UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal period ended December 31, 2002
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.
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(Exact name of registrant as specified in its charter)
Texas 74-2763837
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(State of incorporation) (IRS Employer Identification Number)
4137 Commerce Circle Idaho Falls, Idaho 83401
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(Address of principal executive offices) (zip code)
(208) 524-5300
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(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-KSB or any amendment to
this Form 10-KSB. (X)
The aggregate market value of the shares of common stock at March 7, 2003 was
$3,823,245.
As of March 7, 2003 the number of shares outstanding of common stock, $.01 par
value was 95,581,135 shares.
INTERNATIONAL ISOTOPES INC.
FORM 10-KSB
PRELIMINARY STATEMENT
International Isotopes Inc., a Texas corporation, (together with its wholly
owned subsidiary, International Isotopes Idaho Inc. ("I4") hereafter referred to
as "we" or the "Company" or "I3") was initially formed in 1995 to produce,
market, and distribute a broad range of products used in diagnostic and
therapeutic nuclear medicine, research, and industry. Because of difficulties
encountered with start up of the Company's Radioisotope Production Facility and
Linear Accelerator (LINAC) in 1999 and 2000 it became necessary to change the
Company strategy, mission, and objectives. Consistent with that new business
strategy, in 2001 the Company moved its headquarters and consolidated all
operations to Idaho, put two new contract manufacturing and processing
agreements in place, and sold most of the Company assets in Texas associated
with discontinued operations (Radioisotope Production Facility and LINAC). The
remainder of 2001 and part of 2002 were transition periods for the Company in
which we established manufacturing capability for nuclear medicine
reference/calibration standards and processing capability for gemstones that
have undergone treatment for color enhancement.
Documents Incorporated by Reference
The information called for in 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, 2002.
2
INTERNATIONAL ISOTOPES INC.
FORM 10-KSB
TABLE OF CONTENTS
Page No.
Part I.
Item 1. Business ................................................... 4
Item 2. Properties ................................................. 6
Item 3. Legal Proceedings .......................................... 7
Item 4. Submission of Matters to a Vote of Securities-Holders ...... 7
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters .............................. 7
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 8
Item 7. Financial Statements........................................ 12
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 13
Part III.
Item 9. Directors and Executive Officers of Registrant ............. 13
Item 10. Executive Compensation ..................................... 13
Item 11. Security Ownership of Certain Beneficial Owners
and Management ........................................... 13
Item 12. Certain Relationships and Related Transactions ............. 14
Item 13. Exhibits, Financial Statement Schedule
and Reports on Form 8-K .................................. 14
Item 14. Controls and Procedures .................................... 14
Power of Attorney .................................................... 15
Signatures ........................................................... 15
3
PART I
Item 1. BUSINESS
General
International Isotopes Inc. (I3) was established as a Texas corporation in 1995.
The Company was initially formed to produce, market, and distribute a broad
range of products used in diagnostic and therapeutic nuclear medicine, research
and industry. In 1998 the Company acquired a subsidiary, subsequently named
International Isotopes Idaho Inc.,which specialized in sales of isotopes and
providing hot cell services through a contract with the Department Of Energy
(DOE) Idaho Operations and using the Advanced Test Reactor (ATR). Because of
difficulties encountered with start up of the Company's Radioisotope Production
Facility and Linear Accelerator, and the high cost of conducting commercial
operations in the midst of a DOE laboratory, the Company underwent a substantial
change in mission and strategy during 2000 and 2001. This change resulted in the
sales of the Radioisotope Production Facility and Linear Accelerator in Texas
and termination of the commercial isotope production contract with the DOE's
prime-operating contractor in Idaho. In June of 2001, the Company relocated its
corporate headquarters to Idaho to continue the subsidiary's operations as the
new, primary focus and mission of the Company.
In support of our new mission and strategy, in 2001 new contract manufacturing
and processing agreements were put in place, a new operating facility was
obtained and licensed through the Nuclear Regulatory Commission, and new
contracts put in place with the DOE's prime-operating contractor for continued
reactor production of high specific activity cobalt. These new agreements now
fully support the Company's business products and services, which include
manufacturing nuclear medicine reference and calibration standards, processing
gemstones that have undergone treatment for color enhancement, and large volume
production of high specific activity (HSA) cobalt. We have been able to continue
steady growth in the amount of revenues generated from these business
activities. We expect continued growth and the addition of new products in 2003,
which management feels will produce sufficient cash to meet our operational
needs. However, prospective investors are cautioned regarding the speculative
nature of any forward-looking projections. Also see "Item 6, Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of these and other risk factors relating to the Company when
considering an investment in our securities.
Company Licensing, Capabilities, and Qualifications
We have a fully implemented Quality Assurance program which meets the
requirements of ANSI/ASME NQA-1 and 10 CFR 830.120. In order to support the
production of Nuclear Medicine calibration and reference standards the Company
is also a participating member of the National Institute of Standards and
Technology/ Nuclear Energy Institute's (NIST/NEI) Measurement Assurance Program
(MAP) for the radiopharmaceutical industry. This program participation ensures
that we can provide analytical methods and standards necessary for accurate
radioactivity measurement. The Company is also a registered Food and Drug
Administration (FDA) medical device manufacturer for Class I medical devices,
including Nuclear Sealed Calibration Sources (892.1400) and Nuclear Flood Source
Phantoms (892.1380).
Industry Overview and Target Markets
The industries and markets that require or involve the use of radioactive
material are diverse. Our current operations involve products that are used in a
wide variety of applications and in various markets. First, our HSA cobalt is
supplied as bulk material, which is subsequently assembled into medical devices
by our customer. Second, we are a contract manufacturer of several nuclear
medicine reference and calibrations standards used for operational checks of
various imaging and measurement systems for nuclear medicine. And third, we
support the special packaging and measurement of gemstones that have undergone
irradiation for color enhancement.
We conduct our operations in Idaho Falls, Idaho. Although the cobalt, nuclear
medicine calibration and reference standards, and gemstone products appear
diverse, they share the common links of being radioactive materials requiring
extensive process quality control. Therefore, the Company is required to have an
operating license from the Nuclear Regulatory Commission and specially trained
staff with rigorously employed quality standards to produce and process these
materials.
4
Products
HSA Cobalt - The Company is one of a very few sources of this material
worldwide. High Specific Activity (HSA) cobalt is used primarily in external
beam radiation medical devices such as Elekta's Leksell Gamma Knife. This device
is used for non-surgical radiation treatment of vascular deformities and
non-malignant tumors in the brain. The HSA cobalt requires three to five years
of irradiation to reach the necessary level of activity for this medical
application. We manage an inventory of approximately 800,000 curies of this
material in various stages of production, thus ensuring a long and continuous
supply of material. After irradiation the material is shipped by us directly
from the DOE reactor laboratory to the customer's facilities, thus eliminating
the need for any on site processing of the material following irradiation.
Other Reactor Produced Radioisotopes - The Company's facility and NRC license
permits processing of a wide variety of radioisotopes. We are evaluating
establishing additional radioisotope transport and processing capabilities that
would permit production and sale of various new radioisotopes using the DOE
laboratory test reactor for production and our Idaho Falls facility for
processing.
Nuclear medicine calibration and reference standards manufacturing - The Company
is an exclusive contract manufacturer to RadQual LLC for several of these types
of standards. There are approximately 6,000 nuclear medicine centers around the
U.S. and the number of these centers is expected to grow at an annual rate of
about 5%. Each of these centers has a variety of measurement and imaging systems
that require frequent use of calibration and reference standards to ensure their
proper operation. Because of the relatively short lived nature of the
radioactivity used in these standards, the customers are required to replace
them approximately once every 12 to 18 months.
Gemstone Processing - The Company has an exclusive contract with Quali-Tech Inc.
for processing gemstones. The processing involves special packaging of the
gemstones in containers, which allow them to undergo irradiation for color
enhancement. The processing we perform entails initial receipt of the gemstones,
packaging the gemstones for irradiation, managing the transport of the stones to
and from the reactor facility, and then completing post irradiation processing
of the stones before return shipment to the customer. In 2001 the production
volume of the gemstones was limited by the availability of irradiation
containers due to the difficulty involved with repairing and constructing these
containers. However, in January 2002 we had solved container construction
problems and implemented a new technology to repair containers. As a result we
have been able to double the number of containers available for irradiation of
the gemstones. During 2002, however, the general slowdown of the economy
impacted the market demand for gemstones and thus the Company's revenue
resulting from processing did not meet expectations.
