- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<PAGE>
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
<PAGE>
<TABLE>
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:
<S> <C> <C>
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.
</TABLE>
3
<PAGE>
<TABLE>
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:
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
<TABLE>
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
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ==== ======== ======== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
5
<PAGE>
<TABLE>
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:
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,714
<SECURITIES> 34,192
<RECEIVABLES> 36,003
<ALLOWANCES> 0
<INVENTORY> 6,034
<CURRENT-ASSETS> 96,099
<PP&E> 26,269
<DEPRECIATION> 18,126
<TOTAL-ASSETS> 114,268
<CURRENT-LIABILITIES> 11,299
<BONDS> 0
0
0
<COMMON> 485
<OTHER-SE> 98,483
<TOTAL-LIABILITY-AND-EQUITY> 114,268
<SALES> 50,554
<TOTAL-REVENUES> 55,653
<CGS> 7,733
<TOTAL-COSTS> 37,175
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 18,478
<INCOME-TAX> 5,543
<INCOME-CONTINUING> 12,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,935
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
