** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-K/A**

** **

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2001**

** **

**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 Number) |
|                                         |   |                   |
| **70 Wood Avenue South, Iselin, New Jersey** |   | **08830**              |
| (Address  of principal executive offices)    |   | (Zip Code)             |

 

 

Registrant’s telephone number, including area code:**(732) 632-8800**

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

(Title of class)

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of each class)

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES ý  NO o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S–K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10–K or any amendmentto this Form 10–K. o

 

Aggregatemarket value of the Registrant’s Common Stock held by non–affiliates atMarch 13, 2002 (based on the closing sale price for such shares as reported bythe National Association of Securities Dealers Automated QuotationSystem):  $293,245,213.  Common Stock outstanding as of March 13,2002: 58,328,485 shares.

 

**Documentsincorporated by reference:** None.

 

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# **PART II**

 

**ITEM 6.  SELECTEDCONSOLIDATED FINANCIAL DATA**

 
|                                                                      |   | **Year ended  December 31,**              |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **1997**                                  |   | **1998** |   | **1999** |   | **2000(2)** |   | **2001(3)** |   |
|                                                                      |   | **(in  thousands except per share data)** |   |
| **Statement  of Operations Data**(1)**:**                                 |   |                                      |   |   |   |   |   |   |   |   |   |
| Total revenues                                                            |   | $                                         | 65,335 |   | $ | 76,855 |   | $ | 83,320 |   | $ | 80,257 |   | $ | 102,246 |   |
| Total expenses                                                            |   | 45,249                                    |   | 51,790 |   | 65,091 |   | 67,516 |   | 127,439 |   |
| Income (loss) before cumulative effect of change in accounting  principle |   | 13,776                                    |   | 17,941 |   | 13,408 |   | 8,943 |   | (29,926 | ) |
| Cumulative effect of change in accounting principle                       |   | —                                    |   | — |   | — |   | (8,178 | ) | — |   |
| Net income (loss)                                                         |   | $                                         | 13,776 |   | $ | 17,941 |   | $ | 13,408 |   | $ | 765 |   | $ | (29,926 | ) |
| Earnings (loss) per common share:                                         |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic:                                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of change in accounting  principle |   | $                                         | 0.29   |   | $ | 0.37 |   | $ | 0.26 |   | $ | 0.16 |   | $ | (0.52 | ) |
| Cumulative effect of change in accounting principle                       |   | —                                    |   | — |   | — |   | (0.15 | ) | — |   |
| Net income (loss)                                                         |   | $                                         | 0.29   |   | $ | 0.37 |   | $ | 0.26 |   | $ | 0.01 |   | $ | (0.52 | ) |
| Diluted:                                                                  |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of change in accounting  principle |   | $                                         | 0.27   |   | $ | 0.36 |   | $ | 0.25 |   | $ | 0.15 |   | $ | (0.52 | ) |
| Cumulative effect of change in accounting principle                       |   | —                                    |   | — |   | — |   | (0.14 | ) | — |   |
| Net income (loss)                                                         |   | $                                         | 0.27   |   | $ | 0.36 |   | $ | 0.25 |   | $ | 0.01 |   | $ | (0.52 | ) |
| Weighted average shares outstanding:                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic                                                                     |   | 46,767                                    |   | 48,184 |   | 52,348 |   | 54,320 |   | 57,230 |   |
| Diluted                                                                   |   | 51,916                                    |   | 49,848 |   | 54,191 |   | 56,885 |   | 57,230 |   |

 
|                            |   | **As of  December 31,** |         |
|---------------------------------|--------|-------------------------|--------------|
|                            |   | **1997**                |         | **1998** |   | **1999** |   | **2000(2)** |   | **2001(3)** |   |
|                            |   | **(in  thousands)**     |         |
| **Balance  Sheet Data**(1)**:** |   |                    |         |   |   |   |   |   |   |   |   |
| Working capital                 |   | $                       |  68,271 |   | $ |  110,359 |   | $ |  120,587 |   | $ |  154,089 |   | $ |  139,472 |   |
| Total assets                    |   | 94,711                  |         | 142,797 |   | 162,538 |   | 209,960 |   | 235,086 |   |
| Long-term liabilities           |   | 3,975                   |         | 3,818 |   | 4,333 |   | 24,593 |   | 24,125 |   |
| Stockholders’ equity       |   | 82,156                  |         | 123,179 |   | 140,534 |   | 152,645 |   | 157,540 |   |
|                                 |        |                         |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Wehave determined to restate our financial results for each of the years endedDecember 31, 1999, 2000 and 2001.  Theprincipal 

 

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adjustments are as follows:  (i) development and start-up costsassociated with establishing alternate manufacturing sources for our approveddrug OXANDRIN and for a new tablet formulation, which costs were previouslycapitalized, have been expensed in the year incurred; (ii) manufacturingdevelopment costs associated with a product we were developing, which costswere originally capitalized and written-off in 1999 when we terminated researchon this product, have been expensed in the year incurred; (iii) compensationcharges resulting from modification of the period of vesting and exercisabilityof certain stock option awards to certain employees and former employees madein connection with the termination of their employment and post-employmentconsulting arrangements have been recognized in the period of modification;(iv) a 1999 product sale has been reversed to reflect significant uncertaintiesconcerning the realization of the invoiced amount at the time of sale; (v)recognition of an up-front contract fee related to a development anddistribution agreement, originally treated as a milestone payment, has beendeferred in accordance with Staff Accounting Bulletin 101 (“SAB 101”); and (vi) reestablishment of assets previouslywritten off against negative goodwill associated with the Myelos acquisitionand subsequent depreciation and amortization of such assets and additionalamortization of negative goodwill.  Seenote 2 of the notes to our consolidated financial statements included elsewhereherein.  The selected consolidatedfinancial data for the years ended December 31, 1997 and 1998 and as ofDecember 31, 1997, 1998 and 1999 have been adjusted in accordance with theforegoing adjustments and are unaudited.

(2)           Effective January 1, 2000, BTGadopted SAB 101 issued by the Securities and Exchange Commission in December1999.  As a result of adopting SAB 101,BTG changed the way it recognizes revenue from contract fees for the license ofmarketing and distribution rights where the consideration is a one-timenonrefundable payment.  Prior to theissuance of SAB 101, BTG recorded revenue from the license of marketing anddistribution rights when the rights were licensed and/or when these paymentswere received. Effective January 1, 2000, BTG recorded a cumulative effect of achange in accounting principle related to contract revenues recognized in prioryears in the amount of $12,558,000, net of income taxes of $4,380,000, of which$853,000 was recognized as contract fee revenue in 2000 and $1,156,000 wasrecognized as contract fee revenue in 2001. The related revenues are now being recognized over the term of therelated agreements.

(3)           In connection with our acquisition ofMyelos and based on an independent valuation, BTG allocated $45,600,000 toin-process research and development projects of Myelos, representing theestimated fair value based on risk-adjusted cash flows of the acquiredtechnology.  At the date of theacquisition the technology acquired in the acquisition was not fullycommercially developed and had no alternative future uses.  Accordingly, the value was expensed as ofthe acquisition date.  BTG recordednegative goodwill of $18,914,000 on its balance sheet, primarily because theamount written off as in-process research and development acquired exceeded thepurchase price for accounting purposes. This negative goodwill was being amortized over its expected useful lifeof five years, and had the effect of reducing reported expenses by $2,961,000during 2001.  In accordance with SFASNo. 142, amortization of the negative goodwill ceased beginning January 1,2002, and the balance remaining will be maintained as a deferred credit untilit is either netted against the contingent payments or reflected in net incomeas an extraordinary item should the contingent payments not become due becausethe technology did not meet the milestones which trigger payment.

 

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The followingtable sets forth BTG’s *pro forma* results of operations as if SAB101 had been in effect since January 1, 1997. Because BTG adopted SAB 101 as of January 1, 2000, there is nodifference between BTG’s actual and *pro forma* results of operations for theyears ended December 31, 2000 and 2001, other than the cumulative effectadjustment recognized in 2000.

 
|                                 |   | **Year ended  December 31,**              |   |
|--------------------------------------|--------|-------------------------------------------|--------|
|                                 |   | **1997**                                  |   | **1998** |   | **1999** |   |
|                                 |   | **(in  thousands except per share data)** |   |
| Total revenues                       |   | $                                         | 64,355 |   | $ | 76,210 |   | $ | 73,742 |   |
| Total expenses                       |   | 45,249                                    |   | 51,790 |   | 65,091 |   |
| Net income                           |   | 13,162                                    |   | 17,220 |   | 7,278 |   |
| Earnings per common share:           |   |                                      |   |   |   |   |   |
| Basic                                |   | $                                         | 0.28   |   | $ | 0.36 |   | $ | 0.14 |   |
| Diluted                              |   | $                                         | 0.25   |   | $ | 0.35 |   | $ | 0.13 |   |
| Weighted average shares outstanding: |   |                                      |   |   |   |   |   |
| Basic                                |   | 46,767                                    |   | 48,184 |   | 52,348 |   |
| Diluted                              |   | 51,916                                    |   | 49,848 |   | 54,191 |   |

 

 

 

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statements in this Annual Report on Form 10-K/A concerningBTG’s business outlook or future economic performance; anticipatedprofitability, revenues, expenses or other financial items; introductions andadvancements in development of products, and plans and objectives relatedthereto; and statements concerning assumptions made or expectations as to anyfuture events, conditions, performance or other matters, are “forward-lookingstatements” as that term is defined under the Federal Securities Laws.  Forward-looking statements are subject torisks, uncertainties and other factors that could cause actual results todiffer materially from those stated in such statements.  Such risks, uncertainties and factorsinclude, but are not limited to, changes and delays in product developmentplans and schedules, changes and delays in product approval and introduction,customer acceptance of new products, changes in pricing or other actions bycompetitors, patents owned by BTG and its competitors, changes in healthcarereimbursement, risk of operations in Israel, risk of product liability,governmental regulation, dependence on third parties to manufacture productsand commercialize products and general economic conditions, as well as otherrisks detailed in our filings with the Securities and Exchange Commission,including its Annual Report on Form 10-K and this Amended Annual Report on Form10-K/A.*

Overview

We are engaged in the research, development,manufacture and marketing of biopharmaceutical products.  Through a combination of internal researchand development, acquisitions, collaborative relationships and licensingarrangements, BTG has developed a portfolio of therapeutic products, includingnine products that have received regulatory approval for sale and are currentlybeing marketed, four products that are in registration or clinical trials andseveral products that are in pre-clinical development.  We pursue the development of both productswith broad markets as well as products with specialized niche markets where wecan seek Orphan Drug designation and potential marketing exclusivity.

BTG was founded in 1980 to develop, manufactureand market novel therapeutic products. BTG’s overall administration, licensing, human clinical studies,marketing activities, quality assurance and regulatory affairs are primarilycoordinated at our headquarters in Iselin, New Jersey.  Pre-clinical studies, research anddevelopment activities and manufacturing of BTG’s genetically engineeredproducts are primarily carried out through its wholly-owned subsidiary inRehovot, Israel.

Effective January 1, 2000, BTG adopted StaffAccounting Bulletin 101 (“SAB 101”) issued by the Securities and ExchangeCommission in December 1999.  As aresult of adopting SAB 101, BTG changed the way it recognizes revenue fromcontract fees for the license of marketing and distribution rights where theconsideration is a one-time nonrefundable payment.  Prior to the issuance of SAB 101, BTG recorded revenue from thelicense of marketing and distribution rights when the rights were licensedand/or when these payments were received. Effective January 1, 2000, BTG recorded a cumulative effect of a changein accounting principle related to contract revenues recognized in prior yearsin the amount of $12,558,000, net of income taxes of $4,380,000, of which$853,000 was recognized as contract fee revenue in 2000 and $1,156,000 wasrecognized as contract fee revenue in 2001. The related revenues are now being recognized over the estimated term ofthe related agreements.

 

Restatement of Financial Statements

We have determined to restate our financialstatements for each of the years ended December 31, 1999, 2000, and 2001.  The principal adjustments are as follows:

—Our financial statements include expensesof $680,000 in 1999, $1,379,000 in 2000 and $1,058,000 in 2001 for developmentand start-up costs associated with establishing alternate manufacturing sourcesfor our approved drug Oxandrin and for a new tablet formulation, which costswere originally capitalized.

—In 1999 we wrote off $1,894,000 ofmanufacturing development costs associated with a product under development,which costs were originally capitalized, when we terminated research on thisproduct.  These costs have now beenexpensed in the year incurred.  Thefinancial statements have been adjusted to eliminate the effect of thiswrite-off from the 1999 consolidated statements of operations and to adjust theaccumulated deficit as of December 31, 1998 to write off this cost, net of taxeffect.

