-----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, Uy6iMPaG7bnN+sB8Um8yLIfnlOsu2ZwCfAWtKe3ZNlPdtO4gXuzK+GIJemQN8vVK SMM2jk7w4u/I31U695yMEg== 0000950110-98-001245.txt : 19981106 0000950110-98-001245.hdr.sgml : 19981106 ACCESSION NUMBER: 0000950110-98-001245 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIO TECHNOLOGY GENERAL CORP CENTRAL INDEX KEY: 0000722104 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 133033811 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15313 FILM NUMBER: 98738026 BUSINESS ADDRESS: STREET 1: 70 WOOD AVE S CITY: ISELIN STATE: NJ ZIP: 08830 BUSINESS PHONE: 9086328800 MAIL ADDRESS: STREET 1: 70 WOOD AVENUE SOUTH CITY: ISELIN STATE: NJ ZIP: 08830 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- FORM 10-Q ---------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 Commission File Number 0-15313 BIO-TECHNOLOGY GENERAL CORP. ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3033811 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 70 Wood Avenue South, Iselin, New Jersey 08830 (Address of principal executive offices) (732) 632-8800 (Registrant's telephone number, including area code) Former address: Not Applicable ---------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, par value $.01 per share, outstanding as of October 27, 1998 48,721,367 - -------------------------------------------------------------------------------- BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES INDEX Page Part I. Financial Information Item 1 Financial Statements: Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 ......................3 Consolidated Statements of Operations for the three and nine months ended September 30, 1998 and 1997....................................4 Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 1998................................5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997....................................6 Notes to Consolidated Financial Statements........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................8 Part II. Other Information Item 5. Other Information ...............................................17 Item 6. Exhibits and Reports on Form 8-K ................................17 2 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS (In thousands) September 30, 1998 December 31, 1997 (Unaudited) - -------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents............................. $ 16,714 $ 9,329 Short-term investments................................ 34,192 26,178 Accounts receivable and other......................... 36,003 27,540 Inventories........................................... 6,034 5,401 Deferred income taxes................................. 2,936 8,000 Prepaid expenses and other current assets............. 220 403 -------- -------- Total current assets................................. 96,099 76,851 Deferred income taxes.................................. 2,149 2,148 Severance pay funded................................... 2,262 2,435 Property and equipment, net............................ 8,143 7,545 Intangibles, net....................................... 1,943 2,590 Patents, net........................................... 304 551 Other assets........................................... 3,368 3,293 -------- -------- Total assets......................................... $114,268 $ 95,413 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term bank loans................................. $ 467 362 Accounts payable...................................... 2,439 1,645 Other current liabilities............................. 8,393 6,573 -------- -------- Total current liabilities............................ 11,299 8,580 -------- -------- Long-term liabilities.................................. 4,001 3,975 -------- -------- Stockholders' equity: Preferred stock - $.01 par value; 4,000,000 shares authorized; no shares issued.................. -- -- Common stock - $.01 par value; 150,000,000 shares authorized; issued: 48,533,000 (47,304,000 at December 31, 1997)................................... 485 473 Capital in excess of par value........................ 142,407 136,662 Deficit............................................... (41,200) (54,135) Less - treasury stock at cost, 83,000 shares.......... (340) (340) Accumulated other comprehensive (loss) income. (2,384) 198 -------- -------- Total stockholders' equity........................... 98,968 82,858 -------- -------- Total liabilities and stockholders' equity........... $114,268 $ 95,413 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets.
