability and Early Stage of Radioisotope and
Radiopharmaceutical Production. We will manufacture proprietary products to be
used for the production of standard radioisotopes for the radiopharmaceutical
industry and will seek joint ventures for marketing of these isotopes through
major pharmaceutical companies, hospitals, health care organizations and
radiopharmacies as well as industrial companies. In addition to the
manufacturing of proprietary products, we will investigate a variety of new
radioisotopes and radiopharmaceuticals that have application to applied
diagnostic and therapeutic methods. The primary radioisotopes we plan to produce
have been in general use in nuclear medicine and have been approved by the FDA
for distribution by various pharmaceutical companies. However, some of our
proposed future products are being developed for us by others and are in the
early developmental stage, require significant further development, testing and
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. We cannot predict
whether these research and development activities will result in any
commercially viable products or applications. Due to the extended testing and
regulatory review process required before marketing clearance can be obtained,
we do not expect to be able to commence commercial production of any new
radiopharmaceuticals that are classified as diagnostic or therapeutic agents or
which may require pre-market approvals for clinical use unless we can
manufacture them under our customers' approved licenses.
Government Regulation. The Texas Department of Public Health, the FDA
(if not previously approved) and comparable agencies in other countries must
approve our proposed products prior to manufacture, sale and distribution. The
regulatory process for radioisotope, pharmaceutical grade radiochemicals,
finished radiopharmaceutical products and medical devices which are classified
as diagnostic and/or therapeutic agents or that may require pre-market testing
and approval for clinical uses is lengthy and expensive. Assurance cannot be
given to you that, after the expenditure of time and funds, we will obtain
regulatory clearance for any of our proposed products. If we obtain regulatory
clearance, regulators will continue to review our products and procedures on a
periodic basis. If the regulators, after inspection, determine previously
unknown problems exist or decide that we have failed to comply with the
applicable current good manufacturing practices (cGMP) regulatory requirements,
then they will require corrective action, or may impose restrictions on the
products or order us to withdraw our products from the market until compliance
is demonstrated. In addition, each of our customers will be required to have
appropriate licenses to possess and use radioactive materials, radiochemicals,
radiopharmaceuticals and medical devices. Prior to sale, distribution and
transporting radiopharmaceuticals across state lines, approval from the FDA must
be obtained as to which there can be no assurance. In addition, the DOT
regulates the quantity and method of shipment of radioactive materials, and sets
specifications with respect to the class of shipping containers used. Our
Radioisotope Production Facility will be subject to continual inspection for
compliance with the State of Texas regulations and current good manufacturing
practices, which require that the Company manufacture radioisotopes and maintain
manufacturing, testing and quality control records in a prescribed manner. The
Company also will be subject to regulation by the United States Environmental
Protection Agency ("EPA"), the Texas Natural Resources Conservation Commission,
and the United States Occupational Safety and Health Administration ("OSHA")
with respect to the radioactive content of water and air discharges and the
handling and disposal of radioactive waste. Our failure to obtain any such
approvals or delays thereof or our failure to comply with any such regulations
would have a material adverse effect on the Company.
Certain radioisotopes manufactured by our subsidiary, International
Isotopes Idaho Inc, are subject to the U.S. Nuclear Regulatory Commission
regulations. To the extent these regulations are or become burdensome, our
business development will be adversely affected.
Proposed Federal, State and Institutional Policy. Various federal and
state agencies and public and private institutions have guidelines that require
organizations that receive public funds to establish conflict of interest
policies which prohibit researchers from owning stock or options in a company
whose value would be affected by the outcome of the research being conducted
with the funds. Although some research underlying our patents and patent
applications was funded with grants, none of our current research is being
supported by public funds. However, these guidelines may further restrict or
preclude funding for research conducted or supervised on
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our behalf by affiliates or certain of our scientific advisors at their
respective affiliated institutions. These guidelines, if adopted, may adversely
affect our ability to obtain government grant funding to support any basic
research.
Limited Nature of Patent Protection. The possibility exists that
competitors are developing or will develop and distribute products similar to
ours or our customers. Partial security from competition is obtained by relying
on the protection afforded us under the United States and foreign patent laws.
Others may design similar products that, although not identical and therefore
not infringing upon the patents used by us, could function adequately and be
distributed into the same market. It is also possible that other parties have
non-patented but prior existing products or designs that have never been made
public and therefore are not known to us or the industry in general. A
competitor could introduce such a product into the market without infringing
upon our patents. If any such competing non-infringing products are produced and
distributed, our customers' profit potential could be limited, resulting in a
decrease in our contract manufacturing gross margin.
Lack of Proprietary Rights; Dependence Upon Licenses from Affiliates.
Our officers, directors and founders have granted the Company certain rights to
patents, intellectual property, technology and know how. The right to acquire
exclusive licenses under certain patents and patent applications, intellectual
property, technology, know-how, trade secrets and copyrights may be obtained
from other affiliates on a case by case basis. We may not be able to negotiate
certain terms and conditions of these licenses in a way that is acceptable to
us. In such event, we may have expended substantial amounts in investigating
radioisotopes, radiopharmaceuticals, proprietary products or processes without
the ability to commercialize the related products.
We cannot assure you that we will ever develop any proprietary
technology that can be patented, or that any issued patents will provide us with
any competitive advantages or will not be challenged by any third parties.
Furthermore, it is possible that others will independently develop similar
technologies or duplicate a technology developed by us or, if patents are
issued, design around the patented aspects of a technology developed by us. It
is also possible that technology we have developed could infringe patents or
other rights owned by others who are unwilling to license their technology to us
on economically acceptable terms.
To the extent that consultants, key employees or other third parties
apply technological information independently developed by them or by others to
our proposed projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in our favor. Our scientific advisors and
other consultants are employed by and/or have consulting agreements with third
parties and any inventions discovered by these individuals may or may not become
our property.
Dependence Upon Key Personnel and Consultants. Our operations are
dependent on Dr. I. L Morgan, Chairman and Treasurer, Mr. Carl Seidel, President
and Chief Executive Officer, Mr. Tommy Thompson, Executive Vice President and
Chief Operating Officer, Ms. Joan Gillett, Chief Financial Officer, Mr. Virgil
Simmons, Senior Vice President International Marketing, Mr. Joe Beaver, Vice
President for Production, Dr. Homer Hupf, Vice President for Research and
Radiochemistry, Mr. Gaylord King, Vice President of Radiochemistry and
Radiopharmaceutical Operations, and Mr. Will Lepeska, Vice President for
Marketing. We are highly dependent upon these personnel and the loss of any of
these individuals would have a material adverse effect on us. We are also
dependent on certain founders and key shareholders for transfer of intellectual
property. We have obtained $5 million of key person life insurance on the
Chairman and $500,000 policies on the lives of certain of the other principals.
The Company will continue to hire other operations, production,
processing and engineering personnel. Competition for qualified employees among
radioisotope, radiopharmaceutical and biotechnology companies is intense, and if
we lose any of these persons, or are unable to attract, retain and motivate
highly skilled employees required for the expansion of our activities, it would
adversely affect our business plans. There is no assurance we will be able to
retain our existing personnel or attract additional qualified employees.
Other employers employ our Scientific Advisors on a full time basis, and
some have consulting or other advisory arrangements with other entities that may
conflict or compete with their obligations to the Company. Although we have
consulting agreements with our advisors, inventions or processes discovered by
such persons,
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other than those for which we are able to negotiate licenses, will not become
our property, but will remain the property of such persons or their full-time
employers. If we fail to obtain needed patents or licenses or proprietary
information held by others, it could have a material adverse effect on our
business.
Dependence on Third Parties; Significant Additional Funds for
Manufacturing and Marketing. Currently our manufacturing and production
facilities are sufficient for the production of the major radioisotopes,
radiochemicals, finished radiopharmaceuticals and medical devices we intend to
produce. We intend to distribute, or market directly, on a commercial scale some
of our proposed products. However, in most cases we will use corporate partners
or other entities to market our products. It is not assured that we will be able
to enter into any arrangements for marketing of our proprietary products or
acquire the additional capital to conduct such activities. Additional
manufacturing, marketing and distribution facilities will require the
expenditure of substantial additional funds and the hiring of additional
personnel.
Competition. Our business plan includes the contract manufacturing of
proprietary finished radiopharmaceutical products for others, standard
radioisotope and pharmaceutical grade radiochemical production, new radioisotope
and radiochemical development, product commercialization and medical
instrumentation development. Many companies, research institutes and
universities are working in a number of radioisotope, radiopharmaceutical or
biotechnology disciplines similar to our fields of interest. In addition, many
companies are engaged in the development of, or offer, products that may be
competitive with the proposed diagnostic and therapeutic radioisotopes and
proprietary products we intend to manufacture for others. Most of these entities
have substantially greater financial, technical, manufacturing, marketing,
distribution and/or other resources than the Company. These companies may be in
various phases of clinical testing of radioisotope and radiopharmaceutical
products intended for various diagnostic and therapeutic processes related to
brain, cardiac function and cancer diagnosis and treatment. Accordingly, other
companies may succeed in developing products earlier, or that are safer or more
effective than those we propose to develop, and in obtaining FDA clearances for
such products before our customers obtain approval.
Risk of Product Liability. As we successfully develop our products, we
may be exposed to product liability claims. We might also be required to
indemnify affiliates against any product liability claims incurred by them as a
result of products developed by the Company under licenses granted by these
affiliates. We believe we currently carry adequate product liability insurance;
however, we cannot assure you that we will in the future be able to obtain
sufficient amounts of insurance to protect us against such liability at a
reasonable cost. If we experience an uninsured or inadequately insured product
liability claim, our business and financial condition could be materially
adversely affected.
Voting Control; Anti-Takeover Provisions. Our Officers and Directors
currently beneficially own, or have voting control over, approximately 37% of
the outstanding Common Shares. Our Board of Directors has the authority, without
further approval of our shareholders, to issue stock options to purchase up to
600,000 shares of Common Stock. As of March 29, 1999, the Board of Directors has
granted options to employees to purchase 394,500 shares of the 600,000
authorized by the shareholders. Under the Company's Articles of Incorporation,
the Board of Directors is authorized to issue, without further shareholder
approval, up to five million shares of preferred stock on such terms as they may
determine. The Company's issuance of preferred stock could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may create substantial dilution for holders of Common Stock.
Year 2000
See discussion regarding risk associated with the Year 2000 computer
problem and management's plans at Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Science and Technology Board
The Company has assembled the following distinguished experts to advise
it with respect to a variety of scientific and technological issues related to
the Company and its operations.
NAME POSITION
Frederick Bonte, M.D. Associate Chairman
Michael Devous, Ph.D. Member
Earnest Gloyna, Ph.D. Member
Norman Hackerman, Ph.D. Chairman
Robert Jameson, Ph.D. Member
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Edward Knapp, Ph.D. Associate Chairman
Henry Kramer, Ph.D. Member
Francis Masse, B.S. Member
Jim McGovern, B.S. Member
Paul Murphy, Ph.D. Member
Richard Reba, M.D. Member
Tom Tombrello, Ph.D. Member
Frederick Bonte, M.D., has been a member since March 1997 and serves as
Associate Chairman. Dr. Bonte has served as Director of the Nuclear Medicine
Center of the University of Texas Southwestern Medical School in Dallas, Texas
since 1980 and as the Dr. Jack Krohmer Professor of Radiation Physics since
1994. From 1990 to 1994, he served as the Effie and Wofford Cain Distinguished
Chair in Diagnostic Imaging at University of Texas Southwestern Medical Center
and as Dean of Southwestern Medical School from 1973 to 1980. Dr. Bonte has
served as Chairman of the Medical Committee of the Texas Radiation Advisory
Board since 1986, as a member of the Commission on Radiologic Units, Standards
and Protection of the American College of Radiology since 1991 and as a member
of the Radiation Advisory Committee and Environmental Hazards Committee of the
American Medical Association since 1986 and 1988. Dr. Bonte received a B.S.
degree in 1942 and an M.D. degree in 1945 from Western Reserve University School
of Medicine. Dr. Bonte is also a member of the Company's Board of Directors.