Competition
HSA cobalt is produced in some other reactors, but we do not believe any in the
U.S. are capable of producing the high activity level and volume required for
meaningful commercial production. The two domestic reactor sources are the
University of Missouri Research Reactor and the High Flux Isotope Reactor
located in Oak Ridge Tennessee. There are, however, numerous foreign reactors
actively producing high and low specific activity cobalt. While the logistics of
international transport of cobalt presents some competitive barriers, the
Company must always consider the potential threat these other suppliers pose to
our HSA cobalt business.
Nuclear medicine calibration and reference standards - The Company is the
smallest of three major producers of these sources within the U.S. The Company's
customer (RadQual, LLC) has increased the number of authorized distributors and
plans to make further expansion into the market in 2003. However, there can be
no assurance of increased sales.
5
Gemstone processing - there is no other commercial company or reactor in the
U.S. processing irradiated gemstones. We believe there are one or two other
reactors in the world that support this business with other companies overseas.
Government Regulation
The Company has obtained a license from the Nuclear Regulatory Commission,
Region IV that permits use and possession of by-product material. The scope of
this license includes calibration and reference standard manufacturing and
distribution, radioactive gemstone processing, environmental sample analysis,
and various research and development activities. The scope and activities
permitted by this license are broad enough that it is not expected to restrict
any anticipated business activities in the coming year. The Company is also
registered as a medical device manufacturer through the U.S. Food and Drug
Administration (FDA).
Regulation of Radioisotope Production and Radioactive Waste. The manufacture of
radioisotopes, nuclear medicine calibration and reference standards, and
processing gemstones are subject to extensive federal regulation. Prior to
commencing operations in our newly leased Idaho facility, the Company obtained
approval from the Nuclear Regulatory Commission. The nuclear medicine
calibration and reference standards are licensed as Sealed Sources through the
State of Texas Department of Health. The Company's production facility does not
handle "special nuclear materials" (i.e. nuclear fuels and weapons grade
uranium, thorium and plutonium) and, therefore, is not designated as a "nuclear"
facility.
Pursuant to the Low Level Radioactive Waste Policy Act of 1980, states are
required to assure the safe disposal of mildly radioactive materials. The
Nuclear Regulatory Commission, Region IV, regulates the disposal of radioactive
waste for facilities operating in Idaho. The radioactive waste we produce falls
into the category of low-level radioactive waste.
Other Regulations. In the event we enter into agreements with suppliers to
acquire neutron-produced research and therapeutic radioisotopes we could be
subject to additional regulations of the Nuclear Regulatory Commission or the
Food and Drug Administration.
Employees
The Company possesses a significant depth of radiological safety and Health
Physics professionals and technicians with experience in both government and
commercial operating sectors. In addition, we have developed a wide array of
capabilities directly related to manufacture and distribution of our products
and miscellaneous service work for the nuclear industry.
Item 2. PROPERTIES
The Company has two years remaining on a five-year lease with purchase options
on a 7,500 square foot facility located in Idaho Falls. This facility is
currently licensed by the Nuclear Regulatory Commission and is being used for
processing of topaz gemstones and contract manufacturing of nuclear medicine
calibration and reference standards.
The Company's 115 acres of property in Waxahachie, Texas was purchased by an
individual in early 2003 in consideration for the assumption by the individual
of our remaining bank indebtedness related to the property. The Company has some
remaining LINAC components being held for sale that are expected to be disposed
of in 2003. Following these transactions, all of the Company's property and
assets will be located in Idaho.
6
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings incidental to its business,
which, in the opinion of management, are expected to have any material adverse
effect on the Company's consolidated financial position, operating results, or
liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual meeting of stockholders was conducted on June 26, 2002. The purpose of
the meeting was to review Company performance and present 3 propositions for
stockholder approval. The three propositions were 1) to elect five directors to
serve until the next succeeding annual meeting and until their respective
successors are elected and qualified; 2) to ratify the appointment by the Board
of Directors of Hansen Barnett & Maxwell as independent certified public
accountants of the Company for the fiscal year ending December 31, 2002; and 3)
to approve the Company's Amended and Restated Long Term Incentive Plan. A Proxy
Statement, form of Proxy and a copy of the Annual Report on Form 10K as filed
with the Securities and Exchange Commission were distributed to all stockholders
on May 22, 2002. A total of 86.4% of the Common shares voted and all three
propositions were passed by at least 70% of the shares then outstanding.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Prior to the completion of our IPO in August 1997, there was no established
public trading market for our Common Stock. At that time the Company's Common
Stock commenced trading on the NASDAQ Small Cap Market under the symbol of
"INIS". The Company was also listed on the Boston Stock Exchange under the
symbol "ITL". Since the second quarter of 2001 the Company's stock has not been
listed on Nasdaq and has been traded solely over the counter in the Pink Sheets.
High and low sales prices reported by the respective trading sectors during the
periods indicated are shown below:
Fiscal Year Quarter High Low
2001 1st $0.35 $0.09
2001(1) 2nd $0.09 $0.06
2001(2) 2nd $0.13 $0.04
2001 3rd $0.09 $0.03
2001 4th $0.05 $0.02
2002 1st $0.15 $0.02
2002 2nd $0.13 $0.05
2002 3rd $0.09 $0.05
2002 4th $0.06 $0.03
(1) For the Nasdaq listing April 2 - 10, 2001
(2) For the Non- Nasdaq OTC April 11 - June 29, 2001
On December 31, 2002, there were over 310 holders of record of the Common Stock.
The closing price on December 31, 2002 , of a share of common stock was $ 0.05.
We have never paid any cash dividends on our common stock. In the future, and
based upon Company profit performance, the Board of Directors of the Company
will evaluate and determine whether to issue dividends or retain funds for
research and development and expansion of our business. It is unlikely that we
will pay any dividends to shareholders for the foreseeable future.
7
Recent Sales of Unregistered Securities
In January 2002 certain persons acting together as a group acquired all of the
Company's outstanding shares of Series A 5% Convertible Redeemable Preferred
Stock and certain Common Stock from its then current owners, Brown Simpson's
Strategic Growth Fund, Ltd. and Brown Simpson's Strategic Growth Fund LP. The
securities acquired consisted of all 10,000 shares of Series A Preferred Stock
and 2,087,837 shares of common stock, which the Brown Simpson entities had
acquired as interest payments on the Preferred Stock. Also in January 2002, the
Company re-acquired 2,817 shares (or 37.7%) of the Company's Series B 7%
Convertible Redeemable Preferred Stock for $86,832.
In February and March 2002 the Company gained approval from 100% of the holders
of Series A Preferred Stock and 80% of the holders of Series B Preferred Stock
to amend their respective Certificates of Designation to eliminate the Series A
5% dividend and the Series B 7% dividend, change the mandatory redemption date
for both series of Preferred Stock to May 2022, and remove certain default and
penalty provisions. In addition, the Company's Board of Directors approved a
purchase offer for the Series A and B Preferred Stock (5,000 common shares for
each one share of Series A or B Preferred Stock). All of the holders of the
Series A Preferred Stock agreed to sell their 10,000 preferred shares for
50,000,000 shares of common stock valued by the Company at $0.20 per share.
During 2002 most of the Holders of the Series B Preferred Stock agreed to sell
3,800 of their preferred shares in return for 19,000,000 shares of common stock
valued by the Company at $0.20 per share, reducing the remaining number of
outstanding Preferred Series B shares to 850.
Item 6. 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.
International Isotopes Inc. (I3) was established as a Texas corporation in 1995.
The Company was initially formed to produce, market and distribute a broad range
of products used in diagnostic and therapeutic nuclear medicine, research and
industry. In 1998 the Company acquired a subsidiary, subsequently named
International Isotopes Idaho Inc., which specialized in sales of isotopes and
providing hot cell services through a contract with the Department Of Energy
(DOE) Idaho Operations and using the Advanced Test Reactor (ATR). Because of
difficulties encountered with start up of the Company's Radioisotope Production
Facility and Linear Accelerator, and the high cost of conducting commercial
operations in the midst of a DOE laboratory, the Company underwent a substantial
change in mission and strategy during 2000 and 2001. This change resulted in our
sale of the Radioisotope Production Facility and Linear Accelerator in Texas and
termination of our commercial isotope production contract with the DOE's
prime-operating contractor in Idaho. In June of 2001 we relocated our corporate
headquarters to Idaho to continue the subsidiary's operations as the new,
primary focus and mission of the Company.