3 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands except per share data) Nine Months Ended Three Months Ended September 30, September 30, ----------------------------------------------------------------- 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------- Revenues: Product sales............................ $50,554 $39,523 $17,895 $10,558 Contract fees............................ 2,353 6,706 609 6,240 Other revenues........................... 564 1,025 289 695 Interest and finance income.............. 2,182 1,120 774 424 ------- ------- ------- ------- 55,653 48,374 19,567 17,917 ------- ------- ------- ------- Expenses: Research and development................. 13,176 11,781 4,203 4,458 Cost of product sales ................... 7,733 6,303 2,727 1,509 General and administrative............... 6,299 6,228 1,918 2,271 Marketing and sales...................... 9,345 6,432 3,395 2,439 Commissions and royalties................ 557 991 214 798 Interest and finance..................... 65 234 25 69 ------- ------- ------- ------- 37,175 31,969 12,482 11,544 ------- ------- ------- ------- Income before income taxes................. 18,478 16,405 7,085 6,373 Income taxes............................... 5,543 4,614 2,058 1,891 ------- ------- ------- ------- Net income ................................ $12,935 $11,791 $5,027 $4,482 ======= ======= ======= ======= Earnings per share: Basic..................................... $0.27 $0.25 $0.10 $0.10 ======= ======= ======= ======= Diluted................................... $0.26 $0.23 $0.10 $0.09 ======= ======= ======= ======= Weighted average number of shares outstanding: Basic..................................... 48,022 46,651 48,437 46,883 ======= ======= ======= ======= Diluted................................... 50,616 51,966 49,710 51,691 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. 4 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands) Accumulated Common Stock Capital in Other Total Par Excess of Treasury Comprehensive(Loss) Stockholders' Shares Value Par Value Deficit Stock Income Equity - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997... 47,304 $473 $136,662 $(54,135) $(340) $ 198 $82,858 Issuance of common stock. ... 6 46 46 Exercise of stock options.... 458 4 1,945 1,949 Exercise of warrants......... 765 8 3,754 3,762 Unrealized loss on marketable securities, net............. (2,582) (2,582) Net income for nine months ended September 30, 1998... 12,935 12,935 ------ ---- -------- -------- ----- ------- ------- Balance, September 30, 1998.. 48,533 $485 $142,407 $(41,200) $(340) $(2,384) $98,968 ====== ==== ======== ======== ===== ======= =======
The accompanying notes are an integral part of this consolidated statement. 5 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, ------------------------- 1998 1997 - --------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ................................................. $12,935 $11,791 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................ 2,328 2,359 Provision for severance pay .............................. 26 276 (Gain) on sales of short-term investments and fixed assets (229) (7) Deferred income taxes .................................... 4,834 4,373 Common stock as payment for services ..................... 46 43 Changes in: receivables .................................. (8,463) (5,413) inventories .................................. (633) 543 prepaid expenses and other current assets .... 183 (222) accounts payable ............................. 793 (2,344) other assets ................................. (75) (895) other current liabilities .................... 2,155 1,266 ------- ------- Net cash provided by operating activities .................. 13,900 11,770 ------- ------- Cash flows from investing activities: Short-term investments ..................................... (20,694) (12,533) Capital expenditures ....................................... (1,968) (2,571) Severance pay used (funded) ................................ 173 (37) Changes in patents ......................................... (98) (36) Proceeds from sales of short- term investments and fixed assets ......................... 10,361 5,458 ------- ------- Net cash used in investing activities ...................... (12,226) (9,719) ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock ..................... 5,711 5,312 Interests on Series B Notes ................................ -- (9) Repayment of Notes ......................................... -- (4) ------- ------- Net cash provided by financing activities .................. 5,711 5,299 ------- ------- Net increase in cash and cash equivalents ................... 7,385 7,350 Cash and cash equivalents at beginning of year .............. 9,329 7,005 ------- ------- Cash and cash equivalents at end of period .................. $16,714 $14,355 ======= ======= Supplementary Information Non-cash investing and financing activities: Conversions of convertible debt ............................ $ -- $ 288 Other information: Interest paid .............................................. $ -- $ 27 Income tax paid ............................................ $ 464 $ 236
The accompanying notes are an integral part of these consolidated statements. 6 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Statement on Adjustments In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation. Due to fluctuations in quarterly revenues earned, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The accounting policies continue unchanged from December 31, 1997. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Note 2: Comprehensive Income Effective March 31, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. For the nine month period ended September 30, 1998 and 1997 total comprehensive income was approximately $10,353,000 and $11,988,000, respectively. Other comprehensive income (loss) consists of unrealized gains (losses) on marketable securities. 