-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EPA8RrWmlJJYANWuSPC40BCbnCpsO3gn62tw4S0Y2Zdsw8YawKQ9zwVw12kPOIiD gUcBU9DWUKOAcLLv3iQ3Sw== 0001005477-97-001198.txt : 19970502 0001005477-97-001198.hdr.sgml : 19970502 ACCESSION NUMBER: 0001005477-97-001198 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL ISOTOPES INC CENTRAL INDEX KEY: 0001038277 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-26269 FILM NUMBER: 97592786 BUSINESS ADDRESS: STREET 1: 2600 LONGHORN BLVD STREET 2: STE 105 CITY: AUSTIN STATE: TX ZIP: 78758 BUSINESS PHONE: 5128341822 MAIL ADDRESS: STREET 1: 2600 LONGHORN BLVD STREET 2: STE 105 CITY: AUSTIN STATE: TX ZIP: 78758 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on May 1, 1997 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- FORM SB-2 Registration Statement Under The Securities Act of 1933 --------------------------------- INTERNATIONAL ISOTOPES INC. (Name of Small Business Issuer in its Charter) Texas (State or Other Jurisdiction of Incorporation or Organization) 2835 (Primary Standard Industrial Classification Code Number) 74-2763837 (I.R.S. Employer Identification No.) 2600 Longhorn Boulevard, Suite 105 Austin, Texas 78758 (512) 834-1822 (Address and Telephone Number of Principal Executive Offices) 2600 Longhorn Boulevard, Suite 105 Austin, Texas 78758 (Address and Principal Place of Business or Intended Principal Place of Business) SIDNEY TODRES, ESQ. Epstein Becker & Green, P.C. 250 Park Avenue New York, New York 10177 (212) 351-4500 (Name, Address and Telephone Number of Agent for Service) Copy to: LAWRENCE B. FISHER, ESQ. Orrick, Herrington & Sutcliffe LLP 666 Fifth Avenue New York, New York 10103 (212) 506-5000 Approximate Date of Proposed Sale to the Public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X| If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| --------------------------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================================== Proposed Proposed Maximum Maximum Amount of Amount To Be Offering Price Aggregate Registration Title of Each Class of Securities To Be Registered Registered Per Share(1) Offering Price(1) Fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value ............................ 2,530,000(2) $ 10 $25,300,000 $ 7,667 - ------------------------------------------------------------------------------------------------------------------------------------ Representative's Warrants to purchase Common Stock ...... 220,000 $ .0001 $ 22 -- - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value, issuable upon exercise of Representative's Warrants ................. 220,000 $ 12 $ 2,640,000 $ 800 - ------------------------------------------------------------------------------------------------------------------------------------ Total....................................................... $ 8,467 ====================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee. (2) Includes 330,000 shares issuable upon exercise of the Underwriters' over-allotment option. --------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ INTERNATIONAL ISOTOPES INC. --------------------------------- CROSS-REFERENCE SHEET (Between Items of Form SB-2 and Prospectus) Form SB-2 Item No. and Caption Prospectus Captions 1. Front of Registration Statement and Outside Front Cover of Prospectus................. Front Cover Page; Underwriting 2. Inside Front and Outside Back Cover Pages of Prospectus............. Inside Front Cover Page; Available Information; Back Cover Page 3. Summary Information and Risk Factors............................. Prospectus Summary; The Company; Risk Factors 4. Use of Proceeds........................ Use of Proceeds 5. Determination of Offering Price............................... Underwriting 6. Dilution............................... Dilution 7. Selling Security Holders............... Principal and Selling Stockholders 8. Plan of Distribution................... Front Cover Page; Underwriting 9. Legal Proceedings...................... Business 10. Directors, Executive Officers, Promoters and Control Persons..................... Management; Principal and Selling Stockholders 11. Security Ownership of Certain Beneficial Owners and Management.......................... Principal and Selling Stockholders 12. Description of Securities.............. Description of Capital Stock 13. Interest of Named Experts and Counsel............................. Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities......................... Not Applicable 15. Organization Within Last Five Years............................... Prospectus Summary; The Company; Business 16. Description of Business................ Business 17. Management's Discussion and Analysis or Plan of Operation........................... Plan of Operation 18. Description of Property................ Business 19. Certain Relationships and Related Transactions........................ Certain Transactions 20. Market for Common Equity and Related Stockholder Matters............................. Front Cover Page; Capitalization; Dividends; Description of Securities; Principal and Selling Stockholders 21. Executive Compensation................. Management 22. Financial Statements................... Selected Financial Data; Financial Statements 23. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......................... Not Applicable Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not consitute an offer to sell or the solitication of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion, Dated May 1, 1997 PROSPECTUS 2,200,000 Shares INTERNATIONAL ISOTOPES INC. Common Stock --------------------------------- International Isotopes Inc. (the "Company") hereby offers (the "Offering") 2,200,000 shares of its common stock, $.01 par value (the "Common Stock"). Prior to this Offering, there has been no public market for the Common Stock and there can be no assurance that such a market will develop following completion of this Offering or, if developed, that it will be sustained. It is currently anticipated that the initial offering price will be between $8.00 and $10.00 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on The Nasdaq SmallCap Market ("Nasdaq") under the symbol "INIS" and listing of the Common Stock on the Boston Stock Exchange ("BSE") under the symbol "_______." Certain existing stockholders, directors and officers of the Company and their affiliates intend to purchase approximately 10% of the shares of Common Stock being offered hereby. See "Underwriting." --------------------------------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 10 AND "DILUTION." --------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================ Price to Underwriting Proceeds to Public Discount (1) Company (2) - -------------------------------------------------------------------------------- Per Share................... $ $ $ - -------------------------------------------------------------------------------- Total (3)................... $ $ $ ================================================================================ (1) Does not include additional compensation payable to Keane Securities Co., Inc., the representative of the several Underwriters (the "Representative"), in the form of a non-accountable expense allowance. In addition, see "Underwriting" for information concerning indemnification and contribution arrangements with the Underwriters and other compensation payable to the Representative. (2) Before deducting estimated expenses of $_________ payable by the Company, including the non-accountable expense allowance payable to the Representative. (3) The Company and certain stockholders of the Company (the "Selling Stockholders") have granted the Underwriters an option, exercisable within 45 days after the date of this Prospectus, to purchase from them up to an additional 230,000 and 100,000 shares of Common Stock, respectively, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to the Company will be $______, $ and $______, respectively, and the proceeds to the Selling Stockholders will be $______. See "Underwriting." --------------------------------- The shares of Common Stock are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval of certain legal matters by their counsel and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify this Offering and to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock offered hereby will be made against payment therefor at the offices of Keane Securities Co., Inc. in New York, New York on or about ____________, 1997. --------------------------------- Keane Securities Co., Inc. --------------------------------- The date of this Prospectus is ____________, 1997. [Inside front cover page of Prospectus] [Insert: Layout of diagnostic and therapeutic procedures for radioisotopes: LINAC, targets, radiochemical separation, assay, air shipment, hospital, scanning and therapy.] The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent certified public accountants and such other reports as the Company may determine to be appropriate or as may be required by law. -------------------- CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 [Front of first page of prospectus (or fold-out)] [Insert: Photographs of radioisotope diagnostic scans of brain, heart, lung and bones. Also, photographs of pre-and post-cancer therapy using radioisotopes.] 3 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements. Such forward-looking statements 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, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus (i) gives effect to a 2.5-for-1 stock split effected March 15, 1997 and the adoption of Restated Articles of Incorporation on March 20, 1997, (ii) assumes no exercise of the Underwriters' over-allotment option to purchase up to an additional 330,000 shares of Common Stock (230,000 shares from the Company and 100,000 shares from the Selling Stockholders) and (iii) assumes no exercise of the warrants to purchase 220,000 shares of Common Stock issued to the Representative in connection with this offering (the "Representative's Warrants"). A glossary of terms has been included on page 52 of this Prospectus. The Company International Isotopes Inc. (the "Company") is a development stage company which intends to be the first independent domestic producer of pharmaceutical grade radioactive isotopes ("radioisotopes") and radiopharmaceuticals (on a contract or joint venture basis) for commercial sale to the nuclear medicine industry. Radioisotopes, which are indispensable components of nuclear medicine, are radiation emitting atoms that are used for both medical diagnostics and in-the-body ("in vivo") therapeutics. The Company also intends, under an exclusive worldwide license, to complete development of and to manufacture and market a high resolution medical imaging camera, key components of which are patented, for use in nuclear diagnostic medicine, which the Company believes will have resolution at least four times greater than any imaging camera currently on the market. When a specifically selected radioisotope is attached or "tagged" to one of a variety of pharmaceuticals, the resulting product is known as a radiopharmaceutical. The pharmaceutical component acts as a carrier to seek out targeted internal organs, tumor sites and/or cells for which it has a predetermined natural affinity. In diagnostics, the radioisotope component provides a signal as to the location of the attached pharmaceutical as it targets the specific organ or site. This process, in turn, is captured by external imaging equipment, such as positron emission tomography ("PET") and single photon emission computed tomography ("SPECT") cameras. In therapeutics, the radioisotope component provides in vivo treatment of the targeted organ, cancerous tumor and/or cancerous cell site through the emission of either photons or beta radiation. Nuclear medicine is estimated to be a $7 to $10 billion industry in the United States which, according to industry studies, is projected to grow at a 10.8% compound annual rate over the next eight years with radiopharmaceuticals representing an estimated 13% of this market. The Company believes that the in vivo therapeutics segment of nuclear medicine will grow at a substantially higher rate based on anticipated United States Food and Drug Administration ("FDA") approvals of a number of monoclonal antibodies, peptides and other pharmaceutical carriers, currently in clinical trials, for in vivo therapeutic treatment of various forms of cancer, including primary tumors, metastasized sites, other tumors and organ disorders, including cardiovascular disease. In vivo therapeutic doses of radioisotopes (measured in millicuries) administered to a patient are generally ten to 100 times greater than diagnostic doses and generate proportionally greater revenues. In May 1996, the Company acquired for approximately $2.9 million the equipment, proprietary designs and intellectual property comprising the proton linear accelerator injector (the "LINAC") which was part of the U.S. government's 53-mile Superconducting Super Collider ("SSC") project which was terminated in 1994. The LINAC has been redesigned and is being reconfigured by the Company to produce an energy level of up to 70 million electron volts ("70 MeV"), which is more than twice that of all but one of the 17 largest proton cyclotron accelerators currently in use in the United States. In addition, the LINAC will have a beam intensity of 1,000 microamperes ("1.0mA"), which is five times the beam intensity of any of the 17 largest cyclotron accelerators. When fully operational in the second quarter of 1998, as to which there can be no assurance, the Company believes that the LINAC will be able to produce radioisotopes at approximately one-fifth the unit cost and five times the volume (measured in millicuries) of any of the 17 cyclotron accelerators. A new 30 MeV cyclotron radioisotope production facility costs approximately $10 to $12 million and 4 becomes operational two to three years from the date ordered. To the Company's knowledge, there are no new cyclotrons or linear accelerators with energy capacities of 30 MeV or more currently on order in the United States. Furthermore, of the 17 largest cyclotron accelerators currently in use in the United States, only one has an energy level significantly above 30 MeV (i.e. approximately 80 MeV) but is limited in its production capacity due to its maximum 0.25mA beam intensity. According to the Committee on Biomedical Isotopes of the Institute of Medicine-National Academy of Sciences, the production of promising radioisotopes for medical diagnostic and therapeutic use will require proton accelerators with energy levels higher than 30 MeV. Heretofore, two U.S. government national laboratories, Brookhaven National Laboratory and Los Alamos National Laboratory, have been the primary domestic suppliers of research radioisotopes which require such higher energy levels to produce. However, a combination of scheduling problems, costs and, more recently, anticipated long-term or permanent shutdowns have made these two sources unreliable and/or unavailable. It is the Company's strategy to supply currently used radioisotopes and to use its high energy 70 MeV LINAC to manufacture many of the upcoming and potentially superior diagnostic and therapeutic pharmaceutical grade radioisotopes. In addition, when the LINAC is fully operational, the Company intends to manufacture and distribute finished radiopharmaceutical kits (finished, packaged dosage-form radiopharmaceutical drug products) for the major and specialized radiopharmaceutical companies on a contract or joint venture basis. One out of every three hospital patients in the United States undergoes a procedure involving the use of radioisotopes for diagnosis or therapy. More than 13 million diagnostic medical procedures employing radioisotopes are performed annually and, in addition, approximately 325,000 therapeutic medical procedures employing radioisotopes were performed in the United States in 1995 resulting in more than one millon treatments employing radioisotopes. According to industry sources, there will be approximately 21 million diagnostic medical procedures and more than one million therapeutic medical procedures employing radioisotopes performed in the United States in the year 2000. Cancer is the leading cause of death in the United States after heart disease. In the United States, five million persons have been diagnosed as having cancer within the past five years and an estimated one million persons are expected to be diagnosed with the disease in 1997. Worldwide, there are more than 200 drug products currently under development for both cancer diagnostics and treatment. Many of these are radiopharmaceuticals which require specific radioisotopes which cyclotron accelerators currently in use in the United States cannot produce either in volume or at all because of their limited energy and/or beam intensity. Presently, the most commonly used radioisotopes in the United States are produced by four domestic radiopharmaceutical companies, primarily for their own use, and by foreign manufacturers. These radioisotopes include: Radioisotope Symbol Half-life Primary Source - ------------ ------ --------- -------------- Thallium - 201 Tl-201 3 days Domestic Gallium - 67 Ga - 67 3.1 days Domestic Indium - 111 In - 111 2.8 days Domestic Iodine - 123 I - 123 13 hours Domestic Molybdenum - 99 Mo - 99 2.7 days Foreign Technetium - 99m* Tc - 99m 6 hours Foreign Xenon - 133 Xe - 133 5.3 days Foreign Iodine - 131 I - 131 8 days Foreign Palladium - 103 Pd - 103 17 days Domestic *Note: Technetium-99m is the "daughter" of Molybdenum-99. These radioisotopes are used either independently or in various combinations or "cocktails" and assist in the diagnosis of a myriad of medical conditions including coronary heart disease, pulmonary embolism, thyroid carcinoma, 5 brain disorders, acute cholecystitis (inflammation of the gall bladder), gastrointestinal bleeding, renal artery stenosis, bone cancer and other diseases. Based on volume, 70% of all radioisotopes currently used for medical diagnostics in the United States are from foreign sources with substantially all commercially available nuclear reactor-produced radioisotopes being manufactured in Canada. This is of continuing concern to the medical community, researchers and the U.S. Department of Energy ("DOE"). Accelerators have a significant environmental advantage over nuclear reactors in that they produce radioisotopes with relatively little attendant radioactive waste. Molybdenum-99 ("Mo-99"), which at present accounts for 36% of the revenues and 70% of the unit volume of sales of radioisotopes for medical diagnostics, currently is reactor-produced through neutron fission of uranium-235, which results in 90% radioactive waste with long-term hazardous levels of radiation. The Company believes the LINAC will be able to produce Mo-99 with limited attendant radioactive waste at a cost projected to be substantially equivalent to the cost of reactor-produced Mo-99. The Company is constructing two facilities, a 27,000 square foot facility for administration, manufacturing, research and development and a 40,000 square foot facility for radioisotope production (the "Radioisotope Production Facility") on 21.6 acres of land the Company has acquired in a 500 acre high technology industrial park located in Denton, Texas, known as the "North Texas Research Center" (the "Research Center"). The Company expects the administration, manufacturing, research and development facility to be completed by August 1997 and the Radioisotope Production Facility to be completed by March 1998. The Research Center is strategically located adjacent to a principal highway and is 24 miles from the Dallas/Fort Worth International Airport and 14 miles from Alliance Industrial Airport. Radioisotopes manufactured by the Company will be packaged for immediate transport by overnight carriers which have distribution hubs at these airports. Most radioisotopes used in nuclear medicine have limited half-lives and the proximity of the Company's facilities to these airports will enable the Company to deliver its radioisotopes and radiopharmaceuticals to most locations in the United States within 12 to 24 hours of production. The Company has an option to acquire an additional 60 acres of land in the Research Center adjacent to the site of the Radioisotope Production Facility to enable major and specialized pharmaceutical companies, radiopharmacies and related service companies to establish facilities in close proximity to the Company to facilitate coordination and joint venture projects with the Company for the manufacture and delivery of radiopharmaceuticals to hospitals, clinics, radiopharmacies and research institutions. As part of its long-term strategy, upon completion of its facilities, the Company intends to complete development of and commence to manufacture and market a high resolution medical imaging camera, key components of which are patented, for use in diagnostic nuclear medicine. The Company has obtained the exclusive worldwide rights in the medical field to the relevant patents from Hospital Financial Corporation which cover certain inventions by Ira Lon Morgan, Ph.D., a founder and the Chairman of the Board of the Company, and relate to single photon counting of penetrating radiation. Current medical imaging cameras are limited in their spatial resolution and sensitivity due to the use of electric current integration detection of photons and the scatter of low energy photons. Presently, the resolution of SPECT cameras is approximately four millimeters and is approximately ten millimeters for PET cameras. Certain aspects of the patented technology to be used in the Company's medical imaging camera have been used in a camera for industrial applications which has demonstrated spatial resolution of less than 0.5 millimeters, reflecting a material enhancement compared to existing medical imaging technology. There is a direct correlation between the early detection of a cancerous tumor that is 2.0 millimeters or less in size and the likelihood of a successful outcome following treatment. In 1995, according to industry sources, the number of installed medical imaging cameras worldwide was 10,110 located at 4,780 sites representing an investment in excess of $7.5 billion. The predominant imaging cameras were SPECT, which numbered 6,890 units up from 5,940 units in 1993. It is estimated that more than 1,000 medical imaging cameras for diagnostic nuclear medicine will be purchased during 1997 representing an annual world market of approximately $380 million. The Company's management team has been assembled by Dr. Morgan. The Company believes that its senior management, collectively, has had more experience in designing, constructing and operating linear accelerators than the management group of any other commercial company in the country. The team includes senior management personnel who are known internationally for their expertise in radioisotope production, radiochemical processing and radiopharmaceutical production. In addition, Mr. Carl W. Seidel, Associate Director, Technical Affairs of DuPont Merck Pharmaceutical Co., the largest radiopharmaceutical manufacturer in the world, has taken early retirement and will soon join the Company as President and Chief Executive Officer. 6 The Company's business strategy is to become the leading domestic commercial producer of a full range of radioisotopes, radiopharmaceuticals (on a contract or joint venture basis) and medical instrumentation for use in nuclear medicine, radiation oncology, diagnostic imaging and research by: o Completing construction of the Radioisotope Production Facility in March 1998; o Commencing full operation of the LINAC in June 1998 and commencing to produce all radioisotopes required for diagnostic medical imaging and most radioisotopes required for radiation therapy, including radioisotopes which can only be produced in volume with the higher energy and beam intensity of the LINAC; o Developing relationships with major and specialized radiopharmaceutical companies to produce, package and distribute radiopharmaceuticals, on a contract or joint venture basis, to end-users throughout the country; o Forming joint ventures in foreign countries to construct and operate linear accelerator facilities to produce radioisotopes and radiopharmaceuticals; o Building upon its current relationships with medical institutions and universities in the southwestern United States, including the University of North Texas in Denton, Texas; the University of Texas Southwest Medical Center in Dallas, Texas; M.D. Anderson Cancer Institute in Houston, Texas; the School of Pharmacy and Radiopharmacy in Albuquerque, New Mexico; and the School of Pharmacy and Radiopharmacy at the University of Oklahoma; and entering into contracts to assist these institutions, as well as other institutions, in their research and development of radioisotopes and radiopharmaceuticals in exchange for the exclusive commercial rights to the developed technology; o Developing, manufacturing and marketing a proprietary high resolution medical imaging camera for use in nuclear diagnostic medicine; and o Developing, manufacturing and marketing a pulsed plasma device to produce (i) short-lived positron radioisotopes for use in PET imaging cameras and (ii) thermal neutrons essential to a certain localized cancer therapy treatment. The Company was organized under the laws of the State of Texas in November 1995. Its principal executive offices, located at 2600 Longhorn Boulevard, Suite 105, Austin, Texas 78758 (tel. 512-834-1822), will be moved to the administration, manufacturing, research and development facility being constructed at Denton, Texas by August 1997. 7 The Offering Common Stock offered by the Company.......................... 2,200,000 shares Common Stock outstanding prior to the Offering................ 3,868,446 shares(1) Common Stock to be outstanding after the Offering................... 6,068,446(1) Use of Proceeds........................ To repay certain indebtedness; to reconfigure, assemble, test and commence operation of the LINAC, including capital expenditures to procure radioisotope processing equipment; to acquire radioisotopes for distribution prior to full operation of the LINAC; to complete development of, manufacture and market a proposed medical imaging camera; to develop, manufacture and market a proposed pulsed plasma device; and for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors and Dilution.............. An investment in the shares of Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution. Prospective investors should carefully consider the matters set forth under the captions "Risk Factors" and "Dilution." Proposed Symbols: Nasdaq........................ "INIS" Boston Stock Exchange......... " " - ------------------------ (1) Does not include ______ shares of Common Stock reserved for issuance upon exercise of options or stock appreciation rights or the issuance of restricted stock available for grant under the Company's 1997 Long Term Incentive Plan (the "Incentive Plan"), and ______ shares of Common Stock reserved for issuance upon exercise of options granted under the Incentive Plan at an exercise price of $______ per share. See "Capitalization" and "Management - Long Term Incentive Plan." 8 Summary Financial Information Statement of Operations Data: Period from November 1, 1995 (inception) through December 31, 1996 ----------------- Sale of accelerator components .......................... $ 775,102 Cost of sales ........................................... 263,440 ----------- Gross Profit ............................................ 511,662 Operating costs and expenses ............................ 883,637 ----------- Net loss ................................................ (834,446) =========== Net loss per share ...................................... $ (0.22) =========== Weighted average shares of Common Stock used to compute net loss per share ...................... 3,766,663 =========== Balance Sheet Data: December 31, 1996 ---------------------------------- Actual As Adjusted (1) ------------ ---------------- Working capital (deficit) ............ $ (750,907) $ 16,887,945 Total assets ......................... 4,256,176 19,306,587 Total liabilities .................... 2,697,270 108,829 Deficit accumulated during the development stage .................... (834,446) (834,446) Stockholders' equity ................. 1,558,906 19,197,758 - ------------------- (1) Adjusted to give effect to (i) the sale by the Company of the 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and the initial application of the net proceeds therefrom, (ii) the issuance of 101,783 shares of Common Stock for $162,852 since December 31, 1996, (iii) the collection of $160,000 of receivables from the sale of stock issued prior to December 31, 1996 and (iv) the repayment of $175,589 of short-term debt since December 31, 1996. See "Use of Proceeds" and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. 9 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully by prospective investors, who should be in a position to risk the loss of their entire investment. This Prospectus contains forward-looking statements which 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, including those set in the following risk factors and elsewhere in this Prospectus. Development Stage Company; Limited Operating History; No Assurance of Profitability The Company is in the development stage and is subject to all of the business risks associated with a new enterprise, including uncertainties regarding operation of the LINAC, constraints on the Company's financial and personnel resources, government regulation, development of proposed products and competition. The Company was incorporated in November 1995 and has a limited operating history. Its operations to date have been limited to acquiring the LINAC and related assets, redesigning and reconfiguring the LINAC for production of radioisotopes, designing facilities for its operations, acquiring land, acquiring license rights for its proposed medical imaging camera and proposed pulsed plasma device, raising capital, selling accelerator components and disposing of excess equipment through private sales and auctions. At December 31, 1996, the Company had an accumulated deficit during the development stage of approximately $834,000 and a working capital deficit of approximately $751,000. The Company has generated only limited operating revenues, the LINAC is not operational and has not been tested, and there can be no assurance as to when or whether the Company will become profitable. See "Plan of Operation." Untested LINAC The LINAC design is based on the linear accelerators at the Brookhaven National Laboratory and the Los Alamos National Laboratory, but the LINAC's configuration differs dramatically from such linear accelerators in that the LINAC is configured to operate at a significantly lower energy level (70 MeV as compared to 200 MeV and 800 MeV, respectively), produce a higher beam intensity (1.0mA as compared to 0.10mA to 0.15mA, respectively) and utilize three extracted beams of protons at different energy levels to produce multiple radioisotopes rather than one. In its intended configuration, the LINAC has not been tested to produce radioisotopes and will not be able to be fully tested until the Radioisotope Production Facility has been completed. There can be no assurance that the tests will be successful and that the LINAC will operate as designed. Delays in the operation of the LINAC or its inability to operate as designed would materially adversely affect the Company. See "Business - The LINAC." Possible Need for Additional Financing The Company anticipates the net proceeds of this Offering will be sufficient to finance its activities for at least 18 months following the date of this Prospectus. There can, however, be no assurance that the Company will not require additional financing or, if required, that such additional financing will be available to the Company on acceptable terms. Factors that may lead to a need for additional financing include delays in construction of the Company's administration, manufacturing, research and development facility or Radioisotope Production Facility, delays in commencing operation of the LINAC, unanticipated expenses in developing the proposed medical imaging camera or other proposed products, needs to protect and enforce intellectual property rights, and technological and market developments. To the extent the Company obtains additional capital by issuing equity securities, investors in this Offering may be diluted. Debt financing, if available, will likely contain restrictive covenants, including covenants restricting the Company's ability to incur additional indebtedness and pay dividends, and provide for security interests in the Company's assets. The unavailability of additional financing, when needed, could have a material adverse effect on the Company. See "Plan of Operation." Although the Company intends to finance construction of its administration, manufacturing, research and development facility and Radioisotope Production Facility, at an estimated aggregate cost of $4,428,000, through mortgage financing with a commercial lending institution, there can be no assurance that the Company will be able to obtain such 10 mortgage financing, in which event the Company may be required to fund such construction, in whole or in part, with proceeds from this Offering (in which event the Company may be required to reduce amounts currently allocated to other uses) or alternative sources of financing, the availability of which cannot be assured. See "Use of Proceeds" and "Plan of Operation - Liquidity and Capital Resources." Limited Sources for Raw Materials Enriched stable isotopes, which are used as targets (i.e. they are bombarded with protons to produce radioisotopes), constitute the principal raw materials required for the manufacture of accelerator-produced radioisotopes. The principal United States source for enriched stable isotopes is the Oak Ridge National Laboratory in Oak Ridge, Tennessee, which relies on government funding for continuing production. Although currently also available from Russia, Israel, China and other foreign sources, there can be no assurance that there will continue to be an adequate supply of enriched stable isotopes, which could materially adversely impact the Company's ability to manufacture radioisotopes which, in turn, would have a material adverse effect on the Company. Although the energy level and beam intensity of the LINAC are expected to be sufficient to produce most radioisotopes from unenriched stable isotopes, which are in abundant supply, the production process will require various proprietary chemical separation techniques which, although the Company has already developed, have not been tested to date, and as to the success of which there can be no assurance. See "Business - Supply of Raw Materials." No Assurance as to Validity of Intellectual Property Rights The Company has a license from the DOE with respect to all intellectual property rights owned or licensed by the U.S. government necessary for the use or operation of the LINAC, and currently is making inquiries of the General Counsel of the DOE to determine whether, and to what extent, such license is intended to be exclusive for commercial applications. In the event the license is deemed to be non-exclusive, there can be no assurance that the DOE will not license others to use the same technology. The Company, through its employees and consultants, has developed and owns the proprietary rights to significant modifications and improvements to the LINAC for the production of radioisotopes on a commercial scale. The Company intends to file patent applications for some of these modifications and improvements and to protect others as trade secrets. There can be no assurance, however, that patents on such modifications and improvements will be issued or, if issued, that such patents or modifications and improvements protected as trade secrets will provide meaningful protection. The Company has an exclusive license for the worldwide rights in the medical field to two patents for its proposed medical imaging camera, one of which expires in August 1998 and the second in March 2001. Accordingly, there can be no assurance that such patents will provide the Company with adequate, if any, protection. The Company is negotiating for an exclusive license for its proposed pulsed plasma device in certain fields of use, the success of which cannot be assured. Third parties may have filed applications for or been issued patents and may obtain additional patents and proprietary rights related to products or processes competitive with or similar to those of the Company. The Company may not be aware of all patents potentially adverse to its interests that may have been issued to others and there can be no assurance that such patents do not exist or have not been filed or may not be filed or issued. If patents have been or are issued to others containing preclusive or conflicting claims and such claims are ultimately determined to be valid, the Company may be required to obtain licenses thereto or to develop or obtain alternate technology. There can be no assurance that such licenses, if required, would be available on commercially acceptable terms, if at all, or that the Company would be able to develop or obtain alternate technology, which would have a material adverse effect on the Company. See "Business - Patents and Proprietary Rights." Government Regulation The manufacture and sale of radioisotopes is subject to extensive federal and state regulation. Prior to commencing operations, approval of the Radioisotope Production Facility must be obtained from the Texas Department of Health and, prior to transporting radioisotopes across state lines, from the U.S. Department of Transportation (the "DOT") and the FDA, as to which there can be no assurance. Thereafter, the Company's facility is subject to continual inspection for compliance with the federal current good manufacturing practice ("GMP") regulations, which require that the Company manufacture radioisotopes and maintain manufacturing, testing and quality control records in a prescribed manner. The Company also 11 will be subject to regulation by the United States Environmental Protection Agency ("EPA"), the Texas Natural Resources Conservation Commission, and the United States Occupational Safety and Health Administration ("OSHA") with respect to the radioactive content of water and air discharges and the handling and disposal of radioactive waste. The failure to obtain any such approvals, delays thereof or the failure to comply with any such regulations would have a material adverse effect on the Company. See "Business - Government Regulation." The Company's production of radioisotopes will involve the controlled use of hazardous materials, chemicals and various radioactive substances. Although the Company's compliance with safety procedures for handling, storing and disposing of such materials prescribed by state and federal regulations is a prerequisite to the Company commencing the manufacture and sale of radioisotopes, the accidental contamination or injury from these materials will be a continuing risk. See "Business - Government Regulation." The FDA regulates the clinical testing, manufacturing, labeling, distribution and promotion of medical devices in the United States, which includes the Company's proposed medical imaging camera and its proposed pulsed plasma device. The Company believes its proposed medical imaging camera and proposed pulsed plasma device will be classified by the FDA as Class II devices and that its proposed medical imaging camera will not require a pre-market approval application but will be eligible for pre-market clearance through the 510(k) notification procedure based upon its substantial equivalence to previously marketed devices. The Company is investigating whether its proposed pulsed plasma device will be eligible for pre-market clearance through the 510(k) notification procedure. However, there can be no assurance that the Company's proposed products will be so classified or obtain 510(k) pre-market clearance or, if obtained, that such approval will not involve a long and costly process or be granted subject to conditions on the marketing or manufacturing of the proposed medical imaging camera that may impede the Company's ability to market and/or manufacture the camera. If the Company's proposed medical imaging camera or proposed pulsed plasma device does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed device or because it is a Class III device), the FDA must approve a pre-market approval ("PMA") application before marketing can begin. PMA applications must demonstrate, among other matters, that the medical device is safe and effective. A PMA application is typically a complex submission, usually including the results of clinical studies, and its preparation is a detailed and time-consuming process. Once a PMA application has been submitted, the FDA's review may be lengthy and include requests for additional data and there can be no assurance that the application will be approved. See "Business - Government Regulation." Any radiopharmaceuticals developed under arrangements between the Company and medical institutions and universities will also require the prior approval of the FDA, which has established mandatory procedures and standards for the clinical testing, manufacture and marketing of therapeutic and diagnostic products, a protracted and costly process. See "Business - Government Regulation." Dependence on Key Management and Other Personnel The Company is dependent on the efforts of its senior management and scientific staff, including Ira Lon Morgan, Ph.D., Chairman of the Board of Directors, Tommy L. Thompson, Executive Vice President and Chief Operating Officer, Homer B. Hupf, Ph.D., Vice President of Radiochemistry, Joe Beaver, M.A., Vice President of Radioisotope Production, and Jerry W. Watson, Ph.D., Vice President of Manufacturing and Systems Engineering. The Company also will be dependent upon Carl W. Seidel, who will serve as President and Chief Executive Officer commencing May 5, 1997. The loss of any of these individuals could have a material adverse effect on the Company. The Company is a 51% beneficiary of a $1,000,000 key man life insurance policy on the life of Dr. Morgan and the 100% beneficiary of a $500,000 policy on the life of each of Dr. Hupf and Mr. Beaver. In addition, the Company has applied for $500,000 key-man life insurance policies on the lives of each of Mr. Thompson, Dr. Watson and Mr. Seidel. The coverage under these policies may be inadequate to compensate the Company for the loss of any of such individuals. The Company's future success will depend in large part upon its ability to attract and retain skilled scientific, management, operational and marketing personnel, as to which there can be no assurance. See "Management." Competition and Risk of Technological Obsolescence Currently, radioisotopes produced by cyclotron accelerator are manufactured in the United States principally by DuPont Merck Pharmaceutical Co., Mallinckrodt Medical, Inc., Amersham Medi-Physics, Inc. and Theragenics, Inc. (the 12 "Radioisotope Producing Companies") primarily, the Company believes, for their own radiopharmaceutical products. The Company believes that hospitals, medical institutions and universities also produce certain short-lived radioisotopes utilizing small cyclotron accelerators, principally for their own needs. The Radioisotope Producing Companies have substantially greater capital and other resources than the Company and there can be no assurance they will not elect to produce radioisotopes for commercial sale. The U.S. government also produces radioisotopes, primarily for research purposes, in two national laboratories, Brookhaven National Laboratory and Los Alamos National Laboratory, and has announced that it plans to modify the nuclear reactor at Sandia National Laboratory in Albuquerque, New Mexico to produce certain radioisotopes and there can be no assurance that a third party will not contract with the U.S. government to acquire radioisotopes for commercial sale. In addition, a Canadian firm, which also has substantially greater capital and other resources than the Company, currently supplies a significant portion of the radioisotopes used in the nuclear medicine industry in the United States and there can be no assurance that the Company will be able to compete successfully with such firm. Further, there can be no assurance that new improved accelerators will not be designed or new technologies developed which would render the LINAC obsolete and the Company's radioisotopes non-competitive. There is substantial competition in the medical imaging camera market. The Company faces competition in the United States imaging market from a large number of firms, many of which have significantly greater financial and technical resources and production and marketing capabilities than the Company. In addition, other established medical concerns, any one of which would likely have greater resources than the Company, may enter the market. The Company also faces competition from other imaging technologies which are more firmly established and have a greater market acceptance, including PET and SPECT cameras, magnetic resonance imaging ("MRI") systems, CAT scanners and X-rays. There can be no assurance that the Company will be able to compete successfully against any competitor or potential competitor. In addition, the medical imaging camera market is subject to rapid and significant technological change, and there can be no assurance that the Company's proposed medical imaging camera can be upgraded to meet future innovations in the medical imaging camera market or that new technologies will not emerge, or existing technologies will not be improved, which would render the Company's proposed medical imaging camera obsolete or non-competitive. The Company is subject to similar substantial competition with respect to the development of its proposed pulsed plasma device. See "Business - Competition." No Assurance of Development of Medical Imaging Camera or Pulsed Plasma Device Additional research and development will be required for the Company to develop its proposed medical imaging camera and its proposed pulsed plasma device, as to the success of either of which there can be no assurance. Further, in the event the medical imaging camera or pulsed plasma device is successfully developed, regulatory approval will be required and there can be no assurance such approval can be obtained in a timely manner, or at all, and if obtained, that the medical imaging camera or pulsed plasma device can be marketed successfully or profitably. Failure by the Company to successfully develop and/or market its proposed medical imaging camera or pulsed plasma device could have a material adverse effect on the Company. Relationships of Technical Advisors with Other Entities The Company's technical advisors (the "Technical Advisors") are employed on a full-time basis by academic or research institutions. Accordingly, the Technical Advisors are able to devote only a portion of their time to the Company's business and research activities. In addition, except for work performed specifically for and at the direction of the Company, the inventions or processes discovered by the Technical Advisors and other consultants will not become the intellectual property of the Company, but will be the intellectual property of their institutions. Further, invention assignment agreements executed by the Technical Advisors and consultants in connection with their relationships with the Company may be subject to the rights of their primary employers or other third parties with whom such individuals have consulting relationships. See "Business - Technical Advisors." Dependence on Power Supply The operation of the LINAC will be dependent upon receiving 400 kilowatts of electric power 24 hours per day six days per week, and any power interruption could materially affect the Company's operations. The Company has elected to receive power from the Denton Electric Power Plant (a member of a tri-grid interconnected power system) which is located 13 adjacent to the site of the proposed Radioisotope Production Facility, although the Company believes there are other power sources readily available. See "Business - Manufacturing." Uncertain Availability of Health Care Reimbursement; Health Care Reform The Company anticipates that its proposed medical imaging camera and pulsed plasma device will be purchased or leased primarily by medical institutions which provide health care services to their patients. Such institutions and patients typically bill or seek reimbursement from various third party payors, such as Medicare, Medicaid, other government programs and private insurance carriers, for the charges associated with the health care services provided. The Company believes that its ability to sell medical imaging cameras or pulsed plasma devices at levels sufficient to be profitable will be directly related to the coverage and reimbursement policies of third party payors. If adequate coverage and reimbursement levels are not provided by government and third party payors, the market acceptance of the Company's proposed medical imaging camera or pulsed plasma devices would be materially adversely affected. Health care reform proposals have been introduced in Congress and in various state legislatures. It is currently uncertain whether any health care reform legislation will be enacted at the federal level, or what actions governmental and private payors may take in response to the suggested reforms. Such reforms, if enacted, may affect the availability of third-party reimbursement for medical imaging cameras or other proposed medical device products of the Company as well as the price levels at which the Company will be able to sell such products. The Company cannot predict when any proposed reforms will be implemented, if ever, or the effect of any implemented reforms on the Company's business. Any implemented reforms are likely, however, to have an adverse effect on the Company. Product Liability Exposure and Insurance The use of its radioisotopes in radiopharmaceuticals and in clinical trials and the use of its proposed medical imaging camera or other proposed medical device products may expose the Company to potential product liability risks which are inherent in the testing, manufacture, marketing and sale of human diagnostic and therapeutic products. In addition, the failure to effect timely delivery of radioisotopes may cause a delay in a scheduled test or procedure or result in the functional loss of radioactivity of the radioisotope, thereby exposing the Company to potential liability. The Company currently has no product liability insurance. The Company intends to obtain product liability insurance prior to commencing production of any radioisotopes and prior to the manufacture and sale of medical imaging cameras or other proposed medical device products but there can be no assurance it will be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage. Claims or losses in excess of any liability insurance coverage ultimately obtained by the Company could have a material adverse effect on the Company. See "Business - Product Liability and Insurance." Control By Directors and Officers Upon consummation of this Offering, the directors and officers of the Company will beneficially own 43.3% (41.7% if the Underwriters' over-allotment option is exercised in full) of the outstanding shares of Common Stock and, accordingly, will have the ability to elect a majority of the Company's directors and otherwise control the Company. See "Principal and Selling Stockholders." Immediate Substantial Dilution; Disparity of Consideration Purchasers of the Common Stock in this Offering will experience immediate and substantial dilution in the net tangible book value of the shares of Common Stock purchased by them in this Offering of $5.84 per share, assuming an initial public offering price of $9.00 per share. The current stockholders of the Company, including the Company's officers and directors, acquired their shares of Common Stock for nominal consideration or for consideration substantially less than the assumed initial public offering price. As a result, new investors will bear substantially all of the risks inherent in an investment in the Company. See "Capitalization," "Dilution" and "Certain Transactions." 14 Arbitrary Determination of Offering Price; No Public Market for Common Stock The initial public offering price of the Common Stock has been determined arbitrarily by negotiations between the Company and the Representative. Factors considered in such negotiations, in addition to prevailing market conditions, included the history and prospects for the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure and certain other factors as were deemed relevant. Therefore, the initial public offering price of the Common Stock does not necessarily bear any relationship to established valuation criteria and, accordingly, may not be indicative of prices that may prevail at any time or from time to time in the public market. Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop after the Offering, or, if developed, be sustained. See "Underwriting." Management's Broad Discretion in Use of Proceeds Although the Company intends to apply the net proceeds from the sale of the Common Stock in the manner described under "Use of Proceeds," it has broad discretion within such proposed uses as to the precise allocation of the net proceeds, the timing of expenditures and all other aspects of the use thereof. Further, approximately 18.2% of the net proceeds of this Offering (26.2% if the Underwriters' over-allotment option is exercised in full) will be added to the Company's working capital and will be utilized for general corporate purposes. Accordingly, the Board of Directors will have broad discretion in applying such funds. See "Use of Proceeds." Portion of Net Proceeds to Benefit Certain Stockholders and Management The Company intends to use a portion of the net proceeds from this Offering to repay $20,000 of indebtedness to Dr. Morgan. In addition, the Company intends to use a portion of the net proceeds from this Offering to repay the $1,654,000 principal balance of a bank loan for which Dr. Morgan and James K. Eichelberger, a founder and director of the Company, have pledged $130,000 and $100,000, respectively, of their personal assets as collateral, and to repay $400,000 outstanding under a bank line of credit which is personally guaranteed by Messrs. John M. McCormack and William W. Nicholson, directors of the Company. See "Use of Proceeds," "Plan of Operation - Liquidity and Capital Resources" and "Certain Transactions." Absence of Dividends The Company has never paid cash dividends on its Common Stock and does not expect to pay cash dividends in the foreseeable future. See "Dividend Policy." Potential Adverse Effect of Shares Eligible for Future Sale Sales of Common Stock in the public market after this Offering could materially and adversely affect the market price of the Common Stock and might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate. Upon the completion of this Offering, the Company will have 6,068,446 shares of Common Stock outstanding. Of these shares, the 2,200,000 shares of Common Stock sold in this Offering will be freely tradeable (unless held by affiliates of the Company) without restriction. The remaining 3,868,446 shares will be restricted securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and the holders thereof have agreed (i) for a period of 12 months after the date of this Prospectus, not to sell, directly or indirectly, any shares owned by them without the prior written consent of the Company and the Representative and (ii) for the subsequent 12-month period, not to sell such shares at a price per share less than the initial public offering price and then only through the Representative. The Company and the Representative jointly may, at any time without notice, release all or any portion of the shares subject to such lock-up agreements. Upon expiration of the initial 12-month lock-up period, all of the shares of Common Stock held by existing stockholders will be eligible for immediate public resale under Rule 144, subject to the volume limitations and other requirements thereunder. See "Description of Capital Stock" and "Shares Eligible for Future Sale." 15 Possible Issuance of Preferred Stock The Company's Restated Articles of Incorporation authorize the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Company's Board of Directors. Accordingly, the Company's Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could materially adversely affect the voting power or other rights of the holders of the Common Stock (including those of the purchasers in the Offering). In the event of issuance, such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. See "Description of Capital Stock." Representative's Influence on the Market A significant amount of the Common Stock offered hereby may be sold to customers of the Representative. Such customers subsequently may engage in transactions for the sale or purchase of such Common Stock through or with the Representative. If the Representative participates in the market, the Representative may exert a dominating influence on the market, if one develops, for the Common Stock. Any such market-making activity by the Representative may be discontinued at any time. The price and liquidity of the Common Stock may be significantly affected by the degree, if any, of the Representative's participation in the market. Price Volatility The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. Announcements of delays in the Company's testing and development schedules, technological innovations or new products by the Company or its competitors, developments or disputes concerning patents or proprietary rights, regulatory developments in the United States and foreign countries, public concern as to the safety of products containing radioactive compounds and economic and other external factors, as well as period-to-period fluctuations in the Company's financial results, may have a significant impact on the market price of the Common Stock. In addition, the realization of any of the risks described in these "Risk Factors" could have a significant and adverse impact on such market prices. Potential Adverse Effect of Representative's Warrants At the consummation of this Offering, the Company will sell to the Representative for nominal consideration the Representative's Warrants to purchase 220,000 shares of Common Stock. The Representative's Warrants will be exercisable for a period of four years commencing one year after the date of this Prospectus at an exercise price of $ (120% of the initial public offering price of the Common Stock). For the term of the Representative's Warrants, the holders thereof will have, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock without assuming the risk of ownership, with a resulting dilution in the interest of other security holders. As long as the Representative's Warrants remain unexercised, the Company's ability to obtain additional capital might be adversely affected. Moreover, the holders of the Representative's Warrants may be expected to exercise such Warrants at a time when the Company would, in all likelihood, be able to obtain any needed capital through a new offering of its securities on terms more favorable than those provided by the Representative's Warrants. See "Underwriting." 