 

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—Our financial statements includecompensation charges of $318,000 in 1999, $1,592,000 in 2000 and $1,024,000 in2001, arising from modification of the period of vesting and exercisability ofcertain stock option awards to certain employees and former employees made inconnection with the termination of their employment and post-employmentconsulting arrangements, which expense should have been recognized at the timeof the modification.  Additionally,additional paid-in-capital and accumulated deficit as of December 31, 1998 haveeach been increased by $2,209,000 to reflect the effect of stock optionmodifications prior to 1999.

—A 1999 product sale to, and the subsequentrepurchase of this product in 2001 from, a distributor in the amount of$2,000,000 and the related cost of goods sold of $385,000 have been excludedfrom the 1999 consolidated financial statements because of significantuncertainties concerning the realization of the invoiced amount at the time ofsale.

—A $5,000,000 up-front contract fee relatedto a development and distribution agreement that we considered a milestonepayment and originally recognized in its entirety as revenue in 2000 has beendeferred and is being amortized over the estimated life of the agreement inaccordance with Staff Accounting Bulletin 101.

—In 2001 we wrote off against negativegoodwill $844,000 of assets acquired in the Myelos acquisition.  We reestablished these assets on our balancesheet and our 2001 financial statements include $229,000 of depreciation andamortization of such assets and additional amortization of negative goodwill inthe amount of $138,000.

The following tables present the impact ofthe restatements on a condensed basis (in thousands except per share amounts):

 
|                            |   | **2000**                    |    | **2001**     |   |
|---------------------------------|--------|-----------------------------|---------|--------------|--------|
|                            |   | **As  Previously Reported** |    | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| **Balance  Sheet:**             |   |                        |    |         |   |   |   |   |   |
| Total current assets            |   | $                           | 172,072 |         | $      | 172,073 |   | $ | 163,848 |   | $ | 163,848 |   |
| Total assets                    |   | 213,225                     |    | 209,960      |   | 236,670 |   | 235,086 |   |
| Total current liabilities       |   | 18,728                      |    | 17,984       |   | 25,070 |   | 24,376 |   |
| Total liabilities               |   | 53,872                      |    | 57,315       |   | 73,807 |   | 77,546 |   |
| Accumulated deficit             |   | (14,817                     | )       | (25,644      | )      | (45,104 | ) | (55,570 | ) |
| Total stockholders’ equity |   | 159,353                     |    | 152,645      |   | 162,863 |   | 157,540 |   |
|                            |   |                        |    |         |   |   |   |   |   |
|                                 |        |                             |         |              |        |  |  |  |  |  |  |  |  |

 
|                                                                                       |   | **1999**                    |   | **2000**     |   | **2001**                    |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------|--------|--------------|--------|-----------------------------|--------|
|                                                                                       |   | **As  Previously Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| **Statement  of Operations:**                                                              |   |                        |   |         |   |                        |   |   |   |   |   |   |   |
| Revenues                                                                                   |   | $                           | 85,320 |         | $      | 83,320                      |   | $ | 84,944 |   | $ | 80,257 |   | $ | 101,965 |   | $ | 102,246 |   |
| Expenses                                                                                   |   | 66,561                      |   | 65,091       |   | 64,574                      |   | 67,516 |   | 126,881 |   | 127,439 |   |
| Income (loss) before income taxes and cumulative effect of change in  accounting principle |   | 18,759                      |   | 18,229       |   | 20,370                      |   | 12,741 |   | (24,916 | ) | (25,193 | ) |
| Tax expense                                                                                |   | 4,897                       |   | 4,821        |   | 4,475                       |   | 3,798 |   | 5,371 |   | 4,733 |   |
| Net income (loss)                                                                          |   | 13,862                      |   | 13,408       |   | 7,717                       |   | 765 |   | (30,287 | ) | (29,926 | ) |
| Net earnings (loss) per common share:                                                      |   |                        |   |         |   |                        |   |   |   |   |   |   |   |
| Basic                                                                                      |   | 0.26                        |   | 0.26         |   | 0.14                        |   | 0.01 |   | (0.53 | ) | (0.52 | ) |
| Diluted                                                                                    |   | 0.26                        |   | 0.25         |   | 0.14                        |   | 0.01 |   | (0.53 | ) | (0.52 | ) |
|                                                                                            |        |                             |        |              |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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As a result of the above adjustments, theCompany’s December 31, 1998 additional paid in capital and accumulated deficitchanged from the previously reported amounts of $161,164,000 and $(36,396,000)to $163,373,000 and $(39,827,000), respectively.

 

Acquisition of Myelos Corporation

On March 19, 2001, BTG acquired MyelosCorporation, a privately-held biopharmaceutical company focused on thedevelopment of novel therapeutics to treat diseases of the nervous system.  Under the terms of the acquisitionagreement, BTG paid Myelos shareholders $35 million in a combination of cashand stock ($14 million in cash and $21 million through the issuance ofapproximately 2,344,700 shares of BTG common stock (based on a value of$8.9564, representing the average closing price of BTG’s common stock for the20 trading day period ending one day prior to the February 21, 2001 date theacquisition agreement was executed)).

In the event that (i) BTG publicly announcesthat it will file a New Drug Application (“NDA”) related to the use ofPROSAPTIDE to treat neuropathic pain or neuropathy, (ii) BTG receives UnitedStates Food and Drug Administration (“FDA”) minutes stating that the clinicaldata possessed by BTG is sufficient for an NDA filing for the use of PROSAPTIDEto treat neuropathic pain or neuropathy without requiring any further testingor (iii) BTG initiates preparation of an NDA for PROSAPTIDE for the treatmentof neuropathic pain or neuropathy (the date the earliest of the foregoingoccurs being the “Payment Trigger Date”), then BTG will pay to the Myelosshareholders an additional $30 million, at least approximately $14 million ofwhich must be paid in shares of BTG common stock, valued at the average of theclosing prices of BTG common stock during the 20 trading days ending on thePayment Trigger Date, and the remainder can be paid in cash, shares of BTGcommon stock, or a combination thereof, as determined by BTG in its solediscretion.

In addition, in the event that the FDAapproves the sale of PROSAPTIDE for the treatment of neuropathic pain orneuropathy, BTG will pay the Myelos shareholders 15% of the net sales ofPROSAPTIDE for the treatment of neuropathic pain or neuropathy during the 12month period beginning on the earlier of (i) the 25th full month aftercommercial introduction of PROSAPTIDE in the United States for the treatment ofneuropathic pain or neuropathy and (ii) April 1, 2010.  At least 50% of this payment must be paid inshares of BTG common stock, valued at the average of the closing prices of BTGcommon stock during the 20 days ending one day prior to the payment, and theremainder can be paid in cash, shares of BTG common stock, or a combinationthereof, as determined by BTG in its sole discretion.

In no event will BTG be obligated to issuein aggregate to the Myelos shareholders more than 10,962,000 shares of BTGcommon stock.  Any amount of thecontingent payments that cannot be paid in shares of BTG common stock shallinstead be paid in shares of BTG’s preferred stock.  The preferred stock will be non-voting, non-convertible,non-transferable, non-dividend paying (except to the extent a cash dividend ispaid on the BTG common stock), with no mandatory redemption for a period of 20years and one day from the March 19, 2001 closing date of the acquisition, anda right to share in proceeds in liquidation, up to the liquidation amount.

The transaction was treated as a “purchase”for accounting purposes.  The purchaseprice for accounting purposes was approximately $34,387,000 (includingacquisition costs of $1,387,000), based on a value for the approximately 2,344,700shares of BTG common stock issued in the acquisition of $8.1172, representingthe average closing price of BTG’s common stock for the four day periodpreceding the date the terms of the acquisition were agreed to (February 21,2001).  In connection with the mergerand based on an independent valuation, BTG allocated $45,600,000 to in-processresearch and development projects of Myelos, representing the estimated fairvalue based on risk-adjusted cash flows of the acquired technology.  At the date of the merger the technologyacquired in the acquisition was not fully commercially developed and had noalternative future uses.  Accordingly,the value was expensed as of the acquisition date.  BTG recorded negative goodwill of $18,914,000 on its balance sheet,primarily because the amount written off as in-process research and developmentacquired exceeded the purchase price for accounting purposes.  During 2001 this negative goodwill was beingamortized over its expected useful life of five years.  In accordance with SFAS No. 142,amortization of the negative goodwill ceased beginning January 1, 2002, and thebalance remaining will be maintained as a deferred credit until it is eithernetted against the contingent payments or reflected in net income as an extraordinaryitem should the contingent payments not become due because the technology didnot meet the milestones which trigger payment.

BTG allocated values to the in-processresearch and development based on an independent valuation of the research anddevelopment project.  The value assignedto these assets was determined by estimating the costs to develop the acquiredtechnology into a commercially viable product, estimating the resulting netcash 

 

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flows from theproduct, and discounting the net cash flows to their present value.  The revenue projection used to value thein-process research and development was based on estimates of relevant marketsize and growth factors, expected trends in technology, and the nature andexpected timing of new product introductions by BTG and its competitors.  The resulting net cash flows from suchproduct are based on management’s estimates of cost of sales, operatingexpenses and income taxes from such product. BTG believes that the assumptions used in the forecasts were reasonableat the time of the merger.  No assurancecan be given, however, that the underlying assumptions used to estimate sales,development costs or profitability, or the events associated with such product,will transpire as estimated.  For thesereasons, actual results may vary from projected results. The most significantand uncertain assumptions relating to the in-process research and developmentrelate to the ability to successfully develop a product and the projectedtiming of completion of, and revenues attributable to, that product.

 

Investment in Omrix Biopharmaceuticals, Inc.

In January 2001, in order to obtain a periodof exclusivity to negotiate a possible strategic relationship with OmrixBiopharmaceuticals, Inc. (“Omrix”), BTG loaned $2,500,000 to Omrix and agreedto convert the loan into, and to purchase an additional $2,500,000 of, sharesof Omrix preferred stock if it did not pursue a relationship.  BTG determined not to pursue a strategicrelationship with Omrix, and on March 31, 2001 converted the existing loaninto, and purchased an additional $2,500,000 of, shares of Omrix preferredstock, which is convertible into approximately 4.5% of Omrix common stock (on afully-diluted basis).  Omrix is aprivately-held company that develops and markets a unique surgical sealant anda number of immunology products based on blood plasma processingtechnology.  Omrix currently sells itsproducts in Europe, South America and the Middle East.  During the fourth quarter of 2001, BTGdetermined that the decline in the value of its investment in Omrix was otherthan temporary and, accordingly, wrote-down the value of this investment by$3,000,000 based on management’s evaluation of current market conditions andOmrix’s operations and forecasts.  Thiswrite-down is included as a component of realized and unrealized loss oninvestment and other financing expense.

 

2002 Outlook

We currently anticipate total 2002 revenues,excluding interest income, of at least $100 million.  Although we also anticipate growth in total product sales, weexpect the growth in sales of OXANDRIN to be partially offset by a lower levelof human growth hormone sales in 2002 as compared to 2001.  Due in part to industry-wide pricingpressures in Japan by the Japanese Health Ministry and JCR’s management ofinventory levels, the level of sales of our human growth hormone to JCR for theJapanese market will be adversely affected, despite an increasing market share.  Based on wholesaler orders through February2002, revenues from DELATESTRYL sales are currently anticipated to exceed thoseof 2001.  Royalty revenues may fallbelow their 2001 level due to potential generic competition for MIRCETTE.  In addition, our anticipated revenues for2002 may be affected by the injunction preventing Teva Pharmaceuticals USA,Inc., BTG’s exclusive distributor of human growth hormone in the United States,from introducing BTG’s human growth hormone product and the delay in theplanned introduction  of a new OXANDRINtablet until later in the year.

In order to optimize the maturation of BTG’sproprietary pipeline products, BTG is committing significant additionalresources to them in 2002.  Although wehad initially expected research and development expense to increase byapproximately 40% in 2002, we now anticipate such expense will only increase byapproximately 35%.  The decrease inanticipated research and development expenditures is a result of (i) our determinationnot to continue to pursue our SOD product until we reach a favorable resolutionof clinical design issues with the FDA and (ii) completion of our Phase Iclinical studies of PURICASETM, which began in the first quarter of 2002, beingdelayed as we evaluate how best to proceed with the clinical studies in lightof topical hypersensitivity reactions in some individuals participating in thestudy, despite encouraging early observation of the drug’s effectiveness.  Additionally, to fully maximize OXANDRIN’spotential and provide stimulus to its growth, marketing and sales expenses areexpected to grow this year by approximately 20%.

Given this significant investment in ourfuture growth, the increase in expenses is anticipated to outpace revenuegrowth and therefore we are expecting full year EPS to be in the range offifteen to twenty cents.  Our 2002 EPSwill depend in significant measure on the growth in OXANDRIN prescriptions andthe sales achieved by both Ross and BTG. In addition, acquisition activities could affect our 2002 EPS.  We expect our quarterly EPS in 2002 to varybased on the timing of product sales to customers and research and developmentand marketing expenses.