7 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES MAMAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three and nine months ended September 30, 1998 compared with three and nine months ended September 30, 1997 Statements in this Quarterly Report on Form 10-Q concerning the Company's business outlook or future economic performance; anticipated profitability, revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are "forward-looking statements" as that term is defined under the Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, changes and delays in product development plans and schedules, changes and delays in product approval and introduction, customer acceptance of new products, changes in pricing or other actions by competitors, patents owned by the Company and its competitors, changes in healthcare reimbursement, risk of operations in Israel, risk of product liability, governmental regulation, dependence on third parties to manufacture and commercialize products and general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 1997. OVERVIEW The Company is engaged in the research, development, manufacture and marketing of biopharmaceutical products. Through a combination of internal research and development, acquisitions, collaborative relationships and licensing arrangements, BTG has developed a portfolio of therapeutic products, including five products that have received regulatory approval for sale, of which four are currently being marketed. The Company seeks both broad markets for its products as well as specialized markets where it can seek Orphan Drug status and potential marketing exclusivity. The Company was founded in 1980 to develop, manufacture and market novel therapeutic products. The Company's overall administration, licensing, human clinical studies, marketing activities, quality assurance and regulatory affairs are primarily coordinated at the Company's headquarters in Iselin, New Jersey. Pre-clinical studies, research and development activities and manufacturing of the Company's genetically engineered products are primarily carried out through its wholly owned subsidiary in Rehovot, Israel. RESULTS OF OPERATIONS Overview The following tables set forth for the fiscal periods indicated the percentage of revenues represented by certain items reflected on the Company's statement of operations. 8 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES Nine Months Ended Three Months Ended September 30, September 30, ----------------- ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ Revenues: Product sales ............................ 90.8% 81.7% 91.4% 58.9% Contract fees ............................ 4.2 13.9 3.1 34.8 Other revenues ........................... 1.0 2.1 1.5 3.9 Interest and finance income .............. 4.0 2.3 4.0 2.4 ------ ------ ------ ------ Total .............................. 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== Expenses: Research and development ................. 23.7% 24.4% 21.5% 24.9% Cost of product sales .................... 13.9 13.0 13.9 8.4 General and administrative ............... 11.3 12.9 9.8 12.7 Marketing and sales ...................... 16.8 13.3 17.4 13.6 Commissions and royalties ................ 1.0 2.0 1.1 4.4 Interest and finance ..................... 0.1 0.5 0.1 0.4 ------ ------ ------ ------ Total .............................. 66.8 66.1 63.8 64.4 ------ ------ ------ ------ Income before income taxes ................. 33.2 33.9 36.2 35.6 Income tax expense ......................... 10.0 9.5 10.5 10.6 ------ ----- ------ ------ Net income ................................. 23.2% 24.4% 25.7% 25.0% ====== ====== ====== ====== The Company has historically derived its revenues from product sales as well as from collaborative arrangements with third parties, under which the Company may earn up-front contract fees, may receive funding for additional research (including funding from the Chief Scientist of the State of Israel), is reimbursed for producing certain experimental materials, may be entitled to certain milestone payments, may sell product at specified prices, and may receive royalties on sales of product. The Company anticipates that product sales will constitute the majority of its revenues in the future. Revenues have in the past displayed and will in the immediate future continue to display significant variations due to changes in demand for its products, new product introductions by the Company and its competitors, the obtaining of new research and development contracts and licensing arrangements, the completion or termination of such contracts and arrangements, the timing and amounts of milestone payments, and the timing of regulatory approvals of products. 9 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES The following table summarizes the Company's sales of its commercialized products as a percentage of total product sales for the periods indicated: Nine Months Ended Three Months Ended September 30, September 30, ----------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Oxandrin................. 62% 47% 65% 66% Bio-Tropin............... 26 37 23 13 BioLon................... 0 12 10 17 Other.................... 2 4 2 4 ---- ---- ---- ---- Total.............. 