Michael Devous, Ph.D., has been a member since December 1997. Dr. Devous
has been a Professor of Radiology, The University of Texas Southwestern Medical
Center, Dallas, Texas from 1981 to present. He is currently Associate Director,
Nuclear Medicine Center, The University of Texas Southwestern Medical Center at
Dallas and affiliated with Dallas Veterans Administration Medical Center and the
Callier Center for Communication Disorders. Dr. Devous is past president of the
Society of Nuclear Medicine, 1996-1997, current member or past officer of
Academic Council, Computer Council, Cardiovascular Council, Brain Imaging
Council and has served on committees for Health Care Policy, Regulatory Affairs,
Commercial Affairs, Finance, Strategic Planning and Southwestern Chapter Board
of Trustees. Dr. Devous is a member of the Food and Drug Administration Medical
Imaging Drugs Advisory Committee, American College of Nuclear Physicians,
American Heart Association, American Physiological Society, Society for Magnetic
Resonance Imaging, Institute of Electrical and Electronics Engineers and
American Federation for Clinical Research. Dr. Devous received his B.A. from
Washington University in St. Louis in 1970 and his Ph.D. from Texas A&M
University in 1976.
Earnest Gloyna, Ph.D., has been a member since November 1997. Dr. Gloyna
is a retired dean of the College of Engineering at the University of Texas at
Austin. He is presently the B. Smith Chair in Environmental Health Engineering
at the university. He is also a private consultant in environmental engineering
and is president of Gloyna Properties, Inc. Since 1978, he has been a member of
the Board of Directors, Parker Drilling Company. Also, he serves as a member of
the board of trustees of Southwest Research Institute. Dr. Gloyna is a member of
the U.S. National Academy of Engineers.
Norman Hackerman, Ph.D., has been a member since March, 1997 and serves
as Chairman. Dr. Hackerman serves as President Emeritus at the Rice University
in Houston, Texas since 1985 to present. From 1985 to Present, he served as
Distinguished Professor Emeritus of Chemistry. From 1970 to 1985, he served as
President of Rice University. From 1970 to 1985, he served as a Professor of
Chemistry. From 1985 to Present, he served as a Professor Emeritus of Chemistry
at the University of Texas at Austin, Texas. From 1967 to 1970, he served as a
President at the University of Texas at Austin, Texas. From 1963 to 1967, he
served as a Vice Chancellor for Academic Affairs at the University of Texas at
Austin, Texas. From 1961 to 1963, he served as a Vice President and Provost at
the University of Texas at Austin, Texas. From 1960 to 1961, he served as a Dean
of Research and Sponsored Programs at the University of Texas at Austin, Texas.
From 1948 to 1961, he served as a Director of the Corrosion Research Laboratory
at the University of Texas at Austin, Texas. From 1952 to 1961, he served as the
Chairman of the Chemistry Department at the University of Texas at Austin,
Texas. From 1950 to 1970, he served as a Professor of Chemistry at the
University of Texas at Austin, Texas. From 1946 to 1950, he served as an
Associate Professor of Chemistry at the University of Texas, at Austin, Texas.
From 1945 to 1946, he served as an Assistant Professor of Chemistry at the
University of Texas, at Austin, Texas. From 1944 to 1945, he served as a
Research Chemist at Kellex Corporation. From 1941 to 1943, he served as an
Assistant Professor of Chemistry at Polytechnic Inst. in Virginia. From 1939 to
1941, he served as an Assistant Chemist at the United States Coast Guard. From
1936 to 1940, he served as a Research Chemist at Collid Corporation. From 1935
to 1939, he served as an Assistant Professor of Chemistry at Loyola College. Dr.
Hackerman is the author and co-author of 225 publications.
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Robert Jameson, Ph.D., has been a member since January 1998. Dr. Jameson
serves as a Staff Member at Los Alamos National Laboratory since 1988. From 1994
to 1997, he served as an Alexander von Humboldt Senior Researcher Award,
Institute fur Angewandte Physik Johann Wolfgang Goethe Universities
Frankfurt-am-Main in Germany. From 1989 to 1992 and 1997 to 1998, he served as
an Invited Foreign Researcher, Departments of Fuels and Materials Research,
Reactor Engineering and Physics at the Japan Atomic Energy Research Institute.
From 1988 to 1989, he served as a Visiting Professor, National Laboratory of
High Energy Physics, Tsukuba, Japan at the Ministry of Education in Japan. From
1982 to 1987, he served as a Division Leader, Accelerator Technology (AT)
Division at Los Alamos National Laboratory. From 1978 to 1982, he served as an
Alternate Division Leader, Accelerator Technology Division at Los Alamos
National Laboratory. From 1972 to 1982, he served as a Group Leader, Los Alamos
Meson Physics (MP) Division at the Los Alamos National Laboratory. From 1971 to
1972, he served as a Coordinator for LAMPF Accelerator Installation and
Commissioning, MP-Div at Los Alamos National Laboratory. From 1968 to 1971, he
served as an Associate Group Leader, MP-Div. RF Group at Los Alamos National
Laboratory. From 1966 to 1968, he served as an Assistant Group Leader, MP Div.
RF Group. From 1963 to 1966, he served as a Staff Member, MP- Div at Los Alamos
National Laboratory. From 1958 to 1961, he served as an R& D Project Officer at
the United States Air Force. Dr. Jameson received a Ph.D. from University of
Colorado in 1962.
Edward Knapp, Ph.D., has been a member since September 1997 and serves
as Associate Chairman. Dr. Knapp from 1991 to 1995, served as a President at the
Santa Fe Institute. From 1989 to 1991, he served as a Director at the Los Alamos
Meson Physics Facility. From 1986-1989, he served as a President of the
University Research Association. From 1984-1985, he served as a Research Advisor
at the Los Alamos National Laboratory. From 1982 to 1984, he served as a
Director at the National Science Foundation. In 1982, he served as an Assistant
Director for Physics and Mathematics at the National Science Foundation. From
1978 to 1982, he served as a Division Leader at the Accelerator Technology in
Los Alamos National Laboratory. From 1976-1978, he served as an Alternate
Division Leader for Physics at Los Alamos National Laboratory. From 1971 to
1982, he served as an Associate Division Leader for Medium Energy Physics at the
Los Alamos National Laboratory. From 1968 to 1971, he served as an Assistant
Division Leader for Medium Energy Physics at the Los Alamos National Laboratory.
From 1965 to 1976, he served as a Group Leader for Applications, Medium Energy
Physics Division at the Los Alamos National Laboratory. From 1958 to 1965, he
served as a Staff Member at the Los Alamos National Laboratory. From 1956 to
1958, he served as a Research Assistant at the University of California in
Berkeley. From 1954 to 1956, he served as a Teaching Assistant at the University
of California in Berkeley.
Henry Kramer, Ph.D., has been a member since January 1998. Dr. Kramer
served as a consultant in the field of Nuclear Medicine to several non-domestic
and domestic corporations that have an international presence in
radiopharmaceuticals from 1990 to the present. From 1993 to the present, he has
served as an Executive Director to Council on Radionuclides and
Radiopharmaceuticals Inc. From 1982 to present, he has served as a Chairperson
to the Committee on Radionuclides and Radiopharmaceutical, U.S. Council of
Energy Awareness. From 1986 to present, he has been a member of the Brookhaven
National Laboratory- BLIP Users' Committee, Uptown, New York. From 1978 to 1989,
he served as a Corporate Officer, Vice President Research and Development at
Medi Physics, Inc. at Emeryville, CA. From 1960 to 1978 and 1976 to 1978, he
served as a Manager of Nuclear Products Technology. From 1973 to 1976, he served
as a Senior Group Leader at the Corporate Research Department at Tarrytown, NY.
From 1967 to 1973, he served as Project Manager of Nucleonics Research at the
Corporate Research Department at Tuxedo, NY. From 1965 to 1967, he served as a
Group Leader at the Corporate Research Development at the Tuxedo, NY. From 1960
to 1965, he served as a Research Scientist at the Corporate Research Development
at Tuxedo, NY.
Francis Masse, has been a member since January 1998. Mr. Masse has
served as an Institute Radiation Protection Officer and Director of Radiation
Protection Programs at Massachusetts Institute of Technology since 1981. From
1971 to 1981, he served as a Radiation Protection Officer at MIT Bates Linear
Accelerator Center. From 1987 to present he served as a Senior Lecturer at MIT
Nuclear Engineering Department. From 1959 to 1971, he served as an Associate
Radiation Protection Officer at MIT. From 1956 to 1959, he served as a Radiation
Safety Officer, Tufts at New England Medical Center. Mr. Masse received a B.S.
from Northwestern University, Boston Mass in 1956 and is a certified Health
Physicist and certified Medical Physicist.
Jim McGovern, B.S., has been a member since November 17, 1998. Mr.
McGovern is a consultant in the field of radioactive isotope production and
related nuclear operations. From 1985 through 1998 he held the positions of
Senior Vice-President, President and a Member of the Board of Directors of
Cintichem, Inc., a major manufacturer of many nuclear reactor-produced
radioactive chemicals and pharmaceuticals. From 1981 to 1985 he served as
President of Union Carbide Subsidiary B during the transition of the ownership
of this company from Union Carbide Corp. to Medi+Physics/ Hoffmann-LaRoche Inc..
Prior to 1981 he held several
19
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management positions in nuclear operations (most notable were: Business Manager-
Radiochemicals, Superintendent of Nuclear Operations and Reactor Supervisor) at
the Union Carbide Sterling Forest Research Laboratory in Tuxedo, NY. Mr.
McGovern received a BS degree from the State University of New York Maritime
College and did graduate studies at NYU and Fairleigh Dickinson U. He has been
named inventor or co-inventor on three Patents in the field of radioisotope
production. He served on several advisory committees within The Atomic
Industrial Forum, The American Nuclear Society and The Nuclear Energy Institute.
Paul Murphy, Ph.D., has been a member since November 1997. Mr. Murphy
serves as a Professor, Nuclear Medicine Section, Department of Radiology at
Baylor College of Medicine in Houston, Texas. From 1979 to 1993, he served as an
Associate Professor, Nuclear Medicine Section, Department of Radiology at Baylor
College of Medicine in Houston, Texas. From 1971 to 1979, he served as an
Assistant Professor, Nuclear Medicine Section, Department of Radiology at Baylor
College of Medicine in Houston, Texas. From 1979 to 1989, he served as an
Adjunct Associate Professor, Bioengineering Program, Department of Electrical
Engineering at Rice University. Dr. Murphy received a Ph.D. from the University
of Kansas in 1968.
Richard Reba, M.D., has been a member since November 1997. Dr. Reba
serves as a Professor of Radiology and Chief, Nuclear Medicine Section at the
University of Chicago. From 1970 to 1991 Dr. Reba served as Professor of
Radiology and Medicine, Director of the Division of Nuclear Medicine, Chairman
of the Department of Nuclear Medicine, George Washington University School of
Medicine, Washington, D.C. Dr. Reba is a Fellow of the American College of
Nuclear Physicians and the American College of Physicians and is a past
president of the Society of Nuclear Medicine and past president of the American
College of Nuclear Physicians. He is a member of the Society of Nuclear
Medicine, American College of Nuclear Physicians, American College of
Physicians, Johns Hopkins Medical and Surgical Society, American Association
Advanced Science, American Medical Association, Chicago City and Illinois State
Medical Societies, National Coalition of Physicians Against Family Violence and
has authored 300 full papers, invited reviews and book chapters. He has been an
editor of four books. Dr. Reba received an M.D. degree in 1957 from the
University of Maryland College of Physicians and Surgeons.
Tom Tombrello, Jr., Ph.D., has been a member since January 1998. Dr.
Tombrello is the William Kenan, Jr. Professor in the division of Physics,
Mathematics and Astronomy at the California Institute of Technology in Pasadena,
California. He has also served as the Technology Assessment Officer since 1996.