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Stock offered hereby, after deducting the underwriting discount and estimated offering expenses payable by the Company, will be approximately $17,316,000 (or approximately $19,179,000 if the Underwriters' over-allotment option is exercised in full) assuming an initial public offering price of $9.00 per share. The Company intends to use the proceeds as follows: Approximate Approximate Amount Percent ----------- ----------- To repay certain indebtedness(1) ................ $ 2,350,000 13.6% Toreconfigure, assemble, test and commence operation of the LINAC, including capital expenditures to procure radioisotope processing equipment(2) ......................... 7,700,000 44.5 To acquire radioisotopes for distribution prior to full operation of the LINAC(3) ......... 2,100,000 12.1 To complete development of, manufacture and market a proposed medical imaging camera ........ 1,000,000 5.8 To develop, manufacture and market a proposed pulsed plasma device ................... 1,000,000 5.8 For working capital and general corporate purposes(4) ..................................... 3,166,000 18.2 ----------- ------- Total ........................................... $17,316,000 100.0% =========== ======= - --------------- (1) Reflects retirement of (i) $100,000, $1,654,000 and $162,000 principal balances plus accrued interest due on notes issued to a bank in July 1996, December 1996 and January 1997, respectively, (ii) $400,000 plus accrued interest under a bank line of credit obtained in January 1997, and (iii) $20,000 principal balance due on notes issued to Dr. Morgan. See "Plan of Operation - Liquidity and Capital Resources" and "Certain Transactions." (2) Consists of (i) $6,200,000 for, among other items, upgrading the power supply and providing necessary cooling systems for the LINAC, of which approximately $3,700,000 is anticipated to be paid to outside contractors and suppliers and the balance for the salary, expenses and costs of Company personnel performing the services, and (ii) $1,500,000 to procure additional radioisotope processing equipment. See "Plan of Operation" Business-Strategy." (3) Consists of $1,300,000 and $800,000 to purchase, over a 12-month period for commercial distribution by the Company, Mo-99 and research radioisotopes from Sandia National Laboratory and from Brookhaven National Laboratory and/or Los Alamos National Laboratory, respectively, through funding the personnel, labor and materials costs at such facilities during specified times to produce the radioisotopes. See "Plan of Operation" and "Business - Strategy." (4) To be applied to furnish new facilities, officers' salaries, professional fees, and office and other expenses. The initial application of the net proceeds of this Offering represents management's estimate based upon current business and economic conditions. Although the Company does not contemplate material changes in such allocations, to the extent the Company finds that an adjustment is required due to changed business conditions, the amounts may be adjusted among the uses indicated. Although the Company intends to finance construction of its administration, manufacturing, research and development facility and Radioisotope Production Facility, estimated to cost $4,428,000, through mortgage financing with a commercial lending institution, there can be no assurance such financing will be obtained, in which event 17 the Company may be required to fund such construction, in whole or in part, with proceeds from this Offering (in which event the Company may be required to reduce amounts currently allocated to other uses), or alternative sources of financing, the availability of which cannot be assured. See "Risk Factors - Possible Need for Additional Financing" and "Plan of Operation - Liquidity and Capital Resources." Although the Company believes that the net proceeds of this Offering will be sufficient to finance its activities for at least 18 months following the date of this Prospectus, there can be no such assurance. See "Risk Factors - Possible Need For Additional Financing" and "Plan of Operation." To the extent that the Company's application of the net proceeds are less than as allocated or if the net proceeds increase as a result of the exercise of the Underwriters' over-allotment option, the resulting proceeds will be added to the Company's working capital and will be available for general corporate purposes. The net proceeds of this Offering that are not expended immediately will be deposited in interest-bearing accounts, or invested in government obligations, certificates of deposit or similar short-term, low-risk investments. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock and does not expect to pay any cash dividends on its Common Stock in the foreseeable future. The payment of cash dividends in the future will depend on the evaluation by the Company's Board of Directors of such factors as it deems relevant at the time and restrictions imposed by the Company's debt obligations, if any. See "Risk Factors - Absence of Dividends. 18 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company at December 31, 1996 and as adjusted to give effect to (i) the issuance and sale of the 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and the initial application of the net proceeds therefrom, (ii) the issuance of 101,783 shares of Common Stock for $162,852 since December 31, 1996, (iii) the collection of $160,000 of receivables from the sale of stock issued prior to December 31, 1996 and (iv) the repayment of $175,589 of short-term debt since December 31, 1996. This table should be read in conjunction with the Consolidated Financial Statements and the notes thereto which are included elsewhere in this Prospectus. December 31, 1996 ------------------------------- Actual As Adjusted ------------ ------------ Short-term debt ........................ $ 2,439,454 $ -- ============ ============ Stockholders' Equity: Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares issued and outstanding, and as adjusted -- -- Common Stock, $.01 par value; 20,000,000 shares authorized and 3,766,663 shares issued and outstanding; 6,068,446 shares issued and outstanding as adjusted (1) ........................ $ 37,667 $ 60,684 Additional paid-in capital ............. 2,515,685 19,971,520 Deficit accumulated during the development stage ...................... (834,446) (834,446) Receivable from stock sales ............ (160,000) -- ------------ ------------ Total Stockholders' Equity ............. 1,558,906 19,197,758 ------------ ------------ Total Capitalization ................... $ 1,558,906 $ 19,197,758 ============ ============ - ---------------- (1) Does not include ________ shares issuable upon exercise of options or stock appreciation rights or the issuance of restricted stock available for grant under the Incentive Plan and ________ shares of Common Stock reserved for issuance upon exercise of options granted under the Incentive Plan. See "Management - Long Term Incentive Plan." 19 DILUTION At December 31, 1996, after giving effect to (i) the issuance of 101,783 shares of Common Stock for $162,852 since December 31, 1996, and (ii) the collection of $160,000 of receivables from sale of stock issued prior to December 31, 1996, the Company had a pro forma net tangible book value of $1,880,658, or $.49 per share. Net tangible book value per share is equal to the total tangible assets of the Company less total liabilities divided by the total number of shares outstanding. After giving effect to the issuance and sale of the 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and the initial application of the net proceeds therefrom, the pro forma net tangible book value at December 31, 1996 would have been $19,196,658, or $3.16 per share, representing an immediate increase in net tangible book value of $2.67 per share to the present stockholders and an immediate dilution of $5.84 per share, or 64.9% to the public investors from the assumed initial public offering price. Dilution per share represents the difference between the initial public offering price and the pro forma net tangible book value per share after the Offering. The following table illustrates the per share dilution: Assumed initial public offering price per share of Common Stock ........... $9.00 Pro forma net tangible book value per share of Common Stock before the Offering ................. $ .49 Increase in net tangible book value per share of Common Stock attributable to public investors .... 2.67 ----- Pro forma net tangible book value per share of Common Stock after the Offering .................. 3.16 ----- Dilution to public investors ........ $5.84 ===== If the Underwriters' over-allotment option is exercised in full, the pro forma net tangible book value per share of Common Stock would be $3.34, which would result in the dilution to public investors of $5.66 per share, or 62.9%, from the assumed initial public offering price. The following table sets forth, as of the date of this Prospectus, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the present stockholders and the public investors, assuming an initial public offering price of the Common Stock offered hereby of $9.00 per share:
Shares Purchased Total Consideration Average ---------------------------- ---------------------------- Price Per Number Percent Amount Percent Share ----------- ----------- ----------- ----------- ----------- Present stockholders(1)(2) ...... 3,868,446 63.8% $ 2,716,204 12.1% $ .70 Public investors (1) .... 2,200,000 36.2 19,800,000 87.9 $ 9.00 ----------- ----------- ----------- ----------- Total ................... 6,068,446 100.0% $22,516,204 100.0% =========== =========== =========== ===========
- -------------------- (1) The exercise in full of the Underwriters' over-allotment option and resultant sale by the Selling Stockholders of 100,000 shares will result in a reduction in the number of shares held by the present stockholders to 3,768,446 shares, or 59.8% of the shares to be outstanding after the Offering, and an increase in the number of shares held by the public investors to 2,530,000 shares, or 40.2% of the shares to be outstanding. See "Principal and Selling Stockholders." (2) Does not include ______ shares of Common Stock reserved for issuance upon exercise of options or stock appreciation rights or the issuance of restricted stock available for grant under the Incentive Plan and ______ shares of Common Stock reserved for issuance upon exercise of options granted under the Incentive Plan at an exercise price of $______ per share. See "Management - Long Term Incentive Plan." 20 SELECTED FINANCIAL DATA The selected financial data presented below as of December 31, 1996 and for the period from November 1, 1995 (inception) through December 31, 1996 have been derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Such data should be read in conjunction with the consolidated financial statements of International Isotopes Inc. and Subsidiary (including the notes thereto) and the Plan of Operation both of which are incorporated herein. Statement of Operations Data: Period from November 1, 1995 (Inception) through December 31, 1996 ----------------- Sale of accelerator components ........................... $ 775,102 Cost of sales ............................................ 263,440 ----------- Gross profit ............................................. 511,662 Operating costs and expenses: General and administrative ............................... 67,193 Commissions and fees ..................................... 95,315 Consulting fees .......................................... 367,749 Legal and professional fees .............................. 59,685 Salaries and contract labor .............................. 109,887 Rent and security ........................................ 98,427 Other .................................................... 85,381 ----------- Total operating expenses ................................. 883,637 ----------- Loss from development stage operations ................... (371,975) Other income (expense): Gain on sale of assets held for sale ..................... 336,364 Interest income .......................................... 4,906 Interest expense ......................................... (303,741) Loan financing ........................................... (750,000) ----------- Loss before extraordinary item ........................... (1,084,446) Extraordinary gain on debt extinguishment ................ 250,000 ----------- Net loss and accumulated deficit ......................... (834,446) =========== Net loss per share ....................................... ($ 0.22) =========== Weighted average shares of Common Stock used to compute net loss per share ....................... $ 3,766,663 =========== Balance Sheet Data: December 31, 1996 ----------------- Working capital .......................................... $ (750,907) Total assets ............................................. 4,256,176 Total liabilities ........................................ 2,697,270 Deficit accumulated during development stage ............. (834,446) Stockholders' equity ..................................... 1,558,906 21 PLAN OF OPERATION This Plan of Operation contains forward-looking statements which 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, including those set forth under "Risk Factors" and elsewhere in this Prospectus. General The Company is a development stage company which intends to be the first independent domestic producer of pharmaceutical grade radioisotopes and radiopharmaceuticals (on a contract or joint venture basis) for commercial sale to the nuclear medicine industry. Since its inception, the Company's operations have been limited to acquiring the LINAC and related assets, redesigning and reconfiguring the LINAC for production of radioisotopes, designing facilities for its operations, acquiring land, acquiring license rights for its proposed medical imaging camera and proposed pulsed plasma device, raising capital, selling certain accelerator components and disposing of excess equipment through private sales and auctions. The equipment comprising the LINAC initially was designed to constitute the proton linear accelerator injector stage of the 53-mile SSC project which was terminated in 1994. In May 1996, the Company acquired for approximately $2.9 million the equipment, proprietary designs and intellectual property comprising the proton linear accelerator injector stage of the SSC project which, according to government reports, had a cost to the U.S. government of approximately $61.5 million ($21.5 million for the equipment and $40.0 million for the intellectual property). Most of the equipment comprising the LINAC assets purchased by the Company from the State of Texas were acquired for purposes of assembling the LINAC and commencing the commercial production of radioisotopes therewith. A portion of such equipment, including certain ion sources, vacuum pumps, measuring equipment, gauges and test equipment, was acquired for purposes of effecting sales to third parties and the balance, consisting of accelerator components, is included in inventory. Plan of Operation The Company's program for the balance of 1997 and the first half of 1998 is to complete construction of its administration, manufacturing, research and development facility and the Radioisotope Production Facility, develop its other proposed products and pursue formal relationships with various suppliers, universities and medical institutions and the DOE. Construction of the administration, manufacturing, research and development facility is anticipated to be completed in August 1997. Following completion of construction, the Company intends to use this facility to assemble and test components of the LINAC, to complete development of, and commence assembling and testing of its proposed medical imaging camera, and to develop its proposed pulsed plasma device. Construction of the Radioisotope Production Facility is anticipated to commence in June 1997 and be completed and ready for commercial production of radioisotopes in March 1998. Pending completion of such facility, the Company intends to purchase radioisotopes for distribution by the Company to hospitals, clinics and other institutions requiring such radioisotopes for nuclear medicine and currently is holding discussions with the DOE to acquire wholesale quantities of Mo-99 from the Sandia National Laboratory and research radioisotopes from Los Alamos National Laboratory and/or Brookhaven National Laboratory. The Company has allocated a portion of the net proceeds from this Offering for the purchase of such wholesale quantities of radioisotopes. See "Use of Proceeds," "Business - Strategy" and "Business - Marketing." The Company also intends, prior to completion of the Radioisotope Production Facility, to enter into formal relationships with universities and medical institutions in the southwestern United States to assist in their research and development of radioisotopes and radiopharmaceuticals in exchange for exclusive commercial rights to the developed technology, and to pursue formal arrangements with foreign sources, such as Russia, Israel and China, for the acquisition of enriched stable isotopes necessary for the production of radioisotopes. See "Business - Strategy." 22 Liquidity and Capital Resources The Company has financed its operations since inception primarily through bank loans, sales of accelerator components, sales of excess equipment, loans from stockholders and proceeds from the private placement of its equity securities. For the period November 1, 1995 (inception) through December 31, 1996, the Company had revenues of $775,102 from sales of accelerator components which, after deducting $263,440 of acquisition and other selling costs, resulted in a gross profit to the Company of $511,662. In addition, during such period, the Company received proceeds of $796,021 for the sale of excess accelerator, mechanical and test equipment which, after deducting $459,657 of acquisition and other selling costs, resulted in a gain of $336,364. For the period November 1, 1995 (inception) through December 31, 1996, Dr. Morgan loaned the Company an aggregate of $120,000 at an interest rate of 10% per annum. The Company has repaid $95,000 of such loans in cash, exchanged 1,250,000 shares of its Common Stock for cancellation of $5,000 of such loans and intends to repay the $20,000 principal balance out of a portion of the net proceeds of this Offering. See "Use of Proceeds" and "Certain Transactions." In May 1996, the Company borrowed $2,900,000 from a lending institution to fund the acquisition of the LINAC assets (the "LINAC Loan"). The LINAC Loan was secured by substantially all of the assets of the Company plus $130,000 of the personal assets of Dr. Morgan and $100,000 of the personal assets of Mr. Eichelberger, a founder and a director of the Company. See "Certain Transactions." During 1996, $1,428,787 of proceeds from the sale of accelerator components and from excess equipment was applied toward repayment of the LINAC Loan. The remaining principal balance of the LINAC Loan, plus $290,000 of interest, a $500,000 profit sharing fee and legal expenses, was repaid in December 1996. In July 1996, the Company borrowed $100,000 from a bank at an interest rate of 7% per annum, secured by $100,000 of the personal assets of a stockholder of the Company, the proceeds of which were added to working capital and used for general corporate purposes. The Company intends to repay this loan with a portion of the net proceeds of this Offering. See "Use of Proceeds." In December 1996, the Company borrowed $1,750,000 from a bank, payable in quarterly installments of $250,000 plus interest at the rate of 15% per annum, with the final payment due on December 16, 1997. The loan is secured by a first lien on the LINAC assets and the 20-acre tract of land on which the Company intends to construct the Radioisotope Production Facility, plus $130,000 of the personal assets of Dr. Morgan and $100,000 of the personal assets of Mr. Eichelberger. See "Certain Transactions." All of the proceeds of this loan were applied to the repayment of the LINAC Loan. At March 31, 1997, the outstanding principal balance on this loan was $1,654,411, which the Company intends to repay with a portion of the net proceeds of this Offering. See "Use of Proceeds." In December 1996 and January 1997, the Company completed a $1,060,000 private placement of 662,501 shares of Common Stock to 29 Texas residents at a purchase price of $1.60 per share, of which 17,188 shares were purchased by Mr. Eichelberger's spouse. See "Certain Transactions." The proceeds were added to working capital and used for general corporate purposes, including payment of expenses associated with this Offering. In January 1997, the Company obtained a $500,000 line of credit from a bank payable on March 15, 1998 with interest at the bank's prime rate plus 1% payable monthly commencing February 15, 1997. $250,000 of the line of credit is personally guaranteed by John M. McCormack, a director of the Company, and an additional $250,000 is personally guaranteed by William W. Nicholson, a director of the Company. See "Certain Transactions." At March 31, 1997, $400,000 of this line of credit was outstanding. The Company intends to repay the outstanding balance with a portion of the net proceeds of this Offering. See "Use of Proceeds." In January 1997, the Company borrowed $242,000 from a bank with interest payable at 7.05% per annum and the principal and interest due on April 24, 1997, for which the Company has obtained a 30-day extension. The proceeds from this loan were applied to the repayment of the LINAC Loan. At March 31, 1997, the outstanding principal balance on this loan was $162,000, which the Company intends to repay with a portion of the net proceeds from this Offering. See "Use of Proceeds." 23 The Company is applying to the Texas Agriculture Finance Authority for low interest loans from commercial lending institutions guaranteed by the State of Texas, as to the success of which there can be no assurance. The Company intends to finance the construction of its administration, manufacturing, research and development facility and its Radioisotope Production Facility, estimated at $4,428,000, through mortgage financing with a commercial lending institution and currently is in discussions for $1,000,000 of such financing for construction of its administration, manufacturing, research and development facility. There can be no assurance such mortgage financing will be obtained, in which event the Company may be required to fund such construction, in whole or in part, with a portion of the net proceeds of this Offering (in which event the Company may be required to reduce amounts currently allocated to other uses), or alternative sources of financing, the availability of which cannot be assured. See "Risk Factors - Possible Need for Additional Financing." The Company anticipates, based on its currently proposed plans and assumptions relating to its operations, that the net proceeds of this Offering will be sufficient to finance its activities for at least 18 months following the date of this Prospectus. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the costs and timing of constructing the Company's administration, manufacturing, research and development facility and Radioisotope Production Facility and commencing production of radioisotopes; possible delays in the regulatory approval process for the Radioisotope Production Facility, the proposed medical imaging camera and other proposed products; costs involved in filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; technological and market developments; and the ability of the Company to establish and maintain collaborative academic and commercial research, development and marketing relationships. There can be no assurance that additional capital, if needed, will be available on terms acceptable to the Company. Furthermore, any debt financing, if available, will likely include restrictive covenants and provide for security interests in the Company's assets. The failure of the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company. See "Risk Factors - Possible Need for Additional Financing." 24 BUSINESS General The Company is a development stage company which intends to be the first independent domestic producer of pharmaceutical grade radioisotopes and radiopharmaceuticals (on a contract or joint venture basis) for commercial sale to the nuclear medicine industry. Radioisotopes, which are indispensable components of nuclear medicine, are radiation emitting atoms that are used for both medical diagnostics and vivo therapeutics. The Company also intends, under an exclusive worldwide license, to complete development of and to manufacture and market a high resolution medical imaging camera, key components of which are patented, for use in nuclear diagnostic medicine, which the Company believes will have resolution at least four times greater than any imaging camera currently on the market. When a specifically selected radioisotope is attached or "tagged" to one of a variety of pharmaceuticals, the resulting product is known as a radiopharmaceutical. The pharmaceutical component acts as a carrier to seek out targeted internal organs, tumor sites and/or cells for which it has a predetermined natural affinity. In diagnostics, the radioisotope component provides a signal as to the location of the attached pharmaceutical as it targets the specific organ or site. This process, in turn, is captured by external imaging equipment, such as PET and SPECT cameras. In therapeutics, the radioisotope component provides in vivo treatment of the targeted organ, cancerous tumor and/or cancerous cell site through the emission of either photons or beta radiation. Industry Overview Nuclear medicine is estimated to be a $7 to $10 billion industry in the United States which, according to industry studies, is projected to grow at a 10.8% compound annual rate over the next eight years with radiopharmaceuticals representing an estimated 13% of this market. The Company believes that the in vivo therapeutics segment of nuclear medicine will grow at a substantially higher rate based on anticipated FDA approvals of a number of monoclonal antibodies, peptides and other pharmaceutical carriers, currently in clinical trials, for in vivo therapeutic treatment of various forms of cancer, including primary tumors, metastasized sites, other tumors and organ disorders, including cardiovascular disease. In vivo therapeutic doses of radioisotopes (measured in millicuries) administered to a patient are generally ten to 100 times greater than diagnostic doses and generate proportionally greater revenues. One out of every three hospital patients in the United States undergoes a procedure involving the use of radioisotopes for diagnosis or therapy. More than 13 million diagnostic medical procedures employing radioisotopes are performed annually and, in addition, approximately 325,000 therapeutic medical procedures employing radioisotopes were performed in the United States in 1995 resulting in more than one millon treatments employing radioisotopes. According to industry sources, there will be approximately 21 million diagnostic medical procedures and more than one million therapeutic medical procedures employing radioisotopes performed in the United States in the year 2000. Cancer is the leading cause of death in the United States after heart disease. In the United States, five million persons have been diagnosed as having cancer within the past five years and an estimated one million persons are expected to be diagnosed with the disease in 1997. Worldwide, there are more than 200 drug products currently under development for both cancer diagnostics and treatment. Many of these are radiopharmaceuticals which require specific radioisotopes which cyclotron accelerators currently in use in the United States cannot produce either in volume or at all because of their limited energy and/or beam intensity. Radioisotopes are produced commercially either by an accelerator (a cyclotron or a linear accelerator) or a nuclear reactor. Accelerators are machines which accelerate charged particles, generally protons, to a stable (nonradioactive) isotope target, causing a reaction such that the target is transformed into a radioactive isotope. A nuclear reactor produces radioisotopes by bombarding a stable isotope target with neutrons. Radioisotopes produced by cyclotrons and linear accelerators generally have higher specific activity (more disintegrations per mass of desired element) than radioisotopes produced by nuclear reactors, with many radioisotopes so produced being chemically different and capable of being separated by chemistry to produce a pure radioisotope. Radioisotopes produced by neutron bombardment in a nuclear reactor result in a radioisotope of the same chemical element as the target, are difficult to separate, are likely to contain radioactive impurities and have significant attendant radioactive waste. 25 Accelerators have a significant environmental advantage over nuclear reactors in that they produce radioisotopes with relatively little attendant radioactive waste. Mo-99, which at present accounts for 36% of the revenues and 70% of the unit volume of sales of radioisotopes for medical diagnostics, currently is reactor-produced through neutron fission of uranium-235, which results in 90% radioactive waste with long-term hazardous levels of radiation. The Company believes the LINAC will be able to produce Mo-99 with limited attendant radioactive waste at a cost projected to be substantially equivalent to the cost of reactor-produced Mo-99. Accelerator-produced radioisotopes are produced by two different types of accelerators, the linear accelerator and the cyclotron. The linear accelerator accelerates particles along a linear path to produce the energy level necessary for converting stable isotopes through a particle reaction into radioactive isotopes, whereas the cyclotron propels particles along a circular path to produce the necessary energy level. The particles propelled in both types of accelerator are identical and the resultant radioisotopes are the same. Of the 17 largest cyclotron accelerators currently in use in the United States, only one has an energy level significantly above 30 MeV (i.e. approximately 80 MeV) but is limited in its production capacity due to its maximum 0.25mA beam intensity. According to the Committee on Biomedical Isotopes of the Institute of Medicine-National Academy of Sciences, the production of promising radioisotopes for medical diagnostic and therapeutic use will require proton accelerators with energy levels higher than 30 MeV. Heretofore, two U.S. government national laboratories, Brookhaven National Laboratory and Los Alamos National Laboratory, have been the primary domestic suppliers of research radioisotopes which require such higher energy levels to produce. However, a combination of scheduling problems, costs and, more recently, anticipated long-term or permanent shutdowns have made these two sources unreliable and/or unavailable. Presently, the most commonly used radioisotopes in the United States are produced by Dupont Merck Pharmaceutical Co., Mallinckrodt Medical, Inc., Amersham Medi-Physics, Inc. and Theragenics, Inc. (the "Radioisotope Producing Companies"), primarily for their own use, and by foreign manufacturers. These radioisotopes include: Radioisotope Symbol Half-life Primary Source - ------------ ------ --------- -------------- Thallium - 201 Tl-201 3 days Domestic Gallium - 67 Ga - 67 3.1 days Domestic Indium - 111 In - 111 2.8 days Domestic Iodine - 123 I - 123 13 hours Domestic Molybdenum - 99 Mo - 99 2.7 days Foreign Technetium - 99m* Tc - 99m 6 hours Foreign Xenon - 133 Xe - 133 5.3 days Foreign Iodine - 131 I - 131 8 days Foreign Palladium - 103 Pd - 103 17 days Domestic *Note: Technetium-99m is the "daughter" of Molybdenum-99. These radioisotopes are used either independently or in various combinations or "cocktails" and assist in the diagnosis of a myriad of medical conditions including coronary heart disease, pulmonary embolism, thyroid carcinoma, brain disorders, acute cholecystitis (inflammation of the gall bladder), gastrointestinal bleeding, renal artery stenosis, bone cancer and other diseases. Based on volume, 70% of all radioisotopes currently used for medical diagnostics in the United States are from foreign sources with substantially all commercially available reactor-produced radioisotopes being manufactured in Canada. This is of continuing concern to the medical community, researchers and the DOE. 26 The LINAC The LINAC design is based on the linear accelerators at the Brookhaven National Laboratory in Long Island, New York and the Los Alamos National Laboratory in Los Alamos, New Mexico, which currently are used primarily for physics research, with only limited accessibility for production of radioisotopes. The configuration of the LINAC differs dramatically from these two linear accelerators, as it is configured to operate at a significantly lower energy level (70 MeV as compared to 200 MeV and 800 MeV, respectively), produce a higher beam intensity (1.0mA as compared to 0.10mA and 0.15mA, respectively) and utilize three extracted beams of protons at different levels of energy to produce multiple radioisotopes rather than one. The Company believes that the reconfiguration will permit the LINAC to produce radioisotopes in greater volume and with greater efficiency than Brookhaven National Laboratory or Los Alamos National Laboratory. There are 17 large accelerators currently in commercial use in the United States, all of which are cyclotrons owned by the Radioisotope Producing Companies. Sixteen of the 17 machines operate at 30 MeV with a 0.25mA beam intensity. The seventeenth operates at 80 MeV with a 0.25mA beam intensity. The LINAC, with a 70 MeV energy level and 1.0mA beam intensity, is designed to have more than twice the energy level of the sixteen 30 MeV cyclotron-accelerators and five times the beam intensity of all 17 cyclotron accelerators. Unlike the other accelerators which produce a quantity of only one type of radioisotope per 24-hour period, the LINAC is designed to produce quantities of up to 12 radioisotopes during a 24-hour period by directing the unitary beam of protons through switching magnets to create three separate beams directed at 12 different stable isotope targets. The Company anticipates that the LINAC will be able to produce up to 1,000 curies of 12 different radioisotopes during a 24-hour period. A new 30 MeV cyclotron radioisotope production facility costs approximately $10 to $12 million and becomes operational two to three years from the date ordered. To the Company's knowledge, there are no new cyclotrons or linear accelerators with energy capacities of 30 MeV or more currently on order in the United States. The Company intends to use a portion of the proceeds from this Offering to reconfigure, assemble, test and commence operation of the LINAC, including, among other items, to upgrade the power supply and provide necessary cooling systems, and as capital expenditures to procure additional radioisotope processing equipment. See "Use of Proceeds." Business Strategy The Company's strategy is to become the leading domestic commercial producer of a full range of radioisotopes, radiopharmaceuticals (on a contract or joint venture basis) and medical instrumentation for use in nuclear medicine, radiation oncology, diagnostic imaging and research. The Company expects its 27,000 square foot administration, manufacturing, research and development facility to be completed by August 1997 and its 40,000 square foot Radioisotope Production Facility to be completed by March 1998. The facilities are being constructed on 21.6 acres of land the Company has acquired in a 500 acre high technology industrial park located in Denton, Texas, known as the "North Texas Research Center." The Research Center is strategically located adjacent to a principal highway and is 24 miles from the Dallas/Fort Worth International Airport and 14 miles from Alliance Industrial Airport. Radioisotopes manufactured by the Company will be packaged for immediate transport by overnight carriers which have distribution hubs at these airports. Most radioisotopes used in nuclear medicine have limited half-lives and the proximity of the Company's facilities to these airports will enable the Company to deliver its radioisotopes and radiopharmaceuticals to most locations in the United States within 12 to 24 hours of production. Upon full operation of the LINAC in June 1998, the Company intends to produce currently used radioisotopes and the upcoming and potentially superior diagnostic and therapeutic pharmaceutical grade radioisotopes which can only be produced with the high energy (70 MeV) and the 1.0mA beam intensity of the LINAC. See " - Manufacturing." The Company currently is holding discussions with the DOE to acquire wholesale quantities of Mo-99 from the Sandia National Laboratory and research radioisotopes from the Los Alamos National Laboratory and/or Brookhaven National Laboratory to commercially distribute such radioisotopes prior to the LINAC being fully operational. Under the proposed arrangements, the Company would fund the personnel, labor and material costs at such facilities during specified times to produce the required radioisotopes and the DOE would continue to be responsible for all regulatory compliance, including radioactive waste. The Company believes that these arrangements will give the Company credibility as a supplier of radioisotopes to the nuclear medicine industry prior to the LINAC being fully operational. A portion of the net proceeds 27 of this Offering have been allocated to purchase such radioisotopes from the DOE. See "Use of Proceeds" and "Plan of Operation." In addition, the Company intends to develop relationships with the major and specialized radiopharmaceutical companies to produce, package and distribute radiopharmaceuticals on a contract or joint venture basis to end-users throughout the country. The Company has an option to acquire an additional 60 acres of land in the Research Center adjacent to the site of the Radioisotope Production Facility to enable major and specialized pharmaceutical companies, radiopharmacies and related service companies to establish facilities in close proximity to the Company to facilitate coordination and joint venture projects with the Company for the manufacture and delivery of radiopharmaceuticals to hospitals, clinics, radiopharmacies and research institutions. As part of this plan, when the LINAC is fully operational, the Company intends to manufacture and distribute finished radiopharmaceutical kits (finished, packaged dosage-form radiopharmaceutical drug products) for the major and specialized radiopharmaceutical companies on a contract or joint venture basis. Further, upon completion of the Radioisotope Production Facility and commencement of commercial operations, the Company intends to pursue joint ventures with foreign countries to assist them in the design, construction and operation of linear accelerators to produce radioisotopes and radiopharmaceuticals. The Company also intends to establish formal relationships with medical institutions and universities in the southwestern United States, including the University of North Texas in Denton, Texas ("UNT"); the University of Texas Southwest Medical Center in Dallas, Texas; the M.D. Anderson Cancer Institute in Houston, Texas; the School of Pharmacy and Radiopharmacy in Albuquerque, New Mexico; and the School of Pharmacy and Radiopharmacy at the University of Oklahoma, to assist such institutions, as well as other institutions, in their research and development of radiopharmaceuticals in exchange for rights in the radiopharmaceuticals developed. The Company currently is negotiating with UNT (i) to provide UNT access to the LINAC for the production of experimental radioisotopes for research and development, (ii) to assist in such research and development and (iii) to provide training for graduate students, with the Company to have certain rights in any products developed. The Company also is assisting UNT and the North Texas Research Institute to develop a regional biomedical tracer facility. Under the proposed program, UNT and the North Texas Research Institute would operate the facility for research, education, training and the production of research radioisotopes. The Company would provide UNT and the North Texas Research Institute with access to the LINAC to produce research radioisotopes and would assist on a cooperative basis in the marketing and distribution thereof. Also, the Company is discussing donating 20 acres of land adjacent to the Radioisotope Production Facility to UNT for a regional medical technology center. As part of its long-term strategy, the Company intends, under an exclusive worldwide license, to complete development of and commence to manufacture and market a high resolution medical imaging camera, key components of which are patented, to be used in diagnostic nuclear medicine, which the Company believes will have resolution at least four times greater than any imaging camera currently on the market. The Company has allocated a portion of the net proceeds from this Offering for the development of this product. See "Use of Proceeds" and " - Proposed Medical Imaging Camera." In addition, the Company intends, under an exclusive worldwide license, to develop, manufacture and market a pulsed plasma device to produce (i) short-lived positron radioisotopes for use in PET imaging cameras and (ii) thermal neutrons essential to a certain localized cancer therapy treatment, and has allocated a portion of the net proceeds from this Offering for such purposes. See "Use of Proceeds" and " - Proposed Pulsed Plasma Device." Supply of Raw Materials Enriched stable isotopes, which are used as targets (i.e. bombarded with protons to produce radioisotopes), constitute the principal raw materials required for the manufacture of accelerator-produced radioisotopes. The principal United States source for enriched stable isotopes is the Oak Ridge National Laboratory in Oak Ridge, Tennessee, which relies on government funding for continuing production. Although currently also available from Russia, Israel and China and other foreign sources, there can be no assurance that there will continue to be an adequate supply of enriched stable isotopes, which could materially adversely impact the Company's ability to manufacture radioisotopes. Although the energy and current of the LINAC are sufficient to produce most radioisotopes from unenriched stable isotopes, which are in abundant supply, the production process will require various proprietary chemical separation techniques which, although the Company has already developed, have not been tested to date, and as to the success of which there can be no assurance. See "Risk Factors Limited Sources for Raw Materials." 28 The Company anticipates that it will be able to purchase enriched stable isotopes from the DOE. The Company also intends to enter into supply agreements for enriched stable isotopes from foreign sources, such as Russia, Israel and China. Manufacturing It is intended that the LINAC will operate 24 hours per day, six days per week on an annual basis, and its reliability will be critical. The production of radioisotopes cannot be commenced until regulatory approval has been obtained for the Radioisotope Production Facility, which includes a review of the intended manufacturing process and inspection for compliance with GMP regulations. See " - Government Regulation." The radioisotope production process commences with the placement of a stable isotope target in a "target station" in the LINAC for bombardment by a stream of protons at a specific energy and current depending on the stable isotope target and the intended radioisotope to be produced. The target then will be pneumatically transferred from the target area to a shielded chemical processing cell where the radioisotope will be chemically etched and chemically processed to precipitate and separate the radioisotope from the enriched stable isotope. The chemical recovery and external reuse of the enriched stable isotope will be performed in a separate laboratory following an appropriate holding period for decay, and the recovered target material will be tested for identity and purity by activation analysis and used to make new targets. Following chemical separation, the radioisotope will be mixed with a purified solution, tested and then placed in separate vials based on the radioisotope quantity per dose required. Each vial will be assigned an identification number, sterilized and sealed. Thereafter, each lot will be assayed for content and radioisotopic purity, each vial labeled, assigned a shipping identification number, placed in a standard shipping container approved by the DOT and shipped to its intended destination. The Company intends to formulate production strategies that yield high quantities of desired radioisotopes with minimal impurities. Techniques to reduce impurities include selecting appropriate target materials, setting particular target thickness and utilizing specific energy levels of protons to bombard the target. Quality assurance and quality control will be performed according to GMP regulations. The Company intends to maintain a quality control ("QC") unit, to consist of four employees, responsible for the quality of all components, containers, in-process materials, labeling and final radiochemical products. The QC unit will also review records to assure no errors have been made, perform analytical tests according to established operating procedures and verify compliance with analytical specifications. The Company also intends to maintain a Quality Assurance unit, to consist of four employees, responsible for reviewing and controlling basic and training records and for the Company's compliance with GMP regulations. In- process materials will be tested for identity, strength, quality and purity as appropriate and approved or rejected by the QC unit before, during and after the production process. Materials stored for long periods of time will also be subject to QC unit review. The operation of the LINAC will be dependent upon receiving 400 kilowatts of electric power 24 hours per day, six days per week, and any power interruption could materially affect the Company's operations. The Company has elected to receive power from the Denton Electric Power Plant (a member of a tri-grid interconnected power system), which is adjacent to the site of the proposed Radioisotope Production Facility, although the Company believes there are other power sources readily available. See "Risk Factors - Dependence on Power Supply." Upon initial operation of the LINAC, scheduled for March 1998, the Company intends to produce the following radioisotopes, which can be produced at relatively low energy levels (30 MeV) and currently represent a majority of the accelerator-produced radioisotopes used in nuclear medicine diagnostic procedures: Radioisotope Half-life ------------ --------- Thallium-201......................... 3 days Indium-111........................... 2.8 days Iodine-123........................... 13 hours Gallium-67........................... 3.1 days Cobalt-57............................ 271 days Strontium-82......................... 35 hours 29 These radioisotopes are used either independently or in various combinations or "cocktails" and assist in the diagnosis of a myriad of medical conditions including coronary heart disease, pulmonary embolism, thyroid carcinoma, brain disorders, acute cholecystitis (inflammation of gall bladder), gastrointestinal bleeding, renal artery stenosis, bone cancer and other diseases. Upon full operation of the LINAC, scheduled for June 1998, the Company believes the 70 MeV energy level and 1.0mA beam intensity of the LINAC will enable it to produce the following experimental radioisotopes that cannot be produced by any of the cyclotron accelerators currently in commercial use in the United States: Radioisotope Half-life Applications - ------------ --------- ------------ Sodium-24.................... 15 hours hypertension Magnesium-28................. 20.9 hours bone magnesium tracer Silicone-31.................. 2.6 hours materials research Phosphorus-32................ 14.2 days bone cancer therapy Sulfur-35.................... 87.5 days DNA labeling Chromium-51.................. 27.7 days blood volume Manganese-54................. 312 days liver diagnostics Iron-52...................... 8.3 hours liver diagnostics Iron-55...................... 2.7 years liver biochemistry Copper-67.................... 61.9 hours radioimmunotherapy Zinc-65...................... 244 days biochemistry Germanium-68................. 271 days antibody labeling Selenium-75.................. 119 days biochemistry Strontium-85................. 65 days bone tracer Yittrium-90.................. 64 hours radioimmunotherapy Ruthenium-97................. 2.9 days hepatobiliary function Palladium-103................ 16.9 days prostate cancer therapy Tin-113...................... 115 days colon cancer therapy Xenon-122.................... 20.1 hours thyroid diagnostic & therapy Barium-128................... 2.4 days potassium tracer Samarium-153................. 46.7 hours bone cancer therapy Gadolinium-153............... 241 days osteoporosis Gadolinium-159............... 18 hours liver cancer Dysprosium-165............... 2.3 hours arthritis therapy Holmium-166.................. 26.8 hours leukemia therapy Ytterbium-169................ 32 days radiography Ytterbium-175................ 10.5 hours cancer therapy Lutetium-177................. 6.7 days cancer therapy Rhenium-186.................. 90 hours lung cancer 30 Rhenium-188.................. 17 hours thyroid cancer Gold-199..................... 3.1 days tumor cancer Bismuth-206.................. 6.2 days biochemistry Marketing The Company intends to market radioisotopes for use in nuclear medicine to (i) pharmaceutical companies engaged in creating radiopharmaceuticals by coupling radioisotopes with carrier drugs, including the Radioisotope Producing Companies, (ii) radiopharmacies (radiopharmacies both produce radiopharmaceuticals, generally under licenses from pharmaceutical companies, and distribute radioisotopes) and (iii) hospitals, clinics, physicians and licensed technicians that produce radiopharmaceuticals with "cold kits" supplied by pharmaceutical companies and otherwise. The Company intends to maintain a computerized data base of physicians and licensed technicians in the United States engaged in nuclear medicine to assist in its marketing of radioisotopes, and intends to market experimental radioisotopes to research institutions. The Company is currently holding discussions with the DOE to acquire wholesale quantities of Mo-99, the "parent" of technetium-99m, which is used in many diagnostic imaging procedures, from Sandia National Laboratory, and wholesale quantities of research radioisotopes from Los Alamos National Laboratory and/or Brookhaven National Laboratory. If such discussions are successful, as to which there can be no assurance, the Company intends to distribute radioisotopes prior to the LINAC being fully operational. The Company has allocated a portion of the net proceeds of this Offering to acquire radioisotopes from the DOE. See "Use of Proceeds," "Plan of Operation" and " - Strategy." Proposed Medical Imaging Camera As part of its long-term strategy, upon completion of its facilities, the Company intends to complete development of and commence to manufacture and market a high resolution medical imaging camera, key components of which are patented, for use in diagnostic nuclear medicine. The Company has obtained the exclusive worldwide rights in the medical field to the relevant patents from Hospital Financial Corporation which cover certain inventions by Dr. Morgan and relate to single photon counting of penetrating radiation. Current medical imaging cameras are limited in their spatial resolution and sensitivity due to the use of electric current integration detection of photons and the scatter of low energy photons. Presently, the resolution of SPECT cameras is approximately four millimeters and is approximately ten millimeters for PET cameras. Certain aspects of the patented technology to be used in the Company's medical imaging camera have been used in a camera for industrial applications which has demonstrated spatial resolution of less than 0.5 millimeters, reflecting a material enhancement compared to existing medical imaging technology. There is a direct correlation between the early detection of a cancerous tumor that is 2.0 millimeters or less in size and the likelihood of a successful outcome following treatment. In 1995, according to industry sources, the number of installed medical imaging cameras worldwide was 10,110 located at 4,780 sites representing an investment in excess of $7.5 billion. The predominant imaging cameras were SPECT, which numbered 6,890 units up from 5,940 units in 1993. It is estimated that more than 1,000 medical imaging cameras for diagnostic nuclear medicine will be purchased during 1997 representing an annual world market of approximately $380 million. The Company intends to test the medical imaging camera using tomographic equipment it has leased for a five-year term from UNT at a cost of $500 per month. The Company also intends to utilize such equipment to provide tomographic services to industrial users and will pay UNT 10% of the gross revenues received for such services. The Company is required to maintain insurance on the equipment for not less than 80% of replacement cost and has agreed to indemnify UNT for any losses due to injury that may result from use of the equipment. UNT may use the leased equipment for non- commercial purposes at times when it is not being used by the Company. The agreement may be terminated by either party upon 30 days written notice. The Company also is negotiating an agreement to lease analytical instrumentation from UNT for development of its medical imaging camera and presently contemplates paying UNT lease payments of $50,000 per year plus 2% of any revenues from third parties for analytic services utilizing such instrumentation. The Company also intends to enter into collaboration agreements with the Department of Nuclear Medicine and Imaging of the University of Texas Southwestern Medical Center for the development of the proposed medical imaging camera. 