 

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CriticalAccounting Policies and the Use of Estimates

The preparation of our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the U.S. requires management to make estimates and assumptions thataffect the amounts reported in our consolidated financial statements and accompanyingnotes.  Actual results could differmaterially from those estimates.  Theitems in our consolidated financial statements requiring significant estimatesand judgments are as follows:

•                  *Investments*.  We from time to time invest innonmarketable equity securities for strategic purposes.  These investments are carried at cost.  We periodically monitor the liquidityprogress and financing activities of these entities to determine if impairmentwrite downs are required.  In 2001, wewrote-down our investment in Omrix by $3,000,000.

•                  *Write-offof in-process research and development acquired*.  In connection with our acquisition of MyelosCorporation, we allocated $45,600,000 to in-process research and developmentprojects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology.  We expensed this value as of the acquisition date because thetechnology was not fully commercially developed and had no alternative futureuses.

•      *Contract Fees.*  In accordance with SAB 101, we recognize revenue for up-frontnonrefundable contract fees received in respect of the license of marketing anddistribution rights over the estimated term of the related agreement.

•                  *Incometaxes*. Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and their basis for income tax purposes and thetax effects of net operating loss and tax credit carryforwards.  We record valuation allowances to reducedeferred tax assets to the amounts that are more likely than not to berealized.  We have considered futuretaxable income and ongoing prudent and feasible tax planning strategies inassessing the need for valuation allowances, and at December 31, 2001, did notrecord a valuation allowance against our deferred tax asset.  If we determine in the future that we willnot be able to realize all or part of our net deferred tax assets, adjustmentswill be charged to income in the period that we made such determination.

•                  *Baddebts*.  Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

•                  *Litigation*.  We are currently involved incertain legal proceedings referred to in the “Commitments and Contingencies”note in the Notes to Consolidated Financial Statements.  We do not believe these legal proceedingswill have a material adverse effect on our consolidated financial position,results of operations or cash flows. However, were an unfavorable ruling tooccur in any quarterly period, there exists the possibility of a materialimpact on the operating results.

The above listing is not intended to be acomprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particulartransaction is specifically dictated by generally accepted accountingprinciples, with no need for management’s judgment in their application.  There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.  See our auditedconsolidated financial statements and notes thereto which begin on page 20 ofthis Annual Report on Form 10-K/A which contain accounting policies and otherdisclosures required by generally accepted accounting principles.

 

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Results of Operations

Thefollowing table sets forth for the fiscal periods indicated the percentage ofour revenues represented by certain items reflected on our consolidatedstatements of operations.

 
|                                                                                       |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                       |   | **1999**                     |   | **2000** |   | **2001** |   |
| Revenues:                                                                                  |   |                         |   |   |   |   |   |
| Product sales                                                                              |   | 72.4                         | %      | 77.5 | % | 85.2 | % |
| Contract fees                                                                              |   | 17.8                         |   | 6.9 |   | 1.6 |   |
| Royalties                                                                                  |   | 2.1                          |   | 3.9 |   | 3.7 |   |
| Other revenues                                                                             |   | 2.1                          |   | 2.4 |   | 2.2 |   |
| Interest                                                                                   |   | 5.6                          |   | 9.3 |   | 7.3 |   |
| Total revenues                                                                             |   | 100.0                        | %      | 100.0 | % | 100.0 | % |
| Expenses:                                                                                  |   |                         |   |   |   |   |   |
| Research and development                                                                   |   | 26.5                         | %      | 31.6 | % | 27.2 | % |
| Cost of product sales                                                                      |   | 13.0                         |   | 12.3 |   | 12.1 |   |
| General and administrative                                                                 |   | 14.6                         |   | 15.8 |   | 10.1 |   |
| Marketing and sales                                                                        |   | 20.0                         |   | 21.9 |   | 16.6 |   |
| Commissions and royalties                                                                  |   | 3.8                          |   | 2.3 |   | 1.9 |   |
| Realized and unrealized loss on investment and other financing  expense                    |   | 0.2                          |   | 0.2 |   | 12.1 |   |
| Write-off of in-process research and development acquired                                  |   | —                       |   | — |   | 44.6 |   |
| Total expenses                                                                             |   | 78.1                         |   | 84.1 |   | 124.6 |   |
|                                                                                       |   |                         |   |   |   |   |   |
| Income (loss) before income taxes and cumulative effect of change in  accounting principle |   | 21.9                         |   | 15.9 |   | (24.6 | ) |
| Income tax expense                                                                         |   | 5.8                          |   | 4.6 |   | 4.6 |   |
| Income (loss) before cumulative effect of change in accounting  principle                  |   | 16.1                         |   | 11.3 |   | (29.2 | ) |
| Cumulative effect of change in accounting principle                                        |   | —                       |   | 10.2 |   | — |   |
| Net income (loss)                                                                          |   | 16.1                         | %      | 1.1 | % | (29.2 | )% |

 

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The following table setsforth for the fiscal periods indicated our statement of operations on a *pro forma*basis (i) as if SAB 101 had been in effect since January 1, 1999 and (ii)excluding in 2001 the effect of (a) the write-off of in-process research anddevelopment acquired resulting from the Myelos acquisition, (b) the benefitderived from the amortization of negative goodwill resulting from the Myelosacquisition, (c) the recognition of a capital loss of approximately $9 millionon our short-term investments, which generated interest income considerably inexcess of the capital loss, (d) the partial write-off of $3 million of the $5million we invested in Omrix in 2001 as an other than temporary impairment,given current market conditions and the difficulty in assessing the value of aprivate company, and (e) the tax effect of the recognition of the capital lossand the partial write-off.  The tablealso sets forth for the fiscal periods indicated the pro forma percentage ofrevenues represented by these items.

 

 
|                                                                    |   | **Year ended December 31,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                    |   | **1999**                    |   | **2001** |   |
|                                                                    |   | **(dollars in thousands )** |   |
| Revenues:                                                               |   |                        |   |
| Product sales                                                           |   | $                           | 60,332 |   | 81.8 | % | $ | 87,106 |   | 85.2 | % |
| Contract fees                                                           |   | 5,270                       |   | 7.1 |   | 1,656 |   | 1.6 |   |
| Royalties                                                               |   | 1,761                       |   | 2.4 |   | 3,817 |   | 3.7 |   |
| Other revenues                                                          |   | 1,746                       |   | 2.4 |   | 2,195 |   | 2.2 |   |
| Interest income                                                         |   | 4,633                       |   | 6.3 |   | 7,472 |   | 7.3 |   |
|                                                                    |   | 73,742                      |   | 100.0 |   | 102,246 |   | 100.0 |   |
| Expenses:                                                               |   |                        |   |   |   |   |   |   |   |
| Research and development                                                |   | 22,050                      |   | 29.9 |   | 27,778 |   | 27.2 |   |
| Cost of product sales                                                   |   | 10,839                      |   | 14.7 |   | 12,388 |   | 12.1 |   |
| General and administrative                                              |   | 12,141                      |   | 16.4 |   | 13,252 |   | 13.0 |   |
| Marketing and sales                                                     |   | 16,652                      |   | 22.6 |   | 17,006 |   | 16.6 |   |
| Commissions and royalties                                               |   | 3,221                       |   | 4.4 |   | 1,975 |   | 1.9 |   |
| Realized and unrealized loss on investment and other financing  expense |   | 188                         |   | 0.3 |   | 170 |   | 0.2 |   |
|                                                                    |   | 65,091                      |   | 88.3 |   | 72,569 |   | 71.0 |   |
| Income before income taxes                                              |   | 8,651                       |   | 11.7 |   | 29,677 |   | 29.0 |   |
| Income taxes                                                            |   | 1,373                       |   | 1.8 |   | 9,247 |   | 9.0 |   |
| Net income                                                              |   | $                           | 7,278  |   | 9.9 | % | $ | 20,430 |   | 20.0 | % |

 

BTG has historically derived its revenuesfrom product sales as well as from collaborative arrangements with thirdparties, under which BTG may earn up–front contract fees, may receivefunding for additional research (including funding from the Chief Scientist ofthe State of Israel (“Chief Scientist”)), is reimbursed for producing certainexperimental materials, may be entitled to certain milestone payments, may sellproduct at specified prices and may receive royalties on sales of product.  We anticipate that product sales willconstitute the majority of our revenues in the future.  Revenues have in the past displayed and willin the immediate future continue to display significant variations due tochanges in demand for our products, new product introductions by BTG and itscompetitors, the obtaining of new research and development contracts andlicensing arrangements, the completion or termination of such contracts andarrangements, the timing and amounts of milestone payments, and the timing ofregulatory approvals of products.

 

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Thefollowing table summarizes BTG’s sales of its commercialized products as apercentage of total product sales for the periods indicated:

 
|        |   | **Year ended  December 31,** |   |
|-------------|--------|------------------------------|--------|
|        |   | **1999**                     |   | **2000** |   | **2001** |   |
| OXANDRIN    |   | 38                           | %      | 52 | % | 54 | % |
| BIO-TROPIN  |   | 30                           |   | 33 |   | 27 |   |
| BIOLON      |   | 14                           |   | 10 |   | 10 |   |
| DELATESTRYL |   | 17                           |   | 4 |   | 8 |   |
| Other       |   | 1                            |   | 1 |   | 1 |   |
| Total       |   | 100                          | %      | 100 | % | 100 | % |

 

We believe that our product mix will varyfrom period to period based on the purchasing patterns of our customers and ourfocus on: (i) increasing market penetration of our existing products; (ii)expanding into new markets; and (iii) commercializing additional products.

Quarterly fluctuations in sales of OXANDRINhave had a significant impact on our quarterly results of operations.  Quarterly sales of OXANDRIN in 1999, 2000and 2001 are set forth in the following table:
|   |   | **First  Quarter**  |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|--------|--------|---------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|   |   | **(in  thousands)** |   |
| 1999   |   | $                   | 6,733  |                | $      | 4,839              |   | $                   | 6,108  |      | $      | 5,255 |   | $ | 22,935 |   |
| 2000   |   | 5,009               |   | 6,403               |   | 10,889             |   | 9,886               |   | 32,187    |   |
| 2001   |   | 16,692              |   | 17,887              |   | 4,575              |   | 7,996               |   | 47,150    |   |
|        |        |                     |        |                     |        |                    |        |                     |        |           |        |  |  |  |  |  |

 

Our sales of OXANDRIN consist of sales toAccredo Health Services, Inc., formerly known as Gentiva Health Services, Inc.(“Accredo”), our wholesale and retail distributor of OXANDRIN in the UnitedStates, and the Ross Products Division of Abbott Laboratories.  The decrease in OXANDRIN sales in the secondhalf of 1999 was due to the OXANDRIN inventory reduction that Accredo began inApril 1999 as a result of a slowing in the rate of increase in OXANDRINprescriptions.  The increase in OXANDRINsales in each of the last three quarters of 2000 was due to Accredo’s completion,in May 2000, of this OXANDRIN inventory reduction.  The increase in OXANDRIN sales during the first half of 2001 wasdue to: (i) the commencement, in September 2000, of sales by the Ross ProductsDivision of Abbott Laboratories for the long-term care market for the treatmentof patients with involuntary weight loss, including stocking activity bywholesalers in connection with the launch of this product in the long-term caremarket; (ii) stocking by certain wholesalers in anticipation of a priceincrease; (iii) increased purchases by Accredo following its completion, in May2000, of a reduction in the amount of OXANDRIN inventory it carries, whichreduction began in April 1999; and (iv) increased wholesaler sales of OXANDRINby Accredo.

Upon completion of its inventory reductionin May 2000, Accredo began to purchase, on a monthly basis, an amount ofOXANDRIN equal to the average end-user (*i.e.*, wholesaler) sales during thepreceding three months.  However,because of the significant increase in OXANDRIN purchases by wholesalers in thefirst quarter of 2001 in anticipation of a price increase and in connectionwith the launch of OXANDRIN into the long-term care market, Accredo’s purchasesof OXANDRIN in the second quarter of 2001 were higher than the levels of itssales of OXANDRIN to wholesalers in that period. As a result, Accredo’sinventory of OXANDRIN increased beyond the desired level.  Accordingly, BTG and Accredo amended theirdistribution arrangement effective August 2001 to provide for reduced purchasesof OXANDRIN until Accredo’s inventory was reduced to desired levels andthereafter to ensure that sales of OXANDRIN by BTG to Accredo more accuratelyreflected end-user demand.  As a result,sales of OXANDRIN in the second half of 2001 were $22,008,000 lower than in thefirst half of 2001 and $8,204,000 lower than in the second half of 2000.