From 1987 to 1989 he was Vice President and Director of Research at the
Schlumberger-Doll Research Laboratory of Schlumberger, Ltd. During this period
he also served on the Boards of Directors of the Schlumberger Technology
Corporation and the Schlumberger Foundation. In 1992 he was on the President's
Space Policy Advisory Board. Honors include: Distinguished Alumnus of Rice
University (1998); D.H.C. of Uppsala University (1997); Alexander Von Humboldt
Awardee (1984-1985); Distinguished Visiting Professor at University of
California, Davis (1984); and A. P. Sloan Fellow (1971). He is chairman of the
Advisory Committees in Chemistry and Materials Science at Lawrence Livermore
National Laboratory and a member of their Director's Advisory Committee He is
chairman of the Physics Department Visiting Committee at Colorado School of
Mines. Dr. Tombrello obtained his BA (1958), MA (1960) and Ph. D. (1961) at Rice
University.
Item 2. PROPERTIES
In November 1997, the Company purchased an 80,000 square foot
office/manufacturing facility (sometimes referred to herein as the
"Radiopharmaceutical Manufacturing Facility") and a 12,000 square foot warehouse
facility located on 12 acres at 3100 Jim Christal Road, Denton, Texas at a cost
of $ 2,100,000. The Company has incurred $375,000 in costs related to
improvements for offices, furnishings, HVAC and general refurbishing. The 80,000
square foot facility houses the Company's administrative offices but is devoted
primarily to finished radiopharmaceutical and brachytherapy production through
the addition of $6,853,000 in a suite of production clean rooms and equipment.
The 12,000 square foot facility houses the 42 MeV Cyclotron, donated by MD
Anderson Cancer Center to the University of North Texas, which has been
remodeled and rebuilt at a cost of $1,731,000 and is being operated by the
Company under a ten year lease with UNT to produce short-lived and research
radioisotopes.
In early 1998, the Company completed construction of a 27,000 square
foot facility, for administration, manufacturing and services located on 1.6
acres in Denton, Texas at a cost of $ 1,260,000. The Company is using the
building for instrumentation manufacturing and other services.
The Company owns 20 acres of land in an Industrial Research Park in
Denton, Texas appraised at $1,750,000. The Company completed construction of the
building housing its 20,000 square foot Radio-Chemistry suites and its 15,000
square foot LINAC facility which comprises the Radioisotope Production Facility
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<PAGE>
on this land in September 1998 at an approximate cost of $7,524,000. The City of
Denton has agreed to grant a temporary certificate of occupancy subject to
completion of the primary road for the Research Park, which is anticipated to be
completed in the summer of 1999.
In March 1998, the Company purchased 115 acres of land in Waxahachie,
Texas from the State of Texas at a cost of $424,000. This site includes a
building with 25,059 square feet that can be used as a secondary accelerator
production and testing site.
The Company also leases space in Austin, Texas related to a three-year
lease that terminates in June 1999. The Company subleases approximately 90% of
this space to an unrelated third party.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to the completion of the Company's IPO in August 1997, there was
no established public trading market for the Company's Common Stock. At that
time the Company's Common Stock commenced trading on the NASDAQ SmallCap Market
under the symbol of "INIS". The Company is also listed on the Boston Stock
Exchange under the symbol "ITL". High and low sales prices reported by Nasdaq
during the periods indicated are shown below:
Fiscal Year Quarter High Low
1997 3rd $10.125 $ 9.00
1997 4th $10.50 $ 8.00
1998 1st $35.50 $ 8.875
1998 2nd $32.375 $16.688
1998 3rd $23.25 $ 9.75
1998 4th $18.875 $10.50
On March 1, 1999, there were 249 holders of record of the Common Stock
(although the Company believes that the number of beneficial owners of its
Common Stock is approximately 2,500). The closing price on March 30, 1999 of a
share of common stock was $9.13. The Company has never paid any cash dividends,
and the Board of Directors does not anticipate paying cash dividends in the near
future. The Company intends to retain any future earnings to provide funds for
the operation and expansion of its business.
Recent Sales of Unregistered Securities
In the fall of 1998 the Company initiated a private placement of Units
of its securities exclusively to accredited investors including certain officers
and directors of the Company. Each Unit consisted of 16,000 shares of common
stock at $12.50 per share and warrants to purchase an additional 16,000 shares
at $13.75 per share. From December 1998 through February 1999, the Company sold
59 units representing 944,000 shares of common stock and warrants to purchase an
additional 944,000 shares to 38 accredited investors for aggregate consideration
of $11,800,000. The sale of the Units was exempt pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder. The shares of
common stock sold and the shares of common stock issuable upon exercise of the
warrants were subsequently registered with the Securities and Exchange
21
<PAGE>
Commission for resale by the purchasing accredited investors pursuant to a
Registration Statement on Form S-3 which became effective on February 10, 1999.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Period of
November 1, 1995
(inception) through
Year ended December 31, December 31,
1998 1997 1996
----------- ------------ --------------
<S> <C> <C> <C>
Revenues $ 2,009,165 $ 135,765 $ 775,102
----------- ------------ --------------
Cost of Revenue 1,130,574 79,287 263,440
Operating costs and expenses 6,537,948 4,515,834 883,637
----------- ------------ --------------
Loss from development stage operations $ (5,659,357) $ (4,459,356) $ (371,975)
=========== ============ ==============
Net loss $ (5,519,405) $ (4,370,960) $ (1,084,446)
=========== ============ ==============
Net loss per common share - basic and diluted (0.84) (0.92) (0.43)
=========== ============ ==============
Weighted average common shares outstanding
basic and diluted 6,534,987 4,750,561 1,918,538
=========== ============ ==============
Cash and cash equivalents and investments $ 6,371,704 $ 13,284,194 $ 331,397
Property and equipment (net) 32,350,399 6,280,760 1,060,816
Total assets 45,302,703 21,122,038 3,007,179
Long-term debt, excluding current portion 15,258,597 3,053,818 -
Total stockholders' equity 23,892,622 15,925,640 309,908
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
This overview contains forward-looking statements that include, but are
not limited to, the Company's expectations regarding its future financial
condition and operating results, product development, business and growth
strategy, market conditions and competitive environment. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors disclosed in this document.
Since its incorporation in November 1995, the Company's operations have
been concentrated in acquiring its proton linear accelerator ("LINAC") and
related assets, redesigning and reconfiguring the LINAC for production of
radioisotopes, acquiring land, designing and constructing facilities for the
production and distribution of radioisotopes, radiopharmaceuticals and
brachytherapy products, raising capital, selling certain accelerator components
and excess equipment and entering into strategic alliances with medical and
pharmaceutical companies, universities and other institutions.
During 1998, we completed the following:
o Employed a qualified staff in the areas of management, manufacturing,
marketing, customer service, distribution, quality assurance, environmental
health and safety.
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o Acquired and constructed 87,059 square feet of facilities located on 148
acres of land to house our operations.
o Constructed, equipped and placed into operation a 25,000 square foot
finished radiopharmaceutical manufacturing facility under cGMP and FDA
guidelines.
o Refurbished, equipped and began to test a 42 MeV cyclotron accelerator for
the production of radioisotopes and constructed and equipped facilities for
the production of short-lived radiochemicals and pharmaceutical grade
radiochemicals.
o Constructed and installed the initial stages of a 70 MeV LINAC accelerator
for more efficient production of radioisotopes and radiochemicals.
o Developed and established the complete infrastructure for operations
including procedures for management, accounting, manufacturing, cost
control, quality control, regulatory compliance, marketing and distribution.
o Shipped to beta test sites its I-125 brachytherapy seeds for prostrate
cancer, Co-60 for irradiation of inoperable brain tumors and Ir-192 for
therapeutic irradiation of cervical cancer.
o Developed production plans for Tl-201 for diagnosis of heart disease, Sr-89
for pain palliation in bone cancer, In-111, F-18 Ga-67, I-123 and several
others radioisotopes.
o Established joint ventures with pharmaceutical companies and academic
institutions.
Major contractual arrangements we finalized during the year included
Imagyn Medical Technologies Inc. and Dr. Roger M. Good and Endo Tech Inc. for
the marketing and development, respectively, of our brachytherapy product for
the treatment of prostate cancer, and Bracco Diagnostics, Inc for the production
of Tl-201 for diagnosis of heart disease.
In April 1998, we completed our acquisition of International Isotopes
Idaho Inc (I4), formerly known as Mac Isotopes, from MACTEC Inc. I4 has a long
term contract with Lockheed Martin Idaho Technology Company to utilize the
United States government's Advanced Test Reactor (ATR) near Idaho Falls for
radioisotope production and radiochemistry operations.
During 1998 we formed strategic alliances with companies, major
laboratories and institutions to develop research radioisotopes, establish
processing procedures and procure radioisotopes for diagnostic and therapeutic
procedures used in nuclear medicine. The Company has also established formal
relationships with medical institutions and universities.
We entered into an agreement with the University of North Texas and M.D.
Anderson Cancer Center, for the transfer of the 42 MeV cyclotron from M.D.
Anderson Cancer Center to the University of North Texas ("UNT"). This cyclotron
has been installed in the Company's facilities and will be operated by us. It
will be used for the research and development of new radioisotopes for
diagnostic and therapy. Pursuant to a lease with UNT, we will retain the
exclusive rights and production quantities of research radioisotopes produced
using the cyclotron.
We have also entered into joint venture agreements with UNT for the
utilization of analytical instrumentation to develop advanced methods and
procedures for QA and QC of products which will lead to more efficient
production, testing and assay methods.
We have established a joint venture relationship with the University of
Texas Southwest Medical Center in Dallas, Texas for the construction and
pre-production engineering prototype of an advanced medical tomography scanner.
The advanced technology that will be proprietary to the Company is covered by
two of the Company's patents and four patents that will be licensed from U.T.
Southwest Medical Center.
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<PAGE>
We have executed joint venture and development agreements with Texas A &
M University for the development of proprietary production methods of reactor
produced radioisotopes and to procure limited quantities for production of bulk
radiochemicals, finished radiopharmaceuticals and brachytherapy devices. The
exclusive production methods have been transferred to operations in Denton and
will be used in commercial production by our subsidiary, International Isotopes
Idaho, Inc.
Discussions are under way to establish joint venture agreements with the
M.D.Anderson Cancer in Houston, Texas, the University of California at Berkeley,
the Arlington Cancer Center in Arlington, Texas, the School of Pharmacy at the
University of Texas at Austin, the School of Radiopharmacy at the University of
New Mexico in Albuquerque, New Mexico, the School of Pharmacy and Radiopharmacy
at the University of Oklahoma, the University of Missouri Research Reactor,
Sandia National Laboratory and Oak Ridge National Laboratory.
The Company will assist these institutions, as well as other
institutions, in their research and development of radiopharmaceuticals in
exchange for the rights to the radioisotopes, radiochemicals,
radiopharmaceutical methods and procedures developed.
Results of Operations
Year ended December 31, 1998 compared to Year ended December 31, 1997
Revenues
Revenues for 1998 were $2,009,165 as compared to $135,765 in 1997, an increase
of $1,873,400, a thirteen fold increase. Product sales were $1,422,711 for 1998
as compared to $-0- for 1997. The purchase of I4, a wholly owned subsidiary,
during 1998 provided the increase in radioisotope sales as our Denton, Texas
facilities were still in the development stage. Product developmental income,
related to our ongoing joint venture product development contracts, was $522,000
for 1998 as compared to $-0- for 1997. Sales of our accelerator components were
$64,454 for 1998 as compared to $135,765 for 1997. Sales of accelerator
components acquired from the State of Texas decreased due to the long lead-time
required to market this type of equipment.
Cost of revenues
Cost of revenues included $1,035,517 for radioisotope sales for 1998 as
compared to $-0- for 1997. The increase is attributable primarily to the
acquisition of International Isotopes Idaho Inc., which provided us with our
first product sales. Cost of development income was $62,830 for 1998 as compared
to $-0- for 1997. This increase is attributable to our ongoing joint venture
product development contracts that were signed in 1998. Cost of accelerator
components sold was $32,227 for 1998 as compared to $79,287 for 1997. The
decrease in the cost of accelerator components sold was due to the decrease in
accelerator components sold.