31 Proposed Pulsed Plasma Device The Company intends to develop a pulsed plasma device that can be configured to produce short-lived radioisotopes used in PET scan imaging and pulsed beams of neutrons which is essential for a certain type of cancer therapy under an exclusive license with respect to two U.S. patents and related proprietary technical know-how being negotiated by the Company with Avogadro Energy Systems, Inc. relating to the production of plasma generated neutrons. Under one configuration, the Company believes that the pulsed plasma device will produce short-lived high-intensity positron-emitting radioisotopes, including carbon-11 with a 20-minute half-life, oxygen-15 with a 122-second half-life, and nitrogen-13 with a 10-minute half-life, that are used extensively in PET cameras for the diagnosis of brain, heart and lung functions. The ability of hospitals to produce these short-lived radioisotopes for immediate PET scan imaging should facilitate the approval for third party payor reimbursement for PET scan imaging. The Company believes that, under a different configuration, the device can produce thermal neutrons that are essential for gadolinium neutron capture therapy ("GNCT"), a type of cancer therapy used to treat certain tumorous cancers located in or near critical organs. Under GNCT, the element gadolinium is transported to a patient's cancerous tumor and irradiated with a beam of thermal neutrons which destroys the tumor without damage to external healthy tissue. Market surveys indicate that 460 radiation treatment units will be purchased between 1996 and 1999 at an estimated investment of over $2 billion. In 1995, radiation therapy was performed at 1,670 sites using 2,670 radiation treatment units, representing an estimated investment of $13.35 billion. The Company has not assembled a prototype of the pulsed plasma device. If successfully developed for either of its proposed uses, an extensive regulatory approval process will be required, including approval by the FDA, a costly and protracted process, the success of which cannot be assured. See " - Government Regulation." Competition Currently, radioisotopes produced by a cyclotron accelerator are manufactured in the United States principally by the Radioisotope Producing Companies, primarily, the Company believes, for their own radiopharmaceutical products. The Company believes that hospitals, medical institutions and universities also produce certain short-lived radioisotopes utilizing small cyclotron accelerators, principally for their own needs. The Radioisotope Producing Companies have substantially greater capital and other resources than the Company and there can be no assurance that they may not elect to produce radioisotopes for commercial sale. The U.S. government also produces radioisotopes primarily for research purposes in two national laboratories, Brookhaven National Laboratory and Los Alamos National Laboratory, and has announced that it plans to modify the nuclear reactor at Sandia National Laboratory in Albuquerque, New Mexico to produce certain radioisotopes and there can be no assurance that a third party will not contract with the U.S. government to acquire radioisotopes for commercial sale. In addition, a Canadian firm, which also has substantially greater capital and other resources than the Company, currently supplies a significant portion of the radioisotopes used in the nuclear medicine industry in the United States and there can be no assurance that the Company will be able to compete successfully with such firm. Further, there can be no assurance that new improved accelerators will not be designed or new technologies developed which would render the LINAC obsolete and the Company's radioisotopes non-competitive. There is substantial competition in the medical imaging camera market. The Company faces competition in the United States imaging market from a large number of firms, many of which have significantly greater financial and technical resources and production and marketing capabilities than the Company. In addition, other established medical concerns, any one of which would likely have greater resources than the Company, may enter the market. The Company also faces competition from other imaging technologies which are more firmly established and have a greater market acceptance, including PET and SPECT cameras, MRI systems, CAT scanners and X-rays. There can be no assurance that the Company will be able to compete successfully against any competitor or potential competitor. In addition, the medical imaging camera market is subject to rapid and significant technological change, and there can be no assurance that the Company's proposed medical imaging camera can be upgraded to meet future innovations in the medical imaging camera market or that new technologies will not emerge, or existing technologies will not be improved, which would render the Company's proposed medical imaging camera obsolete or non-competitive. The Company is subject to similar substantial competition with respect to its proposed pulsed plasma device. See "Risk Factors - Competition and Risk of Technological Obsolescence." 32 Patents and Proprietary Rights There are several patents which cover various components of the LINAC, including the radio frequency ion source used to generate nuclear particles (e.g. protons), the radio frequency quadropole accelerator to accelerate nuclear particles to an intermediate energy, and the drift tube linear accelerator to further accelerate the nuclear particles to the 70 MeV energy level, which were developed at various U.S. government national laboratories or by government contractors and, accordingly, are either owned or licensed by the U.S. government. In conjunction with acquiring the LINAC from the State of Texas, the Company acquired the rights to that State's license from the U.S. government relating to all intellectual property rights owned or licensed by the U.S. government necessary for the use or operation of the LINAC. The Company currently is making inquiries of the General Counsel of the DOE to determine whether, and to what extent, the Company's license is intended to be exclusive for commercial applications. In the event the license is deemed to be non-exclusive, there can be no assurance that the DOE will not license others to use the same technology. Notwithstanding such clarification, the U.S government retains the right to use intellectual property owned by it for non-commercial government purposes. In addition to acquiring the equipment comprising the LINAC, the Company acquired proprietary engineering and assembly designs and drawings that were transferred to the State of Texas by the DOE. The Company believes that the U.S. government did not retain a copy of such designs and drawings and considers them proprietary. The Company, through its employees and consultants, has developed and owns the proprietary rights to significant modifications and improvements to the LINAC for the production of radioisotopes on a commercial scale. The Company intends to file patent applications for some of these modifications and improvements and to protect others as trade secrets. There can be no assurance, however, that patents on such modifications and improvements will be issued or, if issued, that such patents, or modifications and improvements protected as trade secrets will provide meaningful protection. The Company has acquired an exclusive worldwide license from Hospital Financial Corporation to develop, market and sell medical imaging cameras in the medical field under two U.S. patented inventions developed by Dr. Morgan. The two patents relate to high-speed single photon counting in cameras and camera configurations which minimize the "noise" associated with the scattering of low-energy protons. In consideration of the assignment of the exclusive license, the Company issued 25,000 shares of Common Stock to Hospital Financial Corporation and agreed to pay royalties equal to 1% of the net revenues received by the Company from the sale or use of products covered by the licensed patents. One of the two underlying patents expires in August 1998 and the second expires in March 2001. Accordingly, there can be no assurance that such licensed patents will provide the Company with meaningful, if any, protection. The Company's proposed medical imaging camera also will use data acquisition technology acquired from the SSC project for use in conjunction with the high-speed photon counting techniques covered by the licensed patents. The Company is negotiating, the success of which cannot be assured, for an exclusive worldwide license from Avogadro Energy Systems, Inc. ("Avogadro") to manufacture, use and sell equipment in the areas of neutron and ion beam radioisotope production and gadolinium neutron capture therapy under two U.S. patents and related technical know-how. The two patents relate to pulsed plasma apparatus for the production of plasma-generated neutrons. Under the proposed license, Avogadro would be entitled to a royalty equal to 5% of the net sale price of products made, sold or first used by the Company in any country in which Avogadro has been issued a patent and one-half of such royalty with respect to products made, sold or first used in a country in which Avogadro has not been issued a patent. Avogadro also would be entitled to a percentage of any revenues received by the Company from sublicensing the licensed patents and technology. In the event Avogadro does not receive minimum annual royalties of $50,000 for calendar years after 1998, Avogadro will be able to elect to convert the license into a non-exclusive license. The Company also is negotiating a development agreement with Avogadro, the success of which cannot be assured, pursuant to which Avogadro or its affiliates would provide development services on a time and materials basis to develop a prototype of the pulsed plasma device suitable for use in the licensed areas, with a maximum fee not to exceed $1,000,000. The Company will own all intellectual property developed by Avogadro under the development agreement. Third parties may have filed applications for or been issued patents and may obtain additional patents and proprietary rights related to products or processes competitive with or similar to those of the Company. The Company may not be aware of all patents potentially adverse to its interests that may have been issued to others and there can be no assurance that such patents do not exist, have not been filed, or may not be filed or issued. If patents have been or are issued to others containing preclusive or conflicting claims and such claims are ultimately determined to be valid, the Company may be required to obtain licenses thereto or to develop or obtain alternate technology. There can be no assurance that such licenses, 33 if required, would be available on commercially acceptable terms, if at all, or that the Company would be able to develop or obtain alternate technology, which would have a material adverse effect on the Company. There can be no assurance that the validity of any of the patents licensed to, or that may in the future be owned by, the Company would be upheld if challenged by others in litigation or that the Company's products, even if covered by Company patents, would not infringe patents owned by others. The Company could incur substantial costs in defending suits brought against it for infringement or any of its licensors, or in suits by it against others for infringement or in suits contesting the validity of a patent. Any such proceedings may be protracted. In any suit contesting the validity of a patent, the patent being contested would be entitled to a presumption of validity and the contesting party would be required to demonstrate invalidity of such patent by clear and convincing evidence. The Company could also incur substantial costs in connection with any suits relating to matters for which the Company has agreed to indemnify its licensors. If the outcome of any such litigation is adverse to the Company's interests, the Company's business would be materially adversely affected. In certain instances, the Company may choose not to seek patent protection and may rely on trade secrets and other confidential know-how to protect its innovations. There can be no assurance that protectable trade secrets or know-how will be established or, if established, that they will remain protected, or that others will not independently and lawfully develop similar or superior innovations. The Company requires all employees and technical consultants to sign non-disclosure and intellectual property assignment agreements with the Company. In certain instances, the Company will enter into agreements with its employees pursuant to which the employee will be entitled to a small royalty with respect to products developed by the Company based upon the employee's inventions. In addition, all directors, consultants and other parties to whom confidential information of the Company has been or will be disclosed have or will execute agreements containing confidentiality provisions. There can be no assurance, however, that any such intellectual property assignment agreements and confidentiality agreements will be complied with or will be enforceable. See "Risk Factors - No Assurance as To Validity of Intellectual Property Rights." Government Regulation Regulation of Radioisotope Production and Radioactive Waste The manufacture of radioisotopes is subject to extensive federal and state regulation. Prior to commencing operations, approval of the Radioisotope Production Facility must be obtained from the Texas Department of Health (acting in its designated role as the Texas Radiation Control Agency) and, prior to transporting radioisotopes across state lines, from the DOT and the FDA. Thereafter, the Radioisotope Production Facility will be subject to continual inspection for compliance with GMP regulations, which require that the Company manufacture radioisotopes and maintain manufacturing, testing and quality control records in a prescribed manner. See "Risk Factors - Government Regulation." Since the Radioisotope Production Facility will not handle "special nuclear materials" (i.e. nuclear fuels and weapons grade uranium, thorium and plutonium) and, therefore, will not be designated as a "fixed nuclear facility," the Company believes it will not be subject to regulation by the United States Nuclear Regulatory Commission (the "NRC") or the DOE. Texas Department of Health and FDA regulations provide that a radioisotope production facility may not be used for any purpose other than the production of radioisotopes. The Company will be required to file a Drug Master File ("DMF") with the FDA for each radioisotope proposed to be produced and delivered. Radioisotopes delivered to pharmaceutical companies for coupling with drug carriers to create their own proprietary radiopharmaceuticals generally will be covered by NDAs filed by the respective pharmaceutical company. The DMF is a compilation of information relating to the proposed product, requested by the FDA, to determine the identity, purity, strength and manufacturing documentation used for the product and also contains analytical methods documentation and compliance with established specifications. The DMF does not contain any clinical information, which must be supplied by the distributor of the drugs. In some cases, it may be necessary for the customer to generate clinical data for the radiopharmaceutical incorporating the radioisotope. Pursuant to the Low Level Radioactive Waste Policy Act of 1980, states are required to assure the safe disposal of mildly radioactive materials. The disposal of radioactive waste is regulated in Texas by the Texas Natural Resources Conservation Commission (the "TNRCC"), which enforces federal regulations promulgated by the EPA and its own regulations. Regulatory issues arising from the handling, retention and disposal of solid and liquid radioactive waste are governed by the Texas Regulations for the Control of Radiation (the "Texas Regulations"). Radioactive waste produced by 34 the Company will fall into the category of low-level radioactive waste as the production and processing of radioisotopes generate a certain amount of low-level, solid radioactive waste. Most of this waste will be in the form of used laboratory expendables, such as latex gloves and absorbent paper used to protect laboratory counter tops from direct exposure to spilled materials, which will be compacted and disposed of through the usual commercial channels used by universities, medical institutions and industrial users of radioactive materials. Between scheduled waste pick-ups, compacted materials containing longer-lived radioisotopes temporarily will be retained on-site in a specially designed, low-level waste reduction facility, which will greatly reduce the amount of radioactive waste to be removed to a permanent radioactive waste disposal facility. Texas Regulations permit a limited amount of specified radioisotopes, generally those with half-lives of less than 300 days and which have decayed ten half-lives to be disposed of by transport to a commercial municipal waste facility. The Company believes this regulation gives it a distinct advantage over locations in many other states where landfill burial of radioactive waste is forbidden. The production of radioisotopes at the Radioisotope Production Facility will include the chemical separation of radioisotopes. This may lead to the production of some mixed hazardous waste, i.e., a mixture of low-level radioactive materials, water, organic solvents and inorganic salts. As is common practice, the Company will hold such materials on-site for a period of time until the radioisotopes decay to stable isotopes, at which time the materials can be moved off-site for disposal by commercial waste handlers. Liquid radioactive waste resulting from the processing of accelerator-produced products or from the washing down of hot cells or other decontamination procedures will be contained in storage tanks outside the Radioisotope Production Facility. The purpose of such holding tanks is to provide for on-site decay and dilution of the effluent stream to levels of activity where it is permissible to dispose of the waste through discharge into the sewerage system. It is anticipated that the capacity of the storage tanks will be sufficient to permit the holding of radioactive wastes until decay to negligible levels has taken place and that it will not be necessary to discharge the tanks more than once every three or four months. The tanks will be housed in a containment facility to prevent release into the environment in the event of a liquid release accident. Certain proposed federal regulations would require hospitals, clinics and other users of radiopharmaceuticals to take special measures to assure that radioactive waste of patients resulting from nuclear medicine procedures is not released into the public sewer systems. Such regulations, if adopted, may impact on the use of Tc-99m, currently the most widely used radioisotope for nuclear medicine, which has a half-life of six hours and produces another radioactive isotope, Tc-99, which has a 214,000 year half-life and currently is released into sewers through patient waste products following nuclear medicine procedures. Tc-99m is produced by hospitals and clinics in generator machines from Mo-99, a reactor-produced radioisotope. The Company is unable to predict what effect, if any, the enactment of these regulations would have on the Company's business. In compliance with applicable state laws, the Company maintains a Radiation Safety Committee, currently comprised of Dr. Morgan, Jerry W. Watson, Ph.D., Vice President of Manufacturing and Systems Engineering, Homer B. Hupf, Ph.D., Vice President of Radiochemistry, Joe Beaver, Vice President of Radioisotope Production, and Michael Vinson, the Company's Radiation Safety Officer, which will oversee the Company's radiation safety procedures and will control and monitor the Company's compliance with GMP regulations and conduct annual radiation audits to comply with applicable regulatory requirements. Regulation of Proposed Medical Imaging Camera and Proposed Pulsed Plasma Device The Company's proposed medical imaging camera and its proposed pulsed plasma device will be regulated as medical devices and require pre-market clearance by the FDA. Pursuant to the Medical Device Amendments of May 1976, the FDA classifies medical devices in commercial distribution as a Class I, Class II or Class III device. This classification scheme is based on the controls necessary to reasonably ensure the safety and effectiveness of the medical devices. Class I devices are those devices whose safety and effectiveness can reasonably be ensured through general controls, such as adequate labeling, pre-market notification and adherence to the GMP regulations. Class II devices are those devices whose safety and effectiveness can reasonably be assured through the use of special controls, such as performance standards, post- market surveillance, patient registries and FDA guidelines. Class III devices are generally devices which support or sustain human life or present a potential risk for illness or injury. FDA regulations include "emission computed tomography systems" as Class II devices, which are defined as devices intended to detect the location and distribution of gamma-ray and positron-emitting radioisotopes in the body and produce cross-sectional images through computer reconstruction of the data. Accordingly, the Company believes that its proposed medical imaging camera will be classified as a Class II device. The Company also believes its pulsed plasma device will be classified as a Class II device. 35 If a medical device is "substantially equivalent" to a legally marketed Class II device, the manufacturer or distributor may seek FDA clearance by filing what is known as a 510(k) pre-market notification which must be supported by data and test results. The Company believes its proposed medical imaging camera will be "substantially equivalent" to other imaging cameras currently legally marketed as Class II devices, and is investigating whether its proposed pulsed plasma device will be so classified. If the FDA determines that the device is substantially equivalent, then it may be marketed in the United States. The FDA may, however, require additional data or additional test results, or may determine that a device is "not substantially equivalent." Requests for additional data or test results or a "not substantially equivalent" determination could delay the Company's market introduction of the medical imaging camera or pulsed plasma device and could have a material adverse effect on the Company. The FDA is not required to respond to 510(k) pre-market notifications within a specific time period. Recently, the FDA has required a more rigorous demonstration of substantial equivalence and the time periods required for product approvals have increased. There can be no assurance that the Company will not face substantial delays in receiving 510(k) pre-market clearance or be able to obtain such clearance. If the FDA determines that a new product is "not substantially equivalent," then the manufacturer must obtain FDA approval of a PMA application before marketing can begin. PMA applications must demonstrate, among other matters, that the medical device is safe and effective. A PMA application is typically a complex submission, usually including the results of clinical studies, and its preparation is a detailed and time-consuming process. Once a PMA application has been submitted, the FDA's review may be lengthy and include requests for additional data. Furthermore, there can be no assurance that, if required, a PMA application by the Company will be approved by the FDA. The Company also will be required to register as a medical device manufacturer with the FDA. As such, the Company may be inspected from time to time by the FDA for compliance with GMP regulations. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company will be required to comply with various FDA requirements for labeling. The Medical Device Reporting regulation requires that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for unapproved applications. Although the Company intends to comply with all applicable regulations regarding the manufacture and sale of medical devices, such regulations are subject to change and depend on administrative interpretations. There can be no assurance that future changes in regulations or interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not have a material adverse effect on the Company. The Company also will be subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, fire hazard control, and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not incur significant costs in complying with such laws and regulations or that such laws or regulations will not have a material adverse effect upon the Company. Sales of medical devices outside of the United States may be subject to foreign regulatory requirements that vary widely from country to country and the time required to obtain approval by a foreign country may be longer than that required for FDA approval. Medical imaging centers must comply with regulations, promulgated in most states by an agency of the state government, under authority delegated by the NRC, governing the possession and use of radiopharmaceuticals for medical diagnostic procedures. In order to secure approval, a medical imaging center must submit an acceptable site plan for its camera, employ adequate radiation safety and quality procedures, and provide a nuclear medicine or other qualified physician who meets certain training and experience standards. Many states have "certificate of need" regulations that require a hospital purchaser or user of expensive diagnostic equipment, such as medical imaging cameras, to obtain regulatory approval prior to purchasing the equipment. A primary purpose of those regulations is to contain health costs by restricting the number of similar units in a particular locality. There can be no assurance that such requirements or the delays that may be occasioned thereby will not limit the Company's ability to market and sell its medical imaging camera or other proposed products. Further, restrictions of this nature may increase through the passage of legislation and the adoption of regulatory changes as a part of overall health care reform. 36 Other Regulations In the event the Company enters into agreements with the DOE to acquire reactor-produced radioisotopes for distribution by the Company, the Company will be subject to regulations of the Texas Department of Health regarding the handling of radioactive materials, but believes it will not be subject to regulation by the NRC or any other agency for the production of the radioisotopes, including attendant radioactive waste in connection with such production, which will be the responsibility of the U.S. government. See "Plan of Operation" and " - Business Strategy." Any radiopharmaceuticals developed under arrangements between the Company and its affiliated medical institutions and universities will require prior approval of the FDA, which has established mandatory procedures and standards for the clinical testing, manufacture and marketing of therapeutic and diagnostic products, a protracted and costly process, including preclinical animal studies, the filing of an investigational new drug application, human clinical trials and the approval of a new drug application. The Company also will be subject to regulation by the EPA, the TNRCC, and OSHA with respect to the radioactive content of water and air discharges and the handling and disposal of radioactive waste. The Company's management team has experience in dealing with each of the above regulatory authorities and the Company intends to comply with all such laws and regulations and believes its facilities and operations will not pose any unusual hazards to nearby residents, employees or visitors. Product Liability and Insurance The use of its radioisotopes in radiopharmaceuticals and in clinical trials and the use of its proposed medical imaging camera or other proposed products may expose the Company to potential product liability which is inherent in the testing, manufacture, marketing and sale of human diagnostic and therapeutic products. In addition, the failure to effect timely delivery of radioisotopes may cause a delay in a scheduled test or procedure or result in the functional loss of radioactivity of the radioisotope, thereby exposing the Company to potential liability. The Company currently has no product liability insurance. The Company intends to obtain product liability insurance prior to commencing production of any radioisotopes and prior to the manufacture and sale of medical imaging cameras or other proposed products but there can be no assurance it will be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage. Claims or losses in excess of any liability insurance coverage ultimately obtained by the Company could have a material adverse effect on the Company. See "Risk Factors - Product Liability Exposure and Insurance." Technical Advisors To further assist in the development of its technology, the Company has Technical Advisors who advise the Company on technical and scientific issues. Technical Advisors serve without compensation. To date, one Technical Advisor has also served as a consultant to the Company and received compensation in connection therewith. The Technical Advisors are as follows: Norman Hackerman, Ph.D. has been President Emeritus and Distinguished Professor Emeritus of Chemistry of Rice University since 1987. He is a former president of the University of Texas at Austin where he served on the chemistry faculty for 25 years and was involved in the founding of Tracor Corporation. Dr. Hackerman is currently the Chair of the Scientific Advisory Board of the Welch Foundation. He is a member of the National Academy of Science and Past Chairman of the Board of the National Science Foundation. Peter Antich, Ph.D. has been Professor of Radiology and Chair of the Doctoral Program in Radiological Sciences of the University of Texas Southwestern Medical Center since 1991. Dr. Antich is a nuclear physicist whose particle physics detection research has been concentrated in the development of efficient high resolution PET cameras. James Potter, Ph.D., has been President of JP Accelerator Works since 1992. Previously, Dr. Potter was Staff Scientist at AccSys Corporation and at Los Alamos National Laboratory. Dr. Potter holds several patents and is a co- inventor of various components and apparatus related to the construction of the linear accelerator at Los Alamos and has over 20 years experience in the design, operation and construction of linear accelerators. 37 Benjamin Prichard, Ph.D. was Project Manager and Accelerator Systems Coordinator for the SSC project's laboratory in the development and construction of the SSC project linear accelerator from 1989 to 1995. Previously, Dr. Prichard was Senior Principal Physicist and Medical Systems Project Manager for Science Applications International Corporation's Accelerator Technology Division and Medical Systems. Dr. Prichard also served as a Staff Physicist at the Fermi National Accelerator Laboratory, and as the head of the Neutron Beam Program of the Tokamak Fusion Test Reactor. Ted Luera, Ph.D. has been Manager of Business Planning and development at the Reactor Engineering and Technology Center of Sandia National Laboratory since 1992. Dr. Luera is certified as a reactor operations supervisor and is experienced in neutron produced radioisotopes in nuclear reactors and hot cell operation and waste management including various areas of environmental safety. Vittoria Nardi, Ph.D. has been President of Avogadro Energy Systems, Inc. since 1991 and was Professor of Physics and Plasma Physics at Stevens Institute from 1972 to 1996. He was also Professor of Physics and Laboratory Director at the University of Ferrara, Italy. Dr. Nardi specializes in plasma physics, pulsed plasmas for neutron production and pulsed power systems. Ed Knapp, Ph.D. has been Director of the Santa Fe Research Institute and a member of the research staff since 1989, and was formerly its President. Previously, he was Director of the Los Alamos Meson Physics Facility where he was responsible for the design, construction and operation of the 800 MeV linear accelerator. He was also Director of the National Science Foundation and President of the University Research Association, which was responsible for the construction of the linear accelerator for the SSC project. Dr. Knapp holds several patents or is co-inventor on various patents relating to linear accelerator technology. Facilities The Company rents 12,000 square feet of warehouse and office space in Denton, Texas, under a one-year lease expiring in August 1997 at a monthly rental of $3,200; 32,000 square feet of warehouse space in Fort Worth, Texas at a monthly rental of $4,800 with a 30-day cancellation notice and 4,200 square feet of administrative office space in Austin, Texas under a lease expiring in July 1999 at a monthly rental of $2,300 (for aggregate monthly rental payments of $10,300 per month). The Company intends to move its executive and operations offices to its proposed administration, manufacturing, research and development facility soon after construction and to vacate the warehouse space following completion of the Radioisotope Production Facility. Employees The Company has 11 full-time employees, consisting of nine engineers and two administrative personnel, and intends to hire six additional technical personnel following consummation of this Offering. The Company believes its relationship with its employees to be good. Legal Proceedings There are no legal proceedings to which the Company is a party. 38 MANAGEMENT Executive Officers and Directors The executive officers and directors of the Company are as follows: Name Age Position - ---- --- -------- Ira Lon Morgan, Ph.D. 70 Chairman of the Board, Chief Executive Officer, Treasurer and Director(1) Tommy L. Thompson 50 Executive Vice President, Chief Operating Officer and Director Virgil L. Simmons 67 Vice President of International Marketing, Secretary and Director Joan H. Gillett 47 Chief Financial Officer Jerry W. Watson, Ph.D. 48 Vice President of Manufacturing and Systems Engineering Homer B. Hupf, Ph.D. 62 Vice President of Radiochemistry Joe Beaver 64 Vice President of Radioisotope Production Will J. Lepeska 59 Vice President of Marketing John M. McCormack 52 Director William W. Nicholson 54 Director James K. Eichelberger 73 Director Robert J. Gary 70 Director Frederick J. Bonte, M.D. 70 Director - --------------- (1) Effective May 5, 1997, Carl W. Seidel will serve as President, Chief Executive Officer and a director of the Company, and Dr. Morgan will retain the position of Chairman of the Board of Directors. Ira Lon Morgan, Ph.D., a founder of the Company, has served as Chairman of the Board of Directors, Chief Executive Officer and Treasurer since the Company's formation in November 1995. From 1987 to 1995, Dr. Morgan served as President of International Digital Modeling Corporation and its successor, International Diagnostic Measurements Corporation, a manufacturer of real-time diagnostic systems for electric utilities. From 1967 to 1987, Dr. Morgan served as President of Scientific Measurement Systems, Inc., a manufacturer of industrial computed tomography systems used in the dimensional analysis of manufactured products. From 1966 to 1976, Dr. Morgan served as President of Columbia Scientific Industries, a company engaged in manufacturing and analyzing chemical pollution monitoring systems. From 1966 to 1976, Dr. Morgan also served as Professor of Physics and directed the Center for Nuclear Studies at the University of Texas at Austin. From 1987 to 1997, Dr. Morgan also served as Adjunct Professor and Assistant to the Vice President of Research at the University of Texas. Dr. Morgan has over 100 publications in the area of nuclear physics, nuclear reactors, particle accelerators and instrumentation and has been awarded 13 patents in these areas since 1974. From 1964 to 1976, Dr. Morgan was Co-Chairman of the Conference on the Application of Accelerators in Research and Industry and was also actively involved in the Los Alamos Linear Accelerator program. Dr. Morgan is a Fellow of the American Physics Society and a Fellow of the American Nuclear Society. Dr. Morgan received a Ph.D. in physics from the University of Texas at Austin in 1954, an M.A. in Physics and Mathematics from Texas Christian University in 1951 and a B.A. in Physics from Texas Christian University in 1949. Tommy L. Thompson joined the Company in February 1997 as Executive Vice President and Chief Operating Officer. From 1996 to 1997, Mr. Thompson was Executive Vice President of Coastal Power Company, a commercial provider of electric power, where he was responsible for international operations, including business development, project management, engineering and construction. From 1994 to 1996, he served as Vice President of Destec Energy Asia Pte Ltd., 39 a commercial power plant construction company, and from 1992 to 1994, he served as Vice President of Brown and Root, an international engineering and construction company. Mr. Thompson received a B.S. in Mechanical Engineering from the University of Texas in 1970 and is a registered professional Engineer in the State of Texas. Virgil L. Simmons, a founder of the Company, has served as Senior Vice President of International Operations since March 1997. Prior thereto, Mr. Simmons served as President of the Company from its formation in November 1995 until March 1997. Mr. Simmons has also served as Secretary of the Company since its formation. From 1992 to 1994, Mr. Simmons served as a consultant to the President of Tracor Inc. to manage its overseas and manufacturing operations. In 1992, Mr. Simmons founded the Westbank Partnership, and from 1993 to 1995, served as President of Allied Interests, Inc., which companies provided management and marketing consulting services and venture capital to start-up technology companies. From 1975 to 1990, Mr. Simmons held various positions at Tracor, Inc., a diversified aerospace, military and commercial products company, and from 1982 to 1990, served as Vice President of the International Division. From 1973 to 1975, Mr. Simmons served as Vice President of Engineering of Accelerators Incorporated. From 1972 to 1973, Mr. Simmons served as a consultant in the consulting firm of Wilkinson, Sedwick & Yelverton. From 1953 to 1972, Mr. Simmons held various positions at Texas Instruments, including positions in engineering, program management, marketing and corporate management, and in 1972, served as Corporate Director of all intercompany programs. From 1958 to 1960, Mr. Simmons served as a member of the Synthetic Aperture Guidance Committee, and in 1988 was selected by the U.S. Secretary of Defense as one of the seven U.S. members of the NATO Industrial Advisory Group (NIAG) in Brussels, Belgium. Mr. Simmons received a B.S. in Physics and Mathematics from the University of Texas in 1951. Joan H. Gillett joined the Company in March 1997 as Chief Financial Officer. From 1986 to 1996, Mrs. Gillett served as President and Chief Financial Officer of Life Savings Bank, SSB. From 1985 to 1986, Mrs. Gillett served as the Assistant Vice President for Goliad Savings and Loan, and from 1983 to 1985, served as staff accountant for the Dominion Marketing Group. Mrs. Gillett received a B.B.A. with honors in Accounting from Southwest Texas University and a B.A. from the University of Houston in 1983 and 1970, respectively, and has been registered as a Certified Public Accountant in Texas since 1987. Jerry W. Watson, Ph.D. joined the Company in March 1997 as Vice President of Manufacturing and Engineering. From 1994 to 1997, Dr. Watson served as Deputy Director of the Accelerator Technology Division of the Los Alamos National Laboratory. Dr. Watson was deputy head of the Accelerator Division of the SSC Project, where he led the design of the Superconducting Super Collider linear accelerator. Dr. Watson received a Ph.D., M.S. and B.S. in physics from the University of Chicago in 1971, 1965 and 1964, respectively, and received a E.M.B.A. from the University of New Mexico in 1987. Joe Beaver joined the Company in June 1996 as Vice President of Radioisotope Production. From 1980 to 1995, Mr. Beaver served as Cyclotron Operation Manager and Director of Cyclotron Technology Development for Mallinckrodt, Inc. From 1969 to 1980, he served as Technical Director of the cyclotron facility at Mount Sinai Medical Center in Miami Beach, Florida, and from 1961 to 1969, he served as Radioisotope Production Manager of the cyclotron at Oak Ridge National Laboratory. Mr. Beaver received a B.S. in Physics from the University of Central Oklahoma in 1958. Homer B. Hupf, Ph.D. joined the Company in June 1996 as Vice President of Radiochemistry. From 1985 to 1994, Dr. Hupf was a scientific investigator for Hybritech Inc., an international instrumentation and pharmaceutical company. From 1982 to 1985, Dr. Hupf served as Department Head of Radiochemistry/Radiopharmacy of King Faisal Specialist Hospital, a cyclotron-based cancer research center. From 1980 to 1982, he served as Vice President of Radiopharmaceutical Production of Radpharm Inc., a cyclotron-based radiopharmaceutical manufacturer and regional nuclear pharmacy. From 1976 to 1980, he served as Vice President of Radiopharmacy of Diagnostic Isotopes Inc., a pharmaceutical manufacturing and regional nuclear pharmacy, and from 1969 to 1976, as Department Head of Radiopharmacy of Mount Sinai Medical Center, a cyclotron-based research center. From 1960 to 1969, Dr. Hupf served as Staff Scientist-Isotope Production of Oak Ridge National Laboratory. Dr. Hupf received a Ph.D. and an M.S. in chemistry from the University of Tennessee in 1969 and 1965, respectively. He also received an M.S. in pharmaceutics and a B.S. in pharmacy from Philadelphia College of Pharmacy & Science in 1959 and 1955, respectively. Will J. Lepeska joined the Company in June 1996 as Vice President of Marketing. In 1968, Mr. Lepeska founded Hospital Financial Corporation, a company specializing in medical equipment leasing, and has served as its President since inception. From 1954 to 1968, Mr. Lepeska was Vice President of Marketing of Nuclear-Chicago Corp., a nuclear medicine 40 instrument company, where he was responsible for marketing the Nuclear Medicine Imaging Camera and from 1967 to 1970, he served as a director. Mr. Lepeska received a B.S. in Electrical Engineering from Marquette University in 1954. John M. McCormack has been a director since December 1996. Mr. McCormack is a principal in several real estate companies in the Houston, Texas area. From 1977 to 1987, Mr. McCormack served as President of Visible Changes, a chain of 17 Texas beauty salons, and continues to serve as its Chairman. Mr. McCormack currently serves on the Board of Advisors of M.D. Anderson Hospital and co-chairs the Studies of Entrepreneurship at the University of Houston. William W. Nicholson has been a director since March 1997 and also serves as Chairman of the Company's Board of Technical Advisors. Since 1992, Mr. Nicholson has been a private investor. From 1984 to 1992, Mr. Nicholson was Chief Operating Officer of Amway Corporation and from 1974 to 1977 he served as Appointments Secretary to President Ford. Currently, Mr. Nicholson serves on the Board of Advisors to the M.D. Anderson Cancer Institute. James K. Eichelberger has been a director since April 1997. Mr. Eichelberger is a private investor, real estate broker and commercial builder in the Austin, Texas area. Robert J. Gary has been a director since March 1997. Since 1992, Mr. Gary has been President of Gary Investment & Services, an investment and consulting firm. From 1993 to 1996, Mr. Gary was Chairman of the Board of Integrated Diagnostic Measurement Corp., and from 1960 to 1992, was Executive Vice President of the Texas Utilities System. Frederick J. Bonte, M.D. has been a director since April 1997. Dr. Bonte serves as Director of the Nuclear Medicine Center of Southwest Medical School in Dallas, Texas, a position he has held for more than five years. --------------- Carl W. Seidel, age 58, will join the Company as President and Chief Executive Officer on May 5, 1997. From 1969 to 1997, Mr. Seidel served in various positions at New England Nuclear Company and its successors by merger, E.I. duPont De Nemouris and Company ("DuPont") and DuPont Merck Pharmaceutical Corp. ("DuPont Merck"), a joint venture between DuPont and Merck and Company, Inc. for the manufacture of radiopharmaceuticals and other drug products. From 1991 to 1997, he served as Associate Director of Technical Affairs of the Radiopharmaceutical Division of DuPont Merck. From 1991 to 1996, he served as Associate Director and Business Manager of the Radioisotopes and Radioactive Sources Unit and from 1981 to 1991, as Manager of the Radiopharmaceutical Division, Radiopharmaceutical Manufacturing Operations and Contract Manufacturing in Europe of DuPont, a multinational chemical, drug and pharmaceutical company. From 1969 to 1981, he served as Assistant Division Manager, New Ventures Operations and Commercial Development of New Technology of New England Nuclear Company, a manufacturer of radioisotopes and radioactive sources. From 1990 to 1994, Mr. Seidel served as a member of the Department of Energy National Advisory Committee on the need for a national biomedical tracer facility and an independent producer of radioisotopes. Mr. Seidel received a M.S. in Chemistry from the University of Notre Dame in 1962 and a B.S. in Chemistry from the University of Wisconsin in 1959. --------------- As a result of their managerial positions, stock ownership and activities relating to the organization of the Company, Dr. Morgan and Mr. Simmons may be deemed "promoters" as that term is defined in the Securities Act. Each member of the Board was elected to hold office for a period of one year and until his successor is elected and qualified or until such director's earlier death, resignation or removal. Officers are elected annually and serve at the pleasure of the Board of Directors, subject to rights, if any, under contracts of employment. Committees The Executive Committee, established in January 1997, currently consists of Robert J. Gary, Ira Lon Morgan, William W. Nicholson and Virgil L. Simmons. The Executive Committee is responsible for the Company's general operations, as provided in directives from the Board of Directors. The Audit Committee, established in January 1997, currently consists of James K. Eichelberger, John M. McCormack and Ira Lon Morgan. The Audit Committee meets with the Company's independent auditors to review the scope 41 and timing of their audit services, any other services they are asked to perform, the report of independent auditors on the Company's consolidated financial statements following completion of their audit and the Company's policies and procedures with respect to internal accounting and financial controls. In addition, the Audit Committee makes an annual recommendation to the Board of Directors concerning the appointment of independent auditors for the ensuing year. The Compensation Committee, established in January 1997, currently consists of James K. Eichelberger, Robert J. Gary, John M. McCormack, Ira Lon Morgan and William W. Nicholson. The Compensation Committee reviews the compensation and benefits of all officers of the Company, makes recommendations to the Board of Directors and reviews general policy matters relating to compensation and benefits of employees of the Company. Executive Compensation For the period November 1, 1995 (inception) through December 31, 1996, Virgil L. Simmons, the Company's Vice President of International Marketing, was issued 50,428 shares of Common Stock at a value of $1.40 per share, in payment of $70,599 of compensation for his services as an officer of the Company. Other than the foregoing issuance of shares, none of the Company's executive officers were paid any compensation for services to the Company as an executive officer for the period November 1, 1995 (inception) through December 31, 1996. The Company has entered into an employment/royalty agreement with Dr. Morgan effective November 1, 1995, pursuant to which Dr. Morgan is employed as Chairman and President and Chief Executive Officer or in a senior advisory position through October 31, 2000 at an annual salary of $100,000, increasing by $10,000 per year commencing November 1, 1997. Dr. Morgan is entitled to participate in any pension, retirement, stock appreciation or stock option plan, or any key employee compensation plan which may be established. Dr. Morgan's employment is terminable only for "good cause" as determined by a court of law. If Dr. Morgan's employment is terminated due to mental or physical disability or incapacity, the Company will pay Dr. Morgan six months salary. Dr. Morgan has agreed to devote not less than 75% of his working hours to the Company's business interests. The employment agreement contains confidentiality, non-competition and non-solicitation provisions. In addition to salary, Dr. Morgan will receive royalty payments semi-annually equal to 1% of the gross revenues received by the Company from the sale, lease or use of products developed, manufactured and marketed by the Company under any license agreement, know-how or technology developed or being developed by Dr. Morgan, and the greater of 0.5% of gross revenues or 20% of royalties received from the licensing by the Company of any such patents, know-how or technology to others. The total remuneration of Dr. Morgan from salary and royalties is not to exceed $150,000 per year until gross revenues of the Company exceed $5,000,000 and the Company is profitable. Royalties over and above the standard salary are to be paid out of profits not to exceed 10% of the Company's pre-tax profits. Dr. Morgan may accept royalties in the form of cash, Common Stock, deferred annuities or tax-free retirement plans offered by the Company or others in combination or percentages of the above forms of royalty payment. The Company's Board of Directors is required to offer such remuneration to Dr. Morgan on a semi-annual basis based on earnings per share and market value of the Company's Common Stock. Royalty compensation may not exceed $500,000 in any one-year period. Dr. Morgan has entered into an addendum to his employment agreement pursuant to which he has waived any rights to salary through December 31, 1996. The Company intends to enter into a five-year employment agreement with Carl W. Seidel for his services as President and Chief Executive Officer. The Company is a 51% beneficiary of a "key man" life insurance policy in the amount of $1,000,000 on the life of Dr. Morgan, and Dr. Morgan's designee is a 49% beneficiary. The Company has applied for a $500,000 key-man life insurance policy on the life of Mr. Seidel. Consultants The Company is dependent upon third parties for significant aspects of its operations and has retained consultants to assist in the design and configuration of the LINAC and its administration, manufacturing, research and development 42 facility and Radioisotope Production Facility. For the period November 1, 1995 (inception) through December 31, 1996, the Company paid $107,149 in cash and issued 186,142 shares of Common Stock at a value of $260,600 to consultants for services rendered, including Common Stock issued to certain officers and directors of the Company. See "Certain Transactions." As of March 31, 1997, the Company owed 12 consultants an aggregate of approximately $12,000 for services rendered in 1997. The Company will retain additional consultants as required. Long Term Incentive Plan The Company's Board of Directors is considering approval of the Company's 1997 Long Term Incentive Plan (the "Incentive Plan") which will be subject to stockholder approval. The Incentive Plan authorizes the granting of incentive stock options and non-qualified stock options to purchase Common Stock, stock appreciation rights, restricted stock and performance units, to key executive and other key employees of the Company, including officers of the Company and its subsidiaries. The purpose of the Incentive Plan is to attract and retain key employees, to motivate key employees to achieve long-range goals and to further identify the interests of key employees with those of the other shareholders of the Company. The Incentive Plan authorizes the award of 600,000 shares of Common Stock to be used for stock options, stock appreciation rights, or restricted stock. If an award made under the Incentive Plan expires, terminates or is forfeited, canceled or settled in cash, without issuance of shares of Common Stock covered by the award, those shares will be available for future awards under the Incentive Plan. The Incentive Plan will be administered by the Board of Directors or, if directed by the Board of Directors, the Compensation Committee (the Board of Directors or, if applicable, the Compensation Committee is referred to herein as the "Committee"). Executives and other key full-time employees of the Company and its subsidiaries may be selected by the Committee to receive awards under the Incentive Plan. The Incentive Plan provides that no more that 50,000 shares of Common Stock may be subject to awards granted per year to any one employee participating in the Incentive Plan. In the discretion of the Committee, an eligible employee may receive an award in the form of a stock option, stock appreciation right, restricted stock award or performance unit or any combination thereof, and more than one award may be granted to an eligible employee. The Incentive Plan authorizes the award of both incentive stock options ("ISOs") and nonqualified stock options. Under the Incentive Plan, an option may be exercised at any time during the exercise period established by the Committee, except that: (i) no option may be exercised more than 90 days after employment with the Company and its subsidiaries terminates by reason other than death, disability or authorized leave of absence for military or government service; and (ii) no option may be exercised more than 12 months after employment with the Company and its subsidiaries terminates by reason of death or disability. The aggregate fair market value (determined at the time of the award) of the Common Stock with respect to which ISOs are exercisable for the first time by any employee during any calendar year may not exceed $100,000. The term of each option is determined by the Committee, but in no event may such term exceed 10 years from the date of grant. The exercise price of options is determined by the Committee, but the exercise price of ISOs cannot be less than the fair market value of the Common Stock on the date of the grant, and the exercise price of nonqualified stock options cannot be less than 50% of the fair market value of the Common Stock on the date of grant. The exercise price of options may be paid in cash or in shares of Common Stock. Grants of options do not entitle any optionee to any rights as a shareholder, and such rights will accrue only as to shares actually purchased through the exercise of an option. --------------- The Company has agreed for a 24-month period commencing on the date of this Prospectus, without the prior consent of the Representative, not to (i) grant any options or warrants to purchase Common Stock to employees or directors of the Company with an exercise price per share less than the initial public offering price of the Common Stock offered hereby, except that options or warrants granted to key officers of the Company may have an exercise price of not less than 85% of the initial public offering price; or (ii) issue more than an aggregate of 600,000 shares of Common Stock (including securities with equivalent rights as Common Stock, equivalent securities issuable upon exercise of options, warrants or other contractual rights and securities convertible directly or indirectly into Common Stock or equivalent securities), no such shares to be issued at a price per share less than the greater of market value at the date of issuance (or grant, as the case may be), or the initial public offering price of the Common Stock offered hereby. Notwithstanding the foregoing, the Company may issue securities in connection with an underwritten public offering on behalf of the Company, authorize and issue a class of preferred stock, and issue securities in connection with acquisitions, mergers and other reorganizations. 43 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the ownership of the Common Stock as of the date of this Prospectus, and as adjusted to reflect the sale of the shares offered hereby by (i) each person known by the Company to be the owner of more than 5% of the outstanding shares of Common Stock, (ii) each director, (iii) all directors and executive officers as a group and (iv) the Selling Stockholders:
Percent of Outstanding Shares of Common Stock ----------------------------------- Number of Shares Name and Address of Beneficial Owner Beneficially Owned(1) Before Offering After Offering - ------------------------------------ --------------------- --------------- -------------- Ira Lon Morgan 3800 Palomar Lane Austin, Texas 78759 ....................... 1,111,838 28.7% 18.3% Virgil L. Simmons 5 Sugar Shack Dr. Austin, Texas 78746 ....................... 246,902 6.4% 4.1% James K. Eichelberger 12300 FM 140 West Driftwood, Texas 78619 .................... 284,660(2) 7.4% 4.7% John M. McCormack 1303 Campbell Road Houston, Texas 7705 ....................... 372,375 9.6% 6.1% William W. Nicholson 1101 Post Oak Blvd., Suite 9700 Houston, Texas 77056 ...................... 372,375 9.6% 6.1% Dennis Bieber 55 Hiddenledge Road Englewood, New Jersey 07631 ............... 194,522 5.0% 3.2% Tommy L. Thompson ........................... -- * * Robert J. Gary .............................. 125,000 3.2% 2.1% Frederick J. Bonte, M.D ..................... -- * * [Selling Stockholder](3) [Selling Stockholder](3) All directors and executive officers as a group (14 persons) ...................... 2,628,357 67.9% 43.3%(4)