100% 100% 100% 100% ==== ==== ==== ==== The Company believes that its product mix will fluctuate from quarter to quarter as it continues to focus on: (i) increasing market penetration of its existing products; (ii) expanding into new markets; and (iii) commercializing additional products. The following table summarizes the Company's U.S. and international product sales as a percentage of total product sales for the period indicated: Nine Months Ended Three Months Ended September 30, September 30, ----------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- United States............ 63% 49% 66% 69% International............ 37 51 34 31 ---- ---- ---- ---- Total.............. 100% 100% 100% 100% ==== ==== ==== ==== Comparison of Nine Months Ended September 30, 1998 and September 30, 1997 Revenues. Total revenues increased 15% in the first nine months of 1998 to $55,653,000 from $48,374,000 in the same period in 1997. Product sales increased $11,031,000, or 28%, in the nine months ended September 30, 1998 from the comparable prior period, primarily driven by increased sales of Oxandrin in the United States, partially offset by decreased sales of human growth hormone ("hGH") to BTG's distributors. Oxandrin sales increased $12,829,000, or 69%, to $31,440,000 in the nine months ended September 30, 1998 from $18,611,000 in the comparable period in 1997, primarily as a result of the Company's increased marketing efforts and growing awareness of the product. Product sales of hGH decreased $1,551,000, reflecting quarterly variations in purchasing based on the operational needs of the Company's customers. Contract fees and other revenue are primarily generated from licensing and distribution arrangements and partial research and development funding by the Chief Scientist of the State of Israel (the "Chief Scientist"). Contract fees represented approximately 4.2% of total revenues in the nine months ended September 30, 1998 compared to 13.9% in the nine months ended September 30, 1997. Of the contract fees earned in the nine months ended September 30, 1998, $1,000,000, or 42% of total 10 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES contract fees, were earned in respect of the license of distribution rights for BioLon in the United States, and $425,000, $412,000 and $400,000, or 18%, 18% and 17% of total contract fees, respectively, were earned in respect of the Company's oral contraceptive regimen, insulin and hepatitis-B vaccine products, respectively. In the nine months ended September 30, 1997, the Company recognized revenue of $6,706,000 as contract fees, of which $3,000,000 represents fees from the grant of an exclusive right to a third party to evaluate one of the Company's products under development, and $3,000,000 represents an initial licensing fee received in connection with the licensing of worldwide distribution rights (other than the United States, Canada, Israel and Japan) for the Company's superoxide dismutase ("SOD") product for bronchopulmonary dysplasia and other respiratory indications to Ares-Serono ("Serono"). Interest and finance income increased $1,062,000, or 95%, for the comparable period primarily as a result of increased short-term investments and cash balances resulting mainly from cash flow from operations subsequent to September 30, 1997, as well as higher yield achieved on the Company's short-term investments. Research and Development Expense. Research and development expense increased 12% in the nine months ended September 30, 1998 to $13,176,000 from $11,781,000 in the comparable period in 1997. The increase was primarily attributable to expenses associated with the Company's Phase III clinical trials for its superoxide dismutase product and new dosage formulations for Oxandrin and post-approval Phase IV clinical studies to provide additional clinical support for the use of Oxandrin to treat disease-related weight loss conditions other than AIDS-related weight loss. Cost of Product Sales. Cost of product sales increased $1,430,000, or 23%, in the nine months ended September 30, 1998 to $7,733,000 from $6,303,000 in the comparable period in 1997. The increase is primarily attributable to increased product sales. Cost of product sales as a percentage of product sales for the nine month period ended September 30, 1998 decreased to 15.3% from 15.9% for the comparable prior year period. This decrease was primarily due to increased sales of Oxandrin as a percentage of total product sales. Oxandrin and human growth hormone in bulk form have a relatively low cost of manufacture as a percentage of product sales, while BioLon has the highest cost to manufacture as a percentage of product sales. Cost of product sales as a percentage of product sales varies from year to year and quarter to quarter depending on the quantity and mix of products sold. General and Administrative Expense. General and administrative expense increased in the nine months ended September 30, 1998 to $6,299,000 versus $6,228,000 in the comparable prior period. As a percentage of revenues, general and administrative expense decreased to 11.3% of revenues in the nine months ended September 30, 1998 compared to 12.9% of revenues in the comparable prior year period, primarily as a result of the growth in product sales. Marketing and Sales Expense. Marketing and sales expense increased 45% in the first nine months of 1998 to $9,345,000 from $6,432,000 for the prior year period. As a percentage of