Operating costs and expenses
Operating expense for 1998 was $6,537,948 as compared to $2,118,334 in
1997, exclusive of $2,397,500 in employee incentive compensation, an increase of
$4,419,614 or 209%. The acquisition of I4 provided $826,629 of the total
increase. General and administrative expenses for 1998 were $3,553,669 as
compared to $1,193,606 for 1997, a 198% increase, and salaries and wages
increased by $536,752, both as a result of increased activities, facilities
expenses and personnel additions in preparation of going into production.
Research and development expenses included in operating expenses above, were
$281,706 in 1998 as compared to $0 in 1997 as a result of developing processes
related to medical devices. Product development expense was $825,269 in 1998 as
compared to $0 in 1997. Product development expenses are costs associated with
the development and manufacturing of test products prior to commercial
production. Sales and marketing expense for 1998 was $697,530 as compared to
$-0- for 1997. Employee incentive compensation, which was incurred in 1997 due
to stock options issued prior to the initial public offering, was not incurred
in 1998.
Other income (expense)
Other income (expense) during 1998 consisted primarily of interest
income, interest expense and donation of assets held for sale. Interest expense
decreased during 1998 due primarily to an increase in the amounts capitalized.
The Company capitalized interest costs of $607,395 in 1998 and $24,934 in 1997.
24
<PAGE>
Year ended December 31, 1997 compared to Period of November 1, 1995 (inception)
through December 31, 1996
Revenues
Sales of accelerator components and cost of revenues for 1997 were
$135,765 and $79,287, respectively, compared to $775,102 and $263,440 for the
same period in 1996, resulting in gross profit of $56,478 for 1997 and $511,662
for fiscal 1996.
Operating Expenses
Operating costs less the expense related to incentive stock grants
increased in fiscal 1997 to $2,118,334 compared to $883,637 in 1996 principally
due to the fact that for much of 1996 the Company had only a few personnel, no
leased office facilities and only limited equipment and assets. Other expenses
charged to operations in 1997 due to incentive stock compensation were
$2,397,500, while salaries and contract labor expenses increased by $814,841,
general and administrative expenses increased by $823,404, consulting fees
decreased by $299,895, legal and professional fees decreased by $23,922, and
rent and security expenses increased by $83,779, and other operating expenses by
$163,510 for the twelve months ended December 31, 1997, compared to the period
from November 1, 1995 (inception) through December 31, 1996..
Non-cash Employee Incentive Stock Compensation Expense
Approximately 55% of the Company's net loss for the year was related to
non-cash expenditures incurred as a result of agreements by the Company to issue
shares of Common Stock to certain key employees entered into by the Company
between March 1997 and May l, 1997. The Company recorded $2,397,500 of
compensation expense for the year ended December 31, 1997 related to these
transactions.
Interest Income (Expense)
Interest income increased to $297,835 for the year ended December 31,
1997 as compared to $4,906 for 1996 due to the investment of funds from the
Company's initial public offering. Interest expense was $224,413 and $303,741 in
1997 and 1996, respectively. This decrease was due to the favorable refinancing
and loan restructuring activities in 1997.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily by
bank loans, sales of accelerator components and excess equipment, sales of
shares of common stock in private placements to investors, its initial public
offering and loans from stockholders and directors. In 1996 and 1997, the
Company sold 662,501 shares of common stock at a purchase price of $1.60 for an
aggregate net proceeds of $900,000.
During the third quarter of 1997, the Company completed its initial
public offering of 2,300,000 shares of common stock at $9.00 per share,
resulting in net proceeds of approximately $17,709,000.
As of December 31, 1997, the Company had approximately $3,688,272 in
borrowings from Texas Bank in Denton, Texas, collateralized primarily by real
estate. In March 1998, approximately $2,400,000 of these borrowings were
refinanced with Hartland Bank in Austin, Texas to allow for Texas Bank to
furnish $6,000,000 in construction financing for the Radioisotope Production
Facility.
In July 1998, the Company borrowed $2,500,000 in a term loan from First
Southwest Company, secured by Company stock owned by Ira Lon Morgan, the
Company's Chairman. The loan matured on October 31, 1998 and was renewed until
March 31, 1999. The loan was subsequently extended to April 15, 1999, at which
time the Company's Chairman, I.L. Morgan, assumed the debt personally. The
Company intends to repay the debt April 15, 2000.
In October 1998, Texas State Bank in McAllen, Texas provided financing
which allowed the Company to pay off all existing loans with both Texas Bank and
Hartland Bank, and to consolidate its remaining financing into a $15,000,000
loan. The Texas State Bank loan includes (i) a five year term loan with a
fifteen year amortization and a floating interest rate which adjusts every six
months on May 1 and November 1 of each year and (ii) a $5,000,000 one year
revolving line of credit collateralized by accounts receivable of less than 75
25
<PAGE>
days. At December 31, 1998, the Company had no unused availability in the
revolving line of credit. In March 1999, Texas Bank committed to an additional
$5,000,000 in lease financing for the purchase of equipment.
The Company initiated a private placement of its common
stock in late 1998. The offering consisted of units, each unit consisting of
16,000 shares of stock at $12.50 per share and 16,000 three- year warrants with
an exercise price of $13.75. As of December 31, 1998, 49 units, representing
784,000 shares of common stock had been sold for an aggregate amount of
$9,507,414, net of issuance costs of $292,586. An additional $2,000,000 had been
raised through March 1, 1999.
The Company is continuing efforts to raise additional funding through
the private placement of its securities. As of April 15, 1999 the Company has
received commitments of $7,000,000 from certain officers, directors and other
individuals for equity or bridge financing. The Company is continuing to
negotiate potential financing options including long term mortgage financing for
its facilities.
The Company's future liquidity and capital funding requirements will
depend on numerous factors, including commencing production of radioisotopes;
possible delays in the final regulatory approval process for its
Radiopharmaceutical Manufacturing Facility and the LINAC; expenses in developing
the proposed medical imaging camera; costs involved in filing, prosecuting,
enforcing and defending patent claims and other intellectual property rights;
technological and market developments; and the ability of the Company to
maintain collaborative academic and commercial research, development and
marketing relationships.
The Company has incurred losses from operations since inception and has
an accumulated deficit of $10,724,811 as of December 31, 1998. The Company's
history of operating losses has resulted in continued dependence upon additional
external financing. Management's plans regarding its liquidity involve the
successful execution of its 1999 business plan, including the successful
commercialization of the Company's products. The Company intends to obtain
additional capital necessary to fund operations, complete the installation of
the LINAC, and meet debt service requirements, from public and private sales of
equity or debt securities. The Company anticipates, based on the execution of
its business plan and its continued capital raising activities, that it will
have sufficient funds to finance its operating activities for at least the next
twelve months. In the event the Company is unable to secure sufficient funds,
the Company's operations and business expansion would be significantly
curtailed. There can be no assurance that the Company will be able to obtain
additional financing or obtain financing on terms acceptable to the Company. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Impact of Year 2000
The Year 2000 will have a broad impact on the business environment in
which the Company operates due to the possibility that many computerized systems
across all industries will be unable to process information containing dates
beginning in the year 2000. The Company has established an enterprise-wide
program to assess the extent of the Company's exposure to Year 2000 issues and
to formulate and execute a plan to effectively mitigate the effects of the Year
2000 problem on the Company's operations.
The Company has established an Executive Steering Committee to provide
oversight to the implementation of the Year 2000 program and is responsible for
reviewing and approving the plans, activities, and decisions associated with
identifying and mitigating the risk associated with the Year 2000 problem. The
committee also reviews budgetary information, provides guidelines and acts as a
liaison to the Board of Directors, which has the ultimate responsibility for the
budget and mitigation of the Year 2000 problem. Responsibilities for
implementing the plan have been assigned and the Company has identified critical
equipment and software for the following operational areas:
o LINAC
Identified critical equipment and software in the LINAC includes the
oscilloscopes, modulators, Lab/View (time/date system), DAQ Hardware, GPIB
Hardware and AutoCAD 14 Software. Vendor assurance letters of the Year 2000
compliance have been obtained on these components and internal validation is
being done.
o Cyclotron
List of critical equipment in the Cyclotron is still being prepared. Vendor
assurance letters have been obtained on the critical equipment identified and
will be obtained on future identified critical equipment. Internal validation
should be completed by June 30, 1999.
o Radiopharmacy
Identified critical equipment within the Radiopharmacy includes thermal
transfer printer, gamma spectroscopy system, sodium iodine scintillator
detector system 2350 istrument software ionization chamber and dose
calibrators. Vendor assurance letters have been received on all but the 2350
instrumentation software, which is pending as of March 30, 1999. Internal
validation is planned for the second quarter of 1999.
o Computer equipment and software
All computer equipment and software is identified as critical equipment.
Inventories of all systems hardware and software have been completed. Software
inventory reporting software has been installed on each computer, which
monitors installed software on each computer. Vendor assurance letters of Year
2000 compliance have been obtained for all software owned by the Company. We
will be installing ClickNet Y2K software on all computers during the second
quarter 1999 to maintain Year 2000 compliance.
o Utility Equipment & Systems
Identified critical equipment for the utilities systems include series
controllers, pumps and controllers, HVAC, and WFI chillers. Vendor assurance
letters of Year 2000 compliance have been received for each of these
components and internal validation has been performed.
The Company is performing Year 2000 compliance testing on new equipment
and components as they are being put into place. As of March 29, 1999, Year 2000
testing has resulted in no significant remediations required.
In addition to the assesement of in-house systems, the Company is
currently assessing the readiness of its vendors for the Year 2000 issue. The
Company has commenced inquiries of key vendors regarding the status or the
respective Year 2000 compliance procedures, and in certain cases, certifications
regarding Year 2000 compliance have been obtained. By the second quarter 1999,
the Company intends to have developed contingency plans in the event key vendors
have not provided the Company with satisfactory evidence of their readiness to
handle Year 2000 issues. The Company intends to make every reasonable effort to
assess the readiness of its key vendors and to create action plans to address
any identified risks.
The Company has estimated the total cost of the Year 2000 remediation
including modification, upgrade, or replacement of systems and equipment to be
approximately $50,000. The Company expects to identify and resolve all Year 2000
issues that could materially and adversely affect its business operations by
June 30, 1999. Although the Company has estimated the total cost of the
remediation efforts to be about $50,000, any unanticipated failures by key
vendors, as well as failures by the Company to execute its own remediation
efforts, could have a material adverse effect on the cost of the Year 2000
project and its completion date. As a result, there can be no assurance that the
Year 2000 problem will not have a material adverse effect on the Company's
financial position or results of operations.
26
<PAGE>
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt. The Company's exposure to interest rate risk relates to
variable rate loans that are benchmarked to US bank prime lending rates. The
Company does not use derivative financial instruments to manage overall
borrowing costs or reduce exposure to adverse fluctuations in interest rates.
The impact on the Company's results of operations of a one-point interest rate
change on the outstanding balance of the variable rate debt as of December 31,
1998 would be immaterial.
Item 8. FINANCIAL STATEMENTS
The following financial statements are included herewith:
Independent Auditors' Report
Consolidated Balance Sheets of the Company as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31, 1998, and
the period from November 1, 1995 (inception) through December 31, 1996,
and for the period from November 1, 1995 (inception) through December 31, 1998.
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1998 and 1997, and for the period from November 1, 1995 (inception) through
December 31, 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and
1997, the period from November 1, 1995 (inception) through December 31,
1996, and for the period from November 1, 1995 (inception) through December 31,
1998.