In support of our new mission and strategy, in 2001 new contract manufacturing
and processing agreements were put in place, a new operating facility was
obtained and licensed through the Nuclear Regulatory Commission, and new
contracts were executed with the DOE's prime-operating contractor for continued
reactor production of high specific activity cobalt. These new agreements now
fully support our business products & services that include manufacturing
nuclear medicine reference and calibration standards, processing gemstones that
have undergone treatment for color enhancement, and large volume production of
high specific activity (HSA) cobalt. We have been able to continue steady growth
in revenues generated from these new products and expect that these revenues, as
well as revenues from products expected in 2003, will produce sufficient cash to
meet our operational needs. However, prospective investors are cautioned
regarding the speculative nature of any forward-looking statements.
8
Liquidity and Capital Resources
On December 31, 2002 we had cash and cash equivalents of $441,904 compared to
$293,969 at December 31, 2001. For the year ended December 31, 2002, our cash
flows included net cash provided by operating activities of $167,636, net cash
used in financing activities of $105,518 and cash provided by investing
activities of $85,817.
The Company incurred a loss applicable to common shareholders of $199,695 for
the year ended December 31, 2002 and has an accumulated deficit of $87,390,165
since inception. Prior to 2002 the Company principally funded operations and
plant and equipment expenditures from proceeds from public and private sales of
equity as well as through asset sales. We have also borrowed funds under short
and long-term borrowing arrangements. As of December 31, 2002, the Company had
net borrowings of $1,046,520 in our revolving line of credit with Texas State
Bank, secured by a portion of assets, accounts receivable, and excess LINAC
equipment which is still held by the Company for sale; a note payable of
$345,295 to Texas State Bank secured by the Waxahachie real estate with no
monthly payment; and a ten year note payable to William Nicholson, our former
chairman of the board, in the amount of $909,738. We also have a $100,000 loan
from Texas State Bank and an $80,000 note from several of our principal
stockholders. These loans and notes mature on April 30, 2003 and we expect to
use cash proceeds from HSA cobalt sales to pay off these loans and notes.
Results of Operations
All of 2001 and part of 2002 were transition years for the Company during which
time the Company completed asset sales associated with the discontinued
operations segment and put new manufacturing agreements and capabilities in
place for nuclear medicine reference/calibration standards and processing
gemstones. Although total revenues for the Company in 2002 were nearly the same
as 2001 levels, there has been a significant change in the sources of those
revenues. Examining these changes helps to illustrate the magnitude of the
change in the Company mission over the past year.
Year ended December 31, 2002 compared to year ended December 31, 2001
Revenues
Total revenues were $2,181,704 in 2002 as compared to $2,177,900 in 2001, an
increase of $3,804 or 0.2%. Although the net increase in revenue was small,
there was a significant change in the sources of revenue for the Company during
in these periods. Sales of reactor-produced iridium radioisotope and hot cell
services fell from $896,000 in 2001 to $0 in 2002 as the Company terminated
those business areas. This revenue reduction was completely compensated for,
however, by increases in the Company's sales of nuclear medicine calibration and
reference standards, processed gemstone, and HSA cobalt, which grew by $988,477
over 2001 sales.
Cost of revenues
Cost of revenues for 2002 was $1,071,690 compared to $1,424,111 in 2001, a
decrease of $352,421 or 25%. Most of this reduction was attributable to
curtailment of lower margin iridium production and the hot cell operations
contract with the DOE contractor.
9
Operating costs and expenses
Total operating costs and expenses for 2002 were $1,402,664, as compared to
$1,797,385 in 2001, a decrease of $394,721 or 22%. The decrease was attributable
to the change in corporate structure from discontinued operations and a
reduction in contract labor expense and consulting services as a result of
terminating the contract with the DOE laboratory contractor. Even with this
improvement in operating costs, management still noted $338,555 of restructuring
expense in 2002 which it considers as "one-time" expenses still related to
past-discontinued operations and the historic corporate activities associated
with those operations.
Other income (expense)
Interest income was $7,909 in 2002 as compared to $2,613 in 2001. The small
increase was attributable to the establishment of a $140,000 certificate of
deposit for use as financial assurance for decommissioning, an NRC licensing
requirement. Other income in 2002 was $115,485 as compared to $0 for 2001. Most
of the Other Income received by the Company in 2002 resulted from royalty
payments associated with a short term obligation from Imagyn Medical following
our asset sale of the brachytherapy business to them in 2001. Less than $15,000
of remaining royalty payments is expected from Imagyn in 2003.
Interest Expense was $181,196 in 2002 compared to $3,114 in 2001. The increase
of $178,082 was attributable to the cessation of deferrals in interest payments
to Texas State Bank and one individual. During 2002 the Company resumed making
regular interest payments on all notes and loans.
Continuing Operations
The net loss from continuing operations was $350,453 in 2002 compared to a loss
of $1,044,097 in 2001. The $693,644 decrease in net losses was attributed to
$115,485 in Other Income, described in the preceding section, and increases in
sales of nuclear medicine calibration reference standards and gemstone
processing with relatively fixed base operating expenses.
Forward Looking Information and Risk Factors
The Company or its representatives may make forward looking statements, oral or
written, including statements in this Report's Management's Discussion and
Analysis of Financial Condition and Results of Operations, press releases and
filings with the Commission, regarding estimated future operating results,
planned capital expenditures (including the amount and nature thereof) and the
Company's financing plans, if any, related thereto, and other plans and
objectives for future operations. There can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on our business
or operations. Among the factors that could cause actual results to differ
materially from the Company's expectations are general economic conditions,
competition, government regulations and other factors set forth among the risk
factors noted below or in the description of our business in Item 1 of this
Report, as well as factors contained in the Company's other securities filings.
Generally, forward-looking statements include words or phrases such as
"management believes," the "Company anticipates," the "Company expects" and
words and phrases of similar import. Forward-looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995.
All subsequent oral and written forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.
International Isotopes has incurred and may continue to incur losses. With the
exception of 2002, we have incurred net losses for most fiscal periods since our
inception. From inception (November 1995) through December 31, 2002 the Company
generated $17,246,225 in revenues and had an accumulated deficit (including
preferred stock dividends and returns) in the amount of $87,390,165. However,
although we cannot provide any assurance we believe the Company's continued
growth in our new business areas will produce sufficient revenue to meet our
2003 cash flow and operational needs.
10
We may need additional financing to continue operations. As of December 31, 2002
we have an outstanding debt of $1,046,520 on a $1.1 million revolving line of
credit account with Texas State Bank. That note matures on December 31, 2003 and
is secured with 80% of our accounts receivable and 50% of our fixed assets.
Seventy-five percent (75%) of the cash resulting from the sale of any remaining
Linac equipment must be applied to the principal of this note. Sales of about
$260,000 of this equipment are expected in 2003. We will have to negotiate an
extension of terms on this note at the end of 2003. The Company also has a
ten-year note for $909,738 at 7% interest to our former Chairman of the Board.
Principal and interest payments on this note are to be paid annually based upon
net profits of the Company (annual principal payment to equal 30% of net pre-tax
profits). At December 31, 2002, the note holder agreed to defer the April 2003
principal payment. The Company also has a $100,000 line of credit with Texas
State Bank and an $80,000 note with several of our principal shareholders, both
of which mature on April 30, 2003. We plan to use the cash receipt of cobalt
sales in early 2003 to pay off these notes and loans.
Remaining Company Obligations on the Texas State Bank Loan for the Waxahachie
Property. The Company and Texas State Bank have agreed to have the loan of
$345,295 assumed by an individual in consideration of our sale of the Waxahachie
property. Liability for this loan would, however, revert to the Company should
this individual default on the assumed note.
We will continue to be dependent upon our remaining facilities and equipment to
function properly in order to provide consistent, timely shipments of products
that meet our customers' specifications. If we experience equipment failures or
breakdowns we may be unable to satisfy our customers, which could result in the
cancellation of contracts and the loss of revenues.
There is no long-term contract in place with the DOE Contractor for continued
HSA Cobalt production. The Company has put short term specific "work for
non-government sponsor agreements" in place with the DOE contractor to continue
sales of HSA cobalt irradiated at the Idaho reactor facility. We expect that
these agreements will continue, however, there is no assurance these contracts
will be equitable or continuing.
Operational hazards (i.e., spills, faults, ventilation failure, etc.) could
result in the spread of contamination within our facility and require additional
funding to correct. An irrevocable, automatic renewable letter of credit against
a $147,000 Certificate of Deposit at Texas State Bank has been used to provide
the financial assurance required by the Nuclear Regulatory Commission for our
Idaho facility license. If a contamination event resulted in greater liability
to us we would have to borrow money or fund the liability from our future
revenue.