revenues, marketing and sales expense increased to 16.8% from 13.3% for the nine months ended September 30, 1997. This increase is primarily due to increased personnel and increased advertising, promotional and market research activities resulting from the growth of the Company's product sales. Commissions and Royalties. Commissions and royalties were $557,000 in the nine months ended September 30, 1998, as compared to $991,000 in the same period last year. These expenses consist primarily of royalties to entities from which the Company licensed certain of its products and to the Chief Scientist. Commissions and royalties in 1997 consist primarily of a royalty payment in respect of the Company's SOD product resulting from the licensing of distribution rights for the Company's SOD product to Serono. Income Taxes. Provision for income taxes for the nine months ended September 30, 1998 were $5,543,000, representing 30.0% of income before income taxes, as compared to $4,614,000, or 28.1% of income before income taxes, in the comparable period in 1997. The Company's consolidated tax rate 11 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES differs from the statutory rate because of Israeli tax benefits, research and experimental tax credits and similar items which reduce the effective tax rate. Net Income. The Company had approximately 1.4 million additional basic weighted average shares outstanding for the nine month period ended September 30, 1998, as compared to the same period in 1997. The Company had approximately 1.3 million less diluted weighted average shares outstanding, primarily as a result of the decrease in the average fair market value of the Common Stock (which resulted in less outstanding options being considered common equivalent shares because their exercise price was above the average fair market value of the Common Stock for the first nine months of 1998). Comparison of Three Months Ended September 30, 1998 and September 30, 1997 Revenues. Total revenues increased 9% in the third quarter of 1998 to $19,567,000 from $17,917,000 in the third quarter of 1997. Product sales increased $7,337,000, or 69%, in the third quarter of 1998 from the comparable prior period, primarily driven by increased sales of Oxandrin in the United States and increased sales of hGH to BTG's distributors. Oxandrin sales increased $4,632,000, or 66%, to $11,603,000 in the three months ended September 30, 1998 from $6,971,000 in the comparable period in 1997, primarily as a result of the Company's increased marketing efforts and growing awareness of the product. Contract fees and other revenues are primarily generated from licensing and distribution arrangements and partial research and development funding by the Chief Scientist of the State of Israel. Of the contract fees earned in the third quarter of 1998, $500,000, or 82% of total contract fees, was earned in respect of the license of distribution rights for BioLon in the United States. In the third quarter of 1997, the Company recognized revenue of $6,240,000 as contract fees, of which $3,000,000 represents fees from the grant of an exclusive right to a third party to evaluate one of the Company's products under development, and $3,000,000 represents an initial licensing fee received in connection with the licensing of worldwide distribution rights (other than the United States, Canada, Israel and Japan) for the Company's SOD product for bronchopulmonary dysplasia and other respiratory indications to Serono. Interest and finance income increased $350,000, or 83%, for the comparable period primarily as a result of increased short-term investments and cash balances resulting from option exercises and cash flow from operations subsequent to September 30, 1997, as well as higher yield achieved on the Company's short-term investments. Research and Development Expense. Research and development expense decreased 6% in the third quarter of 1997 from $4,458,000 to $4,203,000 in the third quarter of 1998. The decrease was primarily attributable to a decrease in expenses associated with the Company's Phase III clinical trials for its superoxide dismutase product, as such trial was reformatted as a Phase II trial, partially offset by increased expenses related to early stage research and development for potential new products. Cost of Product Sales. Cost of product sales increased $1,218,000, or 81%, in the third quarter of 1998 to $2,727,000 from $1,509,000 in the third quarter of 1997. Cost of product sales as a percentage of product sales for the third quarter of 1998 increased to 15.2% from 14.3% for the comparable prior year period. This increase was primarily due to increased manufacturing personnel in 1998 and better production yield in 1997. Oxandrin and hGH in bulk form have a relatively low cost of manufacture as a percentage of product sales, while BioLon has the highest cost to manufacture as a percentage of product sales. Cost of product sales as a percentage of product sales varies from year to year and quarter to quarter depending on the quantity and mix of products sold. General and Administrative Expense. General and administrative expense decreased to $1,918,000 from $2,271,000 in the comparable prior period, primarily as a result of a decrease in professional expenses and the reversal of previously