Notes to Consolidated Financial Statements
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under the captions "Election of Directors" and
"Executive Officers of the Company" of the Company's definitive Proxy Statement
for the Company's 1999 Annual Meeting of Shareholders (the "Proxy Statement") is
incorporated herein by reference. The Company's Proxy Statement will
27
<PAGE>
be filed by the Company with the SEC not later than 120 days after December
31, 1998, the close of our fiscal year.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation and
Other Matters" of the Proxy Statement is incorporated herein by reference. The
Company's Proxy Statement will be filed by the Company with the SEC not later
than 120 days after December 31, 1998, the close of our fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Outstanding Capital Stock
and Stock Ownership of Directors, Certain Executive Officers and Principal
Shareholders" of the Proxy Statement is incorporated herein by reference. The
Company's Proxy Statement will be filed by the Company with the SEC not later
than 120 days after December 31, 1998, the close of our fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" of
the Company's Proxy Statement is incorporated herein by reference. The Company's
Proxy Statement will be filed by the Company with the SEC not later than 120
days after December 31, 1998, the close of our fiscal year.
PART IV
Item 14. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed or incorporated by reference as exhibits to
this Report:
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-26269)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
4.1 Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
4.2 Form of Warrant Agreement between the Company and Keane Securities
Co., Inc. (incorporated by reference to Exhibit 4.2 to the Company's
Registration statement on Form SB-2 (Registration No. 333-26269)).
7.1 Press release related to building purchase dated November 14, 1997
(incorporated by reference to Exhibit 7.1 of the Company's 8-K filed
effective November 26, 1997).
7.2 Sales Contract Dated September 25, 1997 between Union Camp
Corporation and the Company(incorporated by reference to Exhibit 7.2
of the Company's 8-K filed effective November 26, 1997).
7.3 Promissory Note between the Company and Texas Bank in the amount of
$2,475,000 with an effective date of October 22, 1997(incorporated
by reference to Exhibit 7.3 of the Company's 8-K filed effective
November 26, 1997).
7.4 Press release related to IMAGYN letter of intent dated November 24,
1997(incorporated by reference to Exhibit 7.4 of the Company's 8-K
filed effective November 26, 1997).
28
<PAGE>
10.1 Copy of the Company's 1997 Long Term Incentive Plan, including forms
of nonqualified Stock Option Agreement, Incentive Stock Option
Agreement and Restrictive Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-26269)).
10.2 Copy of Equipment Lease Agreement dated July 1996 among the Company,
the University of North Texas and North Texas Research Institute
regarding tomographic equipment (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
10.3 Copy of Agreement dated June 5, 1997 between Registrant and Hospital
Financial Corporation (incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.4 Copy of Real Estate Option Agreement effective December 13, 1996
among the Company, Terrano Realty, Inc. and NW Realty, Inc.
(incorporated by reference to Exhibit 10.6 to the Company's
Registration statement on Form SB-2 (Registration No. 333-26269)).
10.5 Copy of Employment Agreement effective November 1, 1995 between the
Company and Ira Lon Morgan, Ph.D. and addendum to Employment
Agreement (incorporated by reference to Exhibit 10.7a and 10.7b to
the Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.6 Copy of Employment Agreement effective May 5, 1997 between the
Company and Carl W. Seidel (incorporated by reference to Exhibit
10.8 to the Company's Registration statement on Form SB-2
(Registration No. 333-26269)).
10.7 Copy of Equipment Lease Agreement dated May 29, 1996 between the
Company and the University of North Texas regarding analytical
instrumentation (incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form SB-2 (Registration No.
333-26269)).
10.8 Copy of Employment Agreement effective February 17, 1997 between the
Company and Tommy L. Thompson.
21. List of subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Registration Statement on Form SB-2
(Registration No. 333-26269)).
23. Power of Attorney (included as part of signature page).
23.1 Consent of KPMG LLP, as independent certified public accountants
27.1 Financial Data Schedule
Reports on Form 8-K
The Company filed a Form 8-K on December 22, 1998 with respect to the sale of
its common stock in a private offering and on February 19,1999 with respect to
the filing of a Form 3 to register the resale of securities by certain
shareholders.
29
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of International Isotopes Inc,
a Texas corporation, and the undersigned directors and officer of International
Isotopes Inc, hereby constitutes and appoints Ira Lon Morgan, Carl W. Seidel,
and Joan Gillett, or any one of them, its or his true and lawful
attorney-in-fact and agent, for it or him and in its or his name, place and
stead, in any and all capacities, with full power to act alone, to sign any and
all amendments to this report, and to file each such amendment to the Report,
with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorney in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as it or he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
International Isotopes Inc.
By:
-------------------------------
Ira Lon Morgan, Ph.D.
Chairman & Treasurer
SIGNATURES
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
March 30, 1999 By:/s/ Ira Lon Morgan, Ph.D.
----------------------------
Ira Lon Morgan, Ph.D.
Chairman & Treasurer
March 30, 1999 By:/s/ Carl W. Seidel
----------------------------
Carl W. Seidel
President
Chief Executive Officer
March 30, 1999 By:/s/ Tommy L. Thompson
----------------------------
Tommy L. Thompson
Executive Vice President
Chief Operating Officer
March 30, 1999 By:/s/ Virgil L. Simmons
----------------------------
Virgil L. Simmons
Senior Vice President
March 30, 1999 By:/s/ Joan Gillett
----------------------------
Joan Gillett
Chief Financial Officer
30
<PAGE>
March 30, 1999 By:/s/ John M. McCormack
----------------------------
John M. McCormack
Director
March 30, 1999 By:/s/ William W. Nicholson
----------------------------
William W. Nicholson
Director
March 30, 1999 By:/s/ Charles A. LeMaistre, M.D.
----------------------------
Charles A. LeMaistre, M.D.
Director
March 30, 1999 By:/s/ Robert J. Gary
----------------------------
Robert J. Gary
Director
March 30, 1999 By:/s/ Frederick J. Bonte, M.D.
----------------------------
Frederick J. Bonte, M.D.
Director
31
<PAGE>
The Board of Directors
International Isotopes Inc.:
We consent to incorporation by reference in the registration statement (No.
333-71655) on Form S-3 and the registration statement (No. 333-71657) on Form
S-8 of International Isotopes Inc. (a development stage enterprise) of our
report dated March 19, 1999, except as to note 1(a) which is as of April 15,
1999, relating to the consolidated balance sheets of International Isotopes Inc.
and subsidiaries as of December 31, 1998, and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years ended December 31, 1998 and 1997, the period from November 1, 1995
(inception) through December 31, 1996 and the period from November 1, 1995
(inception) through December 31, 1998, which report appears in the December 31,
1998 annual report on Form 10-K of International Isotopes Inc.
KPMG LLP
Dallas, Texas
April 15, 1999
<PAGE>
INTERNATIONAL ISOTOPES, INC.
FINANACIAL STATEMENTS
TABLE OF CONTENTS
Page No.
Independent Auditors' Report......................................... 33
FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company
as of December 31, 1998 and 1997................................. 34
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997, for the period from November 1, 1995
(inception) through December 31, 1996, and for the period from
November 1, 1995 (inception) through December 31, 1998............ 35
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997, and for the period from November 1, 1995
(inception) through December 31, 1996............................. 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997, for the period from November 1, 1995
(inception) through December 31, 1996, and for the period from
November 1, 1995 (inception) through December 31, 1998............ 37
Notes to Consolidated Financial Statements .......................... 39
32
<PAGE>
Independent Auditors' Report
The Board of Directors
International Isotopes Inc.:
We have audited the accompanying consolidated balance sheets of International
Isotopes Inc. and subsidiaries (a development stage enterprise), (the Company)
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1998 and 1997, the period from November 1, 1995 (inception) through December 31,
1996, and the period from November 1, 1995 (inception) through December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International
Isotopes Inc. and subsidiaries (a development stage enterprise), as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
the years ended December 31, 1998 and 1997, the period from November 1, 1995
(inception) through December 31, 1996, and the period from November 1, 1995
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Dallas, Texas
March 19, 1999, except as to Note 1(a)
which is as of April 15, 1999
33
<PAGE>
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
Assets 1998 1997
- ------------------------ ---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,371,704 $ 8,201,417
Securities available for sale, at fair value - 5,082,777
Interest receivable - 152,358
Accounts receivable 240,433 -
Assets held for sale 526,533 564,932
Inventories 1,744,467 -
Other 78,578 97,941
----------- -----------
Total current assets 8,961,715 14,099,425
Property, plant and equipment, net 32,350,399 6,280,760
Goodwill, net of accumulated amortization of $195,697 1,687,846 -
Other assets 2,302,743 741,853
----------- -----------
Total assets 45,302,703 21,122,038
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
Accounts payable $ 1,825,246 $ 906,062
Accrued liabilities 973,752 602,064
Current portion of lease obligation 235,309 -
Current installments of mortgage and notes payable to banks 3,117,177 634,454
----------- -----------
Total current liabilites 6,151,484 2,142,580
Non-current portion of lease obligation 774,758 -
Mortgage and notes payable to banks, excluding
current installments 14,483,839 3,053,818
----------- -----------
Total liabilities 21,410,081 5,196,398
Commitments (note 1)
Stockholders' equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.01 par value; 20,000,000 shares authorized,
issued and outstanding 7,351,625 shares at December 31, 1998
and 6,370,950 shares at December 31, 1997 73,515 63,709
Additional paid-in capital 35,183,918 21,787,337
Deficit accumulated during the developmental stage (10,724,811) (5,205,406)
Receivable from stockholders (640,000) (720,000)
----------- -----------
Total stockholders' equity 23,892,622 15,925,640
----------- -----------
Total liabilities and stockholders' equity 45,302,703 21,122,038
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from Period from
November 1, 1995 November 1, 1995
Year Ended December 31, (inception) through (inception) through
1998 1997 December 31, 1996 December 31, 1998
----------- ---------- ------------------ --------------------
<S> <C> <C> <C> <C>
Revenue:
Sales of reactor products $ 1,422,711 -- -- 1,422,711
Development contract income 522,000 -- -- 522,000
Sale of accelerator components 64,454 135,765 775,102 975,321
----------- ---------- --------- -------------
2,009,165 135,765 775,102 2,920,032
Cost of revenue:
Cost of reactor products 1,035,517 -- -- 1,035,517
Cost of development contract 62,830 -- -- 62,830
Cost of accelerator components 32,227 79,287 263,440 374,954
----------- ---------- --------- -------------
Gross Profit 878,591 56,478 511,662 1,446,731
----------- ---------- --------- -------------
Operating costs and expenses:
Salaries and contract labor 1,461,480 924,728 109,887 2,496,095
Employee incentive compensation -- 2,397,500 -- 2,397,500
Sales and marketing 697,530 -- 116 697,646
Product development 825,269 -- -- 825,269
General, administrative and consulting 3,553,669 1,193,606 773,634 5,520,909
----------- ---------- --------- -------------
Total operating expenses 6,537,948 4,515,834 883,637 11,937,419
----------- ---------- --------- -------------
Loss from development stage operations (5,659,357) (4,459,356) (371,975) (10,490,688)
Other income (expense):
Gain on sale (donation) of assets held for sale (24,330) 14,974 336,364 327,008
Interest income 288,494 297,835 4,906 591,235
Interest expense (462) (224,413) (303,741) (528,616)
Loan financing fees -- -- (750,000) (750,000)
----------- ---------- --------- -------------
Loss before extraordinary item (5,395,655) (4,370,960) (1,084,446) (10,851,061)
Extraordinary gain (loss) on debt extinguishment (123,750) -- 250,000 126,250
----------- ---------- --------- -------------
Net loss $(5,519,405) (4,370,960) (834,446) (10,724,811)
=========== ========== ========= =============
Loss per common share before extraordinary
item - basic and diluted $ (0.83) $ (0.92) $ (0.57) $ (2.56)
=========== ========== ========= =============
Loss per common share - basic and diluted $ (0.84) $ (0.92) $ (0.43) $ (2.53)
=========== ========== ========= =============
Weighted average common shares outstanding -
basic and diluted 6,534,987 4,750,561 1,918,538 4,244,516
=========== ========== ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998 and 1997, and the period from November 1, 1995
(inception) through December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional Receivable During the Total