Government regulation could adversely affect our business. Operations within our
Idaho facility are subject to the U.S. Nuclear Regulatory Commission and Food
and Drug Administration regulations. Nuclear medicine calibration and reference
standards are licensed and regulated. To the extent these regulations are or
become burdensome, our business development could be adversely affected.
We are dependent upon key personnel. Our ongoing operations are dependent on
Steve T. Laflin, President and Chief Executive Officer. The Company is highly
dependent upon this person and the loss of this individual could have a material
adverse effect on us. We have a $2 million dollar key man life insurance policy
on Mr. Laflin and a 5-year employment agreement with him extending through
February 2007. The Company has revised our employee stock options to assist with
offering incentives and retaining key personnel. In addition, there is no
assurance the Company will be able to retain our existing personnel or attract
additional qualified employees. Loss of any of these relationships would result
in a significant decline in revenue.
We are dependent on various third parties in connection with our business
operations. The production of HSA Cobalt is dependent upon the Department of
Energy, and its prime-operating contractor, who controls the Idaho reactor and
laboratory operations. Our gemstone production is tied to an exclusive agreement
with Quali Tech Inc. Nuclear medicine calibration and reference standard
manufacturing is conducted under and exclusive contract with RadQual, LLC who in
turn has agreements in place with several companies for marketing and sales.
Each of our competitors has significantly greater financial resources than us
and that could create a competitive advantage for them over us.
11
We are subject to competition from other companies. Each of the business areas
of the Company has direct competition from other businesses. HSA cobalt is
supplied by other reactor facilities around the world. Nuclear medicine
calibration and reference standards are being produced by several other
manufacturers in the U.S. and overseas, and there is at least one other gemstone
processor in Europe. Each of our competitors has significantly greater financial
resources than us and that could create a competitive advantage for them over
us.
New Accounting Standards
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale and the recognition of
impairment of long-lived assets to be held and used. The Company implemented
SFAS No. 144 effective January 1, 2002. The adoption of this standard has had no
material effect on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, the statement modifies the criteria classification of
gains and losses on debt extinguishments such that they are not required to be
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30. The Company elected
to adopt this standard during the year ended December 31, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal activities". The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
plan severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company will
be required to apply this statement prospectively for any exit or disposal
activities initiated after December 31, 2002. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based employee compensation. It also amends the disclosure
provisions of Statement No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Statement No. 148 also requires
disclosure about those effects in interim financial information. The Company
will adopt the disclosure requirements of Statement No. 148 beginning with its
quarter ended March 31, 2003.
Item 7. FINANCIAL STATEMENTS
The following financial statements are included herewith:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31, 2002 and
2001
Consolidated Statement of Stockholders' Deficit for the years ended December 31,
2001 and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and
2001
Notes to Consolidated Financial Statements
12
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 12, 2001, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 the Company filed a Form 8-K identifying a change in the Company's
Certifying Accountants. KPMG LLP previously served as the principal accountants
for the Company. On September 6, 2001, the Company elected to terminate that
firm's appointment effective after the audit of the Company's consolidated
financial statements as of the year ended December 31, 2000 and the issuance of
the report thereon. The Company announced it had decided to retain Grant
Thornton LLP as principal accountants. The decision to change accountants was
approved by the Company's Audit committee of the Board of Directors, the Board
of Directors, and was ratified by a vote of the shareholders at the annual
meeting on November 2, 2001. In connection with the audits of the two fiscal
years ended December 31, 2000 there were no disagreements with KPMG LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
On March 29, 2002 Grant Thornton informed the Company it was declining to accept
the engagement as the Company's principal accountants. There were no
disagreements with Grant Thornton LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures. On
April 1, 2002, after approval by the Company's Audit committee of the Board of
Directors and the Board of Directors, the Company retained Hansen, Barnett, and
Maxwell as the Company's Principal Accountants. On April 5, 2002 pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company filed a
Form 8-K identifying the change in the Company's Certifying Accountants. The
Company's selection of Hansen, Barnett, and Maxwell was ratified by a vote of
the shareholders at the annual meeting on June 26, 2002.
PART III.
Item 9. 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 2003 Annual Meeting of Shareholders (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, 2002, the
close of our fiscal year.
Item 10. EXECUTIVE COMPENSATION
The information set forth under the captions "Executive Compensation and Other
Matters" 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, 2002, the close of our fiscal year.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Outstanding Capital Stock and
Stock Ownership of Directors, Certain Executive Officers and Principal
Shareholders" 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, 2002, the close of our fiscal
year.
13
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "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, 2002, the close of our fiscal year.
Item 13. 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)).
10.1 Copy of the Company's 2002 Long Term Incentive Plan. (1)
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.)
99.1 Certification under section 906 of the Sarbanes-Oxley Act (18 u.s.c.
section 1350). (1)
--------------------
(1) Filed herewith
Reports on Form 8-K
The Company filed a Form 8-K on January 16, 2002 with respect the purchase of
the Series A Preferred stock by a group of investors and the Company's
repurchase of 2817 shares of Preferred Series B stock.
The Company filed a Form 8-K on April 5, 2002 pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934, identifying Hansen Barnett & Maxwell as the
Company's Certifying Accountants.
Item 14. CONTROLS AND PROCEDURES
(a) The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the chief executive officer and the principal financial officer of the
Company concluded that the Company's disclosure controls and procedures were
adequate.
(b) Changes in internal controls. The Company made no significant changes in
its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and principal financial officer.
14
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 Steve Laflin 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: /S/ Steve T. Laflin
-------------------------------
Steve T. Laflin
President and Chief Executive Officer
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 7, 2003 By: /s/ Dr. Ralph Richart
----------------------------
Dr. Ralph Richart
Chairman of the Board of Directors
March 7, 2003 By: /s/ Steve T. Laflin
----------------------------
Steve T. Laflin
President, Chief Executive Officer and Director
March 7, 2003 By: /s/ Christopher Grosso
----------------------------
Christopher Grosso
Director
March 7, 2003 By: /s/ Randall O'Kane
----------------------------
Randall O'Kane
Director
15
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Steve T. Laflin, certify that:
1. I have reviewed this annual report on Form 10-KSB of
International Isotopes, Inc (the registrant);
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
base on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/S/ Steve T. Laflin
-------------------------------------
Steve T. Laflin
President, Chief Executive Officer
16
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Steve T. Laflin, certify that:
1. I have reviewed this annual report on Form 10-KSB of
International Isotopes, Inc (the registrant);
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
d) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
e) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
base on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
c) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
d) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/S/ Steve T. Laflin
-------------------------------------
Steve T. Laflin
Chief Financial Officer
17
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page No.
Report of Independent Certified Public Accountants.................... F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of December 31, 2002 and 2001.................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001......................................... F-3
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 2001 and 2002.......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2001.......................................... F-5
Notes to Consolidated Financial Statements ........................... F-7
18
HANSEN, BARNETT & MAXWELL (801) 532-2200
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180-1128
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
International Isotopes Inc
We have audited the accompanying consolidated balance sheets of International
Isotopes Inc and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 as of December 31, 2002 and 2001 and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
January 17, 2003
F-1
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
Assets 2002 2001
------------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 441,904 $ 293,969
Accounts receivable 218,923 138,531
Assets held for sale (Note 2) 607,531 122,000
Inventories (Note 3) 2,279,828 2,537,519
Prepaids and other current assets 128,830 287,074
------------ ------------
Total current assets 3,677,016 3,379,093
Property, plant and equipment, net (Note 4) 236,053 280,036
Assets held for sale (Note 2) -- 607,531
------------ ------------
Total assets $ 3,913,069 $ 4,266,660
============ ============
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Deficit
-------------------------------------------------
Current liabilities
Accounts payable $ 257,776 $ 181,694
Checks written in excess of cash in bank -- 101,714
Accrued liabilities 342,091 448,529
Note payable related to assets held for sale
(Note 2 and 5) 345,295 --
Current installments of mortgage and notes
payable (Note 5) 1,226,520 2,720,610
------------ ------------
Total current liabilities 2,171,682 3,452,547
Mortgage and notes payable, excluding current
installments (Note 5) 909,738 45,182
------------ ------------
Total liabilities 3,081,420 3,497,729
------------ ------------
Mandatorily redeemable preferred stock, $0.01 par
value; 5,000,000 shares authorized; 850 and 17,467
shares issued and outstanding, respectively;
liquidation value of $850,000 850,000 17,117,755
------------ ------------
Stockholders' deficit (Note 6)
Common stock, $0.01 par value; 250,000,000 shares
authorized; 95,581,135 and 26,581,135 shares
issued and outstanding, respectively 955,812 265,812
Additional paid-in capital 86,416,002 70,575,834
Accumulated deficit (87,390,165) (87,190,470)
------------ ------------
Total stockholders' deficit (18,351) (16,348,824)
------------ ------------
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit $ 3,913,069 $ 4,266,660
============ ============
See accompanying notes to consolidated financial statements.