- --------------- *Less than 1%. (1) As used in this table, "beneficial ownership" means the sole or shared power to vote or direct the voting of a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose, or direct the disposition, of a security.) A person is deemed as of any date to have "beneficial ownership" of any security that such person has the right to acquire within 60 days of such date. (2) Includes 17,188 shares owned by Mr. Eichelberger's spouse. Mr. Eichelberger disclaims beneficial ownership of the shares owned by his spouse. (3) The aggregate 100,000 shares to be sold by the Selling Stockholders upon exercise of the Underwriters' over-allotment option will be sold on a pro rata basis. (4) In the event the Underwriters' over-allotment option is exercised in full, all directors and executive officers as a group will beneficially own 41.7% of the outstanding shares of Common Stock after this Offering. 44 CERTAIN TRANSACTIONS For the period November 1, 1995 (inception) through December 31, 1996, Dr. Morgan, Chairman and Chief Executive Officer, loaned the Company an aggregate of $120,000 at an interest rate of 10% per annum. The Company has repaid $95,000 of such loans in cash, exchanged 1,250,000 shares of its Common Stock for cancellation of $5,000 of such loans and intends to repay the $20,000 principal balance out of a portion of the net proceeds of this Offering. See "Use of Proceeds" and "Plan of Operation - Liquidity and Capital Resources." In December 1995 and January 1996, the Company issued an aggregate of 2,062,920 shares of Common Stock at a value of $.004 per share to founders, consisting of (i) 1,250,000 shares to Dr. Morgan in exchange for $5,000 of the principal amount of a loan from Dr. Morgan to the Company, (ii) 250,000 shares to Virgil L. Simmons, Vice President of International Marketing, at a purchase price of $.004 per share, (iii) 250,000 shares to James K. Eichelberger, a director of the Company, at a purchase price of $.004 per share and (iv) 312,920 shares to other founders at a purchase price of $.004 per share. In January 1996, the Company's founders transferred an aggregate of 230,411 shares of Common Stock to three individuals in consideration for consulting services rendered by them to the Company, consisting of 159,862 shares, 28,224 shares, 28,225 shares and 14,100 shares transferred by Dr. Morgan, Mr. Simmons, Mr. Eichelberger and other founders, respectively. The transferees of such shares included Homer B. Hupf, Vice President of Radiochemistry, who received an aggregate of 57,603 shares in consideration for consulting services relating to the design of the proposed Radioisotope Production Facility, and Joe Beaver, Vice President of Radioisotope Production, who received an aggregate of 57,603 shares in consideration for consulting services relating to the design and licensing of the proposed Radioisotope Production Facility. In February 1996, the Company issued at a value of $.004 per share 25,000 shares of Common Stock to Hospital Financial Corporation in consideration for the assignment of an exclusive license. See "Business - Proposed Medical Imaging Camera." In May 1996, the Company approved, and in November 1996 issued, at a value of $.004 per share 21,700 shares of Common Stock to Dr. Morgan and 21,700 shares of Common Stock to Mr. Eichelberger in consideration for their respective pledges of $130,000 and $100,000 of personal assets as partial collateral for the Company's $2,900,000 LINAC Loan. In July 1996, the Company issued, at a value of $.004 per share, 21,700 shares of Common Stock to a stockholder in consideration for such stockholder's pledge of $100,000 of personal assets as collateral for a $100,000 bank loan obtained by the Company. See "Plan of Operations - Liquidity and Capital Resources." In July 1996, the Company borrowed $100,000 from a bank, secured by $100,000 of the personal assets of a stockholder of the Company. The Company intends to repay this loan with a portion of the net proceeds of this Offering. See "Use of Proceeds" and "Plan of Operation - Liquidity and Capital Resources." In November 1996, the Company issued at a value of $1.40 per share (i) 50,428 shares to Mr. Simmons as compensation for serving as an officer of the Company, (ii) 35,714 shares of Common Stock to Mr. Eichelberger in consideration for financial consulting services, and (iii) 50,000 shares of Common Stock to each of two consultants for consulting services rendered to the Company. In December 1996, the Company borrowed $1,750,000 from a bank, secured, in part, by $130,000 of the personal assets of Dr. Morgan and $100,000 of the personal assets of Mr. Eichelberger. At March 31, 1997, the outstanding principal balance on this loan was $1,654,411, which the Company intends to repay with a portion of the net proceeds of this Offering. See "Use of Proceeds" and "Plan of Operation - Liquidity and Capital Resources." In December 1996, the Company acquired all of the capital stock of Gazelle Realty, Inc., a Texas corporation that owns the 20-acre tract of land on which the Radioisotope Production Facility will be constructed and an additional 1.6 acre tract of land on which the Company's administrative, manufacturing and research and development facility will be constructed, from Messrs. John M. McCormack and William W. Nicholson, in exchange for 372,375 shares of Common Stock to Mr. McCormack and 372,375 shares to Mr. Nicholson, valued at $1.60 per share. The Company issued 82,750 shares to another individual in December 1996 in consideration for acting as broker in such transaction. Messrs. McCormack and Nicholson were elected directors of the Company subsequent to this transaction. 45 In December 1996 and January 1997, the Company completed a $1,060,000 private placement of 662,501 shares of Common Stock (100,000 of such shares having been issued in January 1997) to 29 Texas investors at a purchase price of $1.60 per share, of which 17,188 shares were purchased by Mr. Eichelberger's spouse. See "Plan of Operation Liquidity and Capital Resources." In January 1997, the Company issued 39,283 shares of Common Stock to Mr. Eichelberger at a value of $1.60 per share in consideration for his assistance in obtaining the Company's $2,900,000 LINAC Loan. See "Plan of Operation - Liquidity and Capital Resources." In January 1997, the Company obtained a $500,000 line of credit from a bank, $250,000 of which is personally guaranteed by Mr. McCormack and an additional $250,000 of which is personally guaranteed by Mr. Nicholson. At March 31, 1997, $400,000 of this line of credit was outstanding. The Company intends to repay the outstanding balance with a portion of the net proceeds of this Offering. See "Use of Proceeds" and "Plan of Operation - Liquidity and Capital Resources." In April 1997, the Company's Board of Directors authorized the Company's Chairman of the Board to negotiate, on behalf of the Company, and upon conclusion of such negotiations, for seven of the Company's founding stockholders to transfer an aggregate of 150,000 shares of Common Stock at a purchase price or value of $1.60 per share, to the following key employees, as part of the Company's incentive compensation program: 75,000 shares to Carl W. Seidel, who will serve as President and Chief Executive Officer commencing May 1997; 50,000 shares to Tommy L. Thompson, Executive Vice President; and 25,000 shares to Jerry W. Watson, Ph.D., Vice President of Manufacturing and Systems Engineering. 46 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). As of the date of this Prospectus, there are 3,868,446 shares of Common Stock issued and outstanding and held of record by 45 persons and no issued and outstanding shares of Preferred Stock. Common Stock The shares of Common Stock currently outstanding are, and the shares of Common Stock that will be outstanding upon the consummation of this Offering will be, validly issued, fully paid and non-assessable. Each holder of Common Stock is entitled to one vote for each share owned of record on all matters voted upon by the stockholders. In the event of a liquidation, dissolution or winding-up of the Company, the holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company and the liquidation preference of any outstanding Preferred Stock. The holders of the Common Stock have no preemptive rights or cumulative voting rights and there are no redemption, sinking fund or conversion provisions applicable to the Common Stock. Holders of Common Stock are entitled to receive dividends if, as and when declared by the Board of Directors, out of funds legally available for such purpose, subject to the dividend and liquidation rights of any Preferred Stock that may be issued. Preferred Stock Pursuant to the Company's Restated Articles of Incorporation, the Board of Directors is authorized, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to establish the designations, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights of any series of Preferred Stock so issued. The issuance of shares of Preferred Stock could materially adversely affect the voting power and other rights of holders of Common Stock. Because the terms of the Preferred Stock may be fixed by the Board of Directors without shareholder action, the Preferred Stock could be issued quickly with terms designated to defeat a proposed takeover of the Company, or to make the removal of management or the directors of the Company more difficult. The authority to issue Preferred Stock or rights to purchase such stock could be used to discourage a change in control of the Company. Management of the Company is not aware of any threatened transactions to obtain control of the Company, and the Board has no current plans to issue any shares of Preferred Stock. Indemnification As permitted by the Texas Business Corporation Act ("TBCA"), the Company's Restated Articles of Incorporation provide that the Company will indemnify its officers, directors, employees and agents to the fullest extent permitted by the TBCA against actions that may arise against them in such capacities, and to advance expenses in connection with any such actions. The TBCA provides that a corporation may indemnify a person who was, is, or is threatened to be made a named defendant in a proceeding because such person is or was a director if it is determined in accordance with the provisions of the TBCA that the person (i) conducted himself in good faith, (ii) reasonably believed, in the case of conduct in his official capacity as director, that his conduct was in the corporation's best interests or, in other cases, that his conduct at least was not opposed to the corporation's interests and (iii) in the case of any criminal proceeding, had no reasonable cause to be believe his conduct was unlawful. A director may not be indemnified with respect to a proceeding in which the person is found liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity, or in which the person is found liable to the corporation. Officers, employees and agents of a corporation are entitled to be indemnified by the corporation as, and to the same extent provided for, directors of the corporation. The Company has applied for directors' and officers' liability insurance with an aggregate policy limit of $1,000,000. Transfer Agent and Registrar American Stock Transfer & Trust Company, New York, New York is the transfer agent and registrar for the Common Stock. 47 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 6,068,446 shares of Common Stock outstanding. Of these shares, the 2,200,000 shares issued in this Offering (2,530,000 shares of Common Stock if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction under the Securities Act, unless acquired by an "affiliate" of the Company (as that term is defined in the Securities Act) in which event such securities will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 3,868,446 shares of Common Stock currently outstanding are "restricted securities" (the "Restricted Shares") within the meaning of Rule 144 and may not be sold unless they are registered under the Securities Act or sold pursuant to Rule 144 or another exemption from registration. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who has beneficially owned "restricted securities" for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale, provided that certain public information about the Company, as required by Rule 144, is then available and the seller complies with the manner of sale and notification requirements of the rule. A person who is not an affiliate and has not been an affiliate within three months prior to the sale and has, together with any previous owners who were not affiliates, beneficially owned restricted securities for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the availability of current public information, volume limitations, manner of sale provisions or notice requirements of Rule 144. The Restricted Shares will become available for sale under Rule 144 at various dates from 90 days after the date of this Prospectus to January 31, 1998, and the holders of such shares have agreed not to sell or otherwise transfer their shares for a minimum of 12 months following the date of this Prospectus without the consent of the Representative and the Company and, for the 12-month period thereafter, such holders have agreed not to sell their shares except at a per share price at least equal to the initial public offering price per share and only through the Representative acting as broker. The Company is unable to predict the effect, if any, that future sales of shares of Common Stock, or the availability of shares for future sale will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, may have an adverse effect on the market price of the Common Stock. See "Risk Factors - Potential Adverse Effect of Shares Eligible for Future Sale." 48 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Keane Securities Co., Inc. is acting as representative (in such capacity, the "Representative"), have severally and not jointly agreed, subject to the terms and conditions of the Underwriting Agreement among the Company and the Underwriters (the "Underwriting Agreement"), to purchase from the Company and the Company has agreed to sell to the Underwriters on a firm commitment basis, the respective number of shares of Common Stock set forth opposite their names below: Number Shares of Underwriter Common Stock - ----------- ------------ Keane Securities Co., Inc........................... --------- Total............................................... 2,200,000 ========= The Underwriters are committed to purchase all the shares of Common Stock offered hereby, if any of such shares of Common Stock are purchased. The Underwriting Agreement provides that the obligations of the several Underwriters are subject to the approval of certain legal matters by their counsel and various other conditions precedent specified therein. The Representative has advised the Company and the Selling Stockholders that the Underwriters propose initially to offer the Common Stock directly to the public at the initial public offering price per share set forth on the cover page of this Prospectus and that the Underwriters may allow to certain dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") a selling concession not in excess of $ per share of Common Stock. Such dealers may reallow a concession not in excess of $ per share of Common Stock to certain other dealers who are NASD members. After the commencement of the Offering, the public offering price, concession and reallowance may be changed by the Representative. The Representative has advised the Company that it does not expect sales to discretionary accounts by the Underwriters to exceed 5% of the total number of shares of Common Stock offered hereby. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make. The Company has also agreed to pay to the Representative a non-accountable expense allowance equal to 2% of the gross proceeds derived from the sale of the Common Stock underwritten, of which $50,000 has been paid to date. The Company and the Selling Stockholders have granted to the Underwriters an over-allotment option, exercisable during the 45-day period from the date of this Prospectus, to purchase from them up to an additional 230,000 shares and 100,000 shares of Common Stock, respectively, at the initial public offering price per share of Common Stock offered hereby, less the underwriting discount and the non-accountable expense allowance, solely to cover over-allotments, if any, in connection with the sale of the Common Stock offered hereby. See "Principal and Selling Stockholders." To the extent that the Underwriters exercise such option in whole or in part, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the number of the additional shares of Common Stock in proportion to its initial commitment and the Company and the Selling Stockholders will be obligated to sell such shares of Common Stock to the Underwriters. In connection with this Offering, the Company has agreed to sell to the Representative, for nominal consideration, warrants to purchase from the Company up to 220,000 shares of Common Stock (the "Representative's Warrants"). The Representative's Warrants are initially exercisable at a price of per share of Common Stock (120% of the initial public offering price per share of Common Stock) for a period of four years, commencing at the beginning of the second year after their issuance and sale, and are restricted from sale, transfer, assignment or hypothecation for a period of 12 months from the date of this Prospectus, except to stockholders and officers of the Representative. The Representative's Warrants provide for adjustment in the number of shares of Common Stock issuable upon the exercise thereof and in the exercise price of the 49 Representative's Warrants as a result of certain events, including subdivisions and combinations of the Common Stock. The Representative's Warrants grant to the holders thereof certain rights of registration with regard to the Common Stock issuable upon exercise thereof. All officers and directors of the Company, and all current stockholders of the Company and holders of options (including Common Stock underlying options, warrants or other securities exercisable or exchangeable for or convertible into Common Stock) have agreed (i) for a period of 12 months after the date of this Prospectus, not to, directly or indirectly, issue, offer, agree or offer to sell, sell, transfer, assign, encumber, grant an option for the purchase or sale of, pledge, hypothecate or otherwise dispose of any beneficial interest in such securities without the prior written consent of the Company and the Representative and (ii) for the 12-month period thereafter, not sell their shares at a price per share less than the initial public offering price per share, and then only through the Representative acting as broker. An appropriate legend shall be marked on the face of certificates representing all such securities. The Company and the Representative jointly may, at any time without notice, release all or a portion of the shares subject to such lock-up agreements. In connection with this Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 330,000 shares of Common Stock, by exercising the over-allotment option referred to above. In addition, the Representative may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price per share of the Common Stock will be determined arbitrarily by negotiation between the Company and the Representative and does not necessarily bear any relationship to the Company's asset value, net worth or other established criteria of value. The factors considered in such negotiations, in addition to prevailing market conditions, include the history and prospects of the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure, the market for initial public offerings and certain other factors as are deemed relevant. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to a copy of each such agreement which are filed as exhibits to the Registration Statement. See "Additional Information." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Epstein Becker & Green, P.C., New York, New York. Certain matters regarding intellectual property rights will be passed upon for the Company by Locke Purnell Rain Harrell (A Professional Corporation). Orrick, Herrington & Sutcliffe LLP, New York, New York, has acted as counsel to the Underwriters in connection with this Offering. 50 EXPERTS The consolidated financial statements of International Isotopes Inc. and Subsidiary (development stage enterprises) as of December 31, 1996 and for the period from November 1, 1995 (inception) to December 31, 1996 included herein or in the Registration Statement of which this Prospectus forms a part, have been audited by KPMG Peat Marwick LLP, independent certified public accountants, whose report thereon appears herein and elsewhere in this Registration Statement. Such financial statements are included in reliance upon the report of KPMG Peat Marwick LLP, given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and exhibits and schedules thereto, certain parts of which having been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto which may be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Commission's Public Reference Section at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission pursuant to its Electronic Data Gathering Analysis and Retrieval ("EDGAR") system. The address of the Commission's Web site is http/www.sec.gov. The Registration Statement including all exhibits thereto and amendments thereof, has been filed with the Commission through EDGAR. Descriptions contained in this Prospectus as to the contents of any contract or other documents filed as an exhibit to the Registration Statement are not necessarily complete and each such description is qualified by reference to such contract or document. 51 GLOSSARY Accelerator........................... A machine that accelerates charged proton particles to an energy level suitable for causing stable isotopes to be transformed into radioisotopes. Two types of accelerators, the linear accelerators and the cyclotron, are used for the production of radioisotopes. Alpha particle........................ A positively charged nuclear particle identical with the nucleus of a helium atom that consists of two protons and two neutrons and is ejected at a high speed in certain radioactive transformations. Atom.................................. The smallest particle of an element that can exist either alone or in combination. Each atom has a nucleus containing protons and neutrons. Beta particle......................... An electron or positron ejected from the nucleus of an atom during radioactive decay. Cold kit.............................. A pre-measured, sterilized packaged set of chemicals used by hospitals and clinics to attach a radioisotope to a specific carrier drug according to a procedure furnished by the manufacturer. Computerized axial tomography......... Radiography in which a three-dimensional image of a body structure is constructed by computer from a series of plane cross-sectional images made along an axis. Cyclotron............................. A type of proton accelerator that accelerates particles along a circular path to produce the energy suitable for transforming a stable isotope into a radioisotope. Element............................... One of the more than 100 fundamental substances constituting all matter, each of which consists of atoms of only one kind. Half-life............................. The time it takes for one-half of the atoms in a radioisotope to decay into another isotope. Isotope, stable isotope and enriched stable isotope............... An isotope is one of two or more forms of the same element. Each isotope contains the same number of protons but a different number of neutrons in the nucleus of its atom. A stable isotope is a nonradioactive isotope. Stable isotopes are used as targets in accelerators for the production of radioisotopes. An enriched stable isotope is a stable isotope which has been treated to eliminate or minimize the presence of other undesired stable isotopes. Linear accelerator.................... A type of proton accelerator that accelerates particles along a linear path to produce the energy required to transform a stable isotope into a radioisotope. Monoclonal antibody................... Single-cell immunoglobulins produced in cells and increasingly used as carriers of drugs to intended destinations. Neutron............................... An uncharged particle within the nucleus of an atom. Neutrons react with stable isotopes in nuclear reactors to create radioisotopes. Nuclear medicine...................... A branch of medicine in which radiopharmaceuticals are used as tracers in diagnosing the location and severity of diseases and the functionality of organs through medical imaging devices, and as therapeutics in treating cancers, tumors and organ disorders. Peptide............................... Any of various naturally occurring compounds derived from amino acids and increasingly used as carriers of drugs to intended destinations. 52 Proton................................ A positively charged particle within the nucleus of an atom. Protons react with stable isotopes in accelerators to produce radioisotopes. Radioisotope.......................... A radioactive isotope, i.e. an isotope that spontaneously emits alpha or beta rays (streams of alpha or beta particles) by the disintegration of the nuclei of its atoms. Radiopharmaceutical................... A radioisotope coupled with a carrier drug used in nuclear medicine. 53 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (Development Stage Enterprises) Index To Consolidated Financial Statements Page ---- Report of KPMG Peat Marwick LLP, Independent Auditors..................... F-2 Consolidated Financial Statements: Balance Sheet as of December 31, 1996 ................................. F-3 Statement of Operations and Accumulated Deficit for the period from November 1, 1995 (inception) through December 31, 1996.............................................. F-4 Statement of Stockholders' Equity for the period from November 1, 1995 (inception) through December 31, 1996................. F-5 Statement of Cash Flows for the period from November 1, 1995 (inception) through December 31, 1996................. F-6 Notes to Consolidated Financial Statements................................ F-7 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors International Isotopes Inc.: We have audited the accompanying consolidated balance sheet of International Isotopes Inc. and subsidiary (development stage enterprises) (the Company) as of December 31, 1996, and the related consolidated statements of operations and accumulated deficit, stockholders' equity and cash flows for the period from November 1, 1995 (inception) through December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 subsidiary (development stage enterprises) as of December 31, 1996, and the consolidated results of their operations and their cash flows for the period from November 1, 1995 (inception) through December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas April 4, 1997, except for the first paragraph of note 12, which is as of April 24, 1997 F-2 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprise) Consolidated Balance Sheet December 31, 1996 Assets ------ Current assets: Cash and cash equivalents $ 331,397 Restricted certificate of deposit (note 4) 300,000 Assets held for sale (note 1(e)) 546,613 Inventory (note 1(f)) 757,498 Other 10,855 ----------- Total current assets 1,946,363 Property and equipment, net: Land ( note 2 ) 1,336,891 Furniture and equipment (note 3) 972,922 ----------- Total property and equipment, net 2,309,813 ----------- Total assets $ 4,256,176 =========== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 241,341 Accrued liabilities 16,475 Notes payable to bank (note 4) 1,850,000 Notes payable to chairman (note 6) 20,000 Payable to lending institution (note 5) 569,454 ----------- Total current liabilities 2,697,270 Commitments and contingencies (notes 4, 10 and 12) Stockholders' equity: Preferred stock, $1.00 par value; 5,000,000 shares authorized, no shares issued and outstanding at December 31, 1996 (note 7) -- Common stock, $.01 par value; 10,000,000 shares authorized; 3,766,663 shares issued and outstanding at December 31, 1996 (notes 2 and 7) 37,667 Additional paid-in capital 2,515,685 Deficit accumulated during the development stage (834,446) Receivable from stock sales (note 7) (160,000) ----------- Total stockholders' equity 1,558,906 ----------- Total liabilities and stockholders' equity $ 4,256,176 =========== See accompanying notes to consolidated financial statements. F-3 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Consolidated Statement of Operations and Accumulated Deficit Period from November 1, 1995 (inception) through December 31, 1996 Sale of accelerator components $ 775,102 Cost of sales 263,440 ----------- Gross profit 511,662 Operating costs and expenses: General and administrative 67,193 Commissions and fees 95,315 Consulting fees 367,749 Legal and professional fees 59,685 Salaries and contract labor 109,887 Rent and security 98,427 Other 85,381 ----------- Total operating expenses 883,637 ----------- Loss from development stage operations (371,975) Other income (expense): Gain on sale of assets held for sale (note 1(e)) 336,364 Interest income 4,906 Interest expense (note 4) (303,741) Loan financing fees (note 5) (750,000) ----------- Loss before extraordinary item (1,084,446) Extraordinary gain on debt extinguishment (note 5) 250,000 ----------- Net loss and accumulated deficit at December 31, 1996 $ (834,446) =========== Net loss per common share (note 9) $ (0.22) =========== See accompanying notes to consolidated financial statements. F-4 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Consolidated Statement of Stockholders' Equity Period from November 1, 1995 (inception) through December 31, 1996
Deficit accumulated Common stock Additional Stock during the ------------------------ paid-in proceeds development Shares Amount capital receivable stage Total ---------- ---------- ---------- ---------- ---------- ---------- Shares purchased by founders at par 624,997 $ 2,500 -- -- -- 2,500 Shares purchased by founders at prices other than par 187,923 752 114 -- -- 866 Shares issued to chairman as payment on notes payable 1,250,000 5,000 -- -- -- 5,000 Shares issued for service fees to stockholders who collateralized debt 65,100 260 26 -- -- 286 Shares issued for patents 25,000 100 -- -- -- 100 Shares issued to stockholders for services rendered 186,142 745 259,855 -- -- 260,600 Shares issued for purchase of subsidiary 827,500 3,310 1,320,690 -- -- 1,324,000 Shares issued through private placement 600,001 2,400 957,600 (160,000) -- 800,000 Net loss -- -- -- -- (834,446) (834,446) Effect of 2.5 for 1 stock split -- 22,600 (22,600) -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 3,766,663 $ 37,667 2,515,685 (160,000) (834,446) 1,558,906 ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Consolidated Statement of Cash Flows Period from November 1, 1995 (inception) through December 31, 1996 Cash flows from operating activities: Net loss $ (834,446) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,660 Gain on sale of assets (336,364) Services compensated by stock issuance 260,886 Changes in operating assets and liabilities: Other assets (10,855) Inventory (757,498) Accounts payable 241,341 Accrued liabilities 16,475 ----------- Net cash used in operating activities (1,418,801) ----------- Cash flows from investing activities : Purchase of certificate of deposit (300,000) Purchase of assets for resale and equipment held for operations (1,888,673) Proceeds from sale of assets held for sale, net of related expenses 691,051 ----------- Net cash used in investing activities (1,497,622) ----------- Cash flows from financing activities: Proceeds from issuance of notes payable to chairman 120,000 Proceeds from sale of common stock 803,366 Proceeds from issuance of debt 4,750,000 Principal payments on notes payable (2,330,546) Payments on notes payable from chairman (95,000) ----------- Net cash provided by financing activities 3,247,820 ----------- Net increase in cash and cash equivalents 331,397 Cash and cash equivalents at beginning of period -- ----------- Cash and cash equivalents at end of period $ 331,397 =========== Supplemental disclosure of cash flow activities: Cash paid for interest (note 5) $ 295,425 =========== Cash paid for financing fees (note 5) $ 500,000 =========== Supplemental disclosure of noncash transactions: Conversion of notes payable to common stock (note 6) $ 5,000 =========== Acquisition of subsidiary through issuance of common stock (note 2) $ 1,324,000 =========== Acquisition of patent through issuance of common stock $ 100 =========== See accompanying notes to consolidated financial statements. F-6 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements December 31, 1996 (1) Organization and Summary of Significant Accounting Policies (a) Description of Business International Isotopes Inc. (the Company) was incorporated in Texas in November 1995 as Applied Isotope Products Corporation. The Company changed its name to International Isotopes Inc. in January 1997. The Company is a development stage enterprise which has acquired the technology, proprietary designs and intellectual property for the design and assembly of a proton linear accelerator (LINAC) to produce radioisotopes used in nuclear medicine for the detection and treatment of various forms of cancer and other diseases. In addition, the Company intends to manufacture and develop accelerators, diagnostic scanners, and proton/neutron therapy equipment. These assets were purchased in May 1996 from the State of Texas through a competitive bidding process arising from the termination of the government funded Superconducting Super Collider (SSC) project. The Company also owns 100% of the outstanding common shares of Gazelle Realty, Inc. which owns 20 acres of land on which the facility for the LINAC will be constructed and 1.6 acres of land on which the administrative and manufacturing building will be constructed. The Company has devoted substantially all of its efforts since inception to the acquisition of the LINAC and related assets and to raising capital and other organizational activities. The operating revenues to date have been limited to the sales of accelerator components purchased from the State of Texas which will not be a significant source of revenues when and if the Company achieves full operations. Additionally, the Company has derived operating capital from the sales of assets held for sale. The Company has recently financed its operations through a private placement of its equity securities (see note 7) and contemplates an initial public offering (the Offering). The Company will continue to sell the remaining assets held for sale and utilize the inventory of accelerator components in the manufacturing of products for sale to generate operating capital. The Company is also applying for a low cost state or federal loan. In addition, certain officers and directors have noted their ability and intent to finance the Company's operations through January 1, 1998. To date, the Company's product sales has consisted only of accelerator components acquired from the State of Texas. The Company has not manufactured any linear accelerator or radioisotope products and there can be no assurance that the Company will be able to manufacture or market its products in the future, that future revenues will be significant, that any sales will be profitable, or that the Company will have sufficient funds available to manufacture or market its products. The Company's proposed radioisotope product and manufacturing facility is also subject to extensive government regulations. Further, the Company's future operations are dependent on the success of the Company's commercialization efforts and market acceptance of its products. However, during the next F-7 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements year the Company has the ability to delay its expenditures relating to the construction of the manufacturing facilities and the hiring of employees until adequate capital is obtained. (b) Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Gazelle Realty, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. During the period from November 1, 1995 (inception) through December 31, 1995 the activity of the Company was limited to the Chairman's funding expenses totaling $15,240 for the Company. No shares were issued for cash until 1996. Accordingly, consolidated financial statements as of and for the two months ended December 31, 1995 have not been separately presented. (c) Financial Instruments and Cash Equivalents The Company's financial instruments consist of cash equivalents, a restricted certificate of deposit, accounts payable and accrued liabilities and notes payable. The carrying value of these financial instruments approximates fair value because of their short term nature or because they bear interest at rates which approximate market rates. Cash equivalents of $205,847 at December 31, 1996 represent money market accounts. For purposes of the consolidated statement of cash flows, the Company considers all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. (d) Furniture and Equipment Furniture and equipment are stated at cost less accumulated depreciation. The majority of the assets owned by the Company represent assets acquired from the terminated Superconducting Super Collider project. A portion of assets will be retained for the construction of the LINAC. The remainder of the assets were acquired with the intention of being sold for operating capital and are classified an assets held for sale. Depreciation on equipment held for operations is computed using the straight line method. Office furniture and equipment in service are being depreciated over 3 to 5 years. LINAC assets will be depreciated over their estimated economic life upon being placed in service. F-8 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements (e) Assets Held for Sale Assets held for sale consist primarily of excess accelerator, mechanical and test equipment acquired from the terminated Superconducting Super Collider project and are carried at the lower of cost or fair value less cost to sell. These assets are being disposed of through private sales and auctions. During the period from November 1, 1995 (inception) through December 31, 1996, the Company sold for cash assets held for sale with a book value of $354,687 resulting in a gain on sale of $336,364. The remaining assets held for sale are expected to be sold during 1997. (f) Inventory Inventory consists of accelerator components held for sale stated at lower of cost or market. Cost is determined using the first-in first-out method. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (i) Impairment of Long-Lived and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be 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 F-9 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (j) Stock Option Plan The Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. This SFAS superseded certain provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company intends to elect to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 for its granted employee stock options. These standards will not be implemented until the proposed stock option plan is effective. (2) Acquisition of Subsidiary On December 13, 1996, the Company acquired all of the outstanding stock of Gazelle Realty, Inc. (Gazelle) in exchange for 827,500 shares of the Company's common stock valued at $1.60 per share. The value of the Company's common stock was determined based on recent stock transactions at the time of acquisition. Such fair value is not in excess of the estimated fair value of the real estate held by Gazelle. The acquisition was accounted for as a purchase. Gazelle's sole asset is land valued at $1,336,891 including $12,891 in survey and appraisal costs incurred by the Company during the acquisition. Gazelle has no additional tangible or intangible assets or liabilities and no operating activity. F-10 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements (3) Furniture and Equipment Furniture and equipment is summarized as follows at December 31, 1996: Furniture and equipment $ 24,890 LINAC assets 949,492 --------- 974,382 Less accumulated depreciation and amortization (1,460) --------- Furniture and equipment, net $ 972,922 ========= (4) Notes Payable to Bank Notes payable to bank as of December 31, 1996, consisted of the following: 15% Note payable to a bank, secured by substantially all of the assets of the Company, including a restricted certificate of deposit and collateral and personal guarantees of certain officers and shareholders. A quarterly principal payment of $95,589 was made on March 16, 1997. Remaining quarterly payments of $250,000 are due until December 16, 1997 when the remaining balance is due and payable $ 1,750,000 7% Note payable to bank, secured by collateral owned by a shareholder, due January 17, 1997. Subsequently renewed until July 17, 1997 at the same interest rate. 100,000 ----------- $ 1,850,000 =========== Proceeds of the $1,750,000 note payable were primarily used to pay off the remaining balance of a previous note payable to a lending institution (note 5). The Company guarantees shareholders for assets owned by the shareholders pledged as collateral on the above notes. These guarantees totaled $300,000 at December 31, 1996. (5) Payable to Lending Institution In May 1996, the Company obtained $2,900,000 from a lending institution to fund the acquisition of assets of the terminated Superconducting Super Collider project from the State of Texas and related acquisition costs. The loan was secured by all of the assets of the Company as well as certain collateral personally owned by certain shareholders. Under the terms of the financing agreement the principal plus fixed interest of $290,000 was due to have been paid from proceeds of sales of assets held for sale by September 3, 1996. An additional minimum profit sharing fee of $750,000 was due to have been paid from additional proceeds of sales of assets held for sale by F-11 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements November 3, 1996. During 1996, proceeds from the sale of assets held for sale and inventory totaling $1,428,787 were applied to the loan balance. On December 16, 1996, the Company obtained alternate financing from a note payable to a bank (note 4) to pay off the remaining outstanding principal balance of $1,471,213 under the original $2,900,000 note payable to the lending institution plus interest, minimum additional profit sharing and legal fees. A compromise, settlement, and release agreement was obtained from the lending institution effective December 31, 1996. The unpaid balance due to the lending institution of $569,454 at December 31, 1996 was paid by January 3, 1997. In negotiating the settlement, the initial minimum profit sharing fee of $750,000 was reduced by $250,000 to $500,000. This reduction has been recorded as an extraordinary item. (6) Notes Payable to Related Party The Company has received various cash advances totaling $120,000 from the Company's Chairman in the form of notes payable bearing interest at 10%. The notes payable had been reduced to $20,000 at December 31, 1996 due to cash payments from the Company of $95,000 and conversion of notes payable to 1,250,000 shares of common stock valued at $0.004 per share and aggregating $5,000. (7) Shareholder's Equity (Deficit) Common 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 10,000,000 shares of common stock, par value $.01 per share. Restated Articles of Incorporation and By-Laws, adopted by the Company effective March 20, 1997, increased the authorized shares to 20,000,000. Under the Restated Articles of Incorporation and By-Laws, the holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by the common stockholders. The holders of common stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of funds legally available for them. In the event of liquidation, dissolution or winding-up of the company, the holders of common stock are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock having preference over the common stock. Holders of shares of common stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock. Stock Options - The Company has proposed a stock option plan whereby a maximum of 10% of the Company's common stock outstanding will be set aside as common stock options for officers and employees of the Company exercisable at no less than 85% of market value. As of December 31, 1996, the plan had not been finalized and no options had been granted. F-12 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements Due from Stockholders - During December 1996, the Company issued 100,000 shares of common stock upon receipt of signed subscription agreements relating to a private placement of the Company's common stock at $1.60 per share resulting in amounts due from stockholders of $160,000 at December 31, 1996. Such amounts were received in January, 1997. Issuances of common stock involving noncash consideration were based on the fair value of the stock at the time services were rendered or assets acquired. Preferred Stock - Under the terms of the original Articles of Incorporation and By-Laws in effect at December 31, 1996, the Company was authorized to issue 5,000,000 shares of Preferred Stock, par value $1.00 per share. No shares of $1.00 par Preferred Stock were issued. Restated Articles of Incorporation and By-Laws, adopted by the Company effective March 20, 1997, changed the par value of Preferred Stock to $.01 and revised certain voting rights. Under the Restated Articles of Incorporation and By-Laws, Preferred Stock may be issued in series from time to time at the discretion of the Board of Directors. The Board of Directors is authorized to set the distinguishing characteristics of each series prior to issuance, including the granting of limited or full voting rights, rights to payment of dividends and amounts payable in event of liquidation, dissolution or winding up of the Company. No shares of serial preferred stock have been issued. Common Stock Split - The Company's Board of Directors declared a 2.5-for-1 stock split of the Company's common stock effective March 15, 1997. All share and per share data, including stock option information, is presented in the accompanying consolidated financial statements to reflect the stock split on a retroactive basis. There was no change to the number of shares authorized. (8) Income Taxes For the period from November 1, 1995 (inception) through December 31, 1996, the Company recorded no provision for income taxes because of its inability to utilize its operating losses and the creation of net operating loss carryforwards. The effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1996 are presented below: Deferred tax assets: Net operating loss carryforwards $ 18,243 Costs expensed for financial reporting purposes not deducted for tax 125,035 Basis difference of property and equipment 140,434 --------- Total gross deferred tax assets 283,712 Less valuation allowance (283,712) --------- Net deferred taxes $ -- ========= F-13 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements At December 31, 1996, the Company has net operating loss carryforwards of $53,655 which are available to offset future federal taxable income, if any, through 2011. Due to the fact that the Company is in the beginning stages of business operations and the uncertainty of future income generation, a valuation allowance of $283,712 has been established to fully offset the potential deferred tax asset. (9) Net loss per Common Share Per share information was calculated based on net loss available to common shareholders divided by the weighted average number of shares of common stock outstanding during the period. Pursuant to the Securities and Exchange Commission (SEC) staff accounting bulletin and SEC Staff policy, common stock issued during the twelve-month period prior to the proposed initial public offering for consideration below the assumed initial public offering price have been included in the calculation of weighted average number of shares as if they were outstanding for all periods presented. Accordingly, common shares outstanding of 3,766,663 at December 31, 1996 were used in the calculation of net loss per common share. (10) Lease Commitments The Company leases office space and certain office equipment under operating leases expiring at various dates through 2001. Rental expense under such leases for the period from November 1, 1995 (inception) through December 31, 1996 was $53,800. Future minimum commitments as of December 31, 1996 under noncancelable operating leases are as follows: 1997 $ 60,580 1998 37,740 1999 22,560 2000 6,000 --------- Total minimum lease payments $ 126,880 ========= (11) Related Party Transactions During 1996, the Company issued 186,143 shares of common stock valued at $260,600 to various shareholders and affiliates for consulting services. In addition, the Company issued 21,700 shares each to two board members and a shareholder as compensation for providing collateral on notes payable (see note 4). F-14 INTERNATIONAL ISOTOPES INC. AND SUBSIDIARY (development stage enterprises) Notes to Consolidated Financial Statements (12) Subsequent Events On January 3, 1997, the Company transferred funds to fully pay the balance due to lending institution of $569,454. The funds were obtained from proceeds of a note payable to a bank of $242,000 and cash reserves of the Company of $327,454. The note payable, due April 24, 1997, bears interest at 7.05% and is secured by personal collateral of a shareholder. Also, in January 1997, the Company received $160,000 from the receivable from stock sales which occurred in December, 1996 of which $80,000 was applied to the principal of the $242,000 note payable to bank. On April 24, 1997, the due date on the remaining principal of $162,000 and interest on the note was extended for 30 days. In January 1997, the Company issued 62,500 shares of common stock through private placement for proceeds of $100,000. This transaction completed the private placement which aggregated issuance of 662,501 common stock shares and proceeds of $1,060,000. On January 14, 1997, the Company obtained a $500,000 revolving line of credit from a bank bearing interest at a variable rate of 1% over prime (prime at December 31, 1996 was 8.25%). The loan is personally guaranteed by two Directors and is due and payable March 15, 1998. As of March 31, 1997 the Company had drawn $400,000 under this agreement which has been used to fund subsequent operating cash needs of the Company. The Company has committed to pay architectural and engineering costs related to the construction of an administrative and manufacture facility on land owned by the Company. In addition, the Company has committed to purchase steel necessary for the building construction. These commitments total $161,988 at March 31, 1997. In January 1997, the Company issued 39,283 shares of common stock to settle an outstanding account payable to a director of $62,852 included in accounts payable at December 31, 1996. As of March 31, 1997, the Company had received proceeds of $128,072 from sales of accelerator components with a net book value of $57,679. F-15 [Back of last page of prospectus] [Insert: [photograph/drawing] of facilities and LINAC equipment. [Inside back cover page of prospectus] [Insert: Proposed designs for North Texas Research Center] ================================================================================ No dealer, salesperson or any other person has been authorized to give any information or to make any representations in connection with this Offering other thanthose contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. This INTERNATIONAL ISOTOPES INC. Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof as of which such information is furnished. ------------------------------------ TABLE OF CONTENTS 2,200,000 Shares of Page Prospectus Summary........................... 4 Common Stock Risk Factors.................................10 Use of Proceeds..............................17 Dividend Policy..............................18 Capitalization...............................19 Dilution.....................................20 --------------------------- Selected Financial Data......................21 PROSPECTUS Plan of Operation............................22 --------------------------- Business.....................................25 Management...................................39 Principal and Selling Stockholders...........44 Certain Transactions.........................45 Description of Capital Stock.................47 Shares Eligible for Future Sale..............48 Keane Securities Co., Inc. Underwriting.................................49 Legal Matters................................50 Experts......................................51 Additional Information.......................51 Glossary.....................................52 Index to Consolidated Financial Statements..F-1 , 1997 Until _____, 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligations of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ PART II Information Not Required in Prospectus Item 24. Indemnification of Directors and Officers. As permitted by the Texas Business Corporation Act ("TBCA"), the Company's Restated Articles of Incorporation provide that the Company will indemnify its officers, directors, employees and agents to the fullest extent permitted by the BCA against actions that may arise against them in such capacities, and to advance expenses in connection with any such actions. Registrant's Restated Articles of Incorporation provides that directors of the Company will not be personally liable to Registrant or its stockholders for monetary damages for any act or omission in his capacity as a director except as authorized under the TBCA. The TBCA provides that a corporation may indemnify a person who was, is, or is threatened to be made a named defendant in a proceeding because such person is or was a director if it is determined in accordance with the provisions of the TBCA that the person (i) conducted himself in good faith, (ii) reasonably believed, in the case of conduct in his official capacity as director, that his conduct was in the corporation's best interests or, in other cases, that his conduct at least was not opposed to the corporation's interests and (iii) in the case of any criminal proceeding, had no reasonable cause to be believe his conduct was unlawful. A director may not be indemnified with respect to a proceeding in which the person is found liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity, or in which the person is found liable to the corporation. Officers, employees and agents of a corporation are entitled to be indemnified by the corporation as, and to the same extent provided for, directors of the corporation. Registrant has applied for directors' and officers' liability insurance with an aggregate policy limit of $1,000,000. The form of Underwriting Agreement included as Exhibit 1 provides for indemnification of Registrant under certain circumstances, including indemnification for liabilities under the Securities Act. Item 25. Other Expenses of Issuance and Distribution. The estimated expenses of this offering, all of which will be paid by Registrant, are as follows: SEC Registration Fee ..................................... $ 8,467 National Association of Securities Dealers, Inc. Fee ..... 3,294 Boston Stock Exchange Listing Fee ........................ 7,500 Nasdaq Listing Fee ....................................... 6,000 Accounting Fees and Expenses ............................. * Registrant's Legal Fees and Expenses ..................... * Blue Sky Expenses and Counsel Fees ....................... 30,000 Printing and Engraving Fees .............................. * Transfer Agent and Registrar's Fees and Expenses ......... 