expensed tax payment advances to Israeli tax authorities relating to certain benefits provided to Israeli employees. As a percentage of revenues, general and administrative 12 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES expense decreased to 9.8% of revenues in the third quarter of 1998 versus 12.7% of revenues in the comparable prior year period, primarily as a result of the growth in product sales, as well as the absolute decrease in such expenses. Marketing and Sales Expense. Marketing and sales expense increased 39% in the third quarter of 1998 to $3,395,000 from $2,439,000 for the prior year period. As a percentage of revenues, marketing and sales expense increased to 17.4% from 13.6% for the third quarter of 1997. This increase is primarily due to the increased personnel and increased advertising, promotion and market research activities resulting from the growth of the Company's product sales. Commissions and Royalties. Commissions and royalties were $214,000 in the third quarter of 1998, as compared to $798,000 in the third quarter of 1997. These expenses consist primarily of royalties to entities from which the Company licensed certain of its products and to the Chief Scientist. Commissions and royalties in 1997 consist primarily of a royalty payment in respect of the Company's SOD product resulting from the licensing of distribution rights for the Company's SOD product to Serono. Income Taxes. Provision for income taxes for the three months ended September 30, 1998 were $2,058,000, representing 29.0% of income before income taxes, as compared to $1,891,000 and 29.7% of income before income taxes in the three months ended September 30, 1997. The Company's consolidated tax rate differs from the statutory rate because of Israeli tax benefits, research and experimental tax credits and similar items which reduce the effective tax rate. Net Income. The Company had approximately 1.6 million additional basic weighted average shares outstanding for the three month period ended September 30, 1998, as compared to the same period in 1997. The Company had approximately 2.0 million less diluted weighted average shares outstanding, primarily as a result of the decrease in the average fair market value of the Common Stock (which resulted in less outstanding options being considered common equivalent shares because their exercise price was above the average fair market value of the Common Stock for the third quarter of 1998). LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at September 30, 1998 was $84,800,000 as compared to $68,271,000 at December 31, 1997. The major portion of the Company's revenues is derived from product sales. In addition, the Company derives revenue from collaborative arrangements, under which the Company may earn up-front contract fees, may receive funding for additional research, is reimbursed for producing certain experimental materials, may be entitled to certain milestone payments, may sell product at specified prices and may receive royalties on sales of product. Revenues have in the past displayed and will in the immediate future continue to display variations due to changes in demand for its products, introductions of new products by competitors, the obtaining of new research and development contracts and licensing arrangements, the completion or termination of such contracts and arrangements, the timing and amounts of milestone payments and the timing of regulatory approvals of products. The cash flows of the Company have fluctuated significantly due to the impact of net income and losses, capital spending, working capital requirements, the issuance of Common Stock and other financing activities. The Company expects that cash flow in the near future will be primarily determined by the levels of net income and financings, if any, undertaken by the Company. Net cash increased by $7,350,000 and $7,385,000 in the nine months ended September 30, 1997 and 1998, respectively. 13 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES Net cash provided by operating activities was $11,770,000 and $13,900,000 in the nine months ended September 30, 1997 and 1998, respectively. Net income was $11,791,000 and $12,935,000 in the same periods, respectively. In the nine months ended September 30, 1998, net cash provided by operating activities was greater than net income primarily because of a decrease in deferred income taxes of $4,834,000, an increase in current liabilities of $2,948,000 and depreciation and amortization of $2,328,000, partially offset by an increase in receivables and inventories of $8,463,000 and $633,000, respectively. In the nine months ended September 30, 1997, net income and net cash provided by operating activities were approximately the same, as deferred income taxes of $4,373,000, a decrease in inventories of $543,000 and depreciation and amortization of $2,359,000 were completely offset by a $5,413,000 increase in receivables, a $1,078,000 net decrease in current liabilities and an $895,000 increase in other assets. Net cash used in investing activities was $9,719,000 and $12,226,000 in the nine months ended September 30, 1997 and 1998, respectively. Net cash used in investing activities included capital expenditures of $2,571,000 and $1,968,000 in these periods, respectively, primarily for laboratory