F-2
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
2002 2001
------------ ------------
Revenue:
Sales of product $ 2,181,704 $ 2,177,900
Cost of revenue:
Cost of products 1,071,690 1,424,111
------------ ------------
Gross profit 1,110,014 753,789
------------ ------------
Operating costs and expenses:
Salaries and contract labor 469,704 521,753
General, administrative and consulting 594,405 1,275,632
Restructuring charges 338,555 --
------------ ------------
Total operating expenses 1,402,664 1,797,385
------------ ------------
Operating loss (292,650) (1,043,596)
Other income (expense):
Other income 115,484 --
Interest income 7,909 2,613
Interest expense (181,196) (3,114)
------------ ------------
Loss from continuing operations (350,453) (1,044,097)
Discontinued operations
Gain (Loss) on disposal of discontinued operations
including provision of $0 and $2,325,282 for
operating losses during the phase-out period (less
applicable taxes of $0) 500,000 (1,774,118)
------------ ------------
Net income (loss) 149,547 (2,818,215)
Preferred stock dividend, deemed dividend
and accretion of discount (349,242) (1,325,085)
------------ ------------
Net loss applicable to common shareholders $ (199,695) $ (4,143,300)
============ ============
Net loss per common share continuing
operations - basic and diluted $ (0.01) $ (0.15)
Net income (loss) per common share discontinued
operations - basic and diluted 0.01 (0.11)
------------ ------------
Net loss per common share - basic and diluted $ (0.00) $ (0.26)
============ ============
Weighted average common shares outstanding -
basic and diluted 86,654,052 15,976,551
============ ============
See accompanying notes to consolidated financial statements.
F-3
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
Years ended December 31, 2002 and 2001
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------------ ------------ ------------ ------------ ------------
Balance January 1, 2001 10,611,411 $ 106,115 $ 69,190,246 $(83,047,170) $(13,750,809)
Redeemable convertible preferred stock dividend 15,594,724 155,947 639,338 (795,285) --
Accretion of issuance costs on
redeemable convertible preferred stock -- -- -- (529,800) (529,800)
Conversion of Series B redeemable convertible
preferred stock 375,000 3,750 746,250 -- 750,000
Net loss -- -- -- (2,818,215) (2,818,215)
------------ ------------ ------------ ------------ ------------
Balance December 31, 2001 26,581,135 265,812 70,575,834 (87,190,470) (16,348,824)
Accretion of issuance costs on
redeemable convertible preferred stock -- -- -- (349,242) (349,242)
Redemption of 10,000 shares Series A redeemable
convertible preferred stock for common stock
valued at $.20 per share 50,000,000 500,000 9,500,000 -- 10,000,000
Redemption of 2,817 shares Series B redeemable
convertible preferred stock at $30.82 per
share, total redemption $86,832 -- -- 2,730,168 -- 2,730,168
Redemption of 3,800 shares Series B redeemable
convertible preferred stock for common stock
valued at $.20 per share 19,000,000 190,000 3,610,000 -- 3,800,000
Net income -- -- -- 149,547 149,547
------------ ------------ ------------ ------------ ------------
Balance December 31, 2002 95,581,135 $ 955,812 $ 86,416,002 $(87,390,165) $ (18,351)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 149,547 $ (2,818,215)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 80,166 72,306
Gain on disposal of discontinued operations -- (551,164)
Gain on release/foregiveness of debt of discontinued
operations (500,000) (1,197,330)
Loss on disposed property, plant and equipment -- 167,986
Changes in operating assets and liabilities:
Accounts receivable (80,392) 234,982
Prepaids and other current assets 158,244 17,562
Inventories 257,691 50,473
Accounts payable and accrued liabilities 102,380 (3,571,515)
------------ ------------
Net cash provided by (used in) operating activities 167,636 (7,594,915)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (36,183) (64,788)
Proceeds from assets held for sale 122,000 17,609,218
------------ ------------
Net cash provided by investing activites 85,817 17,544,430
------------ ------------
Cash flows from financing activities:
Cash paid for redemption of 2,817 shares Series B
redeemable convertible preferred stock (86,832) --
Checks written in excess of cash in bank (101,714) 101,714
Payments on capital leases -- (3,557,646)
Proceeds from issuance of debt 232,257 1,053,020
Principal payments on notes payable (149,229) (7,895,188)
------------ ------------
Net cash used in financing activities (105,518) (10,298,100)
------------ ------------
Net change in cash and cash equivalents 147,935 (348,585)
Cash and cash equivalents at beginning of year 293,969 642,554
------------ ------------
Cash and cash equivalents at end of year $ 441,904 $ 293,969
============ ============
(Continued)
F-5
INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Continued
Years ended December 31,
2002 2001
----------- -----------
Supplemental disclosure of cash flow activities:
Cash paid for interest $ 101,748 $ 1,036,143
=========== ===========
Supplemental disclosure of noncash financing and
investing transactions:
Common stock issued on conversion of preferred stock $13,800,000 $ 750,000
=========== ===========
Difference in redemption value and liquidation value of
preferred stock redeemed for cash $ 2,730,168 $ --
=========== ===========
Accretion of issuance costs on preferred stock $ 349,242 $ 529,800
=========== ===========
Conversion of accrued interest to note payable $ 132,736 $ --
=========== ===========
Debt assumed by purchaser of Shady Oaks facility $ -- $ 7,433,000
=========== ===========
Common stock issued for payment of preferred dividends $ -- $ 795,285
=========== ===========
See accompanying notes to consolidated financial statements
F-6
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
International Isotopes Inc (the Company) was incorporated in Texas in November
1995. The Company owns 100% of the outstanding common shares of Gazelle Realty,
Inc. and International Isotopes Idaho, Inc. (I4). Gazelle Realty, Inc. has no
assets. The only assets of the Company are those of I4.
Nature of Operations - The Company is a supplier of High Specific Activity (HSA)
cobalt. This material is used primarily in external beam radiation medical
devices such as Elekta's Leksell Gamma Knife. The Company is also involved with
nuclear medicine calibration and reference standards manufacturing. The Company
has an exclusive contract with RadQual LLC for several of these types of
standards. The Company is also involved in gemstone processing. The Company has
an exclusive contract with Quali-Tech Inc. for processing gemstones. The
processing involves special packaging of the gemstones in containers which allow
them to undergo irradiation for color enhancement. The operating assets of the
Company are those of International Isotopes Idaho Inc. (I4) located in Idaho
Falls, Idaho (the Company is still holding for resale certain real estate valued
at $345,296 located in Waxahachie, Texas; and miscellaneous equipment located in
Denton, Texas with a carrying value of approximately $262,235.)
Discontinued Operations - In late 2000, the Company determined that it would be
required to pursue strategic alternatives to sell certain assets in order to
continue operations. It was determined that it would be necessary to dispose of:
the Woodrow Spencer office and warehouse located in Denton, Texas; the
Radiopharmaceutical Manufacturing Facility in Denton, Texas; the Brachytherapy
seed business in Denton, Texas; real estate located in Waxahachie, Texas; and
the Radioisotope Production Facility in Denton, Texas.
As discussed in Note 2, during January 2001 the sale of the Woodrow Spencer
facility was completed. In April 2001 the Company completed the sale of the
Radiopharmaceutical Manufacturing Facility and the Brachytherapy seed business.
The sale of the Radioisotope Production Facility closed in December 2001. At
December 31, 2001, the operations from these facilities and activities have been
classified as discontinued operations for all periods presented. Interest
expense associated directly with the discontinued operations has been classified
as discontinued operations.
Principles of Consolidation - 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.
Significant Accounting Policies
(a) Financial Instruments and Cash Equivalents
The Company's financial instruments consist of notes payable. The
carrying value of these financial instruments approximates fair value
because they bear interest at rates which approximate market rates.
F-7
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Cash and cash equivalents of $441,904 and $293,969 at December 31, 2002
and 2001, respectively, consist of operating accounts, money market
accounts and certificates of deposit. 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.
At December 31, 2002 the Company has pledged cash of $147,157. The
certificate of deposit is pledged as security on a letter of credit. The
letter of credit required as part of the licensing agreement with the
Nuclear Regulatory Commission ("NRC"). Among other things, the licensing
agreement calls for a letter of credit to provide a level of financial
assurance to maintain licensing with the NRC.