5,000 Miscellaneous Expenses ................................... * ------- Total .................................................... $ * ======= - ------------------ * To be completed by amendment. II-1 Item 26. Recent Sales of Unregistered Securities. In December 1995 and January 1996, Registrant issued an aggregate of 2,062,920 shares of Common Stock at a value of $.004 per share to founders, consisting of (i) 1,250,000 shares to Ira Lon Morgan, Ph.D., Registrant's Chairman, in exchange for $5,000 of the principal amount of a loan from Dr. Morgan to Registrant, (ii) 250,000 shares to Virgil L. Simmons, Registrant's Vice President of International Marketing, at a purchase price of $.004 per share, (iii) 250,000 shares to James K. Eichelberger, a director of Registrant, at a purchase price of $.004 per share, and (iv) 312,920 shares to other founders at a purchase price of $.004 per share. These issuances were exempt from registration under the Securities Act of 1933, as amended (the Securities Act") pursuant to Section 4(2) thereunder. In January 1996, Registrant's founders transferred an aggregate of 230,411 of their shares to three individuals in consideration for consulting services rendered by them to Registrant, consisting of 159,862 shares, 28,224 shares, 28,225 shares and 14,100 shares transferred by Dr. Morgan, Mr. Simmons, Mr. Eichelberger and another founder, respectively. The transferees of such shares included Homer B. Hupf, Registrant's Vice President of Radiochemistry, who received an aggregate of 57,603 shares, and Joe Beaver, Registrant's Vice President of Radioisotope Production, who received an aggregate of 57,603 shares. These transfers were exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In February 1996, Registrant issued at a value of $.004 per share 25,000 shares of Common Stock to Hospital Financial Corporation in consideration for the assignment of an exclusive license. This transaction was exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In May 1996, Registrant approved, and in November 1996 issued, at a value of $.004 per share 21,700 shares of Common Stock to Dr. Morgan and 21,700 shares of Common Stock to Mr. Eichelberger in consideration for their respective pledges of $130,000 and $100,000 of personal assets, respectively, as partial collateral for Registrant's $2,900,000 LINAC Loan. These issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In July 1996, Registrant issued, at a value of $.004 per share, 21,700 shares of Common Stock to a stockholder in consideration for such stockholder's pledge of $100,000 of personal assets as collateral for a $100,000 bank loan obtained by Registrant. This issuance was exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In November 1996, Registrant issued at a value of $1.40 per share (i) 50,428 shares to Mr. Simmons as compensation for serving as an officer of Registrant, (ii) 35,714 shares of Common Stock to Mr. Eichelberger in consideration for financial consulting services and (iii) 50,000 shares of Common Stock to each of two consultants for consulting services rendered to the Company. These issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In December 1996, Registrant issued 744,750 shares to the stockholders of Gazelle Realty, Inc. in exchange for all of the capital stock of such corporation, at a value of $1.60 per share, consisting of 372,375 shares issued to each of John M. McCormack and William W. Nicholson, who were elected directors of Registrant subsequent to this transaction. Registrant also issued 82,750 shares to another individual in consideration for acting as broker in such transaction. These issuances were exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In December 1996 and January 1997, Registrant completed a $1,060,000 private placement of 662,501 shares of Common Stock (100,000 of such shares having been issued in January 1997) to 29 Texas investors at a purchase price of $1.60 per share, of which 17,188 shares were purchased by Mr. Eichelberger's spouse. These transactions were exempt from registration under the Securities Act pursuant to Section 3(a)(11) thereunder. In January 1997, Registrant issued 39,283 shares of Common Stock to Mr. Eichelberger at a value of $1.60 per share in consideration for his assistance in obtaining Registrant's $2,900,000 LINAC Loan. This transaction was exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. In April 1997, Registrant's Board of Directors authorized Registrant's Chairman of the Board to negotiate, on behalf of Registrant, and upon conclusion of such negotiations, for seven of Company's founding stockholders II-2 to transfer, an aggregate of 150,000 shares of Common Stock at a purchase price or value of $1.60 per share, to the following key employees, as part of Registrant's incentive compensation program: 75,000 shares to Carl W. Seidel, who will serve as President and Chief Executive Officer commencing May 1997; 50,000 shares to Tommy L. Thompson, Executive Vice President; and 25,000 shares to Jerry W. Watson, Ph.D., Vice President of Manufacturing and Systems Engineering. All stock certificates issued in connection with the foregoing transactions were legended to reflect their restricted status. Item 27. Exhibits. (a) Exhibits: 1 - Form of Underwriting Agreement. 3.1 - Copy of Registrant's Restated Articles of Incorporation. 3.2 - Copy of Registrant's By-Laws. 4.1 - Specimen Common Stock Certificate.* 4.2 - Form of Representative's Warrant Agreement between Registrant and Keane Securities Co., Inc. 5 - Opinion by Epstein Becker & Green, P.C., as to legality.* 10.1 - Copy of Registrant's 1997 Long Term Incentive Plan, including form of option.* 10.2 - Copy of Equipment Lease Agreement dated July 1996 among Registrant, the University of North Texas and North Texas Research Institute. 10.3 - Copy of License Agreement between Registrant and Hospital Financial Corporation.* 10.4 - Copy of License Agreement between Registrant and Avogadro Energy Systems, Inc.* 10.5 - Copy of Development Agreement between Registrant and Avogadro Energy Systems, Inc.* 10.6 - Copy of option to acquire 60 acres on Research Center.* 10.7a - Copy of Employment Agreement effective November 1, 1995 between Registrant and Ira Lon Morgan, Ph.D. 10.7b - Copy of Addendum to Employment Agreement.* 10.8 - Copy of Employment Agreement between Registrant and Carl W. Seidel.* 11 - Computation of Per Share Loss. 21 - List of Subsidiaries. 23.1 - Consent of KPMG Peat Marwick LLP (contained on page II-7). 23.2 - Consent of Epstein Becker & Green, P.C. (included in Exhibit 5).* 23.3 - Consent of Locke Purnell Rain Harrell (A Professional Corporation).* 24 - Power of Attorney (included as part of Signature Page). 27.1 - Financial Data Schedule as of December 31, 1996. - -------------- *To be filed by amendment. II-3 Item 28. Undertakings. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made pursuant to Rule 415 under the Securities Act, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in the total dollar value of securities offered, if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of Registrant pursuant to the provisions of its Restated Articles of Incorporation, its By-Laws, the Texas Business Corporation Act or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant for expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by Registrant under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, to treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-4 POWER OF ATTORNEY TO SIGN AMENDMENTS KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Ira Lon Morgan and Virgil L. Simmons, and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully, for all intents and purposes, as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. SIGNATURES In accordance with the requirements of the Securities Act of 1933, Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Denton, State of Texas, on the 28th day of April, 1997. INTERNATIONAL ISOTOPES INC. By: /s/ Ira Lon Morgan, Ph.D. ----------------------------------- Ira Lon Morgan, Ph.D. Chairman, Chief Executive Officer and Treasurer In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated. Signature Title Date --------- ----- ---- /s/ Ira Lon Morgan, Ph.D. Chairman, Chief Executive April 28, 1997 - --------------------------- Officer, Treasurer and Director Ira Lon Morgan (Principal Executive Officer) /s/ Joan Gillett Chief Financial Officer April 28, 1997 - --------------------------- (Principal Financial and Joan Gillett Accounting Officer /s/ Tommny L. Thompson Director April 28, 1997 - --------------------------- Tommy L. Thompson /s/ Virgil L. Simmons Director April 28, 1997 - --------------------------- Virgil L. Simmons /s/ John M. McCormack Director April 28, 1997 - --------------------------- John M. McCormack /s/ William W. Nicholson Director April 28, 1997 - --------------------------- William W. Nicholson Director April 28, 1997 /s/ James K. Eichelberger - --------------------------- James K. Eichelberger II-5 Signature Title Date --------- ----- ---- /s/ Robert J. Gary Director April 28, 1997 - ----------------------------- Robert J. Gary /s/ Frederick J. Bonte, M.D. Director April 28, 1997 - ----------------------------- Frederick J. Bonte, M.D. II-6 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement on Form SB-2 of our report dated April 4, 1997, except for the first paragraph of note 12, which is as of April 24, 1997, on the consolidated financial statements of International Isotopes Inc. and Subsidiary as of December 31, 1996 and for the period from November 1, 1995 (inception) to December 31, 1996 included herein and to the reference to our firm under the captions "Experts" and "Selected Financial Data" in the Prospectus. KPMG Peat Marwick LLP Dallas, Texas April 29, 1997 II-7 International Isotopes Inc. Index of Exhibits Exhibit No. Description Page - ----------- ----------- ---- 1 Form of Underwriting Agreement...................... 3.1 Copy of Registrant's Restated Articles of Incorporation....................................... 3.2 Copy of Registrant's By-Laws........................ 4.1 Specimen Common Stock Certificate................... * 4.2 Form of Representative's Warrant Agreement between Registrant and Keane Securities Inc...................................... 5 Opinion by Epstein Becker & Green, P.C., as to legality...................................... * 10.1 Copy of Registrant's 1997 Long Term Incentive Plan, including form of option............ * 10.2 Copy of Equipment Lease Agreement dated July 1996 among Registrant, the University of North Texas and North Texas Research Institute........................................... 10.3 Copy of License Agreement between Registrant and Hospital Financial Corporation......................................... * 10.4 Copy of License Agreement between Registrant and Avogadro Energy Systems, Inc................................................. * 10.5 Copy of Development Agreement between Registrant and Avogadro Energy Systems, Inc................................................. * 10.7a Copy of Employment Agreement effective November 1, 1995 between Registrant and Ira Lon Morgan, Ph.D................................ 10.7b Copy of Addendum to Employment Agreement........................................... * 10.8 Copy of Employment Agreement between Registrant and Carl W. Seidel....................... * 11 Computation of Per Share Loss....................... 21 List of Subsidiaries................................ 23.1 Consent of KPMG Peat Marwick LLP (contained on page II-7) 23.2 Consent of Epstein Becker & Green, P.C. (included in Exhibit 5) * 23.3 Consent of Locke Purnell Rain Harrell (A Professional Corporation)........................... * 24 Power of Attorney (included as part of signature page) 27.1 Financial Data Schedule............................. - -------------------------- *To be filed by amendment. 2 EX-1 2 UNDERWRITING AGREEMENT Exhibit 1 OH&S DRAFT 4/9/97 [Form of Underwriting Agreement - Subject to Additional Review] 2,200,000 Shares of Common Stock INTERNATIONAL ISOTOPES, INC. UNDERWRITING AGREEMENT New York, New York , 1997 KEANE SECURITIES CO., INC. As Representative of the Several Underwriters listed on Schedule A hereto 50 Broadway New York, New York 10004 Ladies and Gentlemen: International Isotopes, Inc., a Texas corporation (the "Company") and the stockholders of the Company named in Schedule B hereto (collectively, the "Sellers" and individually, a "Seller") each confirm their agreement with Keane Securities Co., Inc. ("Keane") and each of the underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 12), for whom Keane is acting as representative (in such capacity, Keane shall hereinafter be referred to as "you" or the "Representative"), with respect to the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares ("Shares") of the Company's common stock, $.01 par value per share ("Common Stock"), set forth in Schedule A hereto. Such Shares are hereinafter referred to as the "Firm Securities." Upon your request, as provided in Section 3(b), the Company and the Sellers, acting jointly and not severally, shall also sell to the Underwriters, up to an additional 225,000 shares of Common Stock for the purpose of covering over-allotments, if any (the "Option Securities"). Of the Option Securities, (i) __________ shall be sold by the Company and the balance shall be sold by the Sellers, acting severally and not jointly, in the respective amounts which bear the same proportion to the total number of Option Securities to be sold by such Sellers as the number of Option Securities set forth on Schedule B hereto opposite the name of each such Seller bears to the total number of Option Securities set forth on Schedule B and (ii) the Underwriters, acting severally and not jointly, shall purchase the respective number of Option Securities which bears the same proportion to the total number of Option Securities to be purchased by the Underwriters as the number of Firm Securities to be purchased by each Underwriter bears to the total number of Firm Securities. The Company also proposes to issue and sell to you warrants (the "Representative's Warrants") pursuant to the Representative's Warrant Agreement (the "Representative's Warrant Agreement") for the purchase of an additional 220,000 shares of Common Stock. The shares of Common Stock issuable upon exercise of the Representative's Warrants are hereinafter referred to as the "Representative's Securities." The Firm Securities, the Option Securities, the Representative's Warrants and the Representative's Securities (collectively, hereinafter referred to as the "Securities") are more fully described in the Registration Statement and the Prospectus referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters as of the date hereof, and as of the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter defined), if any, as follows: a. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement, and an amendment or amendments thereto, on Form SB-2 (No. 333-_________), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities under the Securities Act of 1933, as amended (the "Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations (the "Regulations") of the Commission under the Act. The Company will promptly file a further amendment to said registration statement in the form heretofore delivered to the Underwriters and will not file any other amendment thereto to which the Underwriters shall have objected in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein (including, but not limited to those documents or information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Regulations)), is hereinafter called the "Registration Statement", and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations is hereinafter called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and regulations adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. b. Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus, the Registration Statement or Prospectus or any part of any thereof and no proceedings for a stop order suspending the - 2 - effectiveness of the Registration Statement or any of the Company's securities have been instituted or are pending or threatened. Each of the Preliminary Prospectus, the Registration Statement and Prospectus at the time of filing thereof conformed with the requirements of the Act and the Rules and Regulations, and none of the Preliminary Prospectus, the Registration Statement or Prospectus at the time of filing thereof contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in such Preliminary Prospectus, Registration Statement or Prospectus. c. When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date (as defined herein) and each Option Closing Date (as defined herein), if any, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, the Registration Statement and the Prospectus will contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and will conform in all material respects to the requirements of the Act and the Rules and Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in strict conformity with information furnished to the Company in writing by or on behalf of any Underwriter expressly for use in the Preliminary Prospectus, Registration Statement or Prospectus or any amendment thereof or supplement thereto. d. Each of the Company and Gazelle Realty, Inc. (the "Subsidiary") has been duly organized and is validly existing as a corporation in good standing under the laws of the state of its incorporation. Except as set forth in the Prospectus, neither the Company nor the Subsidiary owns an interest in any corporation, partnership, trust, joint venture or other business entity. Each of the Company and the Subsidiary is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing. The Company owns, directly or indirectly, one hundred percent (100%) of the outstanding capital stock of the Subsidiary, and all of such shares have been validly issued, are fully paid and non-assessable, were not issued in violation of any preemptive rights, and, except as set forth in the Prospectus, are owned free and clear of any liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever. Each of the Company and the Subsidiary has all requisite power and authority (corporate and other), and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; each of the Company and the Subsidiary is and has been doing business in compliance with all such authorizations, approvals, - 3 - orders, licenses, certificates, franchises and permits and all applicable federal, state, local and foreign laws, rules and regulations; and neither the Company nor the Subsidiary has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, value, operation, properties, business or results of operations of the Company or the Subsidiary. The disclosures in the Registration Statement concerning the effects of federal, state, local, and foreign laws, rules and regulations on the Company's and the Subsidiary' businesses as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. e. The Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under "Capitalization" and "Description of Capital Stock" and will have the adjusted capitalization set forth therein on the Closing Date and each Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Representative's Warrant Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform or, when issued and paid for, will conform, in all respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable and the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities to be sold by the Company hereunder, the Underwriters or the Representative, as the case may be, will acquire good and marketable title to such Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever. f. The consolidated financial statements of the Company together with the related notes and schedules thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the financial position, income, changes in cash flow, changes in stockholders' equity and the results of operations of the Company and the Subsidiary at the respective dates and for the respective periods to which they apply and such financial statements have been prepared in conformity with generally accepted accounting principles and the Rules and Regulations, consistently applied throughout the periods involved and such financial - 4 - statements as are audited have been examined by KPMG Peat Marwick LLP who are independent public accountants within the meaning of the Act and the Rules and Regulations, as indicated in their reports filed therewith. There has been no adverse change or development involving a material prospective change in the condition, financial or otherwise, or in the earnings, position, prospects, value, operation, properties, business, or results of operations of the Company, whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus and the outstanding debt, the property, both tangible and intangible, and the business of the Company conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. Financial information (including, without limitation, any pro forma financial information) set forth in the Prospectus under the headings "Summary Financial Information," "Capitalization," "Selected Financial Data," and "Plan of Operations," fairly present, on the basis stated in the Prospectus, the information set forth therein, and have been derived from or compiled on a basis consistent with that of the audited financial statements included in the Prospectus; and, in the case of pro forma financial information, if any, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. The amounts shown as accrued for current and deferred income and other taxes in such financial statements are sufficient for the payment of all accrued and unpaid federal, state, local and foreign income taxes, interest, penalties, assessments or deficiencies applicable to the Company and the Subsidiary, whether disputed or not, for the applicable period then ended and periods prior thereto; adequate allowance for doubtful accounts has been provided for unindemnified losses due to the operations of the Company and the Subsidiary; and the statements of income do not contain any items of special or nonrecurring income not earned in the ordinary course of business, except as specified in the notes thereto. g. Each of the Company and the Subsidiary (i) has paid all federal, state, local, and foreign taxes for which it is liable, including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any tax deficiency or claims outstanding, proposed or assessed against it. h. No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriters in connection with (i) the issuance by the Company of the Securities, (ii) the purchase by the Underwriters of the Firm Securities and the Option Securities from the Company and the purchase by the Representative of the Representative's Warrants from the Company, (iii) the consummation by the Company of any of its obligations under this Agreement, or (iv) resales of the Firm Securities and the Option Securities in connection with the distribution contemplated hereby. i. Each of the Company and the Subsidiary maintains insurance policies, including, but not limited to, general liability, product and property insurance, which insures each of the Company and the Subsidiary, and their respective employees, against such losses and risks generally insured against by comparable businesses. Neither the Company nor the Subsidiary (A) has failed to give notice or present any insurance claim with respect to any matter, including - 5 - but not limited to the Company's business, property or employees, under any insurance policy or surety bond in a due and timely manner, (B) has any disputes or claims against any underwriter of such insurance policies or surety bonds or has not failed to pay any premiums due and payable thereunder, or (C) has failed to comply with all conditions contained in such insurance policies and surety bonds. There are no facts or circumstances under any such insurance policy or surety bond which would relieve any insurer of its obligation to satisfy in full any valid claim of the Company or any Subsidiary. j. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of, the Company or the Subsidiary which (i) questions the validity of the capital stock of the Company, this Agreement or the Representative's Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement or the Representative's Warrant Agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), or (iii) might materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, stockholders' equity, value, operation, properties, business or results of operations of the Company and the Subsidiary. k. The Company has full legal right, power and authority to authorize, issue, deliver and sell the Securities, enter into this Agreement and the Representative's Warrant Agreement and to consummate the transactions provided for in this Agreement and the Representative's Warrant Agreement; and this Agreement and the Representative's Warrant Agreement have each been duly and properly authorized, executed and delivered by the Company. Each of this Agreement and the Representative's Warrant Agreement constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, and none of the Company's issue and sale of the Securities, execution or delivery of this Agreement or the Representative's Warrant Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of any of the Company or the Subsidiary pursuant to the terms of, (i) the certificate of incorporation or by-laws of any of the Company or the Subsidiary, (ii) any license, contract, collective bargaining agreement, indenture, mortgage, deed of trust, lease, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument to which any of the Company or the Subsidiary is a party or by which any of the Company or the Subsidiary is or may be bound or to which either of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation applicable to any of the Company or the Subsidiary of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body - 6 - (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over any of the Company or the Subsidiary or any of their respective activities or properties. l. No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Securities pursuant to the Prospectus and the Registration Statement, the performance of this Agreement and the Representative's Warrant Agreement and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Securities, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with the Underwriters' purchase and distribution of the Firm Securities and the Option Securities, and the Representative's Warrants to be sold by the Company hereunder. m. All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which any of the Company or the Subsidiary is a party or by which it may be bound or to which its assets, properties or business may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company or the Subsidiary, as the case may be, enforceable against each of them, in accordance with their respective terms. The descriptions in the Registration Statement of agreements, contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto by Form SB-2, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are in all material respects complete and correct copies of the documents of which they purport to be copies. n. Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, neither the Company nor the Subsidiary has (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, (ii) entered into any transaction other than in the ordinary course of business, or (iii) declared or paid any dividend or made any other distribution on or in respect of its capital stock of any class, and there has not been any change in the capital stock, or any change in the debt (long or short term) or liabilities or material adverse change in or affecting the general affairs, management, financial operations, stockholders' equity or results of operations of the Company or the Subsidiary. o. No default exists in the due performance and observance of any term, covenant or condition of any license, contract, collective bargaining agreement, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, partnership agreement, note, loan or credit agreement, purchase order, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company or the Subsidiary is a party or by which the Company or - 7 - the Subsidiary may be bound or to which the property or assets (tangible or intangible) of the Company or the Subsidiary is subject or affected. p. Each of the Company and the Subsidiary has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. There are no pending investigations involving the Company or the Subsidiary by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company or the Subsidiary pending before the National Labor Relations Board or any lockout, strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company or the Subsidiary, or any predecessor entity, and none has ever occurred. No representation question exists respecting the employees of the Company or the Subsidiary, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company and the Subsidiary. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company or the Subsidiary. No labor dispute with the employees of the Company or the Subsidiary exists, or, is imminent. q. Except as described in the Prospectus, neither the Company nor the Subsidiary maintains, sponsors or contributes to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). None of the Company nor the Subsidiary maintains or contributes, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code, which could subject the Company or the Subsidiary to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. Neither the Company nor the Subsidiary has ever completely or partially withdrawn from a "multiemployer plan." r. Neither the Company, the Subsidiary nor any of their respective employees, directors, stockholders, partners, or affiliates (within the meaning of the Rules and Regulations) of any of the foregoing has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or otherwise. s. Except as otherwise disclosed in the Prospectus, none of the patents, patent applications, trademarks, service marks, trade names and copyrights, and licenses and rights to the foregoing presently owned or held by the Company or the Subsidiary, are in dispute so far - 8 - as known by the Company or are in any conflict with the right of any other person or entity. Each of the Company and the Subsidiary (i) owns or has the right to use, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, all patents, trademarks, service marks, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing and (ii) is not obligated or under any liability whatsoever to make any payment by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, trademark, service mark, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. t. Each of the Company and the Subsidiary owns and has the unrestricted right to use all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information (collectively, herein "intellectual property") that are material to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company or the Subsidiary, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees; provided, however, that the possibility exists that other persons or entities, completely independently of the Company or the Subsidiary, or their respective employees or agents, could have developed trade secrets or items of technical information similar or identical to those of the Company or the Subsidiary. Neither the Company nor the Subsidiary is aware of any such development of similar or identical trade secrets or technical information by others. u. Each of the Company and the Subsidiary has taken reasonable security measures to protect the secrecy, confidentiality and value of its intellectual property in all material respects. v. Each of the Company and the Subsidiary has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus, to be owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable. w. KPMG Peat Marwick LLP, whose report is filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Rules and Regulations. x. The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which each of the Company's stockholders and holders of securities exchangeable or exercisable for or convertible into shares of Common Stock (except the Sellers) has agreed (i) for a period of not less than 12 months following the date of the Prospectus (the - 9 - "Lock-up Period") not to, directly or indirectly, issue, offer, agree or offer to sell, sell, grant any option for the purchase or sale of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial interest therein without the prior written consent of the Representative and the Company and (ii) subsequent to the Lock-up Period, to only sell such shares of Common Stock (a) under Rule 144, (b) solely through the Representative and (c) at a price per share exceeding the initial public offering price. In addition, the Company has caused to be duly executed legally binding and enforceable agreements pursuant to which each of the Sellers have agreed, to the extent their shares of Common Stock are not sold in the Offering, not to, directly or indirectly, agree to offer to sell or dispose of any beneficial interest in the Seller Shares (as defined herein) for a period of six months from the date of the Prospectus, without the prior written consent of the Company and the Representative and, thereafter, such shares may only be sold (a) if effected through the Representative and (b) at a price per share greater than the initial public offering price. The Company will cause the Transfer Agent, as defined below, to mark an appropriate legend on the face of stock certificates representing all of such securities and to place "stop transfer" orders on the Company's stock ledgers. y. There are no claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments or issuance with respect to the Company, the Subsidiary or any of their respective officers, directors, stockholders, partners, employees or affiliates that may affect the Underwriters' compensation, as determined by the National Association of Securities Dealers, Inc. ("NASD"). z. The Common Stock has been approved for quotation on the Nasdaq SmallCap Market ("Nasdaq"). aa. Neither the Company, nor the Subsidiary nor any of their respective officers, employees, agents or any other person acting on behalf of the Company or the Subsidiary has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company or the Subsidiary (or assist the Company or the Subsidiary in connection with any actual or proposed transaction) which (a) might subject the Company or the Subsidiary, or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign), (b) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company or the Subsidiary, or (c) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company or the Subsidiary. The Company's and the Subsidiary's internal accounting controls are sufficient to cause each of the Company and the Subsidiary to comply with the Foreign Corrupt Practices Act of 1977, as amended. - 10 - bb. Except as set forth in the Prospectus, no officer, director, stockholder or partner of the Company or of the Subsidiary, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Rules and Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company or the Subsidiary, or (B) purchases from or sells or furnishes to the Company or the Subsidiary any goods or services, or (ii) a beneficiary interest in any contract or agreement to which the Company or the Subsidiary is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions," there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, or 5% or greater securityholder of the Company or the Subsidiary, or any partner, affiliate or associate of any of the foregoing persons or entities. cc. Any certificate signed by any officer of the Company or the Subsidiary, and delivered to the Underwriters or to Underwriters' Counsel (as defined herein) shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. dd. The minute books of each of the Company and the Subsidiary have been made available to the Underwriters and contain a complete summary of all meetings and actions of the directors and stockholders of each of the Company and the Subsidiary, since the time of its incorporation, and reflect all transactions referred to in such minutes accurately in all material respects. ee. Except and to the extent described in the Prospectus, no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. ff. (A) Each of the Company and the Subsidiary is in compliance with all federal, state, local or foreign laws, common law, rules, codes, administrative orders or regulations relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws, common law, rules, codes, administrative orders and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws") and (B) to the best of the Company's knowledge, there are no events or circumstances that could form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or the Subsidiary relating to any Hazardous Materials or the violation of any Environmental Laws. - 11 - gg. In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and the Subsidiary, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a material adverse effect on the Company and the Subsidiary. hh. Each of the Company and the Subsidiary confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba, and each of the Company and the Subsidiary further agree that if it or any affiliate commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's, any Subsidiary's or any affiliate's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. ii. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus under the caption "Use of Proceeds" will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). jj. Each of the Company and the Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general and specific authorizations; (ii) transactions are recorded as necessary to permit preparations of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 2. Representations and Warranties of the Sellers. Each Seller, severally and not jointly, represents and warrants to, and agrees with, the several Underwriters as follows: a. Each of the Sellers will have on the Closing Date, if any, good and valid title to the shares of Common Stock to be sold by such Sellers hereunder (the "Seller Shares"), free and clear of any lien, charge, claim, encumbrance, pledge, security interest, stockholders' agreement, voting trust, community property right, defect in title, equitable interest or other equities or restrictions of any kind whatsoever (including any liability for estate or inheritance taxes and claims of any creditor, devisee, legatee or beneficiary); other than as described in this - 12 - Agreement or disclosed in the Registration Statement or Prospectus, there are no outstanding options, warrants, rights or other agreements or arrangements with respect to any of the Seller Shares; each Seller has and will have on the Closing Date, if any, full right, power and authority to sell, transfer and deliver the Seller Shares hereunder; and upon delivery of the Seller Shares against payment of the purchase price therefor as contemplated in this Agreement, each of the Underwriters, who has purchased in good faith and without notice of any adverse claim, will receive good and valid title to the Seller Shares purchased by it, free and clear of any lien, charge, claim, encumbrance, pledge, security interest, stockholders' agreement, voting trust, community property right, defect in title, equitable interests or other equities or restrictions of any kind whatsoever (including any liability for estate or inheritance taxes and claims of any creditor, devisee, legatee or beneficiary). b. Such Seller has full legal right, power and authority to enter into this Agreement, the Sellers' Power of Attorney with ______________ as attorney-in-fact (the "Attorney-in-Fact") in the form heretofore furnished to you (the "Power of Attorney") and the Letter of Transmittal and Custody Agreement with ___________________ as custodian (the "Custodian") in the form heretofore furnished to you (the "Custody Agreement"). Each of this Agreement, the Power of Attorney and the Custody Agreement has been duly executed and delivered by such Seller, and (assuming this Agreement is a binding agreement of yours) constitutes the valid and binding agreement of such Seller, enforceable against such Seller in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditor's rights and the application of equitable principles relating to the availability of remedies, and except as rights to indemnity or contribution may be limited by federal or state securities law and the public policy underlying such laws); the Attorney-in-Fact, acting alone, is authorized to execute and deliver this Agreement and the certificates referred to in Sections 3 and 9 hereof on behalf of such Seller, to authorize the delivery of those Shares to be sold by such Seller under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Seller in connection with this Agreement. c. None of the execution, delivery or performance of this Agreement, the Power of Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated, will conflict with or result in a breach of, or default under, any indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note agreement, or other agreement or instrument to which such Seller is a party or by which such Seller is or may be bound or to which any of its property is or may be subject, or to the best of such Seller's knowledge, any statute, judgment, decree, order, rule or regulation applicable to such Seller of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over such Seller or any of its activities or properties. d. At the date hereof such Seller has, and at the time of delivery of the Shares to be sold by such Seller to the several Underwriters, such Seller will have, full right, power and authority to sell, assign, transfer and deliver the Shares to be sold by such Seller hereunder. - 13 - At the date hereof such Seller is, and at the time of delivery of the Shares to be sold by such Seller, such Seller will be, the lawful owner of and has and will have, good and valid title to such Shares free and clear of any liens, charges, pledges, equities, encumbrances, security interests, claims, restrictions on transfer or other defects in title. Upon delivery of and payment for the Shares to be sold by such Seller hereunder, each of the Underwriters who has purchased the Seller Shares in good faith and without notice of any adverse claim, will receive good and valid title to such shares, free and clear of any liens, charges, pledges, equities, encumbrances, security interests, claims, restrictions on transfer or other defects in title. Except as described in the Registration Statement and the Prospectus (or, if there is no Prospectus, the most recent Preliminary Prospectus) or created hereby, there are no outstanding options, warrants, rights, or other agreements or arrangements requiring such Seller at any time to transfer any Common Stock to be sold hereunder by such Seller. e. At the time when the Registration Statement becomes or became effective, and at all times subsequent thereto up to and including the Closing Date and the Option Closing Date, the Registration Statement and any amendments thereto and will not contain any untrue statement of a material fact regarding such Seller or omit to state a material fact regarding such Seller required to be stated therein or necessary in order to make the statements therein regarding such Seller not misleading, and the Prospectus (and any supplements thereto) (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) will not contain any untrue statement of a material fact regarding such Seller or omit to state a material fact regarding such Seller required to be stated therein or necessary in order to make the statements therein regarding such Seller, in light of the circumstances under which they were made, not misleading, it being understood that, as of the date hereof, the statements relating to such Seller under the section of the Prospectus entitled "Principal and Selling Stockholders," in the case of all Sellers, are the only statements provided for inclusion in the Prospectus. f. Such Seller has not taken, directly or indirectly, any action designed to stabilize or manipulate the price of any security of the Company, or which has constituted or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of the Shares or otherwise, in violation of the Rules and Regulations. g. There is not pending or, to the best of such Seller's knowledge, threatened against such Seller any action, suit or proceeding which (A) questions the validity of this Agreement, the Power of Attorney, the Custody Agreement or of any action taken or to be taken by such Seller pursuant to or in connection with this Agreement, the Power of Attorney, or the Custody Agreement or (B) is required to be disclosed in the Registration Statement which is not so disclosed. h. On the effective date of the Prospectus, certificates in negotiable form for the Shares to be sold by each of the Sellers under this Agreement, together with a stock power or powers duly endorsed in blank will have been placed in custody with the Custodian for the purpose of effecting delivery hereunder and thereunder. - 14 - i. Except as set forth in the Prospectus, such Seller does not have any registration rights or other similar rights with respect to any securities of the Company or the Subsidiary; and, except as set forth in the Prospectus, such Seller does not have any right of first refusal or other similar right to purchase any securities of the Company upon the issuance or sale thereof by the Company or upon the sale thereof by any other stockholder of the Company. j. Such Seller has not since the filing of the initial Registration Statement (A) sold, bid for, purchased, attempted to induce any person to purchase, or paid anyone any compensation for soliciting purchases of, Common Stock, or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any securities of the Company (except for the sale of the Seller Shares to the Underwriters under this Agreement and except as otherwise permitted by law). k. Any certificate signed by or on behalf of such Seller and delivered to the Underwriters shall be deemed a representation and warranty by such Seller to the Underwriters as to the matters covered thereby. 3. Purchase, Sale and Delivery of the Securities. a. On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter, severally and not jointly, agrees to purchase from the Company at a price of $__________ [92% of the public offering price] per Share, that number of Firm Securities set forth in Schedule A opposite the name of such Underwriter, subject to such adjustment as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional shares, plus any additional number of Firm Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 12 hereof. b. In addition, on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Sellers, severally and not jointly, hereby grant an option to the Underwriters, severally and not jointly, to purchase all or any part of an additional 330,000 shares of Common Stock at a price of $ ____ [92% of the public offering price] per Share. The option granted hereby will expire 45 days after (i) the date the Registration Statement becomes effective, if the Company has elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Securities upon notice by the Representative to the Company and the Sellers setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for any such Option Securities. Any such time and date of delivery (an "Option Closing Date") shall be determined by the Representative, but shall not be later than five (5) full business days after the exercise of said option, nor in any event prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon by the Representative, the Company and the Sellers. Nothing herein contained shall obligate the Underwriters to make any over-allotments. No Option Securities shall be delivered - 15 - unless the Firm Securities shall be simultaneously delivered or shall theretofore have been delivered as herein provided. If the option is exercised in whole or in part from time to time as provided above, the Company shall sell to the Underwriters _____ of the Option Securities as to which the option shall have been exercised and each of the Sellers, shall sell to the Underwriters that proportion of the balance of such Option Securities which is the same as the proportion that the total number of Option Securities set forth on Schedule B hereto opposite the name of each such Seller bears to the total number of Option Securities set forth on Schedule B, and each Underwriter, severally and not jointly, shall purchase that number of Option Securities as to which the option shall have been exercised which bears the same proportion to the total number of such Option Securities as to which the option shall have been exercised as the number of Firm Securities to be purchased by such Underwriter bears to the total number of Firm Securities (plus any additional number of Option Securities which such Underwriter may become obligated to purchase pursuant to Section 12), all subject to such adjustments as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional shares. c. Payment of the purchase price for, and delivery of certificates for, the Firm Securities shall be made at the offices of the Representative at 50 Broadway, New York, New York 10004, or at such other place as shall be agreed upon by the Representative and the Company. Such delivery and payment shall be made at 10:00 a.m. (New York City time) on ______________, 1997 or at such other time and date as shall be agreed upon by the Representative and the Company, but not less than three (3) nor more than five (5) full business days after the effective date of the Registration Statement (such time and date of payment and delivery being herein called the "Closing Date"). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above mentioned office of the Representative or at such other place as shall be agreed upon by the Representative and the Company on each Option Closing Date as specified in the notice from the Representative to the Company and the Sellers. Delivery of the certificates for the Firm Securities and the Option Securities, if any, shall be made to the Underwriters against payment by the Underwriters, severally and not jointly, of the purchase price for the Firm Securities and the Option Securities, if any, to the order of the Company and each of the Sellers for the Firm Securities and the respective number of Option Securities, if any, to be sold by them, by New York Clearing House funds. Certificates for the Firm Securities and the Option Securities, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriters may request in writing at least two (2) business days prior to the Closing Date or the relevant Option Closing Date, as the case may be. The certificates for the Firm Securities and the Option Securities, if any, shall be made available to the Representative at such office or such other place as the Representative may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to the Closing Date or the relevant Option Closing Date, as the case may be. d. On the Closing Date, the Company shall issue and sell to the Representative Representative's Warrants at a purchase price of $.0001 per warrant, which warrants shall entitle the holders thereof to purchase an aggregate of 220,000 shares of Common Stock. The Representative's Warrants shall be exercisable for a period of four (4) years commencing one - 16 - (1) year from the effective date of the Registration Statement at a price equaling one hundred twenty percent (120%) of the initial public offering price of the Shares. The Representative's Warrant Agreement and form of Warrant Certificate shall be substantially in the form filed as Exhibit [___] to the Registration Statement. Payment for the Representative's Warrants shall be made on the Closing Date. 4. Public Offering of the Shares. As soon after the Registration Statement becomes effective as the Representative deems advisable, the Underwriters shall make a public offering of the Shares (other than to residents of or in any jurisdiction in which qualification of the Shares is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Representative may from time to time increase or decrease the public offering price after distribution of the Shares has been completed to such extent as the Representative, in its sole discretion deems advisable. The Underwriters may enter into one of more agreements as the Underwriters, in each of their sole discretion, deem advisable with one or more broker-dealers who shall act as dealers in connection with such public offering. 