Accredo’s reduction in OXANDRIN inventoryadversely affected the growth in BTG’s product sales and revenues and BTG’sresults of operations in 1999 and 2000. Reductions in wholesaler purchases of OXANDRIN from Accredo in thesecond, third and fourth quarters of 2001 and significantly reduced 

 

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purchases ofOXANDRIN by Accredo in the second half of 2001 adversely affected the growth inBTG’s product sales and revenues and BTG’s results of operations in the secondhalf of 2001.  Because purchases bywholesalers fluctuate from month to month and quarter to quarter based on theirown operating strategies (including desired levels of inventories, purchases bytheir customers and stocking in advance of anticipated price increases), BTG’ssales to Accredo and Ross will fluctuate from quarter to quarter.  There can be no assurance that Accredo willnot determine to further reduce its OXANDRIN inventory levels.

The launch of OXANDRIN in late 2000 by Rossinto the long-term sector for the treatment of patients with involuntary weightloss led to a 26.5% increase in prescriptions in 2001 compared to 2000.  However, prescriptions in the second half of2001, although 19.4% higher than in the second half of 2000, were 0.6% belowprescriptions in the first half of 2001, due, at least in part, to sales forcechanges in the long-term care sector. The Ross long-term care field force contingent detailing physicians,nursing homes, assisted living facilities and geriatric hospitals wasstreamlined in the spring of 2001 in an effort to achieve greater efficiency.BTG believes this may have resulted in a reduction in the number of OXANDRINcalls and details being made.  BTGunderstands that corrective measures have been taken to increase the number ofcalls and details being made.  To datethe average prescription written for the long-term care market involves asignificantly lower dose of OXANDRIN than the average prescription written forthe AIDS market.

The following table summarizes BTG’s UnitedStates and international product sales as a percentage of total product salesfor the periods indicated:

 
|     |   | **Year ended  December 31,** |   |
|----------|--------|------------------------------|--------|
|     |   | **1999**                     |   | **2000** |   | **2001** |   |
| Domestic |   | 58                           | %      | 56 | % | 64 | % |
| Foreign  |   | 42                           |   | 44 |   | 36 | % |
| Total    |   | 100                          | %      | 100 | % | 100 | % |

 

Domestic sales as a percentage of totalproduct sales has fluctuated due primarily to a reduction in purchases ofOXANDRIN by BTG’s distributor in the U.S. from April 1999 through May 2000 andincreased sales of OXANDRIN to BTG’s distributor in the U.S. in the second halfof 2000 and the first half of 2001.

 

*Comparison of Years Ended December 31, 2001, 2000 and 1999*

*Revenues***.** Revenues in 2001 increased 27% to$102,246,000 from $80,257,000 in 2000, which represented a 4% decrease from$83,320,000 in 1999. Product sales increased 40% in 2001 to $87,106,000 from$62,149,000 in 2000, which itself was a 3% increase from 1999 product sales of$60,332,000. The changes in revenues between 1999, 2000 and 2001 were primarilydriven by changes in product sales, principally OXANDRIN, and contract fees.

Sales of OXANDRIN in 2001, 2000 and 1999were approximately $47,150,000, $32,187,000, and $22,935,000, respectively,representing 54%, 52% and 38%, respectively, of BTG’s total product sales inthose periods.  Sales of OXANDRIN toAccredo in 2001, 2000 and 1999 were $38,775,000, $30,885,000 and $22,708,000,net, respectively, representing 82%, 96% and 99%, respectively, of BTG’s totalsales of OXANDRIN.  In 2001 sales ofOXANDRIN increased $14,963,000, or 46%, from 2000 sales.  Sales of OXANDRIN increased $23,167,000 inthe first half of 2001 due to: (i) the commencement, in September 2000, ofsales by the Ross Products Division of Abbott Laboratories for the long-termcare market for the treatment of patients with involuntary weight loss,including stocking activity by wholesalers in connection with the launch ofthis product in the long-term care market; (ii) stocking by certain wholesalersin anticipation of a price increase; (iii) increased purchases by Accredofollowing its completion, in May 2000, of a reduction in the amount of OXANDRINinventory it carries, which reduction began in April 1999; and (iv) increasedwholesaler sales of OXANDRIN by Accredo. Sales of OXANDRIN in the second half of 2001 decreased $8,204,000 fromthe comparable period in 2000 due to Accredo’s increased purchases of OXANDRINin the second half of 2000 following completion of its inventory reduction anddecreased purchases in the second half of 2001 to reduce inventory.  In 2000 sales of OXANDRIN increased$9,252,000, or 40%, as Accredo completed the reduction in the amount ofOXANDRIN inventory it carried in May 2000.

 

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Sales of hGH in 2001, 2000 and 1999 wereapproximately $23,862,000, $20,585,000 and $18,004,000, respectively,representing 27%, 33% and 30%, respectively, of BTG’s total product sales inthose periods.  Sales of human growthhormone increased in 2001 by $3,277,000, or 16%, over 2000 sales.  Sales of human growth hormone increased in2000 by $2,581,000, or 14%, over 1999 sales. The increase in sales of hGH in 2001 and 2000 was mainly due to increasedsales to JCR and Ferring.  Sales of hGHto JCR in 2001, 2000 and 1999 were approximately $16,292,000, $12,975,000 and$10,507,000, respectively, representing 19%, 21% and 17%, respectively, ofBTG’s total product sales in those periods and 68%, 63% and 58%, respectively,of BTG’s total hGH sales in those periods. Sales of hGH to the Ferring Group were approximately $5,889,000,$4,812,000 and $3,619,000 in 2001, 2000 and 1999, respectively, representing7%, 8% and 6%, respectively, of BTG’s total product sales in those periods and25%, 23% and 20%, respectively, of BTG’s total hGH sales in those periods.

Sales of Delatestryl and BioLon increased in2001 by $4,671,000 and $2,110,000, or 181% and 34%, respectively, from 2000levels.  In 2000 sales of DELATESTRYLand BIOLON decreased $7,523,000 and $2,443,000, or 74% and 29%, respectively,from 1999 levels.  We had no sales ofDELATESTRYL in the second and third quarters of 2000.  DELATESTRYL sales increased substantially in 1999 when the FDAstopped the production of a competing injectable testosterone product used totreat men with hypogonadism (testosterone deficiency).  The decrease in sales of DELATESTRYL in 2000relates to Accredo’s election to reduce its DELATESTRYL inventory inanticipation of the FDA’s again permitting the production of the competinginjectable testosterone product. Increased sales of DELATESTRYL in 2001 resulted from the fact that theFDA has yet to approve production of this competing product.  The decrease in sales of BIOLON in 2000 wasprimarily the result of a halt in product shipments to the U.S. beginning inthe first quarter of 2000 pending FDA approval of a supplemental applicationrelating to an upgrade in BTG’s manufacturing process to conform it to a higherstandard of quality implemented by BTG. BTG resumed shipments to the U.S. in the first quarter of 2001, althoughshipments again stopped in the fourth quarter of 2001 as the FDA was not ableto inspect the new manufacturing facility of BTG’s contract sterilizer forBIOLON due to the violence in Israel until August 2002.

For the year ended December 31, 2001contract fees were $1,656,000, which represent contract fees received in priorperiods but recognized in 2001 in accordance with SAB 101. For the years endedDecember 31, 2000 and 1999, contract fees, which consist of licensing andoption to license fees, amounting to $5,542,000 and $14,848,000, or 7% and 18%,respectively, of total revenues, were earned from certain of BTG’scollaborative partners.  Of the contractfees earned in 2000, $2,500,000, or 45% of total contract fees, was earned as amilestone payment under BTG’s strategic alliance with Teva focusing on thedevelopment and global commercialization of several generic recombinanttherapeutic products and the license of distribution rights in the UnitedStates for BTG’s hGH, and $1,475,000, or 27% of total contract fees, was earnedin respect of the BIO-HEP-B vaccine. Under SAB 101, contract fees in 2000 include $853,000 of contract feespaid in prior periods, or 15% of total contract fees, as well as $313,000, or6% of total contract fees, of the $5,000,000 received in 2000 in respect ofARTHREASE; the remaining $4,687,000 of this fee has been deferred in accordancewith SAB 101.  Of the contract feesearned in 1999, $10,000,000, or 67% of total contract fees, was earned inrespect of BTG’s strategic alliance with Teva, and $4,197,000, or 28% of totalcontract fees, was earned in respect of the license of distribution rights forInsulin on a substantially worldwide basis. Approximately $10,114,000 of the contract fees earned in 1999 have beenincluded in the cumulative effect of change in accounting principle.  On a *pro forma* basis as if SAB 101 had been ineffect since January 1, 1999, contract fees in 1999 would have been $5,270,000,or 7% of total revenues.

*Royalties*in 2001, 2000 and 1999 consist mainly of net royalties in respect of theMIRCETTE product in the amount of $3,817,000, $3,139,000 and $1,761,000,respectively.

*Other revenues*consistprimarily of funding from the Chief Scientist, which represented 100%, 81% and89% of other revenues in the years ended December 31, 2001, 2000 and 1999,respectively.

*Interest income*was $7,472,000, $7,496,000 and $4,633,000 for the years ended December 31,2001, 2000 and 1999, respectively.  In2001 interest income decreased slightly, as the total of cash, cash equivalentsand short-term investments decreased $646,000 from December 31, 2000 toDecember 31, 2001. The decreased cash balances (including short-terminvestment) resulted mainly from the use of approximately $15,603,000, net toacquire Myelos, the use of approximately $22,098,000 to fund construction ofthe Company’s new manufacturing facility in 2001 and the use of $5,000,000 topurchase shares of Omrix, partially offset by cash flow from operations,proceeds from the exercise of options and proceeds from a $20,000,000 loanborrowed to finance construction of the Company’s new manufacturing facility inIsrael. The increase in interest income in 2000 was derived primarily from anincrease in cash balances resulting from option exercises and cash flow fromoperations in 2000.

 

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*Research and Development Expense*.  Expenditures for research anddevelopment were $27,778,000, $25,331,000 and $22,050,000 for the years endedDecember 31, 2001, 2000 and 1999, respectively.  The increase in research and development expenditures in 2001compared to 2000 resulted mainly from the increase in research and developmentpersonnel and legal fees related to patent maintenance and patent interferenceproceedings, as well as the addition of research and development activities forPROSAPTIDE following the acquisition of Myelos, partially offset by decreasedexpenses associated with developing alternate manufacturing sources forOXANDRIN and for a new tablet formulation in 2001 compared to 2000 anddecreased compensation charges in 2001 compared to 2000 arising frommodification of the periods of vesting and exercisability of certain stockoption awards to certain employees and former employees made in connection withthe termination of their employment and post-employment consultingarrangements.  The increase in researchand development expenditures in 2000 was mainly due to the increase in researchand development personnel and other expenses associated with these additionalpersonnel, increased expenses associated with developing an alternatemanufacturing source for OXANDRIN and for a new tablet formulation andcompensation costs associated with the modification of stock options discussedabove, partially offset by a decreased level of grants by BTG for clinicalstudies.

*Cost of Product Sales*.  Cost of product sales was $12,388,000,$9,887,000 and $10,839,000 in the years ended December 31, 2001, 2000 and 1999,respectively.  Cost of product sales asa percentage of product sales was 14%, 16% and 18% in 2001, 2000 and 1999,respectively.  Cost of product sales in2001 increased in absolute terms as a result of increased product sales, butdecreased as a percentage of product sales, primarily as a result of OXANDRINaccounting for a significant portion of the increase in product sales.  Cost of product sales in 2000 decreased,both in absolute terms and as a percentage of revenues, primarily as a resultof increased sales of OXANDRIN and decreased sales of DELATESTRYL andBIOLON.  OXANDRIN has a relatively lowcost of manufacture as a percentage of product sales, while BIOLON has thehighest cost to manufacture as a percentage of product sales.  Cost of product sales as a percentage ofproduct sales varies from year to year and quarter to quarter depending on thequantity and mix of products sold.

*General and Administrative Expense*.  General and administrativeexpense was $10,291,000, $12,685,000 and $12,141,000 in the years endedDecember 31, 2001, 2000 and 1999, respectively.  The decrease in 2001 resulted from the amortization of $2,961,000of negative goodwill resulting from the Myelos acquisition. On a pro formabasis to exclude the effect of the amortization of negative goodwill, generaland administrative expense for 2001 was $13,252,000, an increase of 4% from thecomparable period in 2000. The increase in general and administrative expense(excluding the effect of the amortization of negative goodwill) was primarilydue to increased compensation costs, partially offset by a decrease in legalfees (litigation) as compared to 2000, when legal fees increased primarily dueto the reactivation in the fourth quarter of 1998 of the Company’s declaratoryjudgment action against Genentech in respect of the Company’s human growthhormone product in the United States.