At December 31, 2002, the Company had $253,784 of cash deposits in
excess of federally insured limits.
(b) Property, Plant and Equipment
Depreciation on property, plant and equipment is computed using the
straight-line method over the estimated useful life of the asset. The
ranges of estimated useful lives are as follows:
Years
Furniture & fixtures 3 - 5
Plant and improvements 5
Production equipment 5
Depreciation expense was $80,166 and $72,306 for the years ended
December 31, 2002 and 2001, respectively.
(c) Inventories
Inventories are carried at the lower of cost or market. Cost is
determined using the first in, first out method.
(d) 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.
(e) 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 accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates.
F-8
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(f) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets 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 that 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.
(g) Revenue Recognition
Revenue is recognized when products are shipped. No warranty coverage or
right of return provisions are provided to customers.
The Company has three significant customers and relies heavily on a
limited number of suppliers. Although management believes other
suppliers and other marketing/customer opportunities could be pursued,
it believes a change in its limited vendor or customer base could
adversely affect operating results by causing a delay in production and
a possible loss of sales. One of the Company's board members is a
principal in one of the significant customers.
At December 31, 2002, sales to these three significant customers
accounted for $977,055, $659,866 and $491,587 of total sales. At
December 31, 2001, sales to these same three customers accounted for
$574,853, $428,563 and $118,273 of total sales.
(h) Shipping and Handling Costs
The Company expenses all shipping and handling costs incurred. For the
years ended December 31, 2002 and 2001, the Company expensed $139,616
and $126,888 as shipping and handling costs. These costs are reported as
general, administrative and consulting costs on the statement of
operations.
(i) Stock Option Plan
The Company accounts for stock options issued to directors, officers and
employees under Accounting Principles Board Opinion No. 25 and related
interpretations ("APB 25"). Under APB 25, compensation expense is
recognized if an option's exercise price on the measurement date is
below the fair value of the Company's common stock. For options that
provide for cashless exercise or that have been modified, the
measurement date is considered the date the options are exercised or
expire. Those options are accounted for as variable options with
compensation adjusted each period based on the difference between the
market value of the common stock and the exercise price of the options
at the end of the period. The Company accounts for options and warrants
issued to non-employees at their fair value in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123").
F-9
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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
applicable to common shareholders would have been increased to the pro
forma amounts indicated below for the years ended December 31, 2002 and
2001:
2002 2001
----------- -----------
Net loss applicable to common
shareholders, as reported $ (199,695) $(4,143,300)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (168,911) (23,184)
----------- -----------
Pro forma net loss per common share $ (368,606) $(4,166,484)
=========== ===========
Loss per share, basic and diluted:
As reported $ (0.00) $ (0.26)
=========== ===========
Pro forma $ (0.00) $ (0.26)
=========== ===========
(j) 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 issuable common shares outstanding
during the year. Net loss per common share is calculated for both
continuing and discontinued operations.
As of December 31, 2002 and 2001, there were 17,027,326 and 6,390,376
options and warrants and 850 and 17,467 shares of Series A and B
redeemable convertible preferred stock outstanding, respectively that
were not included in the computation of diluted net loss per common
share as their effect would have been anti-dilutive, thereby decreasing
the net loss per common share.
(k) Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a
single accounting model for long-lived assets to be disposed of by sale
and the recognition of impairment of long-lived assets to be held and
used. The Company implemented SFAS No. 144 effective January 1, 2002.
The adoption of this standard has had no material effect on the
Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other provisions, the statement modifies
the criteria classification of gains and losses on debt extinguishments
such that they are not required to be classified as extraordinary items
if they do not meet the criteria for classification as extraordinary
items in APB Opinion No. 30. The Company elected to adopt this standard
during the year ended December 31, 2002. . The adoption of this standard
has had no material effect on the Company's financial position or
results of operations.
F-10
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal activities." The statement requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include
lease termination costs and certain employee plan severance costs that
are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. The Company will be
required to apply this statement prospectively for any exit or disposal
activities initiated after December 31, 2002. The adoption of this
standard is not expected to have a material effect on the Company's
financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement
amends Statement No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for an entity that voluntarily
changes to the fair value method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of Statement No.
123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Statement No. 148 also requires
disclosure about those effects in interim financial information. The
Company adopted the disclosure requirements of Statement No. 148 in the
accompanying financial statements.
(l) Reclassifications
Certain 2001 amounts have been reclassified to conform with the 2002
presentation. These reclassifications had no effect on the previously
reported net loss.
NOTE 2 - SALE OF ASSETS AND LIQUIDITY
On January 16, 2001, the Company completed the sale of the Woodrow Spencer
office and warehouse facility located in Denton, Texas for proceeds of $950,000,
less closing costs of $63,811. Through an impairment charge of $209,773, the
facility had been written down to a net book value of $886,189 at December 31,
2000. The Company used the proceeds to reduce its revolving line of credit by
$863,890 (including interest of $23,400) and fund operating expenses with the
remaining amounts.
On April 20, 2001, the Company completed the sale of the Radiopharmaceutical
Manufacturing Facility to NeoRx Corporation ("NeoRx") for proceeds of $12.0
million, (before settlement costs of $225,000) and warrants to purchase 800,000
shares of NeoRx common stock. (The warrants were deemed to have no fair value
due to the exercise price of the warrants being greater than the market value on
the date the agreement was entered into.) This facility had a net book value of
$11,304,724 at December 31, 2000. The Company used the proceeds to repay
advances made by NeoRx in the amount of $861,060, reduce its note payable to a
commercial lender by $1,296,469 (including interest of $36,578), reduce its
revolving line of credit by $2,614,023 (including interest of $45,857), reduce
its capital lease obligations by $3,291,289, repay a portion of the note payable
to William Nicholson, the former Chairman of the Board, in the amount of
$348,000 and fund other operating expenses. The Company transferred the NeoRx
warrants to the Series A and B preferred shareholders in exchange for certain
concessions in their certificates of designation. See Note 7 for a discussion of
the concessions made by the Series A and B preferred shareholders.
F-11
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
On April 27, 2001, the Company completed the sale of its Brachytherapy seed
assets to Imagyn Medical Technologies, Inc. ("Imagyn") for net cash proceeds of
$5.0 million, less settlement costs of $100,000. The seed business through an
impairment charge of $416,294 had been written down to a net book value of
$5,000,000 at December 31, 2000. The Company used the proceeds to repay advances
and expenses incurred by Imagyn on behalf of the Company in the amount of
$108,786 and reduce its note payable to a commercial lender by $4,645,582
(including interest of $25,768), reduce its capital lease obligations by
$145,632 and fund other operating expenses.
On December 14, 2001, the Company completed the sale of the Radioisotope
Production Facility for $8,251,849. In this transaction, the buyers assumed
Company debt of $7,433,000 and paid interest of $318,848 on behalf of the
Company. The Company incurred additional closing costs of $272,025. The
Radioisotope Production Facility had been written down to a net book value of
$7,164,160 at December 31, 2000. Associated with the sale and the assumption of
debt by the purchaser, the Company retained an obligation of $500,000 on the
loan assumed by the buyers for six months or until the purchaser renewed their
note with Texas State Bank. Offsetting this obligation was a receivable from the
buyer which was fully allowed against. The Company also retained an obligation
(also for six months or until purchaser renewed the note) for decommissioning
the Radioisotope Production Facility should the buyer default on payment or not
meet Texas State Bank requirements for note renewal. During 2002, these
contingent liabilities were terminated with the renewal of the note by the
purchaser; the Company recognized the $500,000 relief of this commitment during
the year ended December 31, 2002.
In addition to the disposal of the above mentioned facilities, the Company wrote
off $134,776 in certain intangible assets that no longer existed after these
disposals.
At December 31, 2001, excess components and equipment had been written down
through an impairment charge to a net realizable value of $384,235. During 2002,
excess components carried at $122,000 were sold. The balance of excess
components and equipment held for sale at December 31, 2002 is $262,235.
At December 31, 2002, the Company continues to carry its Waxahachie real estate
at $345,296. The Company has an offer to sell this property for an assumption of
the related debt which is also $345,296.
Business Condition -The Company has a history of recurring losses to common
shareholders with an accumulated deficit of $87,390,165 at December 31, 2002 and
a net loss applicable to common shareholders of $199,265 for the year then
ended. The Company also has a stockholders' deficit of $18,351. However, the
Company had increased it working capital by $1,578,788 over the prior year and
generated positive cash flows from operations of $167,636.