5. Covenants and Agreements of the Company and the Sellers. The Company and (but only with respect to and to the extent provided with respect to them in Sections 5(f), 5(l), 5(t) and 5(v) covenants and agrees with each of the Underwriters as follows: a. The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Act or Exchange Act before termination of the offering of the Shares by the Underwriters of which the Representative shall not previously have been advised and furnished with a copy, or to which the Representative shall have objected or which is not in compliance with the Act, the Exchange Act or the Rules and Regulations. b. As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Representative and confirm the notice in writing, (i) when the Registration Statement, as amended, becomes effective, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding, suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or the institution of proceedings for that purpose, (iii) of the issuance by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the receipt of any comments from the Commission, and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities commission authority shall enter a stop order or suspend such qualification at any time, the Company will make every effort to obtain promptly the lifting of such order. - 17 - c. The Company shall file the Prospectus (in form and substance satisfactory to the Representative) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to Rule 424(b)(1) (or, if applicable and if consented to by the Representative, pursuant to Rule 424(b)(4)) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement and (ii) the fifth business day after the effective date of the Registration Statement. d. The Company will give the Representative notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will furnish the Representative with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such prospectus to which the Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters' Counsel") shall object. e. The Company shall endeavor in good faith, in cooperation with the Representative, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws of such jurisdictions as the Representative may designate to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution, and shall make such applications, file such documents and furnish such information as may be required for such purpose; provided, however, the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representative agrees that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification. f. During the time when a prospectus is required to be delivered under the Act, the Company and each of the Sellers shall use all reasonable efforts to comply with all requirements imposed upon it by the Act and the Exchange Act, as now and hereafter amended and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Representative and each of the Sellers promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section - 18 - 10 of the Act, each such amendment or supplement to be satisfactory to Underwriters' Counsel, and the Company will furnish to the Underwriters copies of such amendment or supplement as soon as available and in such quantities as the Underwriters may request. g. As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Representative, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement need not be audited unless required by the Act, covering a period of at least 12 consecutive months after the effective date of the Registration Statement. h. During a period of seven years after the date hereof, the Company will furnish to its stockholders, as soon as practicable, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of earnings, and will deliver to the Representative: i. concurrently with furnishing such quarterly reports to its stockholders, statements of income of the Company for each quarter in the form furnished to the Company's stockholders and certified by the Company's principal financial or accounting officer; ii. concurrently with furnishing such annual reports to its stockholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, stockholders' equity, and cash flows of the Company for such fiscal year, accompanied by a copy of the certificate thereon of independent certified public accountants; iii. as soon as they are available, copies of all reports (financial or other) mailed to stockholders; iv. as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; v. every press release and every material news item or article of interest to the financial community in respect of the Company, or its affairs which was released or prepared by or on behalf of the Company; and vi. any additional information of a public nature concerning the Company (and any future subsidiary) or its businesses which the Representative may request. During such seven-year period, if the Company has an active subsidiary, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the - 19 - Company and its subsidiary are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. i. The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for the Common Stock. j. The Company will furnish to the Representative or on the Representative's order, without charge, at such place as the Representative may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Representative may request. k. On or before the effective date of the Registration Statement, the Company shall provide the Representative with true copies of duly executed, legally binding and enforceable agreements pursuant to which for the Lock-up Period, each of the Company's stockholders and holders of securities exchangeable or exercisable for or convertible into shares of Common Stock (except the Sellers) agrees that it or he or she (i) will not directly or indirectly, issue, offer, offer to sell, sell, grant an option for the purchase or sale of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial interest therein without the prior consent of the Representative and the Company (collectively, the "Lock-up Agreements") and (ii) subsequent to the Lock-up Period, will only sell such shares of Common Stock (a) under Rule 144, (b) solely through the Representative and (c) at a price per share exceeding the initial public offering price. In addition, the Company shall provide the Representative with true copies of duly executed, legally binding and enforceable agreements pursuant to which each of the Sellers have agreed to, the extent their shares of Common Stock are not sold in the offering, not to, directly or indirectly, agree or offer to sell or dispose of any beneficial interest in the Seller Shares for a period of six months from the date of the Prospectus, without the prior written consent of the Company and the Representative and thereafter, such shares may only be sold (a) if effected through the Representative and (b) at a price per share greater than the initial public offering price. During the 24-month period commencing with the effective date of the Registration Statement, the Company shall not, without the prior written consent of the Representative, sell, contract or offer to sell, issue, transfer, assign, pledge, distribute, or otherwise dispose of, directly or indirectly, no more than 600,000 shares of Common Stock or any options, rights or warrants with respect to such shares of Common Stock. Such 600,000 shares shall be issued at prices no less than the greater of the market value of the shares on the date of grant or the initial public offering price of the Shares. Notwithstanding the foregoing, the Company may (i) issue securities in an underwritten public offering on behalf of the Company, (ii) authorize and issue a class or classes of Preferred Stock, including Convertible Preferred Stock, (iii) issue debt with warrants attached and (iv) issue securities in connection with acquisitions, mergers and other reorganizations. On or before the Closing Date, the - 20 - Company shall deliver instructions to the Transfer Agent authorizing it to place appropriate legends on the certificates representing the securities subject to the Lock-up Agreements and to place appropriate stop transfer orders on the Company's ledgers. l. None of the Company, the Sellers, the Subsidiary, nor any of their respective officers, directors, stockholders, nor any of its affiliates (within the meaning of the Rules and Regulations) will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. m. The Company shall apply the net proceeds from the sale of the Securities in the manner, and subject to the conditions, set forth under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will be used, directly or indirectly, to acquire any securities issued by the Company. n. The Company shall timely file all such reports, forms or other documents as may be required (including, but not limited to, a Form SR as may be required pursuant to Rule 463 under the Act) from time to time, under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. o. The Company shall furnish to the Representative as early as practicable prior to each of the date hereof, the Closing Date and each Option Closing Date, if any, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in no event shall be as of a date more than thirty (30) days prior to the date of the Registration Statement) which have been read by the Company's independent public accountants, as stated in their letters to be furnished pursuant to Sections 7(l) and 7(m) hereof. p. The Company shall cause the Common Stock to be quoted on Nasdaq and for a period of seven (7) years from the date hereof, use its best efforts to maintain the Nasdaq quotation of the Common Stock to the extent outstanding. q. For a period of five (5) years from the Closing Date, the Company shall furnish to the Representative at the Representative's request and at the Company's sole expense, (i) daily consolidated transfer sheets relating to the Common Stock (ii) the list of holders of all of the Company's securities and (iii) a Blue Sky "Trading Survey" for secondary sales of the Company's securities prepared by counsel to the Company. r. As soon as practicable, (i) but in no event more than 5 business days before the effective date of the Registration Statement, file a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) but in no event more than 30 days from the effective date of the Registration Statement, take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such inclusion for a period of not less than seven (7) years. - 21 - s. The Company hereby agrees that it will not, without the prior written consent of the Representative, for a period of twenty-four (24) months from the effective date of the Registration Statement, adopt, propose to adopt or otherwise permit to exist any employee, officer, director, consultant or compensation plan or similar arrangement permitting (i) the grant, issue, sale or entry into any agreement to grant, issue or sell any option, warrant or other contract right covering more than 600,000 shares of Common Stock at an exercise price that is less than the greater of the market price on the date of grant or sale or the initial public offering price per share (except that options or warrants issued to key officers of the Company may be issued at exercise prices not less than 85% of the initial public offering price of the shares); and (ii) the maximum number of shares of Common Stock or other securities of the company purchasable at any time pursuant to options or warrants issued by the Company to exceed the aggregate of 600,000 shares reserved for future issuance under the Company's 1997 Stock Option Plan; and (iii) the payment for such securities with any form of consideration other than cash, or (iv) the existence of stock appreciation rights, phantom options or similar arrangements. t. Until the completion of the distribution of the Securities, the Company and the Sellers shall not without the prior written consent of the Representative and Underwriters' Counsel, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. u. For a period equal to the lesser of (i) seven (7) years from the date hereof, and (ii) the sale to the public of the Representative's Securities, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form S-1 (or other appropriate form) for the registration under the Act of the Representative's Securities. v. Each of the Sellers, without hereby making any representations or warranties with respect to the contents thereof, consents to the use of each Preliminary Prospectus, the Prospectus and any amendment or supplement thereto by the Underwriters and all dealers to whom the Securities may be sold, both in connection with the offering or sale of the Securities and for such period of time thereafter as the Prospectus, as amended or supplemented, is required by law to be delivered. 6. Payment of Expenses. a. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date (to the extent not paid at the Closing Date) all expenses and fees (other than fees of Underwriters' Counsel, except as provided in (iv) below) incident to the performance of the obligations of the Company under this Agreement and the Representative's Warrant Agreement, including, without limitation, (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing (including mailing and handling charges), filing, delivery and mailing (including the payment of postage with respect thereto) of the Registration Statement and the Prospectus and any amendments and supplements thereto and the printing, mailing (including the payment of postage with respect thereto) and delivery of this Agreement, the Agreement Among - 22 - Underwriters, the Selected Dealer Agreements, and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriters and such dealers as the Underwriters may request, in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of the Securities including, but not limited to, (x) the purchase by the Underwriters of the Firm Securities and the Option Securities and the purchase by the Representative of the Representative's Warrants from the Company, (y) the consummation by the Company of any of its obligations under this Agreement and the Representative's Warrant Agreement, and (z) resale of the Firm Securities and the Option Securities by the Underwriters in connection with the distribution contemplated hereby, (iv) the qualification of the Securities under state or foreign securities or "Blue Sky" laws and determination of the status of such securities under legal investment laws, including the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, and disbursements and fees of counsel in connection therewith (such counsel fees not to exceed $15,000 if the Shares are listed on the American Stock Exchange or $30,000 if the Shares have been accepted for quotation on Nasdaq), (v) advertising costs and expenses, including but not limited to costs and expenses in connection with the "road show" (excluding solely the travel and lodging expenses of personnel of the Representative), information meetings and presentations, bound volumes and prospectus memorabilia and "tomb-stone" advertisement expenses, (vi) costs and expenses in connection with due diligence investigations, including but not limited to the fees of any independent counsel, expert or consultant retained, (vii) fees and expenses of the transfer agent and registrar, (viii) applications for assignments of a rating of the Securities by qualified rating agencies, (ix) the fees payable to the Commission and the NASD, and (x) the fees and expenses incurred in connection with the quotation of the Securities on the Nasdaq and any other exchange. b. If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 7 or Section 13, the Company shall reimburse and indemnify the Representative for all of its actual out-of-pocket expenses, including the fees and disbursements of Underwriters' Counsel, less any amounts already paid pursuant to Section 6(c) hereof. c. The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 5, it will pay to the Representative on the Closing Date by certified or bank cashier's check or, at the election of the Representative, by deduction from the proceeds of the offering contemplated herein a non-accountable expense allowance equal to two percent (2%) of the gross proceeds received by the Company from the sale of the Firm Securities, $50,000 of which has been paid to date. In the event the Representative elects to exercise the over-allotment option described in Section 3(b) hereof, the Company agrees to pay to the Representative on the Option Closing Date (by certified or bank cashier's check or, at the Representative's election, by deduction from the proceeds of the offering) a non-accountable expense allowance equal to two percent (2%) of the gross proceeds received by the Company and the Sellers from the sale of the Option Securities. 7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company and the Sellers herein as of the date hereof and as of the Closing Date and each - 23 - Option Closing Date, if any, as if they had been made on and as of the Closing Date or each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date or Option Closing Date, if any, of the statements of the officers of the Company and the Sellers made pursuant to the provisions hereof; and the performance by the Company and the Sellers on and as of the Closing Date and each Option Closing Date, if any, of his or its covenants and obligations hereunder and to the following further conditions: a. The Registration Statement shall have become effective not later than 12:00 P.M., New York time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative, and, at the Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Representative of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. b. Neither the Representative nor the Sellers shall have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Representative's or such Seller's opinion, is material, or omits to state a fact which, in the Representative's or such Seller's opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representative's or such Seller's opinion, is material, or omits to state a fact which, in the Representative's or such Seller's opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. c. On or prior to each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from Underwriters' Counsel such opinion or opinions with respect to the organization of the Company, the validity of the Securities, the Registration Statement, the Prospectus and other related matters as the Representative may request and Underwriters' Counsel shall have received such papers and information as they request to enable them to pass upon such matters. d. At the Closing Date, the Underwriters shall have received the favorable opinion of Epstein Becker & Green, P.C., counsel to the Company and the Subsidiary, dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: - 24 - i. Each of the Company and the Subsidiary (A) has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction, (B) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, and (C) has all requisite corporate power and authority, and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, to own or lease its properties and conduct its business as described in the Prospectus; each of the Company and the Subsidiary is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state, local and foreign laws, rules and regulations; and, none of the Company nor the Subsidiary has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially adversely affect the business, operations, condition, financial or otherwise, or the earnings, business affairs, position, prospects, value, operation, properties, business or results of operations of the Company or the Subsidiary; ii. the Company owns, directly or indirectly, one hundred percent (100%) of the outstanding capital stock of the Subsidiary and all such shares have been validly issued, are fully paid and non-assessable, were not in violation of any preemptive rights and are owned free and clear of any liens, charges, claims, encumbrances, pledges, security interest, defaults or other restrictions or equities of any kind whatsoever; except as described in the Prospectus, none of the Company nor the Subsidiary owns an interest in any other corporation, partnership, joint venture, trust or other business entity; iii. the Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, and any amendment or supplement thereto, under "CAPITALIZATION", and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and the Representative's Warrant Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. The Securities to be sold by the Company hereunder and under the Representative's Warrant Agreement are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and conform to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely - 25 - as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities are in due and proper form. The Representative's Warrants constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby. Upon the issuance and delivery pursuant to this Agreement of the Firm Securities and the Option Securities and the Representative's Warrants to be sold by the Company, the Underwriters and the Representative, respectively, will acquire good and marketable title to the Firm Securities and the Option Securities and the Representative's Warrants free and clear of any pledge, lien, charge, claim, encumbrance, pledge, security interest, or other restriction or equity of any kind whatsoever. No transfer tax is payable by or on behalf of the Underwriters in connection with (A) the issuance by the Company of the Securities, (B) the purchase by the Underwriters and the Representative of the Firm Securities and the Option Securities and the Representative's Securities, respectively, from the Company, (C) the consummation by the Company of any of its obligations under this Agreement or the Representative's Warrant Agreement, or (D) resales of the Firm Securities and the Option Securities in connection with the distribution contemplated hereby; iv. the Registration Statement is effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and no stop order suspending the use of the Preliminary Prospectus, the Registration Statement or Prospectus or any part of any thereof or suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of such counsel's knowledge, threatened or contemplated under the Act; v. each of the Preliminary Prospectus, the Registration Statement, and the Prospectus and any amendments or supplements thereto (other than the financial statements and other financial and statistical data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; vi. to the best of such counsel's knowledge, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement (or required to be filed under the Exchange Act if upon such filing they would be incorporated, in whole or in part, by reference therein) and the Prospectus and filed as exhibits thereto, and the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company or the Subsidiary is a party or by which it is bound, including any document to which the Company or the Subsidiary is a party or by which it is bound, incorporated by reference into the Prospectus and any supplement or amendment thereto, are accurate in all material respects and fairly represent the information required to be shown by Form SB-2; (C) there is not pending or threatened against the Company or the Subsidiary any action, arbitration, suit, proceeding, inquiry, - 26 - investigation, litigation, governmental or other proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of the Company or the Subsidiary which (x) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects) or (y) questions the validity of the capital stock of the Company or this Agreement or the Representative's Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with any of the foregoing; (D) no statute or regulation or legal or governmental proceeding required to be described in the Prospectus is not described as required; and (E) there is no action, suit or proceeding pending, or threatened, against or affecting the Company or the Subsidiary before any court or arbitrator or governmental body, agency or official (or any basis thereof known to such counsel) in which there is a reasonable possibility of an adverse decision which may result in a material adverse change in the condition, financial or otherwise, or the earnings, position, prospects, stockholders' equity, value, operation, properties, business or results of operations of the Company or the Subsidiary, which could adversely affect the present or prospective ability of the Company to perform its obligations under this Agreement or the Representative's Warrant Agreement or which in any manner draws into question the validity or enforceability of this Agreement or the Representative's Warrant Agreement; vii. the Company has full legal right, power and authority to enter into each of this Agreement and the Representative's Warrant Agreement, and to consummate the transactions provided for therein; and each of this Agreement and the Representative's Warrant Agreement has been duly authorized, executed and delivered by the Company. Each of this Agreement and the Representative's Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the Company's execution or delivery of this Agreement and the Representative's Warrant Agreement, its performance hereunder or thereunder, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company or the Subsidiary pursuant to the terms of, (A) the certificate of incorporation or by-laws of the Company or the Subsidiary, (B) any license, contract, collective bargaining agreement, indenture, mortgage, deed of trust, lease, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument to which the - 27 - Company or the Subsidiary is a party or by which it is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, or (C) any statute, judgment, decree, order, rule or regulation applicable to the Company or the Subsidiary of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or the Subsidiary or any of their respective activities or properties; viii. no consent, approval, authorization or order, and no filing with, any court, regulatory body, government agency or other body (other than such as may be required under Blue Sky laws, as to which no opinion need be rendered) is required in connection with the issuance of the Firm Securities and the Option Securities pursuant to the Prospectus, the issuance of the Representative's Warrants, and the Registration Statement, the performance of this Agreement and the Representative's Warrant Agreement, and the transactions contemplated hereby and thereby; ix. the properties and business of each of the Company and the Subsidiary conform in all material respects to the description thereof contained in the Registration Statement and the Prospectus; and each of the Company and the Subsidiary has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, in each case free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable; x. neither the Company nor the Subsidiary is in breach of, or in default under, any term or provision of any license, contract, collective bargaining agreement, indenture, mortgage, installment sale agreement, deed of trust, lease, voting trust agreement, stockholders' agreement, partnership agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary may be bound or to which the property or assets (tangible or intangible) of the Company or the Subsidiary is subject or affected; and neither the Company nor the Subsidiary is in violation of any term or provision of its Articles of Incorporation or By-Laws or in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation; xi. the statements in the Prospectus under "THE COMPANY," "BUSINESS," "MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF CAPITAL STOCK," and "SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects; xii. the Securities have been accepted for quotation on Nasdaq; - 28 - xiii. the persons listed under the caption "PRINCIPAL STOCKHOLDERS" in the Prospectus are the respective "beneficial owners" (as such phrase is defined in regulation 13d-3 under the Exchange Act) of the securities set forth opposite their respective names thereunder as and to the extent set forth therein; xiv. except as described in the Prospectus, no person, corporation, trust, partnership, association or other entity has the right to include and/or register any securities of the Company in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement; xv. except as described in the Prospectus, there are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or financial consulting arrangement or any other arrangements, agreements, understandings, payments or issuances that may affect the Underwriters' compensation, as determined by the NASD; xvi. assuming due execution by the parties thereto other than the Company, the Lockup Agreements are legal, valid and binding obligations of the parties thereto, enforceable against the party and any subsequent holder of the securities subject thereto in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law); xvii. none of the Company or the Subsidiary shall be subject to the requirements of or shall be deemed an "Investment Company," pursuant to and as defined under the Investment Company Act. Such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and the Subsidiary, and representatives of the independent public accountants for the Company and the Subsidiary, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Preliminary Prospectus, the Registration Statement, the Prospectus, and related matters and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Prospectus, the Registration Statement and Prospectus, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto, at the time such Registration Statement or amendment became effective or the Preliminary Prospectus or Prospectus or amendment or supplement thereto as of the date of such opinion contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Preliminary Prospectus, the Registration Statement or the Prospectus). - 29 - In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriters' Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and the Subsidiary and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Subsidiary, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. The opinion of such counsel for the Company and the Subsidiary shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that the Representative and they are justified in relying thereon. Any opinion of counsel for the Company and the Subsidiary shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991) or any comparable state accord. e. At the Closing Date, the Underwriters shall have received the favorable opinion of ________________________, intellectual property counsel to the Company, dated the Closing Date, addressed to the Underwriters and in the form attached hereto as Exhibit A. f. At each Option Closing Date, if any, the Underwriters shall have received the favorable opinion of Epstein Becker & Green, P.C., counsel to the Company and the Subsidiary, and __________________, intellectual property counsel to the Company, dated the Option Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel confirming as of Option Closing Date the statements made by Epstein Becker & Green, P.C. and _______________, in their respective opinions delivered on the Closing Date. g. At each Option closing Date, if any, the Underwriters shall have received the favorable opinion of _______________, special counsel to the Sellers, dated the Option Closing Date, addressed to the Underwriters, and in form and substance reasonably satisfactory to Underwriters' Counsel, as to such matters as the Representative or Underwriter's Counsel may request. In rendering such opinions, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinions, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriters' Counsel) of other counsel, acceptable to the Underwriters' Counsel, familiar with the applicable laws and (B) as to matters of fact, to the extent they deem proper, in certificates and written statements of the Sellers whom they represent and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Sellers whom they represent; provided, that copies of any such statements or certificates shall be delivered to Underwriters' - 30 - Counsel. The opinions shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that the Underwriters are justified in relying thereon. h. On or prior to each of the Closing Date and the Option Closing Date, if any, Underwriters' Counsel shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 7, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company and the Sellers herein contained. i. Prior to each of the Closing Date and each Option Closing Date, if any, (i) there shall have been no adverse change nor development involving a prospective change in the condition, financial or otherwise, prospects, stockholders' equity or the business activities of the Company or the Subsidiary, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company or the Subsidiary, from the latest date as of which the financial condition of the Company and the Subsidiary is set forth in the Registration Statement and Prospectus which is adverse to the Company or the Subsidiary; (iii) neither the Company nor the Subsidiary shall be in default under any provision of any instrument relating to any outstanding indebtedness; (iv) neither the Company nor the Subsidiary shall have issued any securities (other than the Securities) or declared or paid any dividend or made any distribution in respect of its capital stock of any class and there has not been any change in the capital stock or any change in the debt (long or short term) or liabilities or obligations of the Company or the Subsidiary (contingent or otherwise); (v) no material amount of the assets of the Company or the Subsidiary shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have been pending or threatened (or circumstances giving rise to same) against the Company, or the Subsidiary, or affecting any of its properties or business before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may adversely affect the business, operations, prospects or financial condition or income of the Company, or the Subsidiary, except as set forth in the Registration Statement and Prospectus; and (vii) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission. j. At each of the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate of the Company signed by the principal executive officer and by the chief financial or chief accounting officer of the Company, dated the Closing Date or Option Closing Date, as the case may be, to the effect that each of such persons has carefully examined the Registration Statement, the Prospectus and this Agreement, and that: i. The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; - 31 - ii. No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge, after due inquiry, are contemplated or threatened under the Act; iii. The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information required to be included therein, and none of the Registration Statement, the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and neither the Preliminary Prospectus or any supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and iv. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (a) neither the Company nor the Subsidiary has incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (b) neither the Company nor the Subsidiary has paid or declared any dividends or other distributions on its capital stock; (c) neither the Company nor the Subsidiary has entered into any transactions not in the ordinary course of business; (d) there has not been any change in the capital stock or long-term debt or any increase in the short-term borrowings (other than any increase in the short-term borrowings in the ordinary course of business) of the Company or the Subsidiary; (e) neither the Company nor the Subsidiary has sustained any loss or damage to its property or assets, whether or not insured; (f) there is no litigation which is pending or threatened (or circumstances giving rise to same) against the Company or any affiliated party of any of the foregoing which is required to be set forth in an amended or supplemented Prospectus which has not been set forth; and (g) there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this subsection (j) are to such documents as amended and supplemented at the date of such certificate. k. By the Closing Date, the Underwriters will have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters, as described in the Registration Statement. l. At the time this Agreement is executed, the Underwriters shall have received a letter, dated such date, addressed to the Underwriters in form and substance satisfactory (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) in all respects to the Underwriters and Underwriters' Counsel, from KPMG Peat Marwick LLP: - 32 - i. confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; ii. stating that it is their opinion that the financial statements and supporting schedules of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations thereunder and that the Representative may rely upon their opinion with respect to the financial statements and supporting schedules included in the Registration Statement; iii. stating that, on the basis of a limited review which included a reading of the latest available unaudited consolidated interim financial statements of the Company and the Subsidiary, a reading of the latest available minutes of the stockholders and board of directors and the various committees of the boards of directors of the Company, consultations with officers and other employees of the Company and the Subsidiary, responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited consolidated financial statements and supporting schedules of the Company and the Subsidiary included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements of the Company and the Subsidiary included in the Registration Statement, or (B) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock or long-term debt of the Company or the Subsidiary or any decrease in the stockholders' equity or net current assets or net assets of the Company or the Subsidiary as compared with amounts shown in the March 31, 1997 balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease, and (C) during the period from March 31, 1997 to a specified date not more than five (5) days prior to the effective date of the Registration Statement, there was any decrease in net revenues, net earnings or increase in net earnings per common share of the Company or the Subsidiary, in each case as compared with the corresponding period beginning March 31, 1996, other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; iv. setting forth, at a date not later than five (5) days prior to the date of the Registration Statement, the amount of liabilities of the Company and the Subsidiary (including a break-down of commercial paper and notes payable to banks); v. stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company and the Subsidiary set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and the Subsidiary - 33 - and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and vi. statements as to such other matters incident to the transaction contemplated hereby as the Representative may request. m. At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received from KPMG Peat Marwick LLP a letter, dated as of the Closing Date or the Option Closing Date, as the case may be, to the effect that they reaffirm that statements made in the letter furnished pursuant to subsection (j) of this Section, except that the specified date referred to shall be a date not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that they have carried out procedures as specified in clause (v) of subsection (l) of this Section with respect to certain amounts, percentages and financial information as specified by the Representative and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (v). n. At each Option Closing Date, if any, the Representatives shall have received a certificate of each of the Sellers dated as of such date, to the effect that (i) the representations and warranties of such Seller contained herein are true and correct in all material respects as if made on and as of the Option Closing Date, if any, and (ii) such Seller has complied in all material respects with all covenants and agreements and satisfied in all material respects all conditions on its or his part to be performed or satisfied under this Agreement or the Letter of Transmittal and Custody Agreement relating to such Seller on or before the option Closing Date, if any. For purposes of each such certificate, references to the Registration Statement and the Prospectus in such representations, warranties, covenants and agreements shall mean the Registration Statement and Prospectus as amended or supplemented to the date of such certificate. o. On each of the Closing Date and each Option Closing Date, if any, there shall have been duly tendered to the Representative for the several Underwriters' accounts the appropriate number of Firm Securities and Option Securities. p. No order suspending the sale of the Firm Securities and Option Securities in any jurisdiction designated by the Representative pursuant to subsection (e) of Section 5 hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. q. On or before the Closing Date, the Company shall have executed and delivered to the Representative, (i) the Representative's Warrant Agreement substantially in the form filed as Exhibit [___] to the Registration Statement in final form and substance satisfactory to the - 34 - Representative, and (ii) the Representative's Warrants in such denominations and to such designees as shall have been provided to the Company. r. On or before the Closing Date, the Firm Securities and Option Securities shall have been duly approved for quotation on Nasdaq, subject to official notice of issuance. s. On or before the Closing Date, there shall have been delivered to the Representative all of the Lock-up Agreements, in form and substance satisfactory to Underwriters' Counsel. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Representative may terminate this Agreement or, if the Representative so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 8. Indemnification. a. The Company agrees to indemnify and hold harmless each of the Underwriters (for purposes of this Section 8 "Underwriter" shall include the officers, directors, partners, employees, agents and counsel of the Underwriter, including specifically each person who may be substituted for an Underwriter as provided in Section 12 hereof), and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), whatsoever (including but not limited to any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever), as such are incurred, to which the Underwriter or such controlling person may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon (A) any untrue statement or alleged untrue statement of a material fact contained (i) in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Securities; or (iii) in any application or other document or written communication (in this Section 8 collectively called "application") executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, Nasdaq or any other securities exchange; (B) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made) or (C) any breach of any representation, warranty, covenant or agreement of the Company contained herein or in any certificate by or on behalf of the Company, the Subsidiary and/or any of their respective officers delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such statement or omission was made in reliance upon and in strict conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary - 35 - Prospectus, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, or in any application, as the case may be. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. b. Each of the Sellers agrees severally, but not jointly, to indemnify and hold harmless each of the Underwriters and each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act to the same extent as the indemnity from the Company to the Underwriters under Section 8(a) but only with respect to (A) statements or omissions, if any, in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or in any application (as such term is defined in Section 8(a) above), in each case, made in reliance upon and in conformity with written information furnished to the Company with respect to such Seller by or on behalf of such Seller for use in such Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or in any such application or (B) any breach of any representation, warranty, covenant or agreement of such Seller contained herein or in any certificate by or on behalf of such Seller delivered pursuant hereto. c. Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, each of the Sellers and each other person, if any, who controls the Company or any Seller within the meaning of the Act, to the same extent as the foregoing indemnity from the Company and each of the Sellers, respectively, to the Underwriters under Section 8(a) or 8(b), but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any application made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to any Underwriter by such Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any such application, provided that such written information or omissions only pertain to disclosures in the Preliminary Prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriters in connection with this Offering. The Company and each of the Sellers acknowledge that the statements with respect to the public offering of the Firm Securities and the Option Securities set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriters expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Prospectus. d. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 8, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it may have otherwise). In case any such action is brought against any indemnified party, and it notifies an indemnifying party or - 36 - parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 8 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. An indemnifying party will not, without the prior written consent of the indemnified parties, settle, compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. e. In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 8, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 8 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Firm Securities and the Option Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to - 37 - be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company or any of the Sellers is a contributing party and the Underwriters are the indemnified party, the relative benefits received by the Company or such Seller on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Firm Securities and the Option Securities (before deducting expenses) bear to the total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the Cover Page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, by a Seller, or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to above in this subdivision (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (d) the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Firm Securities and the Option Securities purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Company within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to this subparagraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this subparagraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subparagraph (d), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 9. Representations and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company submitted pursuant hereto, shall be deemed to be representations, warranties and agreements at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties and agreements of the Company and the indemnity agreements contained in Section 8 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, any Seller, the Company, any controlling person of any Underwriter or the Company, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the Underwriters and the Representative, as the case may be. - 38 - 10. Effective Date. a. This Agreement shall become effective at 10:00 a.m., New York City time, on the next full business day following the date hereof, or at such earlier time after the Registration Statement becomes effective as the Representative, in its discretion, shall release the Securities for sale to the public; provided, however, that the provisions of Sections 6, 8 and 11 of this Agreement shall at all times be effective. For purposes of this Section 10, the Firm Securities and the Option Securities to be purchased hereunder shall be deemed to have been so released upon the earlier of dispatch by the Representative of telegrams to securities dealers releasing such shares for offering or the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Firm Securities and the Option Securities. 11. Termination. a. Subject to subsection (b) of this Section 11, the Representative shall have the right to terminate this Agreement, (i) if any domestic or international event or act or occurrence has materially adversely disrupted, or in the Representative's opinion will in the immediate future materially adversely disrupt, the financial markets; or (ii) if any material adverse change in the financial markets shall have occurred; or (iii) if trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the NASD, the Boston Stock Exchange, the Commission or any other governmental authority having jurisdiction over such matters; or (iv) if trading of any of the securities of the Company shall have been suspended, or any of the securities of the Company shall have been delisted, on any exchange or in any over-the-counter market; or (v) if the United States shall have become involved in a war or major hostilities, or if there shall have been an escalation in an existing war or major hostilities or a national emergency shall have been declared in the United States; or (vi) if a banking moratorium has been declared by a state or federal authority; or (vii) if a moratorium in foreign exchange trading has been declared; or (viii) if the Company shall have sustained a loss material or substantial to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative's opinion, make it inadvisable to proceed with the offering, sale and/or delivery of the Securities; or (ix) if there shall have been such a material adverse change in the conditions or prospects of the Company, or such material adverse change in the general market, political or economic conditions, in the United States or elsewhere, that, in each case, in the Representative's judgment, would make it inadvisable to proceed with the offering, sale and/or delivery of the Securities or (x) if any of Ira Lon Morgan or Carl Seidel shall no longer serve the Company in their present capacity. b. If this Agreement is terminated by the Representative in accordance with the provisions of Section 11(a) the Company shall promptly reimburse and indemnify the Representative for all of its actual out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters (less amounts previously paid pursuant to Section 6(c) above). Notwithstanding any contrary provision contained in this Agreement, if this Agreement shall not be carried out within the time specified herein, or any extension thereof granted to the Representative, by reason of any failure on the part of the Company to perform any undertaking - 39 - or satisfy any condition of this Agreement by it to be performed or satisfied (including, without limitation, pursuant to Section 7 or Section 13) then, the Company shall promptly reimburse and indemnify the Representative for all of its actual out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters (less amounts previously paid pursuant to Section 6(c) above). In addition, the Company shall remain liable for all Blue Sky counsel fees and disbursements, expenses and filing fees (such counsel fees not to exceed $15,000 if the shares are listed on the American Stock Exchange or $30,000 if the shares have been accepted for quotation on Nasdaq). Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 7, 11, 12 and 13 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 7 and Section 8 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 12. Substitution of the Underwriters. If one or more of the Underwriters shall fail (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7, Section 11 or Section 13 hereof) to purchase the Securities which it or they are obligated to purchase on such date under this Agreement (the "Defaulted Securities"), the Representative shall have the right, within 24 hours thereafter, to make arrangement for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the total number of Firm Securities to be purchased on such date, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the total number of Firm Securities, this Agreement shall terminate without liability on the part of any non-defaulting Underwriters (or, if such default shall occur with respect to any Option Securities to be purchased on an Option Closing Date, the Underwriters may at the Representative's option, by notice from the Representative to the Company, terminate the Underwriters' obligation to purchase Option Securities from the Company on such date). No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of any default by such Underwriter under this Agreement. In the event of any such default which does not result in a termination of this Agreement, the Representative shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. 13. Default by the Company and/or any of the Sellers. If the Company shall fail at the Closing Date or at any Option Closing Date, as applicable, to sell and deliver the number of - 40 - Securities which it is obligated to sell hereunder on such date, then this Agreement shall terminate without any liability on the part of any non-defaulting party other than pursuant to Section 6, Section 8 and Section 11 hereof. If any of the Sellers shall fail at any Option Closing Date, if any, to sell and deliver the number of Option Securities which it or he is obligated to sell hereunder on such date, the Underwriters may at the Representative's option terminate the Underwriters' obligation to purchase Option Securities from each of the Sellers and the Company on such date. No action taken pursuant to this Section shall relieve the Company or any of the Sellers from liability, if any, in respect of such default. 14. Notices. All notices and communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative at Keane Securities Co., Inc., 50 Broadway, New York, New York 10004, Attention: Walter D. O'Hearn, Jr. with a copy to Orrick, Herrington & Sutcliffe, LLP, 666 Fifth Avenue, New York, New York 10103, Attention: Lawrence B. Fisher, Esq. Notices to the Company shall be directed to the Company at 2600 Longhorn Boulevard, Suite 105, Austin, Texas 78758, Attention: Ira Lon Morgan, Chairman and Chief Executive Officer, with a copy to Epstein Becker & Green, P.C., 250 Park Avenue, New York, New York 10177- 0077, Attention: Sidney Todres, Esq. Notices to the Sellers shall be directed to ___________________ at _______________________, Attention: ______________________. 15. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon the Underwriters, the Company, the Sellers and the controlling persons, directors and officers referred to in Section 8 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 16. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the choice of law or conflict of laws principles. 17. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 18. Entire Agreement; Amendments. This Agreement and the Representative's Warrant Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in a writing, signed by the Representative, the Sellers and the Company. - 41 - If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, INTERNATIONAL ISOTOPES, INC. By: ------------------------------- Name: Title: SELLERS: ---------------------------------- ---------------------------------- ---------------------------------- Confirmed and accepted as of the date first above written. KEANE SECURITIES CO., INC. For itself and as Representative of the several Underwriters named in Schedule A hereto. By: -------------------------------- Walter D. O'Hearn, Jr. Senior Vice President - 42 - SCHEDULE A Number of Shares Name of Underwriters to be Purchased - -------------------- --------------- Keane Securities Co., Inc. . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,000 ========= - 43 - SCHEDULE B Number of Option Name of Seller Shares to be Sold - -------------- ----------------- - 44 - EX-3.1 3 RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF INTERNATIONAL ISOTOPES INC. ARTICLE ONE International Isotopes Inc. (the "Corporation"), pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts restated articles of incorporation which accurately copy the articles of incorporation and all amendments thereto that are in effect to date and as further amended by such restated articles of incorporation as hereinafter set forth and which contain no other change in any provision thereof. ARTICLE TWO The Articles of Incorporation of the Corporation are amended by the Restated Articles of Incorporation as follows: Article IV is hereby amended in full to read as follows: ARTICLE IV The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Twenty-Five Million (25,000,000), of which (a) Twenty Million (20,000,000) shares shall be designated as Common Stock, par value $.01 per share, and (b) Five Million (5,000,000) shares shall be designated as Preferred Stock, par value $.01 per share. The following is a statement of the designations, preferences, limitations, and relative rights, including voting rights, in respect of the classes of stock of the Corporation and of the authority with respect thereto expressly vested in the Board of Directors of the Corporation: COMMON STOCK (1) Each share of Common Stock of the Corporation shall have identical rights and privileges in every respect. The holders of shares of Common Stock shall be entitled to vote upon all matters submitted to a vote of the shareholders of the Corporation and shall be entitled to one vote for each share of Common Stock held. (2) Subject to the prior rights and preferences, if any, applicable to shares of the Preferred Stock or any series thereof, the holders of shares of the Common Stock shall be entitled to receive such dividends (payable in cash, stock, or otherwise) as may be declared thereon by the Board of Directors at any time and from time to time out of any funds of the Corporation legally available therefor. 