*Marketing and Sales Expense*.  Marketing and sales expense was $17,006,000,$17,614,000 and $16,652,000 in the years ended December 31, 2001, 2000 and1999, respectively.  These expensesprimarily related to the sales and marketing force in the United States thatBTG established principally in the second half of 1995 and during 1996 topromote distribution of OXANDRIN in the United States**. **The decrease in marketing and sales expense in 2001 comparedto last year derived mainly from decreased advertising, promotional and marketresearch activities, partially offset by increased compensation costs.  The increase in 2000 was primarily due toadditional marketing and sales expenses, primarily resulting from increasedpersonnel and increased advertising, promotional and market researchactivities, arising from the growth of BTG’s product sales.

*Commissions and Royalties.*  Commissions and royalties were $1,975,000,$1,879,000 and $3,221,000 in the years ended December 31, 2001, 2000 and 1999,respectively.  These expenses consistprimarily of royalties to entities from which BTG licensed certain of itsproducts and to the Chief Scientist. Commissions and royalties in 1999 included$1,485,000, net of commissions received in respect of Serono’s sales of itshuman growth hormone to Accredo, which commissions we subsequently refundedbecause Accredo was unable to sell most of Serono’s human growth hormoneproduct before it expired.

*Realized and Unrealized Loss on Investment and OtherFinancing Expense. *In 2001 we recognized realized and unrealized capital losses of$9,231,000 on short-term investments that were liquidated in December 2001 andJanuary 2002.  Since January 1, 1996, weearned in excess of $20,000,000 on these investments.  During the fourth quarter of 2001, we determined that the declinein the value of our investment in Omrix was other than temporary and,accordingly, wrote-down the value of this $5,000,000 investment by $3,000,000based on management’s evaluation of current market conditions and Omrix’soperations and forecasts.

 

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*Write-off of In-Process Research and Development Acquired.* In 2001 BTG wrote-off$45,600,000 as in-process research and development acquired relating to theacquisition of Myelos Corporation.  Inconnection with the acquisition BTG allocated $45,600,000 to in-processresearch and development projects of Myelos, representing the estimated fairvalue based on risk-adjusted cash flows of the acquired technology based on anindependent valuation.  At the date ofthe merger the technology acquired in the acquisition was not fullycommercially developed and had no alternative future uses.  Accordingly, the value was expensed as ofthe acquisition date.

*Income Taxes*.  Provision for income taxes for the yearsended December 31, 2001, 2000 and 1999 was $4,733,000, $3,798,000 and$4,821,000, respectively, representing approximately 27.1% (on a pro formabasis excluding the write-off of in-process research and development acquiredand amortization of negative goodwill, which are not taken into account incomputing income taxes), 29.8% and 26.4% of income before income taxes.  BTG’s consolidated tax rate differs from thestatutory rate because of Israeli tax benefits, research and experimental taxcredits, state and local taxes and similar items that affect the tax rate.  In 2001 BTG recorded a provision foradditional taxes as a result of a tax audit that BTG-Israel was undergoingcovering the 1997 through 2000 tax years. The tax audit was settled in the second quarter of 2002, and anadditional $320,000 of tax was accrued at that time.

*Earnings per Common Share.* BTG had approximately 2.9 million additionalbasic weighted average shares outstanding for the year ended December 31, 2001as compared to the same period in 2000. The increased number of basic shares was primarily the result of theissuance in 2001 of shares upon the exercise of options and the issuance ofapproximately 2.3 million shares to the former shareholders of Myelos in March2001.  For 2001 diluted weighted averageshares outstanding does not include dilutive securities because the effectwould be anti-dilutive.

On a pro-forma basis, excluding thewrite-off of in-process research and development acquired, amortization ofnegative goodwill, the realization of capital losses on short-term investmentsand the partial write-off of the Omrix investment, net income would have been$20,430,000, or $0.36 per share  and$0.35 per share, respectively, on a basic and diluted share basis.  Diluted weighted average shares outstandingwould have been 58,528,000, an increase of approximately 1.3 million sharesfrom 2000, primarily as a result of the higher basic weighted average sharesoutstanding for 2001, partially offset by the fact that less outstandingoptions were considered common equivalents because their exercise price wasabove the average fair market value of the common stock for 2001, which averagefair market value was lower than in the same period last year.

*Cumulative Effect of Change in Accounting Principle*.  Effective January 1, 2000, BTGadopted SAB 101.  As a result ofadopting SAB 101, BTG changed the way it recognizes revenue from contract feesfor the license of marketing and distribution rights where the consideration isa one-time nonrefundable payment.  Priorto the issuance of SAB 101, BTG recorded revenue from the license of marketingand distribution rights when the rights were licensed and/or when thesepayments were received.  EffectiveJanuary 1, 2000, BTG recorded a cumulative effect of a change in accountingprinciple related to contract revenues recognized in prior years in the amountof $12,558,000, net of income taxes of $4,380,000, of which $853,000 was recognizedas contract fee revenue in 2000.  Therelated revenues are now being recognized over the estimated term of therelated agreements.

 

**Liquidity and CapitalResources**

Our working capital at December 31, 2001,was $139,472,000 as compared to $154,089,000 at December 31, 2000.  The decrease in working capital at December31, 2001 was primarily due to a decrease in accounts receivable as BTGshortened the average terms of payment to its customers.

Our cash flows have fluctuated significantlydue to the impact of net income, capital spending, working capitalrequirements, the issuance of common stock and other financing activities.  BTG expects that cash flows in the nearfuture will be primarily determined by the levels of net income, workingcapital requirements and financings, if any, undertaken by BTG.  Net cash increased by $49,098,000,$7,650,000, and $9,272,000 in the years ended December 31, 2001, 2000 and 1999,respectively.  The large increase in2001 was primarily due to the sale of short-term investments.

Net cash provided by operating activitieswas $37,760,000, $15,267,000 and $46,405,000 in the years ended December 31,2001, 2000 and 1999, respectively.  Net(loss) income was $(29,926,000), $765,000 and $13,408,000 in the same periods,respectively.  In 2001 we had net cashprovided by operating activities despite the net loss, mainly due to thewrite-off of in-process research and development acquired of 

 

16

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$45,600,000, adecrease in accounts receivable of $14,572,000, an unrealized loss oninvestments, net of $8,963,000, an increase in accounts payable of $5,178,000,depreciation and amortization of $2,937,000, a realized loss on the sale ofshort-term investments, net of $1,735,000, and compensation expense of$1,024,000 resulting from the modification of options previously granted,partially offset by an increase in inventories of $3,875,000, an increase indeferred income tax of $3,957,000, amortization of negative goodwill of$2,961,000 and deferred revenues of $1,656,000.  In 2000 net cash provided by operating activities was greaterthan net income, mainly due to the cumulative effect of the accounting changeresulting from the adoption of SAB 101 of $8,178,000 (net of income taxes),deferred revenues of $3,834,000, depreciation and amortization of $2,861,000and compensation expense of $1,592,000 resulting from the modification ofoptions previously granted, partially offset by an increase in inventories andaccounts receivable of $1,256,000 and $973,000, respectively.  In 1999 net cash provided by operatingactivities was greater than net income, mainly due to a decrease in accountsreceivable of $30,260,000, depreciation and amortization of $3,014,000 and anincrease of accounts payable of $2,343,000, partially offset by an increase ininventories of $5,925,000.

Net cash provided by (used in) investingactivities was $3,651,000, $(37,401,000) and $(44,145,000) in the years endedDecember 31, 2001, 2000 and 1999, respectively.  Net cash used in investing activities included capitalexpenditures of $23,974,000, $10,913,000 and $11,432,000 in these periods,respectively, consisting of approximately $21,758,000, $8,950,000 and$9,517,000, respectively, for the purchase and reconstruction of a new manufacturingfacility, with the remainder in all periods primarily for laboratory andmanufacturing equipment and infrastructure. In 2001, net cash used in investing activities also includes the$5,000,000 investment in Omrix and $15,603,000, net used in connection with theacquisition of Myelos.  The remainder ofthe net cash used in investing activities, in all periods, was primarily forpurchases and sales of short-term investments.

Net cash provided by financing activitieswas $7,687,000, $29,784,000 and $7,012,000 in the years ended December 31,2001, 2000 and 1999, respectively.  Cashflows from financing activities in 2000 were primarily affected by long-termborrowings of $20,000,000 and proceeds from the issuance of common stock of$9,784,000.  Cash flows from financingactivities in 2001 and 1999 were primarily affected by net proceeds fromissuances of common stock of $7,686,000 and $7,012,000, respectively, in theseperiods.  Net proceeds from the sale ofcommon stock resulted mainly from option exercises.

In April 1999, BTG purchased a manufacturingfacility in Israel for approximately $6,250,000. Construction of a modernproduction facility meeting FDA GMP requirements for drugs, biologics anddevices was completed at the end of 2001, and validation has commenced and isexpected to be completed toward the end of 2002.  BTG will then commence the process validation for productsmanufactured in the existing facility to be transferred to the new facility.  Production of BTG’s products cannot be relocatedto the new facility until the new facility has received all necessaryregulatory approvals, which BTG anticipates will occur by the end of 2003.  We expect it will cost approximately$40,000,000 to complete the production facility (excluding the cost ofpurchasing the facility), of which approximately $33,975,000 had been expendedthrough December 31, 2001.  At December31, 2001, BTG had outstanding commitments of $4,467,000 related to completionof this facility. In addition, BTG has agreed to purchase additional propertyadjacent to the new manufacturing facility for approximately $1,200,000, ofwhich approximately $400,000 has been paid to date.  This property will allow BTG to locate its principal research anddevelopment activities adjacent to our new manufacturing facility.

In June 2000 BTG-Israel entered into a$20,000,000 revolving credit facility with Bank Hapoalim B.M. to finance aportion of the cost of completing its new manufacturing facility.  Short-term borrowings under the facility aredue 12 months from the date of borrowing and long-term borrowings are due fiveyears from the date of borrowing.  Loansunder the facility bear interest at the rate of LIBOR plus 0.5% in the case ofshort-term borrowings and LIBOR plus 1% in the case of long-termborrowings.  Amounts repaid under thefacility can be reborrowed.  The creditfacility is secured by the assets of BTG-Israel and has been guaranteed by BTG.  At December 31, 2001, BTG had outstandinglong-term borrowings of $20,000,000 under the facility.

On September 20, 2002, we agreed to acquireRosemont Pharmaceuticals, Limited, a leader in the UK market for oralformulations of branded non-proprietary drugs. The purchase price of £64,000,000,or approximately $99,100,000 (£61,000,000or approximately $95,000,000 net of Rosemont's anticipated cash balances onclosing), will be paid out of BTG's available cash resources.  The acquisition is expected to close bySeptember 30, 2002.  In connection withthe acquisition, BTG entered into a forward contract for the delivery of £64,000,000 on September 30, 2002 at a cost of $99,123,200 (representingan exchange rate of $1.5488 per £1).

We currently maintain our funds incommercial paper, money market funds and other liquid debt instruments.  See Note 1c and 1d of Notes to ConsolidatedFinancial Statements.

BTG manages its Israeli operations with theobjective of protecting against any material net financial loss in U.S. dollarsfrom the impact of Israeli inflation and currency devaluations on its non-U.S.dollar assets and liabilities.  The costof BTG’s operations in Israel, as expressed in dollars, is influenced by theextent to which any increase in the rate of inflation in Israel is not offset(or is offset on a lagging basis) by a devaluation 

 

17

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of the IsraeliShekel in relation to the U.S. dollar. The rate of inflation (as measured by the consumer price index inIsrael) was approximately 1% in 1999, while the Shekel was devalued by lessthan 1%.  In 2000 there was no change inthe consumer price index and the Shekel’s value in relation to the U.S. dollarincreased by approximately 3%.  In 2001the inflation rate was approximately 1% while the Shekel was devalued by 9%. Asa result, for those expenses linked to the Israeli Shekel, such as salaries andrent, this resulted in corresponding increases in these costs in U.S. dollarterms in 1999 and 2000.  However, in2001, for those expenses this resulted in corresponding decreases in thesecosts in U.S. dollar terms.  To theextent that expenses in Shekels exceed BTG’s revenues in Shekels (which to datehave consisted primarily of research funding from the Chief Scientist andproduct sales in Israel), the devaluations of Israeli currency have been and willcontinue to be a benefit to BTG’s financial condition.  However, should BTG’s revenues in Shekelsexceed its expenses in Shekels in any material respect, the devaluation of theShekel will adversely affect BTG’s financial condition.  Further, to the extent the devaluation ofthe Shekel with respect to the U.S. dollar does not substantially offset theincrease in the costs of local goods and services in Israel, BTG’s financialresults will be adversely affected as local expenses measured in U.S. dollars willincrease.