During the year ended December 31, 2002, the Company completed its efforts to
wind down the discontinued Texas operations. In connection with these efforts,
the Company incurred certain non recurring charges relating to professional and
other services in the amount of $338,555 and non recurring charges to cost of
revenues in the amount of $41,442 relating to obsolete inventory items. Had the
Company not experienced these charges it would have shown income from operations
of $29,544.
F-12
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Company has secured a contract for the sale of HSA cobalt-60 to be delivered
during 2003. The Company has received notice from RadQual that it has secured
new distributors for its nuclear medicine calibration and reference standards
("flood source") and anticipates a 33% increase in sales during 2003. The
Company has received notice from Quali Tech, Inc that they anticipate an
approximate 34% increase in the processing of topaz gem stones during 2003.
With these new contracts and the Company's ability to focus on its core
continuing operations, management anticipates the Company being able to generate
net income to common shareholders and positive cash flows sufficient to meet its
operational needs during 2003. However, there is no assurance that this net
income or cash flows will occur.
NOTE 3 - INVENTORIES
Inventories consist of the following at December 31, 2002 and 2001:
2002 2001
---------- ----------
Raw materials $ 294,662 $ 290,019
Finished goods 13,615 20,571
Work in progress 1,971,551 2,226,929
---------- ----------
$2,279,828 $2,537,519
========== ==========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December 31, 2002 and
2001:
2002 2001
--------- ---------
Furniture and fixtures $ 39,641 $ 33,240
Plant and improvements 21,270 10,574
Production equipment 349,240 331,498
--------- ---------
410,151 375,312
Less accumulated depreciation (174,098) (95,276)
--------- ---------
Property, plant & equipment, net $ 236,053 $ 280,036
========= =========
F-13
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 5 - MORTGAGE AND NOTES PAYABLE
Mortgage and notes payable as of December 31, 2002 and 2001, consist of the
following:
2002 2001
---------- ----------
Revolving line of credit with a bank, bearing
interest at 7%, interest payments due monthly,
secured by equipment, accounts receivable and
inventory, due April 2003. $ 100,000 $ --
Short-term note payable to certain investors,
bearing interest at 5%, principal and interest
due April 15, 2003. 80,000 --
Variable rate note payable to a bank, as discussed in
Note 2, this note was settled with the asset sales
and the Company remained contingently liable on
$500,000. During 2002, the Company was released from
all liability on this note with Texas State Bank. -- 500,000
Fixed rate note payable to Eastern Idaho Economic
Development Council bearing interest at 3% per annum.
The note was paid in full in November 2002. -- 70,477
Variable rate (7% at December 31, 2002) promissory note
with revolving line to a bank, secured by equipment,
accounts receivable and inventory. Maximum amount
available on the line is $1,100,000, interest is due
monthly, note is due December 31, 2003. 1,046,520 1,053,020
Note payable to a bank, secured by Waxahachie real
estate, interest at 9.5%, principal and interest due
January 25, 2003. 345,295 345,295
Note payable to the former chairman of the board,
interest accrues at 7% and is payable annually on
April 1, principal payments are due annually on
April 1 consisting of 30% of prior year net income,
no principal payments are due until April 2004. 909,738 797,000
---------- ----------
Total mortage and notes payable to banks 2,481,553 2,765,792
Less; current maturities (1,571,815) (2,720,610)
---------- ----------
Mortgage and notes payable to banks, excluding current
installments $ 909,738 $ 45,182
========== ==========
The aggregate annual maturities of mortgage and notes payable as of December 31,
2002 are as follows:
Years Ending December 31:
------------------------
2003 $ 1,571,815
2004 909,738
-----------
Total $ 2,481,553
===========
F-14
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
NOTE 6 - STOCKHOLDERS' EQUITY, REDEEMABLE CONVERTIBLE PREFERRED STOCK, OPTIONS
AND WARRANTS
Redeemable Convertible 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
$0.01 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.
In May 1999 and October 1999, the Company issued a total of 10,000 shares (5,000
in May 1999 and 5,000 in October 1999) of 5% cumulative redeemable convertible
$0.01 par value $1,000 face value preferred stock ("Series A Preferred Stock")
together with 410,000 warrants to purchase common stock at $11.86 per share, for
aggregate proceeds of $10,000,000, before issuance costs of $600,000. The
warrants are exercisable at any time for a three-year period from the date of
grant.
The Series A Preferred Stock was mandatorily redeemable on May 20, 2002 in cash
or common stock at the then Average Price, at the Company's option. In March,
2001, the holders of Series A Preferred Stock agreed to a modification in terms,
which removed their early redemption rights and certain adjustments to their
conversion price. The Series A Preferred Stock was then convertible to common
stock at a fixed price of $2.00 per share, subject to adjustment in the case of
stock splits or stock dividends. As consideration for those concessions, the
Company distributed to the holders of Series A Preferred Stock an aggregate of
439,150 warrants to purchase NeoRx common stock that the Company had received in
connection with the sale of the Radiopharmaceutical Manufacturing Facility to
NeoRx.
In March 2001, the holders of the Series A Preferred Stock agreed to a
modification in terms, which removed their early redemption rights and certain
adjustments to their conversion price. The Series A Preferred Stock was then
convertible to common stock at a fixed price of $2.00 per share, subject to
adjustment in the case of stock splits or stock dividends. In connection with
this modification, the exercise price of the Series A Preferred Stock warrants
were also reduced to $2.00 per warrant. Because the underlying stock value of
the common stock at the date of adjustment was less than the new exercise price,
the repricing of the warrants resulted in no additional value to the Series A
Preferred Stockholders. As consideration for those concessions, the Company
distributed to the holders of the Series A Preferred Stock an aggregate of
439,150 warrants to purchase NeoRx common stock that the Company had received in
connection with the sale of the Radiopharmaceutical Manufacturing Facility to
NeoRx. Although the Series A preferred stockholders accepted these warrants for
their concessions, the warrants were determined to have no fair value.
On June 15, 2000, the Company completed a private placement of 10,000 shares of
7% cumulative redeemable convertible $0.01 par value $1,000 face value preferred
stock ("Series B Preferred Stock") together with 2,500,000 warrants to purchase
common stock at $4.00 per share, for aggregate proceeds of $10 million, before
issuance costs of $595,000. Dividends are 7% per annum payable in cash or common
stock (at the Company's option) beginning September 1, 2000 and continuing
quarterly thereafter through June 1, 2003.
F-15
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Series B Preferred Stock was mandatorily redeemable on May 31, 2003 in cash
or common stock at the then Average Price, at the Company's option. When
originally issued, holders of Series B Preferred Stock could require early
redemption on December 1, 2000 and June 1, 2001. Other mandatory redemption
events included change in control, suspension or delisting from NASDAQ, the BSE
or any subsequent market on which the common stock is listed for five
consecutive days, breach by the Company of any representations, warranties or
other conditions in the preferred stock purchase agreement, and other events. In
March, 2001, the holders of Series B Preferred Stock agreed to a modification in
terms, which removed their early redemption rights and certain adjustments to
their conversion price. The Series B Preferred Stock was then convertible to
common stock at a fixed price of $2.00 per share subject to adjustment in the
case of stock splits or stock dividends. As consideration for those concessions,
the Company distributed to the holders of Series B Preferred Stock an aggregate
of 360,850 warrants to purchase NeoRx common stock that the Company had received
in connection with the sale of the Radiopharmaceutical Manufacturing Facility to
NeoRx. Although the Series B preferred stockholders accepted these warrants for
their concessions, the warrants were determined to have no fair value.
During 2001, with the exception of the July 15 and the October 15 Series A
Preferred dividends which were waived by the preferred shareholders, the Company
for all other Series A and Series B redeemable convertible preferred stock
dividends in 2001, elected to issue common stock as payment for the quarterly
dividends. The Company satisfied these dividend payments by issuing a total of
15,594,724 shares of common stock.
During April and June of 2001, certain holders of Series B redeemable preferred
stock converted 750 shares of preferred stock into 375,000 shares of common
stock valued at $750,000 or $2.00 per common share.
In January 2002 certain persons acting together as a group acquired all of the
Company's outstanding shares of Series A 5% Convertible Redeemable Preferred
Stock and certain common stock from its then current owners. The securities
acquired consisted of all 10,000 shares of Series A Preferred Stock and
2,087,837 shares of common stock. Also in January 2002, the Company reacquired
2,817 shares (or 37.7%) of the Company's Series B 7% Convertible Redeemable
Preferred Stock for $86,832.