1 (3) In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock or any series thereof, the holders of shares of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation available for distribution to its shareholders, ratably in proportion to the number of shares of the Common Stock held by them. A liquidation, dissolution, or winding-up of the Corporation, as such terms are used in this Paragraph (3), shall not be deemed to be occasioned by or to include any merger of the Corporation with or into one or more corporations or other entities, any acquisition or exchange of the outstanding shares of one or more classes or series of the Corporation, or any sale, lease, exchange, or other disposition of all or a part of the assets of the Corporation. PREFERRED STOCK (4) Shares of the Preferred Stock may be issued from time to time in one or more series, the shares of each series to have such designations, preferences, limitations, and relative rights, including voting rights, as shall be stated and expressed herein or in a resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation. Each such series of Preferred Stock shall be designated so as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors of the Corporation is hereby expressly authorized, subject to the limitations provided by law, to establish and designate series of the Preferred Stock, to fix the number of shares constituting each series, and to fix the designations and the preferences, limitations, and relative rights, including voting rights, of the shares of each series and the variations of the relative rights and preferences as between series, and to increase and to decrease the number of shares constituting each series, provided that the Board of Directors may not decrease the number of shares within a series to less than the number of shares within such series that are then issued. The relative powers, rights, preferences, and limitations may vary between and among series of Preferred Stock in any and all respects so long as all shares of the same series are identical in all respects, except that shares of any such series issued at different times may have different dates from which dividends thereon cumulate. The authority of the Board of Directors of the Corporation with respect to each series shall include, but shall not be limited to, the authority to determine the following: (a) The designation of such series; (b) The number of shares initially constituting such series; (c) The rate or rates and the times at which dividends on the shares of such series shall be paid, the periods in respect of which dividends are payable, the conditions upon such dividends, the relationship and preferences, if any, of such dividends to dividends payable on any other class or series of shares, whether or not such dividends shall be cumulative, partially cumulative, or noncumulative, if such dividends shall be cumulative or partially cumulative, the date or dates from and after which, and the amounts in which, they shall accumulate, whether such dividends shall be share dividends, cash or other 2 dividends, or any combination thereof, and the other terms and conditions, if any, applicable to dividends on shares of such series; (d) Whether or not the shares of such series shall be redeemable or subject to repurchase at the option of the Corporation or the holder thereof or upon the happening of a specified event, if such shares shall be redeemable, the terms and conditions of such redemption, including but not limited to the date or dates upon or after which such shares shall be redeemable, the amount per share which shall be payable upon such redemption, which amount may vary under different conditions and at different redemption dates, and whether such amount shall be payable in cash, property, or rights, including securities of the Corporation or another corporation; (e) The rights of the holders of shares of such series (which may vary depending upon the circumstances or nature of such liquidation, dissolution, or winding up) in the event of the voluntary or involuntary liquidation, dissolution, or winding up of the Corporation and the relationship or preference, if any, of such rights to rights of holders of stock of any other class or series. A liquidation, dissolution, or winding up of the Corporation, as such terms are used in this subparagraph (e), shall not be deemed to be occasioned by or to include any merger of the Corporation with or into one or more corporations or other entities, any acquisition or exchange of the outstanding shares of one or more classes or series of the Corporation, or any sale, lease, exchange, or other disposition of all or a part of the assets of the Corporation; (f) Whether or not the shares of such series shall have voting powers and, if such shares shall have such voting powers, the terms and conditions thereof, including, but not limited to, the right of the holders of such shares to vote as a separate class either alone or with the holders of shares of one or more other classes or series of stock and the right to have more (or less) than one vote per share; provided, however, that the right to cumulate votes for the election of directors is expressly denied and prohibited; (g) Whether or not a sinking fund shall be provided for the redemption of the shares of such series and, if such a sinking fund shall be provided, the terms and conditions thereof; (h) Whether or not a purchase fund shall be provided for the shares of such series and, if such a purchase fund shall be provided, the terms and conditions thereof; (i) Whether or not the shares of such series, at the option of either the Corporation or the holder or upon the happening of a specified event, shall be convertible into stock of any other class or series and, if such shares shall be so convertible, the terms and conditions of conversion, including, but not limited to, any provision for the adjust ment of the conversion rate or the conversion price; 3 (j) Whether or not the shares of such series, at the option of either the Corporation or the holder or upon the happening of a specified event, shall be exchangeable for securities, indebtedness, or property of the Corporation and, if such shares shall be so exchangeable, the terms and conditions of exchange, including, but not limited to, any provision for the adjustment of the exchange rate or the exchange price; and (k) Any other preferences, limitations, and relative rights as shall not be inconsistent with the provisions of this Article IV or the limitations provided by law. (5) Except as otherwise required by law or in any resolution of the Board of Directors creating any series of Preferred Stock, the holders of shares of Preferred Stock and all series thereof who are entitled to vote shall vote together with the holders of shares of Common Stock, and not separately by class. Article V is hereby amended in full to read as follows: ARTICLE V At each election of directors, each shareholder entitled to vote at such election shall have the right to vote in person or by proxy the number of shares owned by such shareholder for as many persons as there are directors to be elected and for whose election such shareholder has a right to vote. No shareholder shall have the right to cumulate their votes in any election of directors. Article VIII is hereby amended in full to read as follows: ARTICLE VIII The address of the initial registered office of the corporation is 2600 Longhorn Blvd., #105, Austin, Texas 78758, and the name of the its initial registered agent at such address is Virgil Simmons. Article X is hereby amended in full to read as follows: ARTICLE X The Corporation shall indemnify any person who was, is, or is threatened to be made a named defendant or respondent in a proceeding (as hereinafter defined) because the person (i) is or was a director or officer of the Corporation or (ii) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent that a corporation may grant indemnification to a director under the Texas Business Corporation Act, as the same exists or may hereafter be amended. Such right shall be a contract 4 right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article X is in effect. Any repeal or amendment of this Article X shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment of this Article X. Such right shall include the right to be paid or reimbursed by the Corporation for expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within 90 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Texas Business Corporation Act, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or any committee thereof, special legal counsel, or shareholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its Board of Directors or any committee thereof, special legal counsel, or shareholders) that such indemnification or advancement is not permissible, shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of shareholders or directors, agreement, or otherwise. The Corporation may additionally indemnify any person covered by the grant of mandatory indemnification contained above to such further extent as is permitted by law and may indemnify any other person to the fullest extent permitted by law. To the extent permitted by then applicable law, the grant of mandatory indemnification to any person pursuant to this Article X shall extend to proceedings involving the negligence of such person. As used herein, the term "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. 5 The following Article XII is hereby added to the Corporation's Articles of Incorporation: ARTICLE XII Any action of the Corporation which, under the provisions of the Texas Business Corporation Act or any other applicable law, is required to be authorized or approved by the holders of any specified percentage which is in excess of fifty percent of the outstanding shares (or of any class or series thereof) of the Corporation shall, notwithstanding any law, be deemed effectively and properly authorized or approved if authorized or approved by the vote of the holders of more than fifty percent of the outstanding shares entitled to vote thereon (or, if the holders of any class or series of the Corporation's shares shall be entitled by the Texas Business Corporation Act or any other applicable law to vote thereon separately as a class, by the vote of the holders of more than fifty percent of the outstanding shares of each such class or series). Without limiting the generality of the foregoing, the foregoing provisions of this Article Twleve shall be applicable to any required shareholder authorization or approval of: (a) any amendment to these articles of incorporation; (b) any plan of merger, share exchange, or reorganization involving the Corporation; (c) any sale, lease, exchange, or other disposition of all, or substantially all, the property and assets of the Corporation; and (d) any voluntary dissolution of the Corporation. ARTICLE THREE Each such amendment made by the Restated Articles of Incorporation has been effected in conformity with the provisions of the Texas Business Corporation Act and such Restated Articles of Incorporation and each such amendment made by the Restated Articles of Incorporation were duly adopted by the shareholders of the Corporation on the 20th day of March, 1997. ARTICLE FOUR The number of shares outstanding was 3,759,509; the number of shares entitled to vote on the Restated Articles of Incorporation as so amended was 3,759,509; the number of shares voted for such Restated Articles as so amended was 3,486,798; and the number of shares voted against such Restated Articles as so amended was 0. ARTICLE FIVE In connection with amending the articles to change the name of Class B Stock to Preferred Stock, the par value has been changed. Because no Class B or Preferred Stock has been issued, there was no exchange, reclassification, or cancellation of issued shares to be carried out. 6 ARTICLE SIX The Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Restated Articles of Incorporation which accurately copy the entire text thereof and as amended as above set forth: ARTICLE I The name of the Corporation is INTERNATIONAL ISOTOPES INC. ARTICLE II The period of duration of the Corporation is perpetual. ARTICLE III The purposes for which the Corporation is organized are as follows: To transact any and all lawful business for which a corporation may be incorporated under the Texas Business Corporation Act. ARTICLE IV The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Twenty-Five Million (25,000,000), of which (a) Twenty Million (20,000,000) shares shall be designated as Common Stock, par value $.01 per share, and (b) Five Million (5,000,000) shares shall be designated as Preferred Stock, par value $.01 per share. The following is a statement of the designations, preferences, limitations, and relative rights, including voting rights, in respect of the classes of stock of the Corporation and of the authority with respect thereto expressly vested in the Board of Directors of the Corporation: COMMON STOCK (1) Each share of Common Stock of the Corporation shall have identical rights and privileges in every respect. The holders of shares of Common Stock shall be entitled to vote upon all matters submitted to a vote of the shareholders of the Corporation and shall be entitled to one vote for each share of Common Stock held. 7 (2) Subject to the prior rights and preferences, if any, applicable to shares of the Preferred Stock or any series thereof, the holders of shares of the Common Stock shall be entitled to receive such dividends (payable in cash, stock, or otherwise) as may be declared thereon by the Board of Directors at any time and from time to time out of any funds of the Corporation legally available therefor. (3) In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock or any series thereof, the holders of shares of the Common Stock shall be entitled to receive all of the remaining assets of the Corporation available for distribution to its shareholders, ratably in proportion to the number of shares of the Common Stock held by them. A liquidation, dissolution, or winding-up of the Corporation, as such terms are used in this Paragraph (3), shall not be deemed to be occasioned by or to include any merger of the Corporation with or into one or more corporations or other entities, any acquisition or exchange of the outstanding shares of one or more classes or series of the Corporation, or any sale, lease, exchange, or other disposition of all or a part of the assets of the Corporation. PREFERRED STOCK (4) Shares of the Preferred Stock may be issued from time to time in one or more series, the shares of each series to have such designations, preferences, limitations, and relative rights, including voting rights, as shall be stated and expressed herein or in a resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation. Each such series of Preferred Stock shall be designated so as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors of the Corporation is hereby expressly authorized, subject to the limitations provided by law, to establish and designate series of the Preferred Stock, to fix the number of shares constituting each series, and to fix the designations and the preferences, limitations, and relative rights, including voting rights, of the shares of each series and the variations of the relative rights and preferences as between series, and to increase and to decrease the number of shares constituting each series, provided that the Board of Directors may not decrease the number of shares within a series to less than the number of shares within such series that are then issued. The relative powers, rights, preferences, and limitations may vary between and among series of Preferred Stock in any and all respects so long as all shares of the same series are identical in all respects, except that shares of any such series issued at different times may have different dates from which dividends thereon cumulate. The authority of the Board of Directors of the Corporation with respect to each series shall include, but shall not be limited to, the authority to determine the following: 8 (a) The designation of such series; (b) The number of shares initially constituting such series; (c) The rate or rates and the times at which dividends on the shares of such series shall be paid, the periods in respect of which dividends are payable, the conditions upon such dividends, the relationship and preferences, if any, of such dividends to dividends payable on any other class or series of shares, whether or not such dividends shall be cumulative, partially cumulative, or noncumulative, if such dividends shall be cumulative or partially cumulative, the date or dates from and after which, and the amounts in which, they shall accumulate, whether such dividends shall be share dividends, cash or other dividends, or any combination thereof, and the other terms and conditions, if any, applicable to dividends on shares of such series; (d) Whether or not the shares of such series shall be redeemable or subject to repurchase at the option of the Corporation or the holder thereof or upon the happening of a specified event, if such shares shall be redeemable, the terms and conditions of such redemption, including but not limited to the date or dates upon or after which such shares shall be redeemable, the amount per share which shall be payable upon such redemption, which amount may vary under different conditions and at different redemption dates, and whether such amount shall be payable in cash, property, or rights, including securities of the Corporation or another corporation; (e) The rights of the holders of shares of such series (which may vary depending upon the circumstances or nature of such liquidation, dissolution, or winding up) in the event of the voluntary or involuntary liquidation, dissolution, or winding up of the Corporation and the relationship or preference, if any, of such rights to rights of holders of stock of any other class or series. A liquidation, dissolution, or winding up of the Corporation, as such terms are used in this subparagraph (e), shall not be deemed to be occasioned by or to include any merger of the Corporation with or into one or more corporations or other entities, any acquisition or exchange of the outstanding shares of one or more classes or series of the Corporation, or any sale, lease, exchange, or other disposition of all or a part of the assets of the Corporation; 9 (f) Whether or not the shares of such series shall have voting powers and, if such shares shall have such voting powers, the terms and conditions thereof, including, but not limited to, the right of the holders of such shares to vote as a separate class either alone or with the holders of shares of one or more other classes or series of stock and the right to have more (or less) than one vote per share; provided, however, that the right to cumulate votes for the election of directors is expressly denied and prohibited; (g) Whether or not a sinking fund shall be provided for the redemption of the shares of such series and, if such a sinking fund shall be provided, the terms and conditions thereof; (h) Whether or not a purchase fund shall be provided for the shares of such series and, if such a purchase fund shall be provided, the terms and conditions thereof; (i) Whether or not the shares of such series, at the option of either the Corporation or the holder or upon the happening of a specified event, shall be convertible into stock of any other class or series and, if such shares shall be so convertible, the terms and conditions of conversion, including, but not limited to, any provision for the adjust ment of the conversion rate or the conversion price; (j) Whether or not the shares of such series, at the option of either the Corporation or the holder or upon the happening of a specified event, shall be exchangeable for securities, indebtedness, or property of the Corporation and, if such shares shall be so exchangeable, the terms and conditions of exchange, including, but not limited to, any provision for the adjustment of the exchange rate or the exchange price; and (k) Any other preferences, limitations, and relative rights as shall not be inconsistent with the provisions of this Article IV or the limitations provided by law. (5) Except as otherwise required by law or in any resolution of the Board of Directors creating any series of Preferred Stock, the holders of shares of Preferred Stock and all series thereof who are entitled to vote shall vote together with the holders of shares of Common Stock, and not separately by class. 10 ARTICLE V At each election of directors, each shareholder entitled to vote at such election shall have the right to vote in person or by proxy the number of shares owned by such shareholder for as many persons as there are directors to be elected and for whose election such shareholder has a right to vote. No shareholder shall have the right to cumulate their votes in any election of directors. ARTICLE VI The corporation will not commence business until it has received for the issuance of its shares consideration of the value of at least One Thousand Dollars ($1,000.00), consisting of money, labor done or property actually received. ARTICLE VII No holder of any shares of any class of stock of the corporation shall, as such holder, have any preemptive or preferential right to receive, purchase or subscribe to additional, unissued or treasury shares of any class of stock of the corporation, or securities, obligations or evidences of indebtedness of the corporation convertible into or carrying a right to subscribe to or purchase such shares, or any other securities that may hereafter from time to time be issued or sold by the corporation. ARTICLE VIII The address of the initial registered office of the corporation is 2600 Longhorn Blvd., #105, Austin, Texas 78758, and the name of its initial registered agent at such address is Virgil Simmons. ARTICLE IX The number of the members of the Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The initial Board of Directors shall consist of one member. The name and address of the person who will serve as director until the first annual meeting of shareholders or until his successor is elected and qualified is: Ira Lon Morgan 3800 Palomar Lane Austin, Texas 78727 ARTICLE X The Corporation shall indemnify any person who was, is, or is threatened to be made a named defendant or respondent in a proceeding (as hereinafter defined) because the person (i) is or was a director or officer of the Corporation or (ii) while a director or officer of the Corporation, is 11 or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent that a corporation may grant indemnification to a director under the Texas Business Corporation Act, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article X is in effect. Any repeal or amendment of this Article X shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment of this Article X. Such right shall include the right to be paid or reimbursed by the Corporation for expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within 90 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Texas Business Corporation Act, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or any committee thereof, special legal counsel, or shareholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its Board of Directors or any committee thereof, special legal counsel, or shareholders) that such indemnification or advancement is not permissible, shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of shareholders or directors, agreement, or otherwise. The Corporation may additionally indemnify any person covered by the grant of mandatory indemnification contained above to such further extent as is permitted by law and may indemnify any other person to the fullest extent permitted by law. To the extent permitted by then applicable law, the grant of mandatory indemnification to any person pursuant to this Article X shall extend to proceedings involving the negligence of such person. 12 As used herein, the term "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. ARTICLE XI The name and address of the incorporator is Ira Lon Morgan, 3800 Palomar Lane, Austin, Texas 78727. ARTICLE XII Any action of the Corporation which, under the provisions of the Texas Business Corporation Act or any other applicable law, is required to be authorized or approved by the holders of any specified percentage which is in excess of fifty percent of the outstanding shares (or of any class or series thereof) of the Corporation shall, notwithstanding any law, be deemed effectively and properly authorized or approved if authorized or approved by the vote of the holders of more than fifty percent of the outstanding shares entitled to vote thereon (or, if the holders of any class or series of the Corporation's shares shall be entitled by the Texas Business Corporation Act or any other applicable law to vote thereon separately as a class, by the vote of the holders of more than fifty percent of the outstanding shares of each such class or series). Without limiting the generality of the foregoing, the foregoing provisions of this Article Ten shall be applicable to any required shareholder authorization or approval of: (a) any amendment to these articles of incorporation; (b) any plan of merger, share exchange, or reorganization involving the Corporation; (c) any sale, lease, exchange, or other disposition of all, or substantially all, the property and assets of the Corporation; and (d) any voluntary dissolution of the Corporation. INTERNATIONAL ISOTOPES INC. By: /s/ Virgil L. Simmons --------------------------------- Virgil L. Simmons, President 13 EX-3.2 4 BYLAWS Exhibit 3.2 BYLAWS OF INTERNATIONAL ISOTOPES INC. TABLE OF CONTENTS Page ---- PREAMBLE ARTICLE ONE: OFFICES 1.01 Registered Office and Agent.......................................1 1.02 Other Offices.....................................................1 ARTICLE TWO: SHAREHOLDERS 2.01 Annual Meetings...................................................1 2.02 Special Meetings..................................................1 2.03 Place of Meetings.................................................1 2.04 Notice............................................................2 2.05 Voting List.......................................................2 2.06 Voting of Shares..................................................2 2.07 Quorum............................................................2 2.08 Majority Vote; Withdrawal of Quorum...............................3 2.09 Method of Voting; Proxies.........................................3 2.10 Closing of Transfer Books; Record Date............................3 2.11 Officers Duties at Meeting........................................4 ARTICLE THREE: DIRECTORS 3.01 Management........................................................4 3.02 Number; Election; Term; Qualification.............................4 3.03 Changes in Number.................................................4 3.04 Removal...........................................................4 3.05 Vacancies.........................................................5 3.06 Place of Meetings.................................................5 3.07 First Meeting.....................................................5 3.08 Regular Meetings..................................................5 3.09 Special Meetings; Notice..........................................5 3.10 Quorum; Majority Vote.............................................5 3.11 Procedure; Minutes................................................5 3.12 Presumption of Assent.............................................6 3.13 Compensation......................................................6 ARTICLE FOUR: COMMITTEES 4.01 Designation.......................................................6 4.02 Number; Qualification; Term.......................................6 4.03 Authority.........................................................6 i 4.04 Committee Changes; Removal........................................7 4.05 Regular Meetings..................................................7 4.06 Special Meetings..................................................7 4.07 Quorum; Majority Vote.............................................7 4.08 Minutes...........................................................7 4.09 Compensation......................................................8 4.10 Responsibility....................................................8 ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS 5.01 Notice............................................................8 5.02 Waiver of Notice..................................................8 5.03 Telephone and Similar Meetings....................................8 5.04 Action Without Meeting............................................8 ARTICLE SIX: OFFICERS AND OTHER AGENTS 6.01 Number; Titles; Election; Term; Qualification.....................9 6.02 Removal...........................................................9 6.03 Vacancies.........................................................9 6.04 Authority.........................................................9 6.05 Compensation......................................................9 6.06 Chairman of the Board............................................10 6.07 Chief Executive Officer..........................................10 6.08 President........................................................10 6.09 Vice Presidents..................................................10 6.10 Treasurer........................................................10 6.11 Assistant Treasurers.............................................10 6.12 Secretary........................................................11 6.13 Assistant Secretaries............................................11 ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.01 Certificated and Uncertificated Shares...........................11 7.02 Certificates for Certificated Shares.............................11 7.03 Issuance.........................................................12 7.04 Consideration for Shares.........................................12 7.05 Lost, Stolen, or Destroyed Certificates..........................12 7.06 Transfer of Shares...............................................12 7.07 Registered Shareholders..........................................13 7.08 Legends..........................................................13 7.09 Regulations......................................................13 ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.01 Dividends........................................................13 8.02 Reserves.........................................................13 ii 8.03 Books and Records................................................14 8.04 Fiscal Year......................................................14 8.05 Seal.............................................................14 8.06 Attestation by the Secretary.....................................14 8.07 Resignation......................................................14 8.08 Securities of Other Corporations.................................14 8.09 Amendment of Bylaws..............................................14 8.10 Invalid Provisions...............................................15 8.11 Headings; Table of Contents......................................15 iii BYLAWS OF INTERNATIONAL ISOTOPES INC. A Texas Corporation PREAMBLE These bylaws are subject to, and governed by, the Texas Business Corporation Act and the articles of incorporation of International Isotopes Inc. (the "Corporation"). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the Texas Business Corporation Act or the provisions of the articles of incorporation of the Corporation, such provisions of the Texas Business Corporation Act or the articles of incorporation of the Corporation, as the case may be, will be controlling. ARTICLE ONE: OFFICES 1.01 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of Texas. 1.02 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Texas, as the board of directors may from time to time determine or the business of the Corporation may require. ARTICLE TWO: SHAREHOLDERS 2.01 Annual Meetings. An annual meeting of shareholders of the Corporation shall be held during each calendar year on such date and at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, if not a legal holiday in the place where the meeting is to be held, and, if a legal holiday in such place, then on the next business day following, at the time specified in the notice of the meeting. At such meeting, the shareholders shall elect directors and transact such other business as may properly be brought before the meeting. 2.02 Special Meetings. A special meeting of the shareholders may be called at any time by the chairman of the board, the board of directors, or the holders of not less than ten percent of all shares Bylaws Page 1 entitled to vote at such meeting. Only business within the purpose or purposes described in the notice of special meeting may be conducted at such special meeting. 2.03 Place of Meetings. The annual meeting of shareholders may be held at any place within or without the State of Texas designated by the board of directors. Special meetings of shareholders may be held at any place within or without the State of Texas designated by the person or persons calling such special meeting as provided in Section 2.02 above. Meetings of shareholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein. 2.04 Notice. Except as otherwise provided by law, written or printed notice stating the place, day, and hour of each meeting of the shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting by or at the direction of the president, the secretary, or the person calling the meeting, to each shareholder of record entitled to vote at such meeting. 2.05 Voting List. At least ten days before each meeting of shareholders, the secretary shall prepare a complete list of shareholders entitled to vote at such meeting, arranged in alphabetical order, including the address of each shareholder and the number of voting shares held by each shareholder. For a period of ten days prior to such meeting, such list shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder during usual business hours. Such list shall be produced at such meeting, and at all times during such meeting shall be subject to inspection by any shareholder. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list. 2.06 Voting of Shares. Treasury shares, shares of the Corporation's own stock owned by another corporation the majority of the voting stock of which is owned or controlled by the Corporation, and shares of the Corporation's own stock held by the Corporation in a fiduciary capacity shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent, or proxy as the bylaws of such corporation may authorize or, in the absence of such authorization, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by such person, either in person or by proxy, without transfer of such shares into such persons name so long as the shares form a part of the estate served by him and are in the possession of such estate. Shares held by a trustee may be voted by such person, either in person or by proxy, only after the shares have been transferred into such person's name as trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without transfer of such shares into his name if authority to do so is contained in the court order by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until they have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote such shares. Bylaws Page 2 2.07 Quorum. The holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of shareholders, except as otherwise provided by law, the articles of incorporation, or these bylaws. If a quorum shall not be present or represented at any meeting of shareholders, a majority of the shareholders entitled to vote at the meeting, who are present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any reconvening of an adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which could have been transacted at the original meeting, if a quorum had been present or represented. 2.08 Majority Vote; Withdrawal of Quorum. If a quorum is present in person or represented by proxy at any meeting, the vote of the holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one on which, by express provision of law, the articles of incorporation, or these bylaws, a different vote is required, in which event such express provision shall govern and control the decision of such question. The shareholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding any withdrawal of shareholders which may leave less than a quorum remaining. 2.09 Method of Voting; Proxies. Every shareholder of record shall be entitled at every meeting of shareholders to one vote on each matter submitted to a vote, for every share standing in his name on the original stock transfer books of the Corporation except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation. Such stock transfer books shall be prima facie evidence as to the identity of shareholders entitled to vote. At any meeting of shareholders, every shareholder having the right to vote may vote either in person or by a proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the secretary of the Corporation before, or at the time of, the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. If no date is stated on a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. 2.10 Closing of Transfer Books; Record Date. For the purpose of determining shareholders entitled to notice of, or to vote at, any meeting of shareholders or any reconvening thereof, or entitled to receive a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may provide that the stock transfer books of the Corporation shall be closed for a stated period but not to exceed in any event sixty days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of, or to vote at, a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the board of directors may fix in advance a date as the record date for any such determination of shareholders, Bylaws Page 3 such date in any case to be not more than sixty days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and if no record date is fixed for the determination of shareholders entitled to notice of, or to vote at, a meeting of shareholders or entitled to receive a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, the date on which the notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. 2.11 Officers Duties at Meetings. The chairman of the board shall preside at, and the secretary shall prepare minutes of, each meeting of shareholders, and in the absence of either such officer, his duties shall be performed by some person or persons elected by the vote of the holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy. ARTICLE THREE: DIRECTORS 3.01 Management. The business and property of the Corporation shall be managed by the board of directors, and subject to the restrictions imposed by law, the articles of incorporation, or these bylaws, the board of directors may exercise all the powers of the Corporation. 3.02 Number; Election; Term; Qualification. The number of directors which shall constitute the board of directors shall be not less than one. The first board of directors shall consist of the number of directors named in the articles of incorporation. Thereafter, the number of directors which shall constitute the entire board of directors shall be determined by resolution of the board of directors at any meeting thereof or by the shareholders at any meeting thereof, but shall never be less than one. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. No director need be a shareholder, a resident of the State of Texas, or a citizen of the United States. 3.03 Changes in Number. No decrease in the number of directors constituting the entire board of directors shall have the effect of shortening the term of any incumbent director. Any directorship to be filled by reason of an increase in the number of directors may be filled by (i) the shareholders at any annual or special meeting of shareholders called for that purpose or (ii) the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Notwithstanding the foregoing, whenever the holders of any class or series of shares are entitled to elect one or more directors by the provisions of the articles of incorporation, any newly created directorship(s) of such class or series to be filled by reason of an increase in the number of such directors may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office or by Bylaws Page 4 a sole remaining director so elected or by the vote of the holders of the outstanding shares of such class or series, and such directorship(s) shall not in any case be filled by the vote of the remaining directors or by the holders of the outstanding shares of the Corporation as a whole unless otherwise provided in the articles of incorporation. 3.04 Removal. At any meeting of shareholders called expressly for that purpose, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote on the election of directors. 3.05 Vacancies. Any vacancy occurring in the board of directors may be filled by (i) the shareholders at any annual or special meeting of shareholders called for that purpose or (ii) the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve for the unexpired term of his predecessor in office. Notwithstanding the foregoing, whenever the holders of any class or series of shares are entitled to elect one or more directors by the provisions of the articles of incorporation, any vacancies in such directorship(s) may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office or by a sole remaining director so elected or by the vote of the holders of the outstanding shares of such class or series, and such directorship(s) shall not in any case be filled by the vote of the remaining directors or the holders of the outstanding shares of the Corporation as a whole unless otherwise provided in the articles of incorporation. 3.06 Place of Meetings. The board of directors may hold its meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places within or without the State of Texas as the board of directors may from time to time determine. 3.07 First Meeting. Each newly elected board of directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of shareholders, and notice of such meeting shall not be necessary. 3.08 Regular Meetings. Regular meetings of the board of directors may be held without notice at such times and places as may be designated from time to time by resolution of the board of directors and communicated to all directors. 3.09 Special Meetings; Notice. Special meetings of the board of directors shall be held whenever called by the chairman of the board or by any director. The person calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each director at least two days before such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of the board of directors need be specified in the notice or waiver of notice of any special meeting. Bylaws Page 5 3.10 Quorum; Majority Vote. At all meetings of the board of directors, a majority of the directors, fixed in the manner provided in these bylaws, shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. 3.11 Procedure; Minutes. At meetings of the board of directors, business shall be transacted in such order as the board of directors may determine from time to time. The board of directors shall appoint at each meeting a person to preside at the meeting and a person to act as secretary of the meeting. The secretary of the meeting shall prepare minutes of the meeting which shall be delivered to the secretary of the Corporation for placement in the minute books of the Corporation. 3.12 Presumption of Assent. A director of the Corporation who is present at any meeting of the board of directors at which action on any matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 3.13 Compensation. Directors, in their capacity as directors, may receive, by resolution of the board of directors, a fixed sum and expenses of attendance, if any, for attending meetings of the board of directors or a stated salary. No director shall be precluded from serving the Corporation in any other capacity or receiving compensation therefor. ARTICLE FOUR: COMMITTEES 4.01 Designation. The board of directors may, by resolution adopted by a majority of the entire board of directors, designate executive and other committees. 4.02 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire board of directors. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire board of directors. Each committee member shall serve as such until the earliest of (i) the expiration of his term as director, (ii) his resignation as a committee member or as a director, or (iii) his removal, as a committee member or as a director. 4.03 Authority. Each committee, to the extent expressly provided in the resolution establishing such committee, shall have and may exercise all of the authority of the board of directors in the Bylaws Page 6 management of the business and property of the Corporation, including, without limitation, the power and authority to declare a dividend and to authorize the issuance of shares of the Corporation. Notwithstanding the foregoing, however, no committee shall have the authority of the board of directors in reference to: (i) amending the articles of incorporation; (ii) approving a plan of merger or consolidation; (iii) recommending to the shareholders the sale, lease, or exchange of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business; (iv) recommending to the shareholders a voluntary dissolution of the Corporation or a revocation thereof; (v) amending, altering, or repealing these bylaws or adopting new bylaws; (vi) filling vacancies in the board of directors or of any committee; (vii) filling any directorship to be filled by reason of an increase in the number of directors; (viii) electing or removing officers or committee members; (ix) fixing the compensation of any committee member; or (x) altering or repealing any resolution of the board of directors which by its terms provides that it shall not be amendable or repealable. 4.04 Committee Changes; Removal. The board of directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. However, a committee member may be removed by the board of directors, only if, in the judgment of the board of directors, the best interests of the Corporation will be served thereby. 4.05 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.06 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each Bylaws Page 7 committee member at least two days before such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting. 4.07 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the board of directors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. 4.08 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the board of directors upon the request of the board of directors. The minutes of the proceedings of each committee shall be delivered to the secretary of the Corporation for placement in the minute books of the Corporation. 4.09 Compensation. Committee members may, by resolution of the board of directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary. 4.10 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the board of directors or any director of any responsibility imposed upon it or such director by law. ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS 5.01 Notice. Whenever by law, the articles of incorporation, or these bylaws, notice is required to be given to any committee member, director, or shareholder and no provision is made as to how such notice shall be given, it shall be construed to mean that any such notice may be given (i) in person, (ii) in writing, by mail, postage prepaid, addressed to such committee member, director, or shareholder at his address as it appears on the books of the Corporation or, in the case of a shareholder, the stock transfer records of the Corporation, or (iii) by any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail, postage prepaid, and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex, cable, telecopier, or similar means shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.02 Waiver of Notice. Whenever by law, the articles of incorporation, or these bylaws, any notice is required to be given to any committee member, shareholder, or director of the Corporation, Bylaws Page 8 a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time notice should have been given, shall be equivalent to the giving of such notice. Attendance of a committee member, shareholder, or director at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 5.03 Telephone and Similar Meetings. Shareholders, directors, or committee members may participate in and hold a meeting by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 5.04 Action Without Meeting. Any action which may be taken, or is required by law, the articles of incorporation, or these bylaws to be taken, at a meeting of shareholders, the directors, or any committee members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders, directors, or committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect, as of the date stated therein, as a unanimous vote of such shareholders, directors, or committee members, as the case may be, and may be stated as such in any document filed with the Secretary of State of Texas or in any certificate or other document delivered to any person. The consent may be in one or more counterparts so long as each shareholder, director, or committee member signs one of the counterparts. The signed consent shall be placed in the minute books of the Corporation. ARTICLE SIX: OFFICERS AND OTHER AGENTS 6.01 Number; Titles; Election; Term; Qualification. The officers of the Corporation shall be a president, one or more vice presidents (and, in the case of each vice president, with such descriptive title, if any, as the board of directors shall determine), a secretary, and a treasurer. The Corporation may also have a chief executive officer, a chairman of the board, one or more assistant treasurers, one or more assistant secretaries, and such other officers and such agents as the board of directors may from time to time elect or appoint. The board of directors shall elect a president and a secretary at its first meeting at which a quorum shall be present after the annual meeting of shareholders or whenever a vacancy exists. The board of directors then, or from time to time, may also elect or appoint one or more other officers or agents as it shall deem advisable. Each officer and agent shall hold office for the term for which he is elected or appointed and until his successor has been elected or appointed and qualified. Any person may hold any number of offices. No officer or agent need be a shareholder, a director, a resident of the State of Texas, or a citizen of the United States. Bylaws Page 9 6.02 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.03 Vacancies. Any vacancy occurring in any office of the Corporation may be filled by the board of directors, except for a vacancy in the office of the chairman of the board, which shall be filled by the shareholders of the corporation. 6.04 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the board of directors not inconsistent with these bylaws. 6.05 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the board of directors; provided, that the board of directors may by resolution delegate to any one or more officers of the Corporation the authority to fix such compensation. 6.06 Chairman of the Board. The chairman of the board shall have such powers and duties as may be prescribed by the shareholders. 6.07 Chief Executive Officer. Subject to the supervision of the board of directors, the chief executive officer shall have general management and control of the business and property of the Corporation in the ordinary course of its business with all such powers with respect to such general management and control as may be reasonably incident to such responsibilities, including, but not limited to, the power to employ, discharge, or suspend employees and agents of the Corporation, to fix the compensation of employees and agents, and to suspend, with or without cause, any officer of the Corporation pending final action by the board of directors with respect to continued suspension, removal, or reinstatement of such officer. The chief executive officer may, without limitation, agree upon and execute all division and transfer orders, bonds, contracts, and other obligations in the name of the Corporation. 6.08 President. The president shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the chief executive officer. 6.09 Vice Presidents. Each vice president shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the president and (in the order as designated by the board of directors, or in the absence of such designation, as determined by the length of time each has held the office of vice president continuously) shall exercise the powers of the president during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by a vice president in the performance of the duties Bylaws Page 10 of the president shall be conclusive evidence of the absence or inability to act of the president at the time such action was taken. 6.10 Treasurer. The treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate accounts of receipts and disbursements, and shall deposit all moneys and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the board of directors. The treasurer shall audit all payrolls and vouchers of the Corporation, receive, audit, and consolidate all operating and financial statements of the Corporation and its various departments, shall supervise the accounting and auditing practices of the Corporation, and shall have charge of matters relating to taxation. Additionally, the treasurer shall have the power to endorse for deposit, collection, or otherwise all checks, drafts, notes, bills of exchange, and other commercial paper payable to the Corporation and to give proper receipts and discharges for all payments to the Corporation. The treasurer shall perform such other duties as may be prescribed by the board of directors or as may be delegated from time to time by the chief executive officer. 6.11 Assistant Treasurers. Each assistant treasurer shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the chief executive officer. The assistant treasurers (in the order as designated by the board of directors or, in the absence of such designation, as determined by the length of time each has held the office of assistant treasurer continuously) shall exercise the powers of the treasurer during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by an assistant treasurer in the performance of the duties of the treasurer shall be conclusive evidence of the absence or inability to act of the treasurer at the time such action was taken. 6.12 Secretary. The secretary shall maintain minutes of all meetings of the board of directors, of any committee, and of the shareholders or consents in lieu of such minutes in the Corporation's minute books, and shall cause notice of such meetings to be given when requested by any person authorized to call such meetings. The secretary may sign with the chief executive officer in the name of the Corporation, all contracts of the Corporation and affix the seal of the Corporation thereto. The secretary shall have charge of the certificate books, stock transfer books, stock ledgers, and such other stock books and papers as the board of directors may direct, all of which shall at all reasonable times be open to inspection by any director at the office of the Corporation during business hours. The secretary shall perform such other duties as may be prescribed by the chief executive officer or as may be delegated from time to time by the chief executive officer. 6.13 Assistant Secretaries. Each assistant secretary shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the chief executive officer. The assistant secretaries (in the order designated by the board of directors or, in the absence of such designation, as determined by the length of time each has held the office of assistant secretary continuously) shall exercise the powers of the secretary during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by an Bylaws Page 11 assistant secretary in the performance of the duties of the secretary shall be conclusive evidence of the absence or inability to act of the secretary at the time such action was taken. ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.01 Certificated and Uncertificated Shares. The shares of the Corporation may be either certificated shares or uncertificated shares. As used herein, the term "certificated shares" means shares represented by instruments in bearer or registered form, and the term "uncertificated shares" means shares not represented by instruments and the transfers of which are registered upon books maintained for that purpose by or on behalf of the Corporation. 7.02 Certificates for Certificated Shares. The certificates representing certificated shares of stock of the Corporation shall be in such form as shall be approved by the board of directors in conformity with law. The certificates shall be consecutively numbered, shall be entered as they are issued in the books of the Corporation or in the records of the Corporation's designated transfer agent, if any, and shall state upon the face thereof: (i) that the Corporation is organized under the laws of the State of Texas; (ii) the name of the person to whom issued; (iii) the number and class of shares and the designation of the series, if any, which such certificate represents; (iv) the par value of each share represented by such certificate, or a statement that the shares are without par value; and (v) such other matters as may be required by law. The certificates shall be signed by the chief executive officer or the president and also by the secretary, an assistant secretary or any other officer; however, the signatures of any of such officers may be facsimiles. The certificates may be sealed with the seal of the Corporation or a facsimile thereof. 7.03 Issuance. Shares with or without par value may be issued for such consideration and to such persons as the board of directors may from time to time determine, except in the case of shares with par value the consideration must be at least equal to the par value of such shares. Shares may not be issued until the full amount of the consideration has been paid. After the issuance of uncertificated shares, the Corporation or the transfer agent of the Corporation shall send to the registered owner of such uncertificated shares a written notice containing the information required to be stated on certificates representing shares of stock as set forth in Section 7.02 above and such additional information as may be required by Section 8.408 of the Texas Uniform Commercial Code as currently in effect and as the same may be amended from time to time hereafter. 7.04 Consideration for Shares. The consideration for the issuance of shares shall consist of money paid, labor done (including services actually performed for the Corporation), or property (tangible or intangible) actually received. The promise of future services shall not constitute payment or part payment for the issuance of shares. In the absence of fraud in the transaction, the judgment of the board of directors as to the value of consideration received shall be conclusive. When consideration, fixed as provided by law, has been paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. The consideration received for Bylaws Page 12 shares shall be allocated by the board of directors, in accordance with law, between stated capital and capital surplus accounts. 7.05 Lost, Stolen, or Destroyed Certificates. The Corporation shall issue a new certificate or certificates in place of any certificate representing shares previously issued if the registered owner of the certificate: (i) Claim. Makes proof by affidavit, in form and substance satisfactory to the board of directors, that a previously issued certificate representing shares has been lost, destroyed, or stolen; (ii) Timely Request. Requests the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) Bond. Delivers to the Corporation a bond in such form, with such surety or sureties, and with such fixed or open penalty, as the board of directors may direct, in its discretion, to indemnify the Corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction, or theft of the certificate; and (iv) Other Requirements. Satisfies any other reasonable requirements imposed by the board of directors. 7.06 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the shareholders thereof in person or by their duly authorized attorneys or legal representatives. With respect to certificated shares, upon surrender to the Corporation or the transfer agent of the Corporation for transfer of a certificate representing shares duly endorsed and accompanied by any reasonable assurances that such endorsements are genuine and effective as the Corporation may require and after compliance with any applicable law relating to the collection of taxes, the Corporation or its transfer agent shall, if it has no notice of an adverse claim or if it has discharged any duty with respect to any adverse claim, issue one or more new certificates to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. With respect to uncertificated shares, upon delivery to the Corporation or the transfer agent of the Corporation of an instruction originated by an appropriate person (as prescribed by Section 8.308 of the Texas Uniform Commercial Code as currently in effect and as the same may be amended from time to time hereafter) and accompanied by any reasonable assurances that such instruction is genuine and effective as the Corporation may require and after compliance with any applicable law relating to the collection of taxes, the Corporation or its transfer agent shall, if it has no notice of an adverse claim or has discharged any duty with respect to any adverse claim, record the transaction upon its books, and shall send to the new registered owner of such uncertificated shares, and, if the shares have been transferred subject to a registered pledge, to the registered pledgee, a written notice Bylaws Page 13 containing the information required to be stated on certificates representing shares of stock set forth in Section 7.02 above and such additional information as may be required by Section 8.408 of the Texas Uniform Commercial Code as currently in effect and as the same may be amended from time to time hereafter. 