Common Stock Paid-in From Development Stockholders'
Shares Amount Capital Stockholders Stage Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased by founders at par 624,997 $ 2,500 - - - 2,500
Shares purchased by founders at prices
other than par 187,923 751 114 - - 865
Shares issued to chairman as payment
on notes payable 1,250,000 5,000 - - - 5,000
Shares issued for service fees to
stockholders who collateralized debt 65,100 260 26 - - 286
Shares issued for patents 25,000 100 - - - 100
Shares issued to stockholders for
services rendered 186,142 745 259,855 - - 260,600
Shares issued for purchase of subsidiary 827,500 3,310 71,693 - - 75,003
Shares issued through private placement 600,001 2,400 957,600 (160,000) - 800,000
Net loss - - - - (834,446) (834,446)
Effect of 2.5 for 1 stock split - 22,600 (22,600) - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,766,663 37,666 1,266,688 (160,000) (834,446) 309,908
Collection of stock sale receivable - - - 160,000 160,000
Shares returned by owners - - 395,994 - 395,994
Shares issued through private placement 62,500 625 99,375 - 100,000
Shares issued to employees and -
directors, including shares -
contributed by founders 86,787 868 1,170,991 (472,000) 699,859
Shares issued in initial public offering, -
net 2,300,000 23,000 17,685,839 - 17,708,839
Shares issued to employees 155,000 1,550 1,168,450 (248,000) 922,000
Net loss - - (4,370,960) (4,370,960)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,370,950 63,709 21,787,337 (720,000) (5,205,406) 15,925,640
Shares issued for purchase of subsidiary 159,416 1,594 3,172,379 - - 3,173,973
Shares issued for license agreement & patent 37,259 372 724,628 - - 725,000
Shares issued through private placement 784,000 7,840 9,499,574 - - 9,507,414
Forgiveness of stock sale receivable - - - 80,000 - 80,000
Net loss - - - - (5,519,405) (5,519,405)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 7,351,625 $ 73,515 35,183,918 (640,000) (10,724,811) 23,892,622
============================================================================================================================
</TABLE>
<PAGE>
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Period from
Year November 1, 1995 November 1, 1995
Ended December 31 (inception) through (inception) through
1998 1997 December 31, 1996 December 31, 1998
------- ------ ------------------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,519,405) (4,370,960) (834,446) (10,724,811)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 490,180 17,354 1,660 509,194
(Gain) loss on sale or donation of assets 24,330 (14,974) (336,364) (327,008)
Services compensated by stock issuance - 1,918,000 260,886 2,178,886
Forgiveness of receivable from stockholder 80,000 - - -
Extraordinary loss/gain on extinguishment of debt 123,750 - (250,000) (126,250)
Changes in operating assets and liabilities
Interest receivable 152,358 (152,358) - -
Accounts receivable 446,888 - - 446,888
Other assets (435,883) (87,086) (10,855) (533,824)
Inventory (485,607) 15,645 (757,498) (1,227,460)
Accounts payable (167,031) 91,990 241,341 967,554
Accrued liabilities 348,447 585,589 16,475 950,511
---------- ---------- ---------- ----------
Net cash used in operating activities (4,941,973) (1,996,800) (1,418,801) (8,607,574)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of certificate of deposit - 400,000 - 400,000
Purchase of certificate of deposit - (100,000) (300,000) (400,000)
Purchase of assets for sale and operations (24,290,167) (4,694,947) (1,888,673) (30,873,787)
Purchase of securities available for sale - (5,082,777) - (5,082,777)
Proceeds from sale of securitites available for sale 5,082,777 - - 5,082,777
Proceeds from sale of assets held for sale 14,069 126,887 691,051 832,007
Purchase MAC Isotopes, Inc., net of cash received (495,000) - - (495,000)
Investment in trademarks and license fee (275,000) - - (275,000)
---------- ---------- ---------- ----------
Net cash used in investing activites (19,963,321) (9,350,837) (1,497,622) (30,811,780)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Collections of stock sale receivable - 160,000 - 160,000
Proceeds from issuance of notes payable to chairman - - 120,000 120,000
Proceeds from issuance of common stock 9,507,414 17,808,839 803,366 28,119,619
Payments on capital leases (220,825) - (220,825)
Proceeds from issuance of debt 17,601,016 7,201,607 4,750,000 29,552,623
Principal payments on notes payable (3,812,022) (5,932,789) (2,080,546) (11,825,357)
Payments on notes payable to chairman - (20,000) (95,000) (115,000)
---------- ---------- ---------- ----------
Net cash provided by financing activities 23,199,333 19,217,657 3,247,820 45,664,810
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (1,829,713) 7,870,020 331,397 6,371,704
Cash and cash equivalents at beginning of period 8,201,417 331,397 - -
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 6,371,704 8,201,417 331,397 6,371,704
========== ========== ========== ===========
(Continued)
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Cash Flows
<PAGE>
Period from Period from
Year November 1, 1995 November 1, 1995
Ended December 31, (inception) through (inception) through
1998 1997 December 31, 1996 December 31, 1998
-------------------------------------------------------------------
Supplemental disclosure of cash flow activities:
Cash paid for interest (net of capitalized interest) $ 84,455 238,011 295,425 617,891
========== ======= ======= ===========
Cash paid for financing fees $ 86,350 10,261 500,000 596,611
========== ======= ======= ===========
Supplemental disclosure of noncash transactions:
Common stock issued for stock receivables $ - 720,000 160,000 880,000
========== ======= ======= ===========
Common stock issued for account payable to director $ - 62,852 - 62,852
========== ======= ======= ===========
Conversion of notes payable to Common Stock $ - - 5,000 5,000
========== ======= ======= ===========
Acquistion of subsidiary through issuance of Common Stock $3,173,973 - 75,003 3,248,976
========== ======= ======= ===========
Capital expenditures included in accounts payable $ 801,254 509,879 - 801,254
========== ======= ======= ===========
Acquistion of license fee and patents rights through $ 725,000 - 100 725,100
of Common Stock ========== ======= ======= ===========
Acquistion of equipment through capital leases $1,147,796 - - 1,147,796
========== ======= ======= ===========
</TABLE>
<PAGE>
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Liquidity
International Isotopes Inc (the Company) was incorporated in Texas in
November 1995 as Applied Isotopes Products Corporation. The Company
changed its name to International Isotopes Inc. in January 1997. The
Company is a development stage enterprise which has acquired the
technology, proprietary designs and intellectual property for the design
and assembly of a proton linear accelerator (LINAC) to produce
radioisotopes used in nuclear medicine for the detection and treatment
of various forms of cancer and other diseases. In addition, the Company
intends to manufacture and develop accelerators, diagnostic scanners,
and proton/ neutron therapy equipment. Some of these assets were
purchased in May 1996 from the State of Texas through a competitive
bidding process arising from the termination of the government funded
Superconducting Super Collider (SSC) project. The Company also owns 100%
of the outstanding common shares of Gazelle Realty, Inc. and
International Isotopes Idaho, Inc. (I4). Gazelle Realty, Inc. owned 20
acres of land on which the facility for the LINAC has been constructed
and 1.6 acres of land on which the administration, manufacturing, and
research and development building was constructed. During 1997 all
the property owned by Gazelle Realty, Inc. was transferred to the
Company. International Isotopes Idaho, Inc. has an exclusive five year
contract, with an option to renew for three additional years, for the
utilization of the Department of Energy Advanced Test Reactor facility
located near Idaho Falls, Idaho.
The Company has devoted substantially all of its efforts since inception
to the acquisition and construction of the LINAC project and related
assets, pharmaceutical production and to raising capital and other
organizational activities. The operating revenues to date have been
limited to the sales of accelerator components purchased from the State
of Texas, product development income and sales of reactor produced
products from I4. Additionally, the Company has derived operating
capital from the sales of assets. The Company has financed its
operations in part through private placements of its equity securities
and its initial public offering (the "Offering") which occurred on
August 19, 1997 (note 7). The Company utilized funds obtained from the
Offering to increase its capital assets primarily through the assembly
and upgrade of the LINAC for efficient production of radioisotopes and
radiopharmaceuticals, as well as construction and acquisition of
manufacturing facilities, and other production equipment. The Company is
actively pursuing strategic alliances with pharmaceutical companies and
universities. The Company has employed additional key personnel in the
area of LINAC manufacturing, operations, radioisotope and
radiopharmaceutical production, quality assurance and regulatory
compliance. The Company will continue to sell the remaining assets held
for sale and utilize the inventory of accelerator components in the
manufacturing of products for sale to generate operating capital.
To date, the Company's product sales have consisted of accelerator
components acquired from the State of Texas and reactor produced product
from I4. The Company has not manufactured any accelerator produced
radioisotope products and there can be no assurance that the Company
will be able to manufacture or market its products in the future, that
future revenues will be significant, that any sales will be profitable,
or that the Company will have sufficient funds available to manufacture
or market its products. The Company's proposed radioisotope production
facility is also subject to extensive government regulations. Further,
the Company's future operations are dependent on the success of the
Company's commercialization efforts, market acceptance of its products
and ability to obtain adequate financing until sufficient cash flows can
be generated from operations.
The Company has limited history of operations and has experienced
operating losses and significant costs in the acquisition of key
personnel, land and facilities. The Company expects operating losses to
continue as it initiates radioisotope and radiopharmaceutical
production, obtains validation and customer approval, and increases
marketing and product development.
<PAGE>
The Company initiated a private placement of its common
stock in late 1998. The offering, which consists of units, each
consisting of 16,000 shares of stock per unit at $12.50 per share and
16,000 three-year warrants with an exercise price of $13.75, was
partially completed at December 31, 1998. Through February 28, 1999,
$11,163,750, net of commissions and placement costs of $636,250, had
been raised ($1,614,750, net of commissions and placement costs of
$385,250 subsequent to December 31, 1998).
The Company is continuing efforts to raise additional funding through
the private placement of its securities. As of April 15, 1999 the
Company has received commitments of $7,000,000 from certain officers,
directors and other individuals for equity or bridge financing. The
company is continuing to negotiate potential financing options including
long term mortgage financing for its facilities.
The Company has incurred losses from operations since inception and has
an accumulated deficit of $10,724,811 as of December 31, 1998. The
Company's history of operating losses has resulted in continued
dependence upon additional external financing. Management's plans
regarding its liquidity involve the successful execution of its 1999
business plan, including the successful commercialization of the
Company's products. The Company intends to obtain additional capital
necessary to fund operations, complete the installation of the LINAC,
and meet debt service requirements, from public and private sales of
equity or debt securities. The Company anticipates, based on the
execution of its business plan and its continued capital raising
activities, that it will have sufficient funds to finance its operating
activities for at least the next twelve months. In the event the Company
is unable to secure sufficient funds, the Company's operations and
business expansion would be significantly curtailed. There can be no
assurance that the Company will be able to obtain additional financing
or obtain financing on terms acceptable to the Company.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Gazelle Realty, Inc. and
International Isotopes Idaho, Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications were made to prior years' presentation to conform to
the current year presentation.
During the period from November 1, 1995 (inception) through December 31,
1995, the activity of the Company was limited to the Chairman's funding
expenses totaling $15,240 for the Company. No shares were issued for
cash until 1996. Accordingly, consolidated financial statements for the
two months ended December 31, 1995 have not been separately presented.
All references to the period from November 1, 1995 (inception) through
December 31, 1996 are referred to in the footnotes as the year ended
1996.
(c) Financial Instruments and Cash Equivalents
The Company's financial instruments consist of cash equivalents,
short-term bonds, daily repurchase account, term repurchase account,
money market accounts, accounts payable and accrued liabilities and
notes payable. The carrying value of these financial instruments
approximates fair value because of their short-term nature or because
they bear interest at rates which approximate market rates.