We believe that our cash resources as ofDecember 31, 2001, together with anticipated product sales and continuedfunding from the Chief Scientist at current levels will be sufficient to fundour ongoing operations for the foreseeable future.  There can, however, be no assurance that product sales will occuras anticipated, that current agreements with third party distributors of ourproducts will not be canceled, that the Chief Scientist will continue toprovide funding at current levels, that we will not use a substantial portionof our cash resources to acquire businesses, products and/or technologies, orthat unanticipated events requiring the expenditure of funds will notoccur.  The satisfaction of BTG’s futurecash requirements will depend in large part on the status of commercializationof BTG’s products, BTG’s ability to enter into additional research anddevelopment and licensing arrangements, and BTG’s ability to obtain additionalequity and debt financing, if necessary. There can be no assurance that BTG will be able to obtain additionalfunds or, if such funds are available, that such funding will be on favorableterms. BTG continues to seek additional collaborative research and developmentand licensing arrange­ments, in order to provide revenue from sales of certainproducts and funding for a portion of the research and development expensesrelating to the products covered, although there can be no assurance that theCompany will be able to obtain such agreements.  See “Item 1.  Business—RiskFactors —We may be unable to obtain any additional capital needed to operateand grow our business” and “—We expect our quarterly results to fluctuate,which may cause volatility in our stock price.”

Below is a table which presents our contractualobligations and commitments at December 31, 2001:

** **
|                                  |   | **Payments  Due by Period** |       |
|---------------------------------------|--------|-----------------------------|------------|
| **Contractual  Obligations**          |   | **Total**                   |       | **Less than  One Year** |   | **1-3 years** |   | **4-5 years** |   | **After 5  years** |   | **Undetermined(3)** |   |
| Long-term debt                        |   | $                           | 20,000,000 |   | $ | 1,111,000 |   | $ | 13,334,000 |   | $ | 5,555,000 |   | — |   | — |   |
| Capital lease obligations             |   | $                           | 130,000    |   | $ | 123,000 |   | $ | 7,000 |   | — |   | — |   | — |   |
| Operating leases (1)                  |   | $                           | 2,399,000  |   | $ | 1,728,000 |   | $ | 671,000 |   | — |   | — |   | — |   |
| Unconditional purchase commitments(2) |   | $                           | 4,467,000  |   | $ | 4,467,000 |   | — |   | — |   | — |   | — |   |
| Other long-term obligations (3)       |   | $                           | 2,845,000  |   | — |   | — |   | — |   | — |   | $ | 2,845,000 |   |
| Total contractual cash obligations    |   | $                           | 29,841,000 |   | $ | 7,429,000 |   | $ | 14,012,000 |   | $ | 5,555,000 |   | — |   | $ | 2,845,000 |   |

 

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(1) BTG’s lease of its headquarters in the United States expires in October2003.  The table does not reflect BTG'slease of new U.S. headquarters' space, entered into in June 2002.  The new lease provides for an average annualrent of $444,000 and expires in June 2012.

(2) Consists of commitments relating to the construction of BTG’s newmanufacturing facility in Israel.

(3) Consists of severance benefits payable under Israeli law.  Because these benefits are paid only upontermination of employment, it is not possible to allocate the liability acrossfuture years.

 

 

18

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**New Accounting Pronouncements**

In June 2001, the FASB approved SFAS Nos.141 and 142 entitled “Business Combinations” and “Goodwill and Other IntangibleAssets”, respectively.  SFAS No. 141,among other things, eliminates the pooling of interests method of accountingfor business acquisitions entered into after June 30, 2001.  SFAS No. 142 requires companies to use afair-value approach to determine whether there is an impairment of existing andfuture goodwill.  SFAS No. 141 isapplied to all business combinations initiated after June 30, 2001.  SFAS No. 142 is effective for fiscal yearsbeginning after December 15, 2001.  As aresult of the adoption of SFAS No. 142, beginning in 2002 we will no longeramortize the negative goodwill resulting from the Myelos acquisition, whichreduced general and administrative expense by approximately $1,000,000 perquarter for financial reporting purposes. Under SFAS No. 142, the negative goodwill balance of $15,953,000 remainingat December 31, 2001 will be maintained on the Balance Sheet as a deferredcredit until it is either netted against the contingent payments, if any, madeto the former Myelos shareholders or reflected in net income as anextraordinary item should the contingent payments not become due.  The adoption of SFAS No. 141 had no impacton BTG’s consolidated financial statements. The only impact of the adoption of SFAS No. 142 on BTG’s consolidatedfinancial statements is that the negative goodwill recorded in connection withthe Myelos acquisition will no longer be amortized.  The amortization of negative goodwill during 2001 reduced ourreported general and administrative expense.

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This statementis effective for fiscal years beginning after June 15, 2002.  We are currently assessing the impact ofthis new standard, although we do not expect it to affect our results ofoperations.

In July 2001, the FASB issued SFAS No. 144,“Impairment or Disposal of Long-Lived Assets,” which is effective for fiscalyears beginning after December 15, 2001. The provisions of this statement provide a single accounting model forimpairment of long-lived assets.  We arecurrently assessing the impact of this new standard, although we do not expectit to affect our results of operations.

 

**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk is the exposure to lossresulting from changes in interest rates, foreign currency exchange rates,commodity prices and equity prices.  Todate our exposure to market risk has been limited.  Other than one foreign currency exchange rate hedge, we do notcurrently hedge any market risk, although we may do so in the future.  We do not hold or issue any derivativefinancial instruments for trading or other speculative purposes.  In early 2002, BTG purchased forwardcontracts in the amount of $3,000,000 to hedge part of its commitments inIsraeli Shekels, primarily salaries, by locking in the Shekel/U.S. Dollarexchange rate, which had become more volatile in recent months.  All of these contracts matured by July 1,2002.

Our obligations under our $20,000,000revolving credit facility bear interest at floating rates and, therefore, weare impacted by changes in prevailing interest rates.  A 100 basis point increase in market interest rates on the$20,000,000 outstanding under this facility at December 31, 2001 would resultin an increase in our annual interest expense of $200,000.  Because these borrowings relate to theconstruction of our new facility, which is not yet ready for its intended use,interest expense is currently being capitalized.

Our material interest bearing assets consistof cash and cash equivalents and short–term investments, which currentlyconsist primarily today of investments in commercial paper and timedeposits.  Our interest income issensitive to changes in the general level of interest rates, primarily U.S.interest rates and other market conditions.

As discussed above under “—Liquidity andCapital Resources,” we manage our Israeli operations with the objective ofprotecting against any material net financial loss in U.S. dollars from theimpact of Israeli inflation and currency devaluations on its non–U.S.dollar assets and liabilities.  All ofBTG’s revenues are in U.S. dollars except for payments from the Chief Scientistand sales of our products in Israel, which are denominated in Israeli Shekels.

 

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Index toConsolidated Financial Statements

 

 
| Independent Auditors’  Report                               |   |   |
|------------------------------------------------------------------|--------|--------|
|                                                             |   |   |
| Consolidated Financial Statements:                               |   |   |
|                                                             |   |   |
| Consolidated Balance Sheets  as of                               |   |   |
| December 31, 2000 and 2001                                       |   |   |
|                                                             |   |   |
| Consolidated  Statements of Operations for the                   |   |   |
| years ended  December 31, 1999, 2000 and 2001                    |   |   |
|                                                             |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity |   |   |
| for  the years ended December 31, 1999, 2000 and 2001            |   |   |
|                                                             |   |   |
| Consolidated  Statements of Cash Flows for                       |   |   |
| the years ended  December 31, 1999, 2000 and 2001                |   |   |
|                                                             |   |   |
| Notes to  Consolidated Financial Statements                      |   |   |

 

 

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Independent Auditors’ Report

 

To the Board ofDirectors and StockholdersBio-Technology General Corp.:

 

We have audited the accompanyingconsolidated balance sheets of Bio-Technology General Corp. and subsidiaries asof December 31, 2000 and 2001, and the related consolidated statements ofoperations, changes in stockholders’ equity and cash flows for each of theyears in the three-year period ended December 31, 2001. These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Bio-Technology General Corp. and subsidiaries as ofDecember 31, 2000 and 2001, and the results of their operations and their cashflows for each of the years in the three-year period ended December 31, 2001,in conformity with accounting principles generally accepted in the UnitedStates of America.

As discussed in Note 1k to the consolidatedfinancial statements, the Company changed its method of revenue recognition forcertain up-front nonrefundable fees in 2000.

As discussed in Note 2 to the consolidatedfinancial statements, the Company has restated its consolidated financialstatements for the years ended December 31, 1999, 2000 and 2001, whichconsolidated financial statements were previously audited by other independentauditors.

 

 

KPMG LLP

 

Princeton,New Jersey

September 20, 2002

 

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CONSOLIDATED BALANCESHEETS

(Restated, see note 2)

(in thousands, except share data)
|                                                                                                               |   | **December  31,** |    |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                               |   | **2000**          |    | **2001** |   |
| ASSETS                                                                                                             |   |              |    |   |   |
| Current Assets:                                                                                                    |   |              |    |   |   |
| Cash and cash equivalents                                                                                          |   | $                 | 26,353  |   | $ | 75,451 |   |
| Short-term investments                                                                                             |   | 93,217            |    | 43,473 |   |
| Accounts receivable, net                                                                                           |   | 38,804            |    | 24,538 |   |
| Inventories                                                                                                        |   | 10,265            |    | 14,140 |   |
| Deferred income taxes                                                                                              |   | 2,445             |    | 5,079 |   |
| Prepaid expenses and other                                                                                         |   | 989               |    | 1,167 |   |
| Total current assets                                                                                               |   | 172,073           |    | 163,848 |   |
|                                                                                                               |   |              |    |   |   |
| Accounts receivable — trade                                                                                   |   | 306               |    | — |   |
| Severance pay funded                                                                                               |   | 2,321             |    | 2,385 |   |
| Deferred income taxes                                                                                              |   | 5,936             |    | 14,687 |   |
| Property and equipment, net                                                                                        |   | 27,819            |    | 51,059 |   |
| Intangibles, net of accumulated amortization of $6,138 in 2000 and  $6,675 in 2001                                 |   | 800               |    | 266 |   |
| Other assets                                                                                                       |   | 705               |    | 2,841 |   |
| Total assets                                                                                                       |   | $                 | 209,960 |   | $ | 235,086 |   |
|                                                                                                               |   |              |    |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                          |   |              |    |   |   |
| Current Liabilities:                                                                                               |   |              |    |   |   |
| Accounts payable                                                                                                   |   | $                 | 5,176   |   | $ | 10,328 |   |
| Deferred revenues                                                                                                  |   | 1,653             |    | 1,646 |   |
| Current portion of long-term debt                                                                                  |   | —            |    | 1,234 |   |
| Other current liabilities                                                                                          |   | 11,155            |    | 11,168 |   |
| Total current liabilities                                                                                          |   | 17,984            |    | 24,376 |   |
|                                                                                                               |   |              |    |   |   |
| Long-term debt                                                                                                     |   | 20,000            |    | 18,896 |   |
| Deferred revenues                                                                                                  |   | 14,738            |    | 13,092 |   |
| Severance pay                                                                                                      |   | 4,593             |    | 5,229 |   |
| Negative goodwill                                                                                                  |   | —            |    | 15,953 |   |
|                                                                                                               |   |              |    |   |   |
| Commitments and contingent liabilities                                                                             |   |              |    |   |   |
|                                                                                                               |   |              |    |   |   |
| 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:  54,765,000 in 2000, 58,260,000 in 2001 |   | 547               |    | 582 |   |
| Additional paid in capital                                                                                         |   | 183,705           |    | 212,408 |   |
| Accumulated deficit                                                                                                |   | (25,644           | )       | (55,570 | ) |
| Accumulated other comprehensive (loss) income                                                                      |   | (5,963            | )       | 120 |   |
| Total stockholders’ equity                                                                                    |   | 152,645           |    | 157,540 |   |
| Total liabilities and stockholders’ equity                                                                    |   | $                 | 209,960 |   | $ | 235,086 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OFOPERATIONS(Restated,  see note 2)

 