7.07 Registered Shareholders. The Corporation shall be entitled to treat the shareholder of record as the shareholder in fact of any shares and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have actual or other notice thereof, except as otherwise provided by law. 7.08 Legends. The board of directors shall cause an appropriate legend to be placed on certificates representing shares of stock as may be deemed necessary or desirable by the board of directors in order for the Corporation to comply with applicable federal or state securities or other laws. 7.09 Regulations. The board of directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, registration, or replacement of certificates representing shares of stock of the Corporation. ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.01 Dividends. Subject to provisions of applicable statutes and the articles of incorporation, dividends may be declared by and at the discretion of the board of directors at any meeting and may be paid in cash, in property, or in shares of stock of the Corporation. 8.02 Reserves. The board of directors may create out of funds of the Corporation legally available therefor such reserve or reserves out of the Corporation's surplus as the board of directors from time to time, in its discretion, considers proper to provide for contingencies, to equalize dividends, to repair or maintain any property of the Corporation, or for such other purpose as the board of directors shall consider beneficial to the Corporation. The board of directors may modify or abolish any such reserve. 8.03 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its shareholders, board of directors, and any committee, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each shareholder. 8.04 Fiscal Year. The fiscal year of the Corporation shall be fixed by the board of directors; provided, that if such fiscal year is not fixed by the board of directors and the board of directors does not defer its determination of the fiscal year, the fiscal year shall be the calendar year. Bylaws Page 14 8.05 Seal. The seal, if any, of the Corporation shall be in such form as may be approved from time to time by the board of directors. If the board of directors approves a seal, the affixation of such seal shall not be required to create a valid and binding obligation against the Corporation. 8.06 Attestation by the Secretary. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the board of directors authorizing such execution expressly state that such attestation is necessary. 8.07 Resignation. Any director, committee member, officer, or agent may resign by so stating at any meeting of the board of directors or by giving written notice to the board of directors, the chairman of the board, or the secretary. Such resignation shall take effect at the time specified in the statement at the board of directors' meeting or in the written notice, but in no event may the effective time of such resignation be prior to the time such statement is made or such notice is given. If no effective time is specified in the resignation, the resignation shall be effective immediately. Unless a resignation specifies otherwise, it shall be effective without being accepted. 8.08 Securities of Other Corporations. The chief executive officer of the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 8.09 Amendment of Bylaws. The power to amend or repeal these bylaws or to adopt new bylaws is vested in the board of directors, but is subject to the right of the shareholders to amend or repeal these bylaws or to adopt new bylaws. 8.10 Invalid Provisions. If any part of these bylaws is held invalid or inoperative for any reason, the remaining parts, so far as is possible and reasonable, shall remain valid and operative. 8.11 Headings; Table of Contents. The headings and table of contents used in these bylaws are for convenience only and do not constitute matter to be construed in the interpretation of these bylaws. The undersigned, the secretary of the Corporation, hereby certifies that the foregoing bylaws were adopted by the board of directors of the Corporation to be effective as of March , 1997. /s/ Linda Eller -------------------------- Linda Eller, Secretary Bylaws Page 15 EX-4.2 5 FORM OF REPRESENTATIVE'S WARRANT AGREEMENT Exhibit 4.2 OH&S DRAFT 3/4/97 [FORM OF REPRESENTATIVE'S WARRANT AGREEMENT] [SUBJECT TO ADDITIONAL REVIEW] - -------------------------------------------------------------------------------- INTERNATIONAL ISOTOPES, INC. AND KEANE SECURITIES CO., INC. -------------------- REPRESENTATIVE'S WARRANT AGREEMENT Dated as of ________, 1997 - -------------------------------------------------------------------------------- REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1997 between INTERNATIONAL ISOTOPES, INC., a Texas corporation (the "Company"), and KEANE SECURITIES CO., INC. (hereinafter referred to variously as the "Holder" or the "Representative"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to the Representative warrants ("Warrants") to purchase up to an aggregate 220,000 shares of Common Stock, $.01 par value, of the Company; and WHEREAS, the Representative has agreed pursuant to the underwriting agreement (the "Underwriting Agreement") dated as of the date hereof between the Company and the several Underwriters listed therein to act as the Representative in connection with the Company's proposed public offering of up to 2,200,000 shares of Common Stock at a public offering price of $____ per share of Common Stock (the "Public Offering"); and WHEREAS, the Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Representative in consideration for, and as part of the Representative's compensation in connection with, the Representative acting as the Representative pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Representative to the Company of an aggregate fifteen dollars ($22.00), the agreements herein 1 set forth and other good and valuable consideration, hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Holder is hereby granted the right to purchase, at any time from _______, 1998 [one year from the effective date of the Registration Statement], until 5:30 P.M., New York time, on _______, 2002 [five years from the effective date of the Registration Statement], up to an aggregate of 220,000 shares of Common Stock (the "Shares") at an initial exercise price (subject to adjustment as provided in Section 8 hereof) of $____ per share of Common Stock [120% of the initial public offering price per share] subject to the terms and conditions of this Agreement. Except as set forth herein, the Shares issuable upon exercise of the Warrants are in all respects identical to the shares of Common Stock being purchased by the Underwriters for resale to the public pursuant to the terms and provisions of the Underwriting Agreement. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions, and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. ss.3.1 Method of Exercise. The Warrants initially are exercisable at an aggregate initial exercise price (subject to adjustment as provided in Section 8 hereof) per share of Common Stock set forth in Section 6 hereof payable by certified or official bank check in New York Clearing House funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of a Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the shares of Common Stock 2 purchased at the Company's principal executive offices in New York (presently located at 2600 Longhorn Boulevard, Suite 105, Austin, Texas 78758) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional shares of the Common Stock underlying the Warrants). Warrants may be exercised to purchase all or part of the shares of Common Stock represented thereby. In the case of the purchase of less than all the shares of Common Stock purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the shares of Common Stock purchasable thereunder. ss.3.2 Exercise by Surrender of Warrant. In addition to the method of payment set forth in Section 3.1 and in lieu of any cash payment required thereunder, the Holder(s) of the Warrants shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner specified in Section 3.1 as payment of the aggregate Exercise Price. The number of Warrants to be surrendered in payment of the aggregate Exercise Price for the Warrants to be exercised shall be determined by multiplying the number of Warrants to be exercised by the Exercise Price per share of Common Stock, and then dividing the product thereof by an amount equal to the Market Price (as hereinafter defined) minus the Exercise Price. Solely for the purposes of this paragraph, Market Price shall be calculated either (i) on the date which the form of election attached hereto is deemed to have been sent to the Company pursuant to Section 13 hereof ("Notice Date") or (ii) 3 as the average of the Market Prices for each of the five trading days preceding the Notice Date, whichever of (i) or (ii) is greater. ss.3.3 Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or by the Nasdaq National Market ("NNM") or the Nasdaq Small Cap Market ("Nasdaq"), or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted by NNM or Nasdaq, the average closing bid price as furnished by the NASD through NNM or Nasdaq or similar organization if NNM or Nasdaq is no longer reporting such information, or if the Common Stock is not quoted on NNM or Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for shares of Common Stock and/or other securities, properties or rights underlying such Warrants, shall be made forthwith (and in any event within five (5) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance 4 thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the Shares underlying the Warrants (and/or other securities, property or rights issuable upon the exercise of the Warrants) shall be executed on behalf of the Company by the manual or facsimile signature of the then Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 5. Restriction On Transfer of Warrants. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof; that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to officers of the Representative. 6. Exercise Price. ss.6.1 Initial and Adjusted Exercise Price. Except as otherwise provided in Section 8 hereof, the initial exercise price of each Warrant shall be $____ [120% of the initial public offering price] per share of Common Stock. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Section 8 hereof. ss.6.2 Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 5 7. Registration Rights. ss.7.1 Registration Under the Securities Act of 1933. The Warrants, the Shares, and any of the other securities issuable upon exercise of the Warrants (collectively, the "Warrant Securities") have been registered under the Securities Act of 1933, as amended (the "Act"), pursuant to the Company's Registration Statement on Form SB-2 (Registration No. 333- ________) (the "Registration Statement"). All of the representations and warranties of the Company contained in the Underwriting Agreement relating to the Registration Statement, the Preliminary Prospectus and Prospectus (as such terms are defined in the Underwriting Agreement) and made as of the dates provided therein, are incorporated by reference herein. The Company agrees and covenants promptly to file post-effective amendments to such Registration Statement as may be necessary in order to maintain its effectiveness and otherwise to take such action as may be necessary to maintain the effectiveness of the Registration Statement as long as any Warrants are outstanding. In the event that, for any reason, whatsoever, the Company shall fail to maintain the effectiveness of the Registration Statement, the certificates representing the Warrant Securities shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act"), and may not be offered or sold except pursuant to (i) an effective registration statement under the Act, (ii) to the extent applicable, Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel to the issuer, that an exemption from registration under such Act is available. ss.7.2 Piggyback Registration. If, at any time commencing after the date hereof and expiring five (5) years thereafter, the Company proposes to register any of its securities under the Act (other than pursuant to Form S-4, S-8 or a comparable registration statement) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such 6 registration statement, to the Representative and to all other Holders of the Warrants and/or the Warrant Securities of its intention to do so. If the Representative or other Holders of the Warrants and/or Warrant Securities notify the Company within twenty (20) business days after receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford the Representative and such Holders of the Warrants and/or Warrant Securities the opportunity to have any such Warrant Securities registered under such registration statement. Notwithstanding the provisions of this Section 7.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. ss.7.3 Demand Registration. (a) At any time commencing after the date hereof and expiring five (5) years thereafter, the Holders of the Warrants and/or Warrant Securities representing a "Majority" (as hereinafter defined) of such securities (assuming the exercise of all of the Warrants) shall have the right (which right is in addition to the registration rights under Section 7.2 hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Representative and Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Warrant Securities for nine (9) consecutive months by such Holders and any other Holders of the 7 Warrants and/or Warrant Securities who notify the Company within ten (10) days after receiving notice from the Company of such request. (b) The Company covenants and agrees to give written notice of any registration request under this Section 7.3 by any Holder or Holders to all other registered Holders of the Warrants and the Warrant Securities within ten (10) days from the date of the receipt of any such registration request. (c) In addition to the registration rights under Section 7.2 and subsection (a) of this Section 7.3, at any time commencing after the date hereof and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement so as to permit a public offering and sale for nine (9) consecutive months by any such Holder of its Warrant Securities provided, however, that the provisions of Section 7.4(b) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders making such request. (d) Notwithstanding anything to the contrary contained herein, if the Company shall not have filed a registration statement for the Warrant Securities within the time period specified in Section 7.4(a) hereof pursuant to the written notice specified in Section 7.3(a) of a Majority of the Holders of the Warrants and/or Warrant Securities, the Company shall have the option, upon the written notice of election of a Majority of the Holders of the Warrants and/or Warrant Securities, to repurchase (i) any and all Warrant Securities at the higher of the Market Price per share of Common Stock on (x) the date of the notice sent pursuant to Section 7.3(a) or (y) the expiration of the period specified in Section 7.4(a) and (ii) any and all 8 Warrants at such Market Price less the Exercise Price of such Warrant. Such repurchase shall be in immediately available funds and shall close within two (2) days after the later of (i) the expiration of the period specified in Section 7.4(a) or (ii) the delivery of the written notice of election specified in this Section 7.3(d). ss.7.4 Covenants of the Company With Respect to Registration. In connection with any registration under Section 7.2 or 7.3 hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within thirty (30) days of receipt of any demand therefor, shall use its best efforts to have any registration statements declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and expenses in connection with any registration statement filed pursuant to Section 7.3(c). (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. 9 (d) The Company shall indemnify the Holder(s) of the Warrant Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify each of the Underwriters contained in Section 7 of the Underwriting Agreement. (e) The Holder(s) of the Warrant Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company. (f) Nothing contained in this Agreement shall be construed as requiring the Holder(s) to exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. 10 (g) The Company shall not permit the inclusion of any securities other than the Warrant Securities to be included in any registration statement filed pursuant to Section 7.3 hereof, or permit any other registration statement to be or remain effective during the effectiveness of a registration statement filed pursuant to Section 7.3 hereof, without the prior written consent of the Holders of the Warrants and Warrant Securities representing a Majority of such securities. (h) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (i) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which 11 need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (j) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriters, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder or underwriter shall reasonably request. (k) The Company shall enter into an underwriting agreement with the managing underwriters selected for such underwriting by Holders holding a Majority of the Warrant Securities requested to be included in such underwriting, which may be the Representative. Such agreement shall be satisfactory in form and substance to the Company, each Holder and such managing underwriter(s), and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter(s). The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for 12 the benefit of such underwriter(s) shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriter(s) except as they may relate to such Holders and their intended methods of distribution. (l) In addition to the Warrant Securities, upon the written request therefor by any Holder(s), the Company shall include in the registration statement any other securities of the Company held by such Holder(s) as of the date of filing of such registration statement, including without limitation restricted shares of Common Stock, options, warrants or any other securities convertible into shares of Common Stock. (m) For purposes of this Agreement, the term "Majority" in reference to the Holders of Warrants or Warrant Securities, shall mean in excess of fifty percent (50%) of the then outstanding Warrants or Warrant Securities that (i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith and (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. 8. Adjustments to Exercise Price and Number of Securities. ss.8.1 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. ss.8.2 Stock Dividends and Distributions. In case the Company shall pay a dividend in, or make a distribution of, shares of Common Stock or of the Company's capital stock convertible into Common Stock, the Exercise Price shall forthwith be proportionately 13 decreased. An adjustment made pursuant to this Section 8.2 shall be made as of the record date for the subject stock dividend or distribution. ss.8.3 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 8, the number of Warrant Securities issuable upon the exercise at the adjusted exercise price of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Securities issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. ss.8.4 Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that the Company shall after the date hereof issue securities with greater or superior voting rights than the shares of Common Stock outstanding as of the date hereof, the Holder, at its option, may receive upon exercise of any Warrant either shares of Common Stock or a like number of such securities with greater or superior voting rights. ss.8.5 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall 14 execute and deliver to the Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in Section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. ss.8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made: (a) Upon the issuance or sale of the Warrants or the Warrant Securities issuable upon the exercise of the Warrants; (b) If the amount of said adjustment shall be less than two cents (2 (cents)) per Warrant Security, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least two cents (2 (cents)) per Warrant Security. 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date 15 representing in the aggregate the right to purchase the same number of Warrant Securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be 16 listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed and/or quoted on NNM or Nasdaq. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the 17 transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made and sent when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holders. 14. Supplements and Amendments. The Company and the Representative may from time to time supplement or amend this Agreement without the approval of any Holders of Warrant Certificates (other than the Representative) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Representative may deem necessary or desirable and 18 which the Company and the Representative deem shall not adversely affect the interests of the Holders of Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holders and their respective successors and assigns hereunder. 16. Termination. This Agreement shall terminate at the close of business on _______, 2004. Notwithstanding the foregoing, the indemnification provisions of Section 7 shall survive such termination until the close of business on _______, 2010. 17. Governing Law; Submission to Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State without giving effect to the rules of said State governing the conflicts of laws. The Company, the Representative and the Holders hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company, the Representative and the Holders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon any of the Company, the Representative and the Holders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 3 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any 19 action, proceeding or claim. The Company, the Representative and the Holders agree that the prevailing party(ies) in any such action or proceeding shall be entitled to recover from the other party(ies) all of its/their reasonable legal costs and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 18. Entire Agreement; Modification. This Agreement (including the Underwriting Agreement to the extent portions thereof are referred to herein) contains the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. 19. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. 20. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Representative and any other registered Holder(s) of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole benefit of the Company and the Representative and any other registered Holders of Warrant Certificates or Warrant Securities. 20 22. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. INTERNATIONAL ISOTOPES, INC. By: --------------------------------------- Name: Ira Lon Morgan, Ph.D. Title: Chief Executive Officer Attest: - ------------------------------ Secretary KEANE SECURITIES CO., INC. By: --------------------------------------- Name: Walter D. O'Hearn, Jr. Title: Senior Vice President EXHIBIT A [FORM OF WARRANT CERTIFICATE] THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, __________, 2002 No. W- Warrants to Purchase ____ Shares of Common Stock WARRANT CERTIFICATE This Warrant Certificate certifies that , or registered assigns, is the registered holder of Warrants to purchase initially, at any time from __________, 1998 [one year from the effective date of the Registration Statement] until 5:30 p.m. New York time on ___________, 2002 [five years from the effective date of the Registration Statement] ("Expiration Date"), up to __________ fully-paid and non-assessable shares of common stock, $.01 par value ("Common Stock"), of INTERNATIONAL ISOTOPES, INC., a Texas corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $______ [120% of the initial public offering price] per share of Common Stock upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Representative's Warrant Agreement dated as of _______, 1997 between the Company and KEANE SECURITIES CO., INC. (the "Warrant Agreement"). Payment of the Exercise Price shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company or by surrender of this Warrant Certificate. A-1 No Warrant may be exercised after 5:30 p.m., New York time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, hereby shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. A-2 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of ___________, 1997 INTERNATIONAL ISOTOPES, INC. By: -------------------------------------- Name: Ira Lon Morgan, Ph.D. Title: Chief Executive Officer [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase: |_| _______________________ shares of Common Stock; and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of International Isotopes, Inc. in the amount of $_______________________, all in accordance with the terms of Section 3.1 of the Representative's Warrant Agreement dated as of ______________________, 1997 between International Isotopes, Inc. and Keane Securities Co., Inc. The undersigned requests that a certificate for such securities be registered in the name of ______________________________ whose address is __________________________ and that such Certificate be delivered to _________________ whose address is ____________________. Dated: Signature___________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ____________________________________________ (Insert Social Security or Other Identifying Number of Holder) A-4 [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase: |_| _________________________ shares of Common Stock; and herewith tenders in payment for such securities ________ Warrants all in accordance with the terms of Section 3.2 of the Representative's Warrant Agreement dated as of __________________, 1997 between International Isotopes, Inc. and Keane Securities Co., Inc. The undersigned requests that a certificate for such securities be registered in the name of _______________________________ whose address is ____________________ and that such Certificate be delivered to ________________________ whose address is ___________________________. Dated: Signature __________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ____________________________________________ (Insert Social Security or Other Identifying Number of Holder) A-5 [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED ___________________________ hereby sells, assigns and transfers unto ________________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________ Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: __________________ Signature: _________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ____________________________________________ (Insert Social Security or Other Identifying Number of Assignee) A-6 EX-10.2 6 EQUIPMENT LEASE AGREEMENT Exhibit 10.2 EQUIPMENT LEASE AGREEMENT THIS AGREEMENT is entered into by and between the North Texas Research Institute, UNT Box 5396, Denton, Texas, 76203 ("Lessor" or "NTRI"), the University of North Texas, UNT Box 5396, Denton, Texas, 76203 ("UNT") and the Applied Isotope Products Corporation, #5 Sugarshack Road, Austin, Texas, 78727 ("Lessee" or "AIPC") for the purpose of leasing certain tomographic testing equipment. WITNESSETH, WHEREAS, Lessor owns and has control over tomographic testing equipment ("Equipment"); and WHEREAS, UNT anticipates assuming ownership of such equipment; and WHEREAS, Lessee desires to use such Equipment for its own purposes and to provide commercial services to others; NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. LEASE OF EQUIPMENT Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Equipment, upon the terms and conditions hereinafter set forth (the specific item(s) and/or systems(s) which make up such Equipment are fully set forth in Schedule A. which is attached hereto and made a part hereof for all purposes). 2. USE OF EQUIPMENT Lessor and Lessee acknowledge that the Equipment shall be used to conduct tomographic research, development and commercial testing for which Lessee will contract with third parties. Lessor and Lessee acknowledge and agree that Lessor may use the Equipment for non-commercial purposes at time when such Equipment is not in use by Lessee's Associates as stipulated in paragraph 4 below. 3. TERM OF LEASE The lease term shall commence as of March 1, 1996, and continue in full force and effect for a period of five (5) years unless otherwise terminated in accordance with the provisions herein. Lessor or Lessee may terminate this lease upon thirty (30) days prior written notice of the intent to terminate to the other party. Early termination of this Agreement shall not affect rights or obligations of either party which accrue prior to such termination. 4. LEASE PAYMENTS Lessee hereby agrees to pay Lessor four (4) monthly rental payments of Five Hundred Dollars ($500.00), for a total payment of Two Thousand Dollars ($2,000.00), which shall be due with the execution of this Agreement and shall be non-refundable. Lessee further agrees to pay Lessor monthly rental payments of Five Hundred Dollars ($500.00) each beginning on July 1, 1996 and continuing for the remainder of the lease term. These rental payments shall be payable on the first day of each month that this Agreement is in effect or with the execution of this Agreement if the first day of the month has passed. In case of a scheduling conflict, these rental payments shall provide Lessee with a right of first refusal to the use of the Leased Equipment. Lessee further agrees to pay Lessor use fees on the Equipment in the amount of Ten Percent (10%) of the gross revenues received by Lessee from the commercial scanning services of the Equipment. Use fee payments shall be payable the month following the collection of such fees. Such payment shall be made with the rental fee payment. 5. REVIEW OF RECORDS Lessee agrees to keep true, accurate and complete records of all revenues collected from use of Equipment for commercial scanning service. All such records shall be maintained by the Lessee for the term of this Agreement and two years thereafter. Upon request, Lessor shall have full access to any Lessee accounts and records pertaining to this Agreement and the right to audit same. 6. INSURANCE Both parities agree that Lessee shall insure the Equipment for fire and extended coverage during the period of this Lease Agreement. The dollar value of the coverage shall not be less than eighty percent (80%) of the replacement cost of the Equipment. In the event of damage or loss, any proceeds of such insurance shall, at the option of Lessee, (a) be used to repair or replace the Equipment or (b) be transferred to Lessor for use in purchasing additional equipment items for lease to Lessee. 7. ALTERATIONS Lessee is hereby given the right to make alterations, additions, or improvements to the Equipment, so long as the value of the equipment is not materially reduced thereby. Lessor retains title to improvements in the Equipment; however, software and intellectual property improvements shall remain the property of Lessee. 8. MAINTENANCE AND REPAIR It is acknowledged that the Equipment being leased by Lessee may require repair to return the Equipment to its as manufactured condition and performance specification. The repairs, extent of repair and the time of repair shall be at the sole discretion and option of Lessee. All maintenance and repair cost as deemed necessary by Lessee shall be the sole responsibility of Lessee, subject to Section 12 hereof. 9. LOCATION Lessee shall not, without the prior written consent of Lessor, permit the Equipment to be removed from the State of Texas. 10. DISCLAIMER OF WARRANTIES LESSOR MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, DESIGN, CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR FITNESS FOR USE OF THE LEASED EQUIPMENT OR ANY PORTION THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY WITH RESPECT TO THE LEASED EQUIPMENT OR ANY PORTION THEREOF. LESSEE HEREBY ACKNOWLEDGES AND DECLARES THAT LESSEE IS SOLELY RESPONSIBLE FOR THE APPLICATION, OPERATION AND MAINTENANCE OF THE EQUIPMENT BY LESSEE, AND THAT LESSOR HAS NO RESPONSIBILITY THEREFOR. IN NO EVENT SHALL LESSOR BE LIABLE FOR ANY DIRECT OR INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THE APPLICATION OR USE OF THE EQUIPMENT BY LESSEE, PRIVATELY OR COMMERCIALLY, OR BY THIS LEASE AGREEMENT OR THE EXISTENCE, FURNISHING, FUNCTIONING OR USE BY LESSEE OF ANY ITEM PRODUCT OR SERVICE PROVIDED FOR HEREIN. 11. INDEMNIFICATION LESSEE AGREES TO DEFEND, ASSUME THE COST OF DEFENSE, HOLD HARMLESS, AND INDEMNIFY LESSOR, ITS OFFICERS, AGENTS, AND EMPLOYEES FROM AND AGAINST ALL LIABILITY AND EXPENSES (INCLUDING COSTS AND ATTORNEYS' FEES) RESULTING FROM ANY INJURY (INCLUDING DEATH) TO ANY PERSON AND FROM ANY DAMAGES TO THE PROPERTY OF OTHERS ARISING OUT OF THE ACTS OR OMISSIONS OF LESSEE'S OFFICERS, AGENTS OR EMPLOYEES IN CONNECTION WITH THE WORK CARRIED OUT INVOLVING THE EQUIPMENT. LESSEE SHALL TAKE ALL REASONABLE PRECAUTIONS IN THE PERFORMANCE OF THE WORK INVOLVING THE EQUIPMENT TO PROTECT THE HEALTH AND SAFETY OF ALL PERSONS AND TO MINIMIZE ALL HAZARDS TO LIFE AND PROPERTY. 12. GENERAL DUTIES OF LESSEE The parties agree that Lessee shall have primary use of the Equipment for the purpose of conducting commercial research, development, and testing activities. Lessee, at its sole discretion, shall repair said equipment to the degree Lessee deems necessary to conduct said commercial research, development, and testing activities. Lessee agrees to maintain the Equipment in its as leased condition along with any repairs or improvements in accordance with normal practices. All costs resulting from operations, maintenance and other actions of Lessee involving the Equipment shall be borne by Lessee, and all benefits derived from Lessee's actions using the Equipment shall inure to Lessee during the term of this Agreement, except as provided herein. In the event of termination of this Agreement, Lessee shall be responsible for returning Equipment to Lessor in the same condition which it was received, normal wear and tear excepted. In such event, Lessee shall bear all costs associated with such return. 13. COMPLIANCE WITH LAW Lessee shall be solely responsible for compliance with all applicable statutes, rules, orders, regulations and requirements of all governmental authorities, now existing or hereinafter enacted, pertaining to Lessee's actions involving the Equipment. 14. ASSIGNMENT AND SUBLEASE Lessor shall not encumber its interest in the use of the Equipment and shall not sell or encumber its ownership of this lease during the term hereof without the consent of Lessee, except that Lessor shall have the right to transfer ownership to UNT. Lessor and Lessee understand and acknowledge that UNT anticipates assuming ownership of the equipment during the term of this Lease. In such event, UNT shall automatically assume all rights and obligations of Lessor as provided under this Agreement, whether accrued or owed in the future. Without the prior written consent of Lessor, Lessee shall not (a) assign or transfer this Lease Agreement, the Equipment or any part thereof, or (b) permit the Equipment or any part thereof to be used by anyone other than Lessee. 15. NOTICES Any notice called for or permitted under the terms hereof may be given in writing and sent by ordinary mail to the last address of the party to whom the notice is given as designated by such party in writing. Lessor hereby designates its address as: Dr. Rollie R. Schafer Executive Director North Texas Research Institute P. O. Box 5396, NT Station Denton, Texas 76203-5396 Lessee hereby designates its address as: Mr. Virgil Simmons President Applied Isotope Products Corporation #5 Sugarshack Road Austin, Texas 78727 A party may change the address it uses for notice by notifying the other party of such address change. 16. STATE LAW AND VENUE This Agreement shall be construed in accordance with the laws of the State of Texas and venue for any proceeding related to this Agreement shall lie in Denton County, Texas. 17. BINDING OF HEIRS AND ASSIGNS Subject to the provisions of this Lease Agreement against assignment of interests hereunder, all provisions of this Lease Agreement shall extend to and bind, or inure to the benefit not only of the parties hereto but to each and every one of the heirs, executors, representatives, successors, and assigns of Lessor and Lessee. 18. INVALID CLAUSES It is expressly agreed and understood by the parties hereto that if any provision of this Lease Agreement is held to be invalid under any applicable statue or rule of law, it is deemed to that extent to be omitted. However, the balance of the Agreement shall remain in full force and effect. 19. ENTIRETY CLAUSE This instrument and Schedule A attached hereto constitute the entire agreement between the parties relating to the rights herein granted and the obligations herein assumed. Any representations or modifications concerning this instrument shall be of no force or effect excepting a subsequent modification in writing, signed by all parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date of the last signature following. NORTH TEXAS RESEARCH INSTITUTE /s/ Rollie R. Schafer 7/22/96 - ------------------------------------------- ------------------ Rollie R. Schafer (Date) Executive Director UNIVERSITY OF NORTH TEXAS /s/ Phillip C. Diebel 7/22/96 - ------------------------------------------- ------------------ Phillip C. Diebel (Date) Vice President for Finance and Business Affairs APPLIED ISOTOPE PRODUCTS CORPORATION /s/ Virgil L. Simmons 7-8-96 - ------------------------------------------- ------------------ Virgil Simmons (Date) President SCHEDULE A LEASED EQUIPMENT ASSET DESCRIPTION IDM Tomographic Software. DEC Fortran & VAM-VMS Operating System System design specifications as specified in Exhibit 2. AGREEMENT for Evaluation of Integrated Pipe and Inspection Systems, between Texas Utilities Electric Company and International Digital Modeling Corporation, executed September 7, 1990 (Exhibit 2, See Addenda). ASSET DESCRIPTION Stationary Tomographic Pipe (IRIS-1) Inspection, IDM A06, consisting of: (1) IDM Data Acquisition System mounted on triangular base, three banks of 243 Scintillator Detector Assemblies spaced at one-sixth degree intervals, three Amersham 1006C Gauging Devices (each with Cobalt-60 pellet) strength of 100 Curles. Three air conditioning units. Electronic Housing Unit with; CAMAC Signal Processing Unit High Voltage Power Supply Low Voltage Power Supply Subpositioning Motor Drives Control Interface Module EHU Interface Cables EHU Power Distributors EHU Environmental Conditioning Unit Source Control Module & Interface Cables Ludlum, Model 1003, Radiation Area Alarm (1) Pandijires Model TU Gantry Position. S/N 60-4360, 10' vertical travel (1) Troyke. 54" Precision Rotary Table. Computer System. Digital (DEC), Model Microvax-II (630Q2), Computer with 1-MB memory and 4-MB expansion memory, consisting of: (1) 159-MB Winchester, Disk Drive, Model DEC-RD-54DA. (1) Ethernet 802.3 Adapter, Model DELQA-M. (1) 95-MB, Cartridge Tap Controller, Model TK-50-AA. (1) Graphics, Video Terminal, Model VT330-C2 (1) Matsushira, Model TX-2016MA, Remote Terminal. (1) CDA Multiplexer. (1) Alphatronix Inspire, Disk Drive (1) OKITEL Model 2400 Modem. (1) Model 2160-KS, Serial Highway Drive. Lot Assorted installed boards, etc. EX-10.7(A) 7 EMPLOYMENT-ROYALTY AGREEMENT INTERNATIONAL ISOTOPES INC. EMPLOYMENT-ROYALTY AGREEMENT THIS AGREEMENT, effective as of November 1, 1995, is made and entered into this 16th day of November, 1995, between International Isotopes Inc., a Texas corporation, with authority to transact business in Texas, having its principal office at Austin, Texas (hereinafter "Company"),and IRA LON MORGAN (hereinafter "Employee"), of Austin, Texas. In consideration of the mutual undertakings contained herein, the compensation to be paid by Company to Employee and the other benefits to Employee resulting from his employment under this Agreement, and in consideration of $100 paid to Employee coincidental with the execution of this Agreement, Employee agrees with Company as follows: I. EMPLOYMENT; SALARY, ROYALTIES AND BENEFITS Company hereby employs and continues the employment of Employee as Chairman & Chief Executive Officer of International Isotopes Inc. or in a Senior Advisory Position for a period of five years from the effective date of this Agreement at an annual salary as follows: Fiscal Year Year ----------- ---- November 1, 1995 to October 31,1996 $100,000.00 November 1, 1996 to October 31,1997 $100,000.00 November 1, 1997 to October 31,1998 $110,000.00 November 1, 1998 to October 31,1999 $120,000.00 November 1, 1999 to October 31,2000 $130,000.00 Employee's salary for each calendar year shall be paid in equal monthly installments at the end of each month, subject to usual deductions for federal income and employment taxes. The employee's compensation, in addition to monthly salary, shall be a royalty payment (paid semiannually) of one (1) percent of Company gross revenues actually paid to COMPANY for the sale, lease or use of products developed, manufactured, and marketed by 1 COMPANY under any license agreements pursuant to patents, know-how or technology owned or licensed by COMPANY currently in use or to be developed, or development by the employee. Said royalty payment will be for the life of the patent or technology and will be accrued on a semi annual basis and payable thirty (30) days after each six months period, and except that the first such payment shall be for the period November 1, 1997 and shall be payable semi-annually thereafter for the life of the patents or technology. In addition, 0.5 percent of gross revenues or 20 percent of royalties received, whichever is greater shall be paid to employee from the licensing of Company patents, know-how and technology to other entities utilizing Company technology for the life of the patents and technology. It is specifically agreed that the total remuneration of Employee from all sources, salary and royalty, shall not exceed $150,000.00 per year until gross revenues exceed $5,000.000 and the Company is profitable. Royalties over and above the standard salary shall be paid out of profits not to exceed lo'-. of the pre-tax profits, The employee may accept royalties in the form of cash, common stock, deferred annuities or tax free retirement plans offered by the Company = others in any combination or 'percentages of the above forms ot royalty payment, The Board of Directors will offer such remuneration to employee on a semi-annual basis based on earni@ per share and market value of the Company's common stock, Employee aarees that the royalty compensation shall not exceed $500,000 any one year period. As long as this Agreement remains in full force, Company agrees to pay all necessary premiums to maintain key man insurance on Employee's life in the amount of $1,000,000.00, $510,000.00 of such death benefits to be payable to the Company and $490,000.00 of such death benefits to be payable to such beneficiaries as Employee may from time to time designate. The Company further agrees to include Employee as a primary key participant in any pension, retirement, stock appreciation or stock option plan, or any key employee compensation plan which may be established after the effective date of this Agreement during the period of Employee's employment by the Company, except as such preferential inclusion is contrary to federal or state law or regulations and then under such terms as may be permissible under such laws or regulations. Employee shall also be entitled to participate in any other employee benefit programs which the Company presently 2 has or may have from time to time in the future, including group health insurance. Employee's employment is terminable by the Company only for good cause as determined by Court of Law in which event, no salary will be paid or by payment of full salary of the remaining term of the contract. Royalties will accrue and will be paid for the life of the patents and technology after such termination. Notice shall be required for such termination. If the Company terminates such employment because of Employee's mental or physical disability or incapacity, the Company shall pay Employee termination pay six month's salary as it accrues, based upon Employee's salary rate at the time of such termination and subject to usual deductions for federal income and employment taxes. No termination pay will be payable by the Company in the event of any termination by Employee except by mutual written agreement. II. EMPLOYEE WARRANTIES Employee warrants that he is free to enter into the terms of this Agreement and that he has no obligations inconsistent herewith; and he agrees to devote his best efforts to Company's business interests and not less than 75%. of his working hours. III. CONFIDENTIAL INFORMATION 1. Employee recognizes that Company's business interests require a confidential relationship between Company and Employee and the fullest practical protection and confidential treatment of Company's financial data, writings, computer software, sales and marketing policies, conceptions, inventions, trade secrets, sources of supply, know-how, plans and programs and other knowledge of Company's business whether or not copyrightable or patentable. 2. Except insofar as is authorized by the Company as necessary disclosure to persons having a need to know consistent 3 with the working relationship within Company and with Company's customers (such disclosures to be made in accordance with Company procedure, including the due execution of prescribed Conf idential Disclosure Agreements): a) Employee will not directly or indirectly disclose b) Company information to others either within or outside of Company. c) Employee will not make or disclose documents or copies of documents containing disclosures of Company Information. d) As to documents which are delivered to or generated by Employee or which are made as a necessary part of the working relationships and duties within the Company and with Company's customers, Employee will treat them confidentially and will mark them as proprietary confidential documents not to be reproduced or used without appropriate authority of Company. e) Employee will not advise others that the technology included in Company Information is known to or used by Company. 3. Employee's obligations set forth in this Article III shall continue as to each item of Company Information both during and after termination of all Employee's employment by Company, until such item of Company Information becomes generally known to Company's competitors from published sources. IV. INVENTIONS AND OTHER INFORMATION:I2ISCLOSURE AND TITLE 1. Employee agrees to make prompt and complete disclosure to Company of every item of information relating to Company's interest, and to make in writing a disclosure of every idea and 4 invention of every character which he learns of, conceives, writes, develops or reduces to practice during the term of his employment. Employee shall submit a report upon completion of any study or research project, setting forth in detail the procedures used, the results achieved and stating whether or not the study or project has resulted in an invention or other Company Information. 2. Employee agrees (a) that every item of such information which relates to Company's field of business interest or which arises out of his use of Company's time, facilities, personnel or money, is the property of Company; and that every invention which is conceived in whole or in substantial part by Employee and which is in response to, is based upon or utilizes Company Information, is the property of Company. 3. Employee will assign all of his right, title and interest in such items of Confidential Information and inventions to Company, subject to royalty payments as set out in Article I. 4. Those inventions by Employee which are not related to Company's field of business interest and which were conceived or reduced to practice during the term of employment but were not conceived or reduced to practice during Company's business hours or by the use of Company's facilities, personnel or money, will still be disclosed to Company in writing, provided he may lawfully do so, but shall remain the property of Employee, provided that, in the event the Company desires, it shall have the right to manufacture, sell and/or lease any such product and will pay unto Employee an additional royalty based upon the payments set out in Article I. The right of the Company granted in the next preceding sentence, however, shall cease 180 days after the written disclosure given by Employee, unless Company both notifies Employee, within said 180 day period, that it desires to exercise said right @ takes affirmative steps to manufacture, sell and/or lease said product and proceeds with reasonable diligence thereafter. 5. Employee agrees that upon Company's request either during or for a period of five years after termination of his employment, but without expense to himself, he will cooperate with the execution of any and all patent and copyright applications, assignments and other legal instruments which Company shall deem 5 necessary or convenient for the protection of its Company Information in either the United Sates or foreign countries. In the event Employee is no longer employed by Company, Employee will be compensated at his salary rate last paid by the Company on an hourly rate based on the hours expended for said services 6. Employee further agrees that upon termination of his employment he will promptly surrender to Company all papers, documents, notebooks, writings, illustrations, models, software and other property produced by him or coming into his possession by or through his employment with Company. 7. The Company further agrees that upon sale, merger, or substantial transfer of the assets or license of the patents, know-how, or technology to a third party or entity, that diligent pursuit of the sale, manufacture, and lease of equipment arising out of the patents, know-how, and technology will be conducted. In the event that for a period of three (3) years, there is no diligent pursuit of the technology, the inventions, technology, and know-how, the patents, technoloay, inventions and know-how shall then be offered on a first rights basis to the Employee for the assumption of patent fees and nominal royalties with reversion in title to the employee and inventors. V. POST-EMPLOYMENT AND RELATED OBLIGATIONS In the course of his employment it is anticipated that Employee will learn of and conceive Company Information during Company time and at Company expense, which Information relates to Company's interests and is likely to be of benefit both to Company's competitors and Company during and after termination of Employee's employment. Accordingly, Employee agrees that in those jurisdictions where such obligations may from time to time be lawful: (a) For the first one year after the termination of his employment as may be lawful consistent with the time, place and circumstance, he will not either directly or indirectly divert or aid others in diverting any trade which Company was enjoying at the time of such 6 termination or which he had solicited on Company's behalf during the last two years of his employment at Company. (b) During his employment and for two years after termination of his employment as may be lawful consistent with the time, place and circumstance, he will not either directly or indirectly solicit or aid or cooperate with others in soliciting any Company employee to leave Company's employ for other employment. (c) Without limiting the term of his obligation hereunder to preserve Company Information for so long as it remains protectable, Employee specifically agrees that during his employment and for two years after termination of such employment as may be lawfully consistent with the time, place and circumstance he will accept no employment wherein the loyal and diligent performance of the duties and responsibilities of the new employment will inherently call upon him to use, to disclose or to base judgments upon Company Information in any capacity, or to utilize the good will of Company in making sales for a competitor of Company. VI. BINDING ON SUCCESSORS Any successor to the Company shall have the same rights and obligations of the Company under this Agreement, provided, however, that in the event of a merger by the Company or Group by another entity or the sale by Company or Group of all or substantially all of its assets, employee has the option of terminating his employment upon such merger or sale. Any successor shall be bound by the Salary-Royalty Agreement as set out in Article I and Disclosure-Title as set out in Article IV. VII. MISCELLANEOUS 1. Applicable Law. This Agreement shall be construed under the laws of the State of Texas, but no restriction shall be considered applicable in any Jurisdiction where it is inconsistent with the public policy of that jurisdiction. 7 2. Common Law Remedies. The provisions of this Agreement shall not be construed as any limitation upon the remedies which Company might, in the absence of this Agreement, have at law or in equity for any wrongs of Employee. 3. Severance. In the event any provision of this Agreement is modified or held ineffective by any Court in any respect, such adjudication shall not invalidate or render ineffective any of the other provisions hereof. 4. Entire Agreement; Amendment. This Agreement constitutes the entire understanding and agreement between the parties hereto and merges and supersedes all prior agreements, understandings, representations, conditions, warranties and covenants (oral or written, express or implied) between the parties concerning the subject matter of this Agreement. No amendment, modification, renewal, or extension of this Agreement or any of its provisions shall be binding upon any party against whom enforcement of such amendment, modifications, renewal or extension is sought, unless it is made in writing and signed by such party or by a duly authorized representative of such party. 5. Waiver. The failure of either party to enforce at any time, or for any period of time, any of the provisions of this Agreement shall not be construed to be a waiver of such provisions or a waiver of the right of such party thereafter to enforce each and every such provision. 8 IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate originals as of the date and year first above written. INTERNATIONAL ISOTOPES INC. By: /s/ Virgil L. Simmons --------------------------------- Title: President EMPLOYEE: /s/ Ira Lon Morgan -------------------------- IRA LON MORGAN Date: 11-1-95 Austin, Texas ------------------------------------ City and State of Employee Execution This Agreement executed by Employee only after advice by the undersigned counsel. N/A - --------------------------------------- Counsel EX-11 8 COMPUTATION OF NET LOSS PER COMMON SHARE Exhibit 11 Computation of Net Loss per Common Share Per share information was calculated based on net loss available to common shareholders divided by the weighted average number of shares of common stock outstanding during the period. Pursuant to Securities and Exchange Commission (SEC) staff accounting bulletin and SEC Staff policy, common stock issued during the twelve-month period prior to the proposed initial public offering for consideration below the initial public offering price have been included in the calculation of weighted average number of shares as if they were outstanding for all periods presented. Accordingly, common shares outstanding of 3,766,663 at December 31, 1996 were used in the calculation of net loss per common share. EX-22 9 LIST OF SUBSIDIARIES Exhibit 22 List of Subsidiaries Gazelle Realty, Inc., a Texas corporation, is a wholly-owned subsidiary of Registrant. EX-27 10 FDS --
5 This schedule contains summary financial information extracted from the audited consolidated financial statements of International Isotopes Inc. and Subsidiary as of December 31,1996 and for the period from November 1, 1995 (inception) to December 31, 1996, and is qualified in its entirety by reference to such financial statements. OTHER DEC-31-1996 NOV-01-1995 DEC-31-1996 331,397 0 0 0 757,498 1,946,363 974,382 1,460 4,256,176 2,697,270 0 0 0 37,667 1,521,239 4,256,176 775,102 775,102 263,440 883,637 408,730 0 303,741 (1,084,446) 0 (1,084,446) 0 250,000 0 (834,446) (.22) (.22)
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