and manufacturing equipment and infrastructure. The remainder of the net cash used in investing activities was primarily for purchases and sales of short-term investments. Net cash provided by financing activities was $5,299,000 and $5,711,000 in the nine months ended September 30, 1997 and 1998, respectively, representing net proceeds from issuances of Common Stock, primarily as a result of exercise of stock options and warrants. In the nine months ended September 30, 1997, warrants and options to purchase 52,000 and 1,282,000 shares were exercised, resulting in net proceeds of $256,000 and $5,056,000, respectively. In the nine months ended September 30, 1998, warrants and options to purchase 765,000 and 458,000 shares were exercised, resulting in net proceeds of $3,762,000 and $1,949,000, respectively. BTG does not currently have any material commitments for capital expenditures. The Company maintains its funds in money market funds, commercial paper and other liquid debt instruments. The Company manages its Israeli operations with the object of protecting against any material net financial loss in U.S. dollars from the impact of Israeli inflation and currency devaluation on its non-U.S. dollar assets and liabilities. The cost of the Company's operations in Israel, as expressed in dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the Israeli Shekel in relation to the dollar. The rate of inflation (as measured by the consumer price index) was approximately 11% in 1996, 7% in 1997 and 4% in the nine month period ended September 30, 1998, while the Shekel was devalued by approximately 4%, 7% and 9% against the U.S. dollar in 1996, 1997 and the nine months ended September 30, 1998, respectively. As a result, for those expenses linked to the Shekel, such as salaries and rent, this resulted in corresponding increases in these costs in U.S. dollars in 1996 and 1997, but a decrease in these costs in U.S. dollars in the nine months ended September 30, 1998. To the extent that expenses in Shekels exceed the Company's income in Shekels (which to date have consisted primarily of research and development funding from the Chief Scientist and product sales in Israel), the devaluations of Israeli currency have been and will continue to be a benefit to the Company's financial condition. However, should the Company's income in Shekels exceed its expenses in Shekels in any material respect, the devaluation of the Shekel will adversely affect the Company's financial condition. Further, to the extent the devaluation of the Shekel with respect to the U.S. dollar does not substantially offset the increase in the cost of local goods and services in Israel, the Company's financial results will be adversely affected as local expenses expressed in U.S. dollar terms will increase. In October 1998, the Shekel was devalued significantly against the U.S. dollar, and at October 27, 1998, the exchange rate was 4.189 Shekels to $1.00, as compared to 3.845 Shekels at September 30, 1998. There can be no assurance that the Shekel 14 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES will continue to be devalued from time to time to offset the effects of inflation in Israel. At September 30, 1998, intangibles, net consist of (i) $1,407,000 (net of amortization) relating to the repurchase of all rights to hGH previously licensed to The DuPont Merck Pharmaceutical Company, together with all rights to all data generated in pharmacological, toxicological and clinical studies and encompassed in the Investigational New Drug Application and New Drug Application files then pending with the U.S. Food and Drug Administration for the treatment of human growth hormone-deficient children and (ii) $536,000 (net of amortization) relating to the reacquisition of all rights to human growth hormone licensed to Smithkline Beecham. The Company is party to several proceedings relating to patents owned by it or others. The Company cannot predict the costs of such proceedings, and there can be no assurance that such costs will not be significant. Should the Company be unsuccessful in any of these proceedings, it may be unable to commercialize the products which are the subject of such proceedings in certain countries, and may be unable to produce the products in Israel, which could have a material adverse effect on the Company's revenues and results of operations. The Company believes that its remaining cash resources as of September 30, 1998, together with anticipated product sales, scheduled payments to be made to BTG under its current agreements with pharmaceutical partners, the proceeds from sales of equity and continued funding from the Chief Scientist at current levels, will be sufficient to fund the Company's current operations for the foreseeable future. There can, however, be no assurance that product sales will occur as anticipated, that scheduled payments will be made by third parties, that current agreements will not be canceled, that the Chief Scientist will continue to provide funding at current levels, or that unanticipated events requiring the expenditure of funds will not occur. The satisfaction of the Company's future cash requirements will depend in large part on the status of commercialization of the Company's products, the Company's ability to enter into additional research and