In February and March 2002 the Company gained approval from 100% of the holders
of Series A and 80% of the holders of Series B Preferred Stock to amend their
respective Certificates of Designation to eliminate the Series A 5% dividend and
the Series B 7% dividend, change the mandatory redemption date for all the
Preferred Stock to May 2022, and remove certain default and penalty provisions.
In addition, the Company's Board of Directors approved a purchase offer of the
Series A and B Preferred Stock (5,000 common shares for each one share of Series
A or B Preferred Stock). The same percentages of Series A and B holders who
agreed to amend their respective certificates of designation have agreed to
convert their preferred shares for common stock. During 2002, all of the holders
of the Series A Preferred Stock and certain holders of the Series B Preferred
Stock agreed to exchange their 13,800 preferred shares for 69,000,000 new shares
of common stock of the Company at $0.20 per share, which was above market value.
F-16
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Common stock
On November 2, 2001, at the annual meeting of stockholders, the stockholders
ratified an amendment to increase the number of authorized common stock to
250,000,000 shares.
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 was amended in 2000 to authorize grants
of options to purchase up to 1,000,000 shares of authorized but unissued common
stock. Stock options are granted with an exercise price of not less than 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. Effective March 2002, the Company amended and restated the 2000 Stock
Incentive Plan. The 2002 Long-Term Incentive Plan (the Plan) authorizes grants
of options to purchase up to 20,000,000 shares of authorized and unissued shares
or issued and outstanding shares of common stock. The maximum number of options
that can be granted to each employee in one year is 10,000,000.
In February 2002, the Company granted an additional 13,000,000 options to key
employees to purchase shares of common stock with an exercise price of $0.02 per
share, which was equal to the closing market price of the common stock on the
date of grant. These options vest through February 2005.
A summary of the stock options issued under the Company's Plan is as follows:
Weighted-Average
Fixed Options Shares Exercise Price
-------------------------------- ---------- --------------
Outstanding at December 31, 2000 869,500 $ 5.57
Granted 1,000,000 0.08
Forfeited (869,500) 5.57
---------- ----------
Outstanding at December 31, 2001 1,000,000 0.08
Granted 13,000,000 0.02
---------- ----------
Outstanding at December 31, 2002 14,000,000 $ 0.02
========== ==========
F-17
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The following table summarizes information about fixed stock options under the
Plan outstanding at December 31, 2002:
Options Outstanding Options Exerciseable
----------------------------- -----------------------------
Options Weighted- Weighted Number Weighted-
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 2002 Contractual Life Price 2002 Price
--------- -------------- ---------------- -------- -------------- ---------
$.02 -.08 14,000,000 9.1 years $ 0.02 4,000,000 $ 0.03
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:
2002 2001
-------- --------
Expected dividend yield - -
Risk-free interest rate 4.8% 4.4%
Expected volatility 148% 153%
Expected life 10 years 3 years
Weighted average fair value
per share $0.02 $0.03
Warrants
The following summarizes outstanding warrants at December 31, 2002:
Weighted-Average
Exercise
Fixed Warrants Shares Price
-------------------------------- ----------- -----------
Outstanding at December 31, 2000 7,312,37 $ 6.32
Expired (1,922,000) 10.00
----------- -----------
Outstanding at December 31, 2001 5,390,376 5.01
Expired (2,363,050) 5.97
----------- -----------
Outstanding at December 31, 2002 3,027,326 $ 4.26
=========== ===========
F-18
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Outstanding at December 31, 2002 Exercisable at December 31, 2002
-------------------------------- --------------------------------
Weighted Average Weighted Average
Remaining Remaining
Exercise Prices Warrants Contractual Life Warrants Contractual Life
--------------- --------- ---------------- --------- ----------------
$4.00 2,500,000 0.34 years 2,500,000 0.34 years
$5.50 527,326 0.02 years 527,326 0.02 years
--------- ---------
3,027,326 3,027,326
========= =========
The following summarizes outstanding warrants at December 31, 2001:
Outstanding at December 31, 2001 Exercisable at December 31, 2001
-------------------------------- --------------------------------
Weighted Average Weighted Average
Remaining Remaining
Exercise Prices Warrants Contractual Life Warrants Contractual Life
--------------- --------- ---------------- --------- ----------------
$3.38-5.50 4,465,966 0.90 years 4,465,966 0.90 years
$10.00 924,410 0.05 years 924,410 0.05 years
--------- ---------
5,390,376 5,390,376
========= =========
NOTE 7 - INCOME TAXES
The Company paid no federal or state income taxes during 2002 or 2001. 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:
2002 2001
------------ ------------
Income tax expense/(benefit) $ 50,846 $ (958,194)
Nondecuctible expenses 587 2,000
Loss of NOL due to change in ownership 22,683,486 -
Change in valuation allowance (22,734,919) 956,194
------------ ------------
Total income tax expense $ - $ -
============ ============
F-19
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax assets (liabilities) as of December 31, 2002 and
2001 are presented below:
2002 2001
--------- ------------
Deferred income tax asset
Net operating loss carry forward $ 450,585 $ 23,065,504
Impairment charge 121,874 291,874
--------- ------------
Total deferred income tax asset 572,459 23,357,378
Valuation allowance (572,459) (23,307,378)
--------- ------------
-- 50,000
Deferred income tax liability - depreciation -- (50,000)
--------- ------------
$ -- $ --
The conversion of the redeemable convertible preferred stock to common stock as
discussed in Note 6 was considered a change in ownership per Internal Revenue
Code Section 382. This change in ownership has resulted in the limitation of the
net operating loss carryforward available for use by the Company. At December
31, 2001, the Company had a net operating loss carryforward of $67,839,717. At
December 31, 2002, the Company's net operating loss carryforward had been
limited to $1,389,251. Unused NOL will begin expiring in 2023. The valuation
allowances for 2002 and 2001 have been applied to offset the deferred tax assets
in recognition of the uncertainty that such benefits will be realized.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space, certain office equipment and production
equipment under operating leases expiring at various dates through 2005. Rental
expense under such leases for the years ended December 31, 2002 and 2001 was
$69,180 and $70,383, respectively, excluding discontinued operations.
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) as of December 31, 2002 are:
Operating
Years ending December 31 Leases
---------
2003 65,941
2004 64,972
2005 16,215
---------
Total minimum lease payments $ 147,128
=========
F-20
INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Employment Contract
The Company has a five-year employment contract with the Company's president.
The employment agreement extends through February 2007.
Dependence on Third Parties
The production of HSA Cobalt is dependent upon the Department of Energy, and its
prime operating contractor, who controls the reactor and laboratory operations.
The revenue associated with the sale of HSA Cobalt is largely dependent on
General Electric, the Company's sole customer of this product. The gemstone
production is tied to an exclusive agreement with Quali Tech Inc. who in turn
has a contract with The Topaz Group, Inc. Medical flood source manufacturing is
conducted under an exclusive contract with RadQual, LLC. who in turn has
agreement in place with several companies for marketing and sales. A loss of any
of these customers or vendors could adversely affect operating results by
causing a delay in production or a possible loss of sales.
Contingencies
The Company conducts its operations in Idaho Falls, Idaho. Although the medical
flood source and gemstone products appear diverse they share the common link as
being radioactive materials. Therefore, the Company is required to have an
operating license from the Nuclear Regulatory Commission ("NRC") and specially
trained staff to handle these materials. The Company has an NRC operating
license and has, in fact, continued to amend this license several times during
2002 and 2001 to increase the amount of material permitted within the facility.
Additional processing capabilities and license amendments could be implemented
that would permit processing of other reactor produced radioisotopes by the
Company but at the present time this license does not restrict the volume of
business operation performed or projected to be performed in the coming year. An
irrevocable, automatic renewable letter of credit against a $147,157 Certificate
of Deposit at Texas State Bank has been used to provide the financial assurance
required by the Nuclear Regulatory Commission for the Idaho facility license.
NOTE 9 - SUBSEQUENT EVENTS (Unaudited)
In January 2003, the Company entered into an agreement to sell the Waxahachie
real estate. The sales price is $345,295. The purchaser is assuming the debt
associated with this real estate, however, the Company remains liable on the
note with Texas State Bank for the remainder of the term should the purchaser
default on this note, but would regain the real estate if this event should
occur.
F-21
TABLE OF EXHIBITS
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)).
10.1 Copy of the Company's 2002 Long Term Incentive Plan. (1)
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.)
99.1 Certification under section 906 of the Sarbanes-Oxley Act (18 u.s.c.
section 1350) (1)
----------------------
(1) Filed herewith
40