(in thousands, except pershare data)

 
|                                                                                       |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                       |   | **Historical**               |   | **Pro Forma*** |   |
|                                                                                       |   | **1999**                     |   | **2000** |   | **2001** |   | **1999** |   |
| Revenues:                                                                                  |   |                         |   |   |   |   |   |   |   |
| Product sales                                                                              |   | $                            | 60,332 |   | $ | 62,149 |   | $ | 87,106 |   | $ | 60,332 |   |
| Contract fees                                                                              |   | 14,848                       |   | 5,542 |   | 1,656 |   | 5,270 |   |
| Royalties                                                                                  |   | 1,761                        |   | 3,139 |   | 3,817 |   | 1,761 |   |
| Other revenues                                                                             |   | 1,746                        |   | 1,931 |   | 2,195 |   | 1,746 |   |
| Interest                                                                                   |   | 4,633                        |   | 7,496 |   | 7,472 |   | 4,633 |   |
|                                                                                       |   | 83,320                       |   | 80,257 |   | 102,246 |   | 73,742 |   |
| Expenses:                                                                                  |   |                         |   |   |   |   |   |   |   |
| Research and development                                                                   |   | 22,050                       |   | 25,331 |   | 27,778 |   | 22,050 |   |
| Cost of product sales                                                                      |   | 10,839                       |   | 9,887 |   | 12,388 |   | 10,839 |   |
| General and administrative                                                                 |   | 12,141                       |   | 12,685 |   | 10,291 |   | 12,141 |   |
| Marketing and sales                                                                        |   | 16,652                       |   | 17,614 |   | 17,006 |   | 16,652 |   |
| Commissions and royalties                                                                  |   | 3,221                        |   | 1,879 |   | 1,975 |   | 3,221 |   |
| Realized and unrealized loss on investment and other financing  expense                    |   | 188                          |   | 120 |   | 12,401 |   | 188 |   |
| Write-off of in-process research and development acquired                                  |   | —                       |   | — |   | 45,600 |   | — |   |
|                                                                                       |   | 65,091                       |   | 67,516 |   | 127,439 |   | 65,091 |   |
| Income (loss) before income taxes and cumulative effect of change in  accounting principle |   | 18,229                       |   | 12,741 |   | (25,193 | ) | 8,651 |   |
| Income tax expense                                                                         |   | 4,821                        |   | 3,798 |   | 4,733 |   | 1,373 |   |
| Income (loss) before cumulative effect of change in accounting  principle                  |   | 13,408                       |   | 8,943 |   | (29,926 | ) | 7,278 |   |
| Cumulative effect of change in accounting  principle, net of income taxes of $4,380   |   | —                       |   | (8,178 | ) | — |   | — |   |
| Net income (loss)                                                                          |   | $                            | 13,408 |   | $ | 765 |   | $ | (29,926 | ) | $ | 7,278 |   |
|                                                                                       |   |                         |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                                          |   |                         |   |   |   |   |   |   |   |
| Basic:                                                                                     |   |                         |   |   |   |   |   |   |   |
| Income (loss) before cumulative   effect of change in accounting   principle     |   | $                            | 0.26   |   | $ | 0.16 |   | $ | (0.52 | ) | $ | 0.14 |   |
| Cumulative effect of change in accounting principle                                        |   | —                       |   | (0.15 | ) | — |   | — |   |
| Net income (loss)                                                                          |   | $                            | 0.26   |   | $ | 0.01 |   | $ | (0.52 | ) | $ | 0.14 |   |
| Diluted:                                                                                   |   |                         |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of change in accounting  principle                  |   | $                            | 0.25   |   | $ | 0.15 |   | $ | (0.52 | ) | $ | 0.13 |   |
| Cumulative effect of change in accounting principle                                        |   | —                       |   | (0.14 | ) | — |   | — |   |
| Net income (loss)                                                                          |   | $                            | 0.25   |   | $ | 0.01 |   | $ | (0.52 | ) | $ | 0.13 |   |
| Weighted average number of common and common equivalent shares:                            |   |                         |   |   |   |   |   |   |   |
| Basic                                                                                      |   | 52,348                       |   | 54,320 |   | 57,230 |   | 52,348 |   |
| Diluted                                                                                    |   | 54,191                       |   | 56,885 |   | 57,230 |   | 54,191 |   |

 

----

* See Note 1k

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

23

----

 

CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

(in thousands)

 
|                                                               |   | **Common  Stock** |   |          |   |                            |   |                     |   |                |    |                                               |   |
|--------------------------------------------------------------------|--------|-------------------|--------|---------------|--------|---------------------------------|--------|--------------------------|--------|---------------------|---------|----------------------------------------------------|--------|
|                                                               |   | **Shares**        |   | **Par Value** |   | **Additional  Paid In Capital** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |    | **Accumulated  other comprehensive income (loss)** |   | **Total  Stockholders’ Equity** |   |
| **Balance,  December 31, 1998, as reported**                       |   | 51,934            |   | $             | 519    |                            | $      | 161,164                  |   | $                   | (36,396 | )                                                  | $      | (340 | ) | $ | (1,970 | ) | $ | 122,977 |   |
| Effect of restatement                                              |   | —            |   | —        |   | 2,209                           |   | (3,421                   | )      | —              |    | —                                             |   | (1,212 | ) |
| **Balance,  December 31, 1998, as restated***                      |   | 51,934            |   |          | 519    |                            |   | 163,373                  |   |                | (39,817 | )                                                  |   | (340 | ) |   | (1,970 | ) |   | 121,765 |   |
| Comprehensive income:                                              |   |              |   |          |   |                            |   |                     |   |                |    |                                               |   |   |   |
| Net income*                                                        |   |              |   |          |   |                            |   | 13,408                   |   |                |    |                                               |   | 13,408 |   |
| Unrealized loss on marketable securities, net                      |   |              |   |          |   |                            |   |                     |   |                |    | (2,548                                             | )      | (2,548 | ) |
| Total comprehensive income*                                        |   |              |   |          |   |                            |   |                     |   |                |    |                                               |   | 10,860 |   |
| Issuance of common stock                                           |   | 259               |   | 3             |   | 1,380                           |   |                     |   |                |    |                                               |   | 1,383 |   |
| Tax benefit derived from exercise   of stock options          |   |              |   |          |   | 521                             |   |                     |   |                |    |                                               |   | 521 |   |
| Compensation expense in connection with options modification*      |   |              |   |          |   | 318                             |   |                     |   |                |    |                                               |   | 318 |   |
| Exercise of stock options                                          |   | 1,087             |   | 11            |   | 5,678                           |   |                     |   |                |    |                                               |   | 5,689 |   |
| **Balance,  December 31, 1999***                                   |   | 53,280            |   | 533           |   | 171,270                         |   | (26,409                  | )      | (340                | )       | (4,518                                             | )      | 140,536 |   |
| Comprehensive income:                                              |   |              |   |          |   |                            |   |                     |   |                |    |                                               |   |   |   |
| Net income*                                                        |   |              |   |          |   |                            |   | 765                      |   |                |    |                                               |   | 765 |   |
| Unrealized loss on marketable securities, net                      |   |              |   |          |   |                            |   |                     |   |                |    | (1,445                                             | )      | (1,445 | ) |
| Total comprehensive loss*                                          |   |              |   |          |   |                            |   |                     |   |                |    |                                               |   | (680 | ) |
| Issuance of common stock                                           |   | 345               |   | 3             |   | 1,926                           |   |                     |   |                |    |                                               |   | 1,929 |   |
| Cancellation of treasury stock                                     |   | (83               | )      | (1            | )      | (339                            | )      |                     |   | 340                 |    |                                               |   | — |   |
| Tax benefit derived from exercise   of stock options          |   |              |   |          |   | 1,353                           |   |                     |   |                |    |                                               |   | 1,353 |   |
| Compensation expense in connection with options modification*      |   |              |   |          |   | 1,592                           |   |                     |   |                |    |                                               |   | 1,592 |   |
| Exercise of stock options                                          |   | 1,223             |   | 12            |   | 7,903                           |   |                     |   |                |    |                                               |   | 7,915 |   |
| **Balance,  December 31, 2000***                                   |   | 54,765            |   | 547           |   | 183,705                         |   | (25,644                  | )      | —              |    | (5,963                                             | )      | 152,645 |   |
| Comprehensive income:                                              |   |              |   |          |   |                            |   |                     |   |                |    |                                               |   |   |   |
| Net loss*                                                          |   |              |   |          |   |                            |   | (29,926                  | )      |                |    |                                               |   | (29,926 | ) |
| Unrealized loss on marketable securities, net                      |   |              |   |          |   |                            |   |                     |   |                |    | (1,110                                             | )      | (1,110 | ) |
| Reclassification adjustment for realized loss included in net loss |   |              |   |          |   |                            |   |                     |   |                |    | 7,193                                              |   | 7,193 |   |
| Total comprehensive loss*                                          |   |              |   |          |   |                            |   |                     |   |                |    |                                               |   | (23,843 | ) |
| Issuance of common stock in Myelos acquisition                     |   | 2,345             |   | 23            |   | 19,009                          |   |                     |   |                |    |                                               |   | 19,032 |   |
| Issuance of common stock                                           |   | 277               |   | 3             |   | 1,994                           |   |                     |   |                |    |                                               |   | 1,997 |   |
| Tax benefit derived from exercise of stock options                 |   |              |   |          |   | 925                             |   |                     |   |                |    |                                               |   | 925 |   |
| Compensation expense in connection with options modification*      |   |              |   |          |   | 1,024                           |   |                     |   |                |    |                                               |   | 1,024 |   |
| Exercise of stock options                                          |   | 873               |   | 9             |   | 5,751                           |   |                     |   |                |    |                                               |   | 5,760 |   |
| **Balance,  December 31, 2001***                                   |   | 58,260            |   | $             | 582    |                            | $      | 212,408                  |   | $                   | (55,570 | )                                                  | — |   | $ | 120 |   | $ | 157,540 |   |

----

* Restated, see note 2.

The accompanying notes are an integral partof these consolidated financial statements.

 

24

----

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Restated,  see note 2)

 

(in thousands)

 
|                                                                                         |                                      | **Year Ended  December 31,** |   |
|----------------------------------------------------------------------------------------------|-------------------------------------------|------------------------------|--------|
|                                                                                         |                                      | **1999**                     |   | **2000** |   | **2001** |   |
| **Cash  flows from operating activities**:                                                   |                                      |                         |   |   |   |   |   |
| Net income (loss)                                                                            |                                      | $                            | 13,408 |   | $ | 765 |   | $ | (29,926 | ) |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |                                      |                         |   |   |   |   |   |
| Cumulative effect of accounting change, net                                                  |                                      | —                       |   | 8,178 |   | — |   |
| Deferred income tax                                                                          |                                      | 1,121                        |   | 140 |   | (3,957 | ) |
| Depreciation and amortization                                                                |                                      | 3,014                        |   | 2,861 |   | 2,937 |   |
| Write-off of in-process research and development acquired                                    |                                      | —                       |   | — |   | 45,600 |   |
| Compensation expense in connection with option modification                                  |                                      | 318                          |   | 1,592 |   | 1,024 |   |
| Amortization of negative goodwill                                                            |                                      | —                       |   | — |   | (2,961 | ) |
| Unrealized loss on investments, net                                                          |                                      | —                       |   | — |   | 8,963 |   |
| Provision for severance pay                                                                  |                                      | 515                          |   | 260 |   | 636 |   |
| Deferred revenues                                                                            |                                      | —                       |   | 3,834 |   | (1,656 | ) |
| (Gain) loss on disposal of property and equipment                                            |                                      | (4                           | )      | (29 | ) | 10 |   |
| Realized loss on sales of short-term investments, net                                        |                                      | 441                          |   | 446 |   | 1,735 |   |
| Common stock as payment for services                                                         |                                      | 60                           |   | 60 |   | 70 |   |
| Changes in:                                                                                  | accounts receivable                       |                         | 30,260 |   | (973 | ) | 14,572 |   |
|                                                                                         | inventories                               |                         | (5,925 | ) | (1,256 | ) | (3,875 | ) |
|                                                                                         | prepaid expenses and other current assets |                         | 124    |   | (769 | ) | (405 | ) |
|                                                                                         | accounts payable                          |                         | 2,343  |   | 174 |   | 5,178 |   |
|                                                                                         | other current liabilities                 |                         | 730    |   | (16 | ) | (185 | ) |
| Net cash provided by operating activities                                                    |                                      | 46,405                       |   | 15,267 |   | 37,760 |   |
| **Cash  flows from investing activities:**                                                   |                                      |                         |   |   |   |   |   |
| Purchases of short-term investments                                                          |                                      | (53,501                      | )      | (48,738 | ) | (10,407 | ) |
| Capital expenditures                                                                         |                                      | (11,432                      | )      | (10,913 | ) | (23,974 | ) |
| Intangibles                                                                                  |                                      | (150                         | )      | — |   | — |   |
| Severance pay funded                                                                         |                                      | (136                         | )      | 48 |   | (64 | ) |
| Other investments                                                                            |                                      | —                       |   | — |   | (5,000 | ) |
| Other assets                                                                                 |                                      | 1,644                        |   | 126 |   | 69 |   |
| Change in patents                                                                            |                                      | (181                         | )      | (180 | ) | — |   |
| Proceeds from sales of short-term investments                                                |                                      | 19,567                       |   | 22,177 |   | 58,416 |   |
| Net cash paid in acquisition                                                                 |                                      | —                       |   | — |   | (15,603 | ) |
| Proceeds from sales of property and equipment                                                |                                      | 44                           |   | 79 |   | 214 |   |
| Net cash provided by (used in) investing activities                                          |                                      | (44,145                      | )      | (37,401 | ) | 3,651 |   |
| **Cash  flows from financing activities:**                                                   |                                      |                         |   |   |   |   |   |
| Proceeds from issuances of common stock                                                      |                                      | 7,012                        |   | 9,784 |   | 7,687 |   |
| Proceeds from long-term loan                                                                 |                                      | —                       |   | 20,000 |   | — |   |
| Net cash provided by financing activities                                                    |                                      | 7,012                        |   | 29,784 |   | 7,687 |   |
|                                                                                         |                                      |                         |   |   |   |   |   |
| Net increase in cash and cash equivalents                                                    |                                      | 9,272                        |   | 7,650 |   | 49,098 |   |
| Cash and cash equivalents at beginning of year                                               |                                      | 9,431                        |   | 18,703 |   | 26,353 |   |
| Cash and cash equivalents at end of year                                                     |                                      | $                            | 18,703 |   | $ | 26,353 |   | $ | 75,451 |   |

