1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A2 (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. ( ) -1- 2 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. INTERNATIONAL ISOTOPES INC FORM 10-K/A2 TABLE OF CONTENTS The Registrant is amending its consolidated statements of cash flows for certain mathematical errors. This amendment does not affect the Company's previously reported financial position or results of operations, or any footnote disclosure. Page No. Part IV. Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K ................................... 3 -2- 3 PART IV Item 14. Exhibits The following documents are filed or incorporated by reference as exhibits to this report: 23.1 Consent of KPMG LLP, as independent certified public accountants -3- 4 INTERNATIONAL ISOTOPES, INC. FINANCIAL STATEMENTS TABLE OF CONTENTS Page No. Independent Auditors' Report........................................................ 5 FINANCIAL STATEMENTS Consolidated Balance Sheets of the Company as of December 31, 1998 and 1997................................................ 6 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........................... 7 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............................................ 8 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........................... 9 Notes to Consolidated Financial Statements ......................................... 11 -4- 5 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 -5- 6 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES (a development stage enterprise) Consolidated Balance Sheets December 31, Assets 1998 1997 ------------ ------------ 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 liabilities 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 ============ ============ See accompanying notes to consolidated financial statements. -6- 7 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES (a development stage enterprise) Consolidated Statements of Operations 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 ----------- ----------- ------------------- ------------------- 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 =========== =========== =========== =========== See accompanying notes to consolidated financial statements. -7- 8 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 Deficit Accumulated Additional Receivable During the Total Common Stock Paid-in From Development Stockholders' Shares Amount Capital Stockholders Stage Equity --------- ----------- ---------- ------------ ----------- ------------- 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 ========= =========== ========== ========== =========== ========== See accompanying notes to consolidated financial statements. -8- 9 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES (a development stage enterprise) Consolidated Statements of Cash Flows 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 ------------ ---------- ------------------- ------------------- 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 -- -- 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) 91,990 241,341 166,300 Accrued liabilities 348,447 585,589 16,475 950,511 ------------ ---------- ---------- ----------- Net cash used in operating activities (4,941,973) (1,996,800) (1,668,801) (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 securities 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 activities (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 9,507,412 17,808,839 803,366 28,119,617 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 23,075,581 19,217,657 3,497,820 45,791,058 ------------ ---------- ---------- ----------- 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) -9- 10 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES (a development stage enterprise) Consolidated Statements of Cash Flows 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 $ -- 62,852 -- 62,852 director ============ ========== ========== =========== Conversion of notes payable to Common Stock $ -- -- 5,000 5,000 ============ ========== ========== =========== Acquisition 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 ============ ========== ========== =========== Acquisition of license fee and patents rights through issuance of Common Stock $ 725,000 -- 100 725,100 ============ ========== ========== =========== Acquisition of equipment through capital leases $ 1,147,796 -- -- 1,147,796 ============ ========== ========== =========== See accompanying notes to consolidated financial statements -10- 11 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. -11- 12 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 were completed and depreciation began. The Company capitalizes interest -12- 13 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 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 balance sheets 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. -13- 14 (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 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. -14- 15 (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. (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. -15- 16 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. 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. -16- 17 Property, plant and equipment is summarized as follows at December 31, 1998 and 1997: 1998 1997 ----------- --------- 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 =========== ========= 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. (6) MORTGAGE AND NOTES PAYABLE TO BANKS Mortgage and notes payable to banks as of December 31, 1998 and 1997, consist of the following: 1998 1997 ------------ ----------- Variable rate (10.00% at December 31, 1998) line of credit payable to financial institution secured by stock owned by the Chairman of the Board $ 2,450,060 -- Variable rate (9.25% at December 31, 1998) note payable to 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 mortgage 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 =========== -17- 18 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 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 -18- 19 155,000 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. The following table summarized information about fixed stock options outstanding at December 31, 1998: 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 Contractual Life Price 1998 Price $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 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 -19- 20 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. 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: 1998 1997 1996 ----------- ---------- -------- 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) -- ----------- ---------- -------- $ -- -- -- =========== ========== ======== 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 $ -- $ -- =========== =========== -20- 21 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. 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: Capital Operating Years ending December 31 Leases Leases ---------- ---------- 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 ========== (10) 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. -21- 22 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.1 Consent of KPMG LLP, as independent certified public accountants