Cash equivalents of $6,058,095 and $8,063,151 at December 31, 1998 and
1997, respectively, consist of money market accounts. For purposes of
the consolidated statements of cash flows, the Company considers all
highly liquid financial instruments with original maturities of three
months or less at date of purchase to be cash equivalents.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. All plant assets were classified as construction in
progress for the periods ended December 31, 1997 and November 1, 1995
(inception) through December 31, 1996. During 1998, construction on the
Company's buildings was completed and depreciation began. The Company
capitalizes interest cost during construction periods, however, amounts
were immaterial for the years ended December 31, 1997 and 1996. For
1998, interest costs capitalized were $607,395
Plant and equipment are stated at cost less accumulated depreciation.
The majority of these assets owned by the Company, concurrent with its
formation, represented assets acquired from the
<PAGE>
terminated Superconducting Super Collider project. A portion of these
assets is being retained for the construction of the LINAC. The
remainder of such assets were acquired with the intention of being
sold for operating capital and are classified on the accompanying 1998
balance sheet as assets held for sale (see note 1(e) below).
Depreciation on plant assets is computed using the straight-line method.
Buildings in service are being depreciated over 39 years.
Depreciation on equipment held for operations is computed using the
straight-line method. Office furniture and equipment in service are
being depreciated over 3 to 5 years.
The Company has construction purchase commitments totaling $2,843,678 at
December 31, 1998.
(e) Assets Held for Sale
Assets held for sale consist primarily of excess accelerator, mechanical
and test equipment acquired from the terminated Superconducting Super
Collider project and are carried at the lower of cost or fair value less
cost to sell. These assets are being disposed of through private sales
and auctions. For the years ended December 31, 1998,1997 and 1996, the
Company sold for cash assets held for sale with a book value of $64,454,
$111,913 and $354,687 resulting in a gain/(loss) on sale of ($24,330),
$14,974 and $336,364, respectively. The remaining assets held for sale
are expected to be disposed of during 1999. At December 31, 1998, the
Company has a carrying value of $526,533 in such assets and has assessed
the recoverability of such assets. However, based on the nature of the
assets and the potential markets for sale, it is reasonably possible
that the Company's estimate that it will recover the carrying amount of
these assets will change in the near term.
Certain finished goods inventory of accelerator components acquired from
the terminated Superconducting Super Collider project, amounting to
$750,760 and $741,853 at December 31, 1998 and 1997 respectively, are
classified as other assets carried at the lower of cost or fair value
less costs to sell.
(f) Inventories
Inventories, which relate to the operations of I4, are carried at the
lower of cost or market. Cost is determined using the first-in first out
method.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses
during the reporting period to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
(j) Revenue Recognition
<PAGE>
Revenue is recognized when product development milestones are
accomplished, reactor products are shipped and accelerator components
are shipped. No warranty coverage or right of return provisions are
given to customers.
(k) Research, Development and Advertising Costs
Research, development and advertising costs are expensed when incurred.
Research and development expenses were $281,706 in 1998, and were
immaterial during 1997 and 1996.
(l) Stock Option Plan
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date
of grant. SFAS No. 123 superseded certain provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earning per share disclosures for employee stock option
grants made in 1995 and future years as if the fair- value based method
defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provision of SFAS No. 123 for its granted employee stock
options.
(m) Goodwill
Goodwill represents the excess of the aggregate purchase price over the
fair value of net assets acquired and is amortized on a straight-line
basis over 77 months. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected discounted
future operating cash flows compared to the carrying value of goodwill.
(n) Net Loss Per Common Share-Basic and Diluted
Basic loss per share is computed on the basis of the weighted average
number of common shares outstanding during the year. Diluted loss per
share, which is computed on the basis of the weighted average number of
common shares and all potentially dilutive common shares outstanding
during the year, is the same as basic loss per share for the years ended
December 31, 1998, 1997 and 1996, and for the period from November 1,
1995 (inception) through December 31, 1998, as all common stock options
and warrants were anti-dilutive.
At December 31, 1998, the Company has 394,500 common stock options and
1,004,000 common stock warrants outstanding (note 7). Options and
warrants excluded from the computation of diluted loss per share would
have resulted in additional weighted average securities, under the
treasury stock method, totaling 225,406, 94,921, -0-, and 116,987 for
the years ended December 31, 1998, 1997 and 1996, and the period from
November 1, 1995 (inception) through December 31, 1998, respectively.
The potentially dilutive effect of these securities has not been
considered in the computation of diluted net loss per common share since
their inclusion would be anti-dilutive.
(o) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income
in a full set of general-purpose financial statements. Comprehensive
income includes net income and other comprehensive income which is
generally comprised of changes in the fair value of available-for-sale
marketable securities, foreign currency translation adjustments and
adjustments to recognize additional minimum pension liabilities. For
each period presented in the accompanying consolidated statements of
operations, comprehensive loss and net loss are the same amount.
<PAGE>
(p) Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for public business enterprises to
report information about operating segments in financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company is in development stage and has not begun significant
operations. The Company's management anticipates operating through
various segments in future periods as operations for those segments
begin.
(2) SECURITIES
The Company invests only in high quality, short-term investments
which are classified as available-for-sale and recorded at fair value.
The Company records gains and losses on securities using the specific
identification method. At December 31, 1997, the carrying value at
amortized cost approximated fair value and these securities were sold or
matured during 1998.
(3) INVENTORIES
Inventories consist of the following at December 31, 1998:
Raw materials $ 388,930
Work in progress 1,355,537
-------------
$ 1,744,467
=============
(4) ACQUISITIONS
On April 24, 1998, Company completed the acquisition of MAC
Isotopes, Inc. from its parent corporation, MACTEC, Inc., of Golden
Colorado, and then merged MAC Isotopes into International Isotopes Idaho
Inc., a newly formed subsidiary of the Company. The Company exchanged
$500,000 in cash and 159,416 shares of its Common Stock, valued at
$3,173,973 for 100% of the stock in MAC Isotopes. MACTEC has the option
to sell 50% of the shares back to the Company on each of April 23,
1999 and April 24, 2000 for a purchase price of $19.91 per share. If the
Company does not repurchase the shares, Auric Partners, of which William
Nicholson, a director of the Company, is a partner, is required to
purchase the shares. If Auric purchases the shares, the Company is
obligated to issue to Auric warrants to purchase common stock of the
Company in sufficient quantity and at an exercise price that will
compensate it for the difference between $19.91 and the current market
price of the Company's stock.
A summary of the assets acquired and liabilities assumed in
connection with the MAC Isotopes acquisition follows:
Current assets, net of cash acquired $ 2,051,822
Property, plant and equipment 41,810
Intangible assets 1,883,542
Current liabilities (308,201)
------------
Total 3,668,973
Issuance of 159,416 shares of common stock,
at $19.91 per share 3,173,973
------------
Cash paid, net of cash acquired $ 495,000
============
The results of operations of MAC Isotopes, for the period prior
to the acquisition in 1998 and 1997 were insignificant, therefore pro
forma results of operations for those periods have not been provided.
On December 13, 1996, the Company acquired all of the outstanding
stock of Gazelle in exchange for 827,500 shares of the Company's common
stock. Gazelle's sole asset is land and Gazelle had no additional
tangible or intangible assets or liabilities and no operating activity.
<PAGE>
Accounting standards under rules and regulations issued by the
Securities and Exchange Commission (SEC) require that transfers of
nonmonetary assets to a company by its promoters or shareholders in
exchange for stock prior to or at the time of the company's initial
public offering be recorded at the transferor's historical cost basis
determined under generally accepted accounting principles. Accordingly,
the acquisition of Gazelle by the Company has been accounted for based
upon the historical cost of the land purchased by the transferors. The
resulting carrying value totaling $87,894 is inclusive of the $12,891
costs incurred by the Company for the acquisition.
The Company also acquired a three-year option to purchase
approximately 60 additional acres of land adjacent to the property held
by Gazelle for approximately $3.7 million. No consideration was charged
for this option, and the grant of the option was not contingent upon the
Company's acquisition of Gazelle.
(5) PROPERTY, PLANT AND EQUIPMENT
In November 1997, the Company purchased an office/manufacturing
facility and a warehouse facility located on 12 acres at 3100 Jim
Christal Road, Denton, Texas at a cost of $2,100,000. The Company has
incurred $375,000 since acquisition in costs related to improvements for
offices, furnishings, HVAC and general refurbishing. The
office/manufacturing facility houses the Company's administrative
offices but is devoted primarily to finished radiopharmaceutical and
brachytherapy production through the addition of $6,853,000 in a suite
of production clean rooms and equipment. The warehouse facility houses
the 42 MeV Cyclotron, donated by MD Anderson Cancer Center to the
University of North Texas which has been remodeled and rebuilt at a cost
of $1,731,000 and will be operated by the Company under a ten year
lease with the University of North Texas to produce short-lived and
research radioisotopes.
In early 1998, the Company completed construction of a facility
for administration, manufacturing and services located on 1.6 acres in
Denton, Texas at a cost of $1,260,000. The Company is using the building
for instrumentation manufacturing and other services.
The Company owns 20 acres of land in an Industrial Research Park
in Denton, Texas. The Company completed construction of the building
housing its Radioisotope Production Facility devoted to the LINAC on
this land in September 1998 at an approximate cost of $7,524,000. The
City of Denton has agreed to grant a temporary certificate of occupancy
subject to completion of the primary road for the Research Park, which
is anticipated to be completed in the summer of 1999.
In March 1998, the Company purchased 115 acres of land in
Waxahachie, Texas from the State of Texas at a cost of $424,000. This
site includes a building that can be used as a secondary accelerator
production and testing site.
Property, plant and equipment is summarized as follows at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 663,674 563,674
Furniture and fixtures 958,663 466,214
Plant & improvements 14,211,707 2,871,266
Production equipment 16,829,565 2,398,333
------------ ---------
32,663,609 6,299,487
Less accumulated depreciation and amortization (313,210) (18,727)
------------ ---------
Property, plant & equipment, net $ 32,350,399 6,280,760
============ =========
</TABLE>
At December 31, 1998, gross property, plant and equipment of
$15,914,268, consisting primarily of the LINAC, Cyclotron and Pharmacy
equipment, were not yet operational and not subject to
depreciation.
<PAGE>
(6) MORTGAGE AND NOTES PAYABLE TO BANKS
Mortgage and notes payable to banks as of December 31, 1998 and 1997,
consist of the following:
<TABLE>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------------------------------------------------
Variable rate (10.00% at December 31, 1998) line of credit to financial institution
secured by stock owned by the Chairman of the Board. $2,450,000 -
Variable rate (9.25% at December 31, 1998) note payable secured bank secured by
substantially all of the Company's assets. Face amount of the note is $15,000,000.