development and licensing arrangements, and the Company's ability to obtain additional equity investments, if necessary. There can be no assurance that the Company will be able to obtain additional funds or, if such funds are available, that such funding will be on favorable terms. YEAR 2000 The Company uses and relies on a variety of information technologies, computer systems and scientific and manufacturing equipment containing computer-related components (such as programmable logic controllers and other embedded systems). Certain of the Company's computer systems and equipment use two digit fields rather than four digit fields to define the applicable year. As a result, such systems may not be able to distinguish between dates in the 20th century and the 21st century. This could cause system or equipment shutdowns, failures or miscalculations resulting in inaccuracies in computer output or disruptions of operations, including inaccurate processing of financial information and/or temporary inabilities to process transactions, manufacture products or engage in normal business activities. The Company has conducted an evaluation of the actions necessary in order to ensure that its business critical computer systems and equipment will be able to function without disruption with respect to the application of dating systems in the Year 2000. Upon completion of its evaluation, the Company began to upgrade, replace and test its computer systems and equipment so as to be able to operate without disruption due to Year 2000 issues. The Company expects to complete its remediation efforts by mid 1999. However, there can be no assurance that any required remedial actions will be able to be completed on a timely basis. If the Company is unable to complete its remedial actions in the necessary time frame, contingency plans will be developed to address those 15 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES business critical systems which may not be Year 2000 compliant. In addition to risks associated with the Company's own computer systems and equipment, the Company has relationships with, and is to varying degrees dependent upon, a number of third parties that provide goods, services and information to the Company. These include contract manufacturers, suppliers, licensees, vendors, research partners and financial institutions. If any of these third parties experience failures in their computer systems or equipment due to Year 2000 non-compliance, which systems and equipment are outside the control of the Company, it could affect the Company's ability to engage in normal business activities. The Company is in the process of making contact with all of its significant customers, suppliers and partners to determine the extent to which the Company is vulnerable to their failures and to ascertain their Year 2000 compliance and risk. The total cost of the Year 2000 systems evaluation and remediation is being funded through operating cash flows and the Company is expensing these costs. While the total cost to obtain Year 2000 compliance is not known at this time, the Company currently expects the cost to be less than $100,000, of which approximately $25,000 has been expended through September 30, 1998. The actual cost, however, could exceed this estimate. These costs are not expected to have a material effect on the Company's financial position, results of operations or cash flows. 16 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 5. Other Matters Pursuant to the Company's amended by-laws any stockholder who intends to nominate a director or present a proposal at the Company's 1999 Annual Meeting of Stockholders must provide written notice to the Company's Secretary, which notice must comply with the provisions of the Company's by-laws, not later than January 5, 1999 of his or her intention to present the proposal. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3. By-laws of Bio-Technology General Corp., as amended.* 4.1 Rights Agreement, dated as of October 7, 1998, by and between Bio-Technology General Corp. and American Stock Transfer & Trust Company, as Rights Agent, which includes the form of Certificate of Designations setting forth the terms of the Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C.* 4.2 Certificate of Designations of the Series A Junior Participating Cumulative Preferred Stock.* ------------------- * Incorporated by reference to the Company's Current Report on Form 8-K dated October 7, 1998. (b) Reports on Form 8-K: Current Report on Form 8-K dated October 7, 1998, reporting the Company's adoption of a Shareholder Rights Plan and By-law amendments. 17 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BIO-TECHNOLOGY GENERAL CORP. (Registrant) By:/s/ Sim Fass --------------------------- Sim Fass Chairman, President and Chief Executive Officer, Principal Executive Officer /s/ Yehuda Sternlicht --------------------------- Yehuda Sternlicht Vice President-Finance and Chief Financial Officer, Principal Financial and Accounting Officer Dated: October 30, 1998 18 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 16,714 34,192 36,003 0 6,034 96,099 26,269 18,126 114,268 11,299 0 0 0 485 98,483 114,268 50,554 55,653 7,733 37,175 0 0 65 18,478 5,543 12,935 0 0 0 12,935 0.27 0.26
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