Principal and current interest are payable in monthly installments of approximately
$154,379 with a final balloon payment of $12,057,765 due November 1, 2003 14,918,638 -
Variable rate (9.25% at December 31, 1998) revolving line of credit secured by
accounts receivable. Maximum amount of the line of credit is $5,000,000 with
interest payments due monthly and the principal balance due on October 1, 1999 232,318
Variable rate established by Chase Manhattan Bank (8.5% at December 31, 1997)
mortgage and note payable, repaid in full in 1998. -- 2,337,778
Variable rate established by Chase Manhattan Bank (8.5% at December 31, 1997) line of
credit payable to bank secured by 20 acres of land. Maximum amount of the line
of credit was $500,000 with interest payments due monthly and the principal
balance paid in 1998 -- 500,000
Variable rate established by Chase Manhattan Bank (8.5% at December 31, 1997)
note payable to bank (interim construction loan) secured by building repaid in
full in 1998 -- 769,298
Variable rate established by Chase Manhattan Bank (8.5% at December
31, 1997) line of credit payable to bank secured by 20 acres of land. Maximum
amount of the line of credit was $250,000 with interest payments due monthly and
the principal balance paid in full in 1998 81,196
- ---------------------------------------------------------------------------------------------------------------
Total mortage and notes payable to banks 17,601,016 3,688,272
Less current installments (3,117,177) (634,454)
- ----------------------------------------------------------------------------------------------------------------
Mortgage and notes payable to banks, excluding current installments $14,483,839 3,053,818
- ----------------------------------------------------------------------------------------------------------------
The aggregate maturities of mortgage and notes payable to banks are as follows:
Years Ending December 31:
- ---------------------------------------------------------------------------------------------------------------
1999 $ 3,117,177
2000 540,730
2001 592,924
2002 650,155
2003 12,700,030
- ---------------------------------------------------------------------------------------------------------------
$ 17,601,016
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
On October 9, 1998 the Company executed two promissory notes with a
commercial lender for the purpose of refinancing existing short-term debt and to
provide a line of credit based on eligible accounts receivable. The financing
included a $15,000,000 note to be repaid in monthly installments of principal
and interest in the amount of $154,379 through November 2003 at which time the
remaining principal balance will be due and a revolving line of credit with a
maximum availability of $5,000,000 and a maturity date of October 1, 1999. At
December 31, 1998, the Company had no unused availability on the revolving line
of credit. The interest rates for both notes, currently 9.25%, is one percent
over the prime rate as listed by the Wall Street Journal and resets every six
months. The loan is secured by substantially all of the Company's assets and
contains a $4,000,000 guarantee by I.L. Morgan, Chairman of the Board. Funds of
$15,000,000 received from execution of the note financing were used in part to
repay two interim construction loans ($5,874,064 outstanding at time of
repayment) and $9,125,936 of other indebtedness. Terms of this loan contains
various restrictive covenants, including prohibition of additional liens
existing on security interest, limitation on additional indebtedness,
limitations on dividends and similar payments and prohibition of any mergers or
acquisitions. In connection with the repayment of indebtedness, the Company paid
a prepayment penalty of $123,750 which has been presented as an extraordinary
loss in the accompanying statement of operations for the year ended December 31,
1998.
In May 1996, the Company obtained $2,900,000 from a lending institution
to fund the acquisition of assets of the terminated Superconducting Super
Collider project from the State of Texas and related acquisition costs. The loan
was secured by all of the assets of the Company as well as certain collateral
<PAGE>
personally owned by certain stockholders. An additional minimum profit sharing
fee of $750,000 was to be paid from proceeds obtained from asset sales by
November 3, 1996. On December 16, 1996, the Company obtained alternate financing
from a note payable to a bank to pay off the remaining outstanding principal
balance of $1,471,213 under the original $2,900,000 note payable to the lending
institution plus interest, minimum additional profit sharing and legal fees. A
compromise, settlement, and release agreement was obtained from the lending
institution effective December 31, 1996. In negotiating the settlement, the
initial minimum profit sharing fee of $750,000 was reduced by $250,000 to
$500,000. This reduction has been recorded as an extraordinary item.
(7) STOCKHOLDERS' EQUITY
Common stock - During December 1998, the Company issued in a private
placement, 49 units consisting each of 16,000 shares of common stock and 16,000
warrants. The warrants are exercisable at any time during a three year period
ending November 2001 at a sales price equaling 110% of the private placement
offering price of the shares ($13.75 per share). The private placement resulted
in net proceeds to the Company of $9,507,414 after deducting placement fees and
issuance costs of $292,586.
On July 1, 1998 the Company issued 29,017 shares of common stock for
patent rights. The shares were issued at a price of $17.23 per share or $500,000
in the aggregate.
On May 14, 1998 the Company issued 8,242 shares of common stock for a
license agreement. The shares were issued at a price of $27.30 per share or
$225,000 in the aggregate.
On April 24, 1998 the Company issued 159,416 shares of common stock for
the purchase of subsidiary. The shares were issued at a price of $19.91 per
share or $3,173,973 in the aggregate.
On August 19, 1997 and September 30, 1997, the Company completed the
Offering of 2,300,000 shares of its Common Stock at $9.00 per share. The Company
received proceeds of $17,708,839 after deducting underwriters' discounts and
commissions and issuance cost of $4,872,294 of which $1,980,000 related to the
issuance of common stock warrants.
Between March and July 1997, in order to establish a pool of shares for
issuances to new employees, seven of the Company's founding stockholders
contributed 247,496 shares of common stock, valued at $1.60 per share, to the
Company. These shares, plus an additional 47,504 shares (total of 295,000
shares) were sold to certain key employees and directors at a purchase price of
$1.60 per share, for notes aggregating $472,000. On December 31, 1997, the
Company issued 155,000 additional shares of common stock at a purchase price of
$1.60 per share to four employees in exchange for stock notes receivable of
$248,000. These transactions resulted in the issuance of 450,000 total shares of
common stock, of which 125,000 shares were issued as compensation for loan
guarantees in January 1997, at a purchase price of the then estimated fair value
of $1.60 per share. The remaining 325,000 shares were issued at quoted market
values ranging from $7.00 to $9.00 per share, resulting in charges to operations
for employee incentive compensation totaling $1,918,000 plus related employee
taxes of $479,500 (total charges of $2,397,500). All stock notes receivable are
recourse notes and are due December 31, 2000 and bear interest at 6.14%
compounded semi-annually.
In January 1997, the Company issued 39,283 shares of common stock to
settle an outstanding account payable to a director of $62,852 included in
accounts payable at December 31, 1996.
In January 1997, the Company issued 62,500 shares of common stock
through private placement for proceeds of $100,000. This transaction completed
the private placement which aggregated issuance of 662,501 shares of common
stock and proceeds of $1,060,000.
Stock Option Plan - In January 1997, the Company adopted a Stock
Incentive Plan (the Plan) pursuant to which the Company's Board of Directors may
grant stock options to officers, key employees, and consultants. The Plan
authorizes grants of options to purchase up to 600,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price equal to
85% of the quoted market value of the common stock at the date of grant. The
Company's options generally have a three- year vesting period and a maximum term
of three years.
The Company granted 82,400 stock options during 1998 at an average
exercise price of $15.65 per share. During 1998 there were forfeitures of 34,800
stock options that were granted during 1997. The Company granted 346,900 stock
option shares during 1997, primarily at an exercise price of $7.65 per share,
resulting in a weighted-average exercise price of $7.66.
<PAGE>
The following table summarized information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
Options Weighted Weighted Number Weighted
Outstanding at Average Average Exercisable at Average
Range of Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1998 Contractural Life Price 1998 Price
<S> <C> <C> <C> <C> <C>
$7.65 to $16.45 369,400 1.63 years $ 8.66 90,697 $7.67
$16.46 to $26.00 25,100 2.29 years $ 19.29 0 0
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1998 and
1997:
1998 1997
------------- -------------
Expected dividend yield - -
Risk-free interest rate 5.6% 5.6%
Expected volatility 45% - 96% 24%
Expected life 3 years 3 years
Weighted average fair value $9.12 $2.26
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for the Plan and, accordingly, except for stock options issued at less than
quoted market value at date of issue, no compensation cost has been recognized
for its stock options in the accompanying consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below for the years ended
December 31, 1998 and 1997 and the period from November 1, 1995 (inception)
through December 31, 1998:
Period from
November 1, 1995
(inception) through
1998 1997 December 31, 1998
---- ---- -----------------
Net loss: As reported (5,519,405) (4,370,960) (10,724,811)
Pro forma (5,806,478) (4,610,828) (11,251,752)
Net loss per basic As reported (0.84) (0.92) (2.53)
and diluted share:
Pro forma (0.89) (0.97) (2.65)
Preferred Stock - Under the terms of the original Articles of
Incorporation and By-Laws in effect at December 31, 1996, the Company was
authorized to issue 5,000,000 shares of Preferred Stock, par value $1.00 per
share. No shares of $1.00 par Preferred Stock were issued. Restated Articles of
Incorporation and By-Laws adopted by the Company effective March 20, 1997,
changed the par value of Preferred Stock to $.01 and revised certain voting
rights. Under the Restated Articles of Incorporation and By-Laws, Preferred
Stock may be issued in series from time to time at the discretion of the Board
of Directors. The Board of Directors is authorized to set the distinguishing
characteristics of each series prior to issuance, including the granting of
limited or full voting rights, rights to payment of dividends and amounts
payable in event of liquidation, dissolution or winding up of the Company. No
shares of serial preferred stock have been issued.
<PAGE>
Warrants - In connection with the aforementioned Offering, on August 19,
1997 the Company issued, to Keane Securities Co., Inc., warrants to purchase
220,000 shares of the Company's common stock. The warrants are exercisable at
any time during a four-year period beginning August 19, 1998 with an exercise
price equal to 120% of the initial public offering price of the shares ($10.80
per share). As of December 31, 1998 none of the warrants have been exercised.
(8) INCOME TAXES
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax losses as a result
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (1,876,598) (1,486,126) (283,712)
Losses for which no tax benefit was realized 1,860,525 1,495,939 283,712
Other 16,073 (9,813) -
- ----------------------------------------------------------------------------------------------------
$ - - -
- ----------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets as of December 31, 1998 and 1997
are presented below:
1998 1997
- ------------------------------------------------------------------------------
Deferred tax assets:
Costs expensed for financial reporting
purposes not yet deducted for tax $ 3,634,051 $ 1,654,575
Property and Equipment 19,206 141,495
Other (13,081) (16,419)
- ------------------------------------------------------------------------------
Net deferred tax asset 3,640,176 1,779,651
- ------------------------------------------------------------------------------
Less valuation allowance (3,640,176) (1,779,651)
- ------------------------------------------------------------------------------
Net deferred taxes $ - $ -
- ------------------------------------------------------------------------------
The valuation allowances for 1998 and 1997 have been applied to offset
the deferred tax assets in recognition of the uncertainty that such tax
benefits will be realized. The net change in valuation allowance for the years
ended December 31, 1998, 1997, and 1996 was an increase of $1,860,525,
$1,495,939 and $283,712, respectively.
(9) LEASE COMMITMENTS
The Company is obligated under various capital leases for certain
equipment that expire at various dates during the next five years. At December
31, 1998, the gross amount of equipment and related accumulated amortization
recorded under capital leases were as follows:
1998
Production equipment $ 1,045,958
Furniture & fixtures 338,500
Less accumulated amortization (154,995)
------------
$ 1,229,463
============
Amortization of assets held under capital leases is included with depreciation
expense.
The Company leases office space and certain office equipment under
operating leases expiring at various dates through 2003. Rental expense under
such leases for the years ended December 31, 1998, 1997 and 1996 was $352,703,
$189,000 and $53,800, respectively.
<PAGE>
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are:
<TABLE>
<CAPTION>
Capital Operating
Years ending December 31 Leases Leases
------------- -------------
<S> <C> <C>
1999 $ 356,665 $ 573,781
2000 427,251 526,420
2001 248,151 374,660
2002 166,611 311,243
2003 48,051 178,328
=============
Total minimum lease payments 1,246,729 $1,964,432
=============
Less amount representing interest (at rates ranging
from 8.5% to 25%) 236,662
-------------
Present value of net minimum capital
lease payments 1,010,067
Less current portion of obligations under
capital leases 235,309
-------------
Obligations under capital leases,
excluding current portions 774,758
=============
</TABLE>
(11) RELATED PARTY TRANSACTIONS
During 1996, the Company issued 186,143 shares of common stock valued at
$260,600 to various stockholders and affiliates for consulting purposes. In
addition, during 1996 the Company issued 21,700 shares to two board members and
a stockholder as compensation for providing collateral on notes payable.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-31-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,371,704
<SECURITIES> 0
<RECEIVABLES> 240,433
<ALLOWANCES> 0
<INVENTORY> 2,495,227
<CURRENT-ASSETS> 78,578
<PP&E> 32,430,427
<DEPRECIATION> 80,028
<TOTAL-ASSETS> 45,302,703
<CURRENT-LIABILITIES> 6,151,484
<BONDS> 0
0
0
<COMMON> 73,515
<OTHER-SE> 34,543,918
<TOTAL-LIABILITY-AND-EQUITY> 45,302,703
<SALES> 2,009,165
<TOTAL-REVENUES> 2,009,165
<CGS> 1,955,843
<TOTAL-COSTS> 5,712,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,212
<INCOME-PRETAX> (5,519,405)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,519,405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,519,405)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