 

25

----

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)

(Restated, see note 2)

 

(in thousands)

 
|                                                      |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------|--------|------------------------------|--------|
|                                                      |   | **1999**                     |   | **2000** |   | **2001** |   |
| **Supplementary  Information:**                           |   |                         |   |   |   |   |   |
| Other information:                                        |   |                         |   |   |   |   |   |
| Interest paid                                             |   | $                            | 11     |   | $ | 269 |   | $ | 1,044 |   |
| Income taxes paid                                         |   | $                            | 3,518  |   | $ | 4,567 |   | $ | 3,937 |   |
| Tax benefit derived from exercise of stock options        |   | $                            | 521    |   | $ | 1,353 |   | $ | 925 |   |
|                                                      |   |                         |   |   |   |   |   |
| **Acquisition  of Myelos Corporation:**                   |   |                         |   |   |   |   |   |
| Assets acquired                                           |   | —                       |   | — |   | $ | 9,141 |   |
| Liabilities assumed                                       |   | —                       |   | — |   | (1,125 | ) |
| Negative goodwill                                         |   | —                       |   | — |   | (18,914 | ) |
| Equity issued                                             |   | —                       |   | — |   | (19,032 | ) |
| In process research and development acquired              |   | —                       |   | — |   | 45,600 |   |
|                                                      |   | —                       |   | — |   | 15,670 |   |
| Less — cash acquired                                 |   | —                       |   | — |   | (67 | ) |
|                                                      |   |                         |   |   |   |   |   |
| Net cash paid                                             |   | $                            | — |   | $ | — |   | $ | 15,603 |   |
|                                                      |   |                         |   |   |   |   |   |
| **Non-cash  activity:**                                   |   |                         |   |   |   |   |   |
| Investment in fixed assets unpaid as of December 31, 2001 |   | $                            | — |   | $ | — |   | $ | 899 |   |

 

 

The accompanying notes are an integral partof these consolidated financial statements.

# ** **

 

26

----

 

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

NOTE1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bio–Technology General Corp. (“BTG”)and its wholly-owned subsidiary, Bio-Technology General (Israel) Ltd.(“BTG-Israel”), were formed in 1980 to research, develop, manufacture andmarket products through the application of genetic engineering and relatedbiotechnologies.

 

a.             Basis of consolidation:

The consolidated financial statementsinclude the accounts of BTG, BTG-Israel and Myelos Corporation (“Myelos”),hereinafter collectively referred to as the “Company”.  All material intercompany transactions andbalances have been eliminated.  Certainprior year amounts have been reclassified to conform to current yearpresentation.

 

b.             Translation of foreign currency:

The functional currency of BTG-Israel is theU.S. dollar.  Accordingly, its accountsare remeasured in dollars, and translation gains and losses (which areimmaterial) are included in the statements of operations.

 

c.             Cash and cash equivalents:

At December 31, 2000 and 2001, cash and cashequivalents included cash of $9,504,000 and $4,334,000, respectively, and moneymarket funds, commercial paper and other liquid short–term debtinstruments (with maturities at date of purchase of ninety days or less) of$16,849,000 and $71,117,000, respectively.

 

d.             Short-term investments:

(i) Short-term investments, which are carried at fair value, consistprimarily of investments in mutual funds and at December 31, 2000 consist alsoof U.S. Treasury and corporate bonds that have been classified as“available-for-sale securities” pursuant to Statement of Financial AccountingStandards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt andEquity Securities.”  Unrealized holdinggains and losses, which are deemed to be temporary, on available-for-salesecurities are excluded from earnings and are reported as a separate componentof other comprehensive income.  Realizedgains and losses from the sale of available-for-sale securities are determinedon a specific identification basis.  Adecline in the market value of an available-for-sale security below cost thatis deemed to be other than temporary is recognized as a charge in theconsolidated statement of operations and a new cost basis for the security isestablished.

At December 31, 2001, management determinedthat the decline in investment value is other than temporary and, accordingly,cost has been adjusted to reflect market value and a loss on impairment ofinvestment of $7,193,000 was recognized and included in the statement ofoperations.  

At December 31, 2000 and 2001, the cost ofthe securities available for sale was $99,180,000 and $40,642,000,respectively.  Gross realized andunrealized losses included in income for the year ended December 31, 2001 was$9,231,000.  There were no realizedlosses in 1999 and 2000.

(ii) Cost basis investment included within other assets represents an equityinvestment of less than 20% in a private entity.  Changes in the value of this investment are not recognized unlessan impairment is deemed to be other than temporary.

 

e.             Inventories:

Inventories are stated at the lower of cost ormarket.  Cost is determined by using theweighted average method.  At December31, 2000 and 2001, inventories include raw materials of $1,324,000 and$1,706,000, work-in-process of $1,499,000 and $1,137,000, and finished goods of$7,442,000 and $11,297,000, respectively.

 

27

----

 

f.              Long-term accounts receivable —trade:

As of December 31, 2000, long-term accountsreceivable — trade consists of amounts owed to the Company by one customer forwhich collection was expected in part by December 31, 2001 and for theremainder by December 31, 2002.  Theamount does not bear interest and as such a discount has been recorded in theconsolidated financial statements.  The$500,000 due by December 31, 2001 was received, and the amount due by December31, 2002 is included in current assets.

 

g.             Property and equipment, net ofaccumulated depreciation and amortization:

Property and equipment are stated atcost.  Depreciation has been calculatedusing the straight–line method over the estimated useful lives of theassets, ranging from 3 to 17 years. Leasehold improvements are amortized over the lives of the respectiveleases, which are shorter than the useful life.  The cost of maintenance and repairs is expensed as incurred.

Land, building and construction-in-progressrepresents building under construction and is stated at cost.  This includes cost of construction under theconstruction contracts, plant and equipment, capitalized interest, labor andother direct costs.  Capitalizedinterest is included under the provision of SFAS No. 34 and totaledapproximately $339,000 and $1,378,000 at December 31, 2000 and 2001,respectively.  Construction-in-progressis not depreciated until such time as the relevant assets are completed andready for their intended use.

 

h.             Intangibles:

Intangibles consist of repurchased rights toone of the Company’s products previously licensed to a third party, and areamortized, using the straight-line method over the shorter of the life of therelated revenue stream or seven years, commencing with the initial sale of therelated product.

 

i.                                          Patents:

Patent costs related to products approved byany regulatory agency worldwide or being sold have been capitalized.Amortization has been calculated using the straight-line method over 17 yearscommencing on the date of grant with respect to each project.

 

j.              Long-lived assets:

The Company’s policy is to record long-livedassets at cost, amortizing these costs over the expected useful lives ofrelated assets.  In accordance with SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of”, these assets are reviewed on a periodic basis forimpairment whenever events or changes in circumstances indicate that thecarrying amounts of the assets may not be recoverable. Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to future undiscounted net cash flows expected to be generated by theasset.  If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.  Management of the Company believes that no suchevent or change has occurred.

 

k.             Revenue recognition:

Product sales are recognized when theproduct is shipped and collectability is probable.

Contract fees consist mainly of license ofmarketing and distribution rights and research and development projects.  Effective January 1, 2000, the Companyadopted Staff Accounting Bulletin 101 (“SAB 101”) issued by the Securities andExchange Commission in December 1999. As a result of adopting SAB 101, the Company changed the way itrecognizes revenue for up-front nonrefundable contract fees for the license ofmarketing and distribution rights. Prior to the issuance of SAB 101, the Company recorded revenue from thelicense of marketing and distribution rights when the rights were licensedand/or when these payments were received. In accordance with SAB 101, the related revenues are now beingrecognized over the estimated term of the related agreements.  Effective January 1, 2000, the Companyrecorded a cumulative effect of 

 

28

----

 

change inaccounting principle related to contract revenues recognized in prior years inthe amount of $12,558,000, net of income taxes of $4,380,000, of which $853,000and $1,156,000 was recognized as contract fee revenue in 2000 and 2001,respectively.

Revenue related to performance milestones isrecognized based upon the achievement of the milestone, as defined in therespective agreements, and when collectability is probable.  Advance payments received in excess ofamounts earned are included in deferred revenue.

Royalties are recognized once agreementexists, the sale is made and the royalty is earned.

Other revenues represent funds received bythe Company for research and development projects that are partially funded bycollaborative partners and the Chief Scientist of the State of Israel,respectively.  The Company recognizesrevenue upon performance of such funded research.  In general, these contracts are cancelable by the Company’scollaborative partners at any time.

The pro forma results of operations of theCompany for the year ended December 31, 1999 have been prepared as if theCompany adopted SAB 101 prior to January 1, 1999.

 

l.              Stock-based compensation:

The Company has adopted SFAS No. 123,“Accounting for Stock Based Compensation”. As permitted under SFAS 123, the Company has elected to followAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations in accounting for itsemployee stock options.  The Company hasprovided the necessary pro forma disclosure as if the fair value method hasbeen applied.  (See note 9.)  Under APB 25, when the exercise price ofemployee stock options equals or exceeds the market price of the underlyingstock on the date of grant, no compensation expense is recorded.

 

m.            Research and development:

All research and development costs areexpensed as incurred.

 

n.             Income taxes:

Deferred income taxes are recognized for thetax consequences of temporary differences by applying the enacted statutory taxrates to differences between the financial statement carrying amounts and thetax bases of existing assets and liabilities.

BTG-Israel files separate income tax returnsand provides for taxes under Israeli regulations.

 

o.             Other comprehensive income (loss):

Other comprehensive income (loss) consistsof unrealized gains (losses) on marketable securities.

 

p.             Earnings per common share:

Net earnings per common share amounts(“basic EPS”) are computed by dividing net earnings by the weighted averagenumber of common shares outstanding and exclude any potential dilution.  Net earnings per common share amountsassuming dilution (“diluted EPS”) are computed by reflecting potential dilutionfrom the exercise of stock options and warrants.

A reconciliation between the numerators anddenominators of the basic and diluted EPS computations for net earnings is asfollows:

 

29

----

 

 
|                                                                           |   | **Year Ended  December 31, 1999**      |   | **Year Ended  December 31, 2000** |   | **Year Ended  December 31, 2001** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                                                           |   | **Income  (Numerator)**                |   | **Shares (Denominator)**          |   | **Per Share  Amounts**            |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amounts** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amounts** |   |
|                                                                           |   | (In  thousands, except per share data) |   |
| **Net  Earnings (Loss)**                                                       |   | $                                      | 13,408 |                              |   |                              |   |   | $ | 765 |   |   |   |   |   | $ | (29,926 | ) |   |   |   |   |
|                                                                           |   |                                   |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic EPS**                                                                  |   |                                   |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to common stock                               |   | 13,408                                 |   | 52,348                            |   | $                                 | 0.26   |   | 765 |   | 54,320 |   | $ | 0.01 |   | (29,926 | ) | 57,230 |   | $ | (0.52 | ) |
|                                                                           |   |                                   |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Effect of  Dilutive Securities**                                             |   |                                   |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                  |   |                                   |   | 1,843                             |   |                              |   |   |   | 2,565 |   |   |   |   |   | — |   |   |   |
|                                                                           |   |                                   |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                                               |   |                                   |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to common stock and assumed option  exercises |   | $                                      | 13,408 |                              | 54,191 |                              | $      | 0.25 |   | $ | 765 |   | 56,885 |   | $ | 0.01 |   | $ | (29,926 | ) | 57,230 |   | $ | (0.52 | ) |

 

 

30

----

 

Options to purchase 697,000 and 732,000 shares of common stock out ofthe total number of options outstanding as of December 31, 1999 and 2000,respectively, are not included in the computation of diluted EPS because oftheir anti-dilutive effect.  In 2001 alloptions outstanding as of December 31, 2001 are excluded from the computation ofdiluted EPS because of their anti-dilutive effect.

 

q.             Use of estimates in preparation offinancial statements:

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  On anongoing basis, we evaluate our estimates, including those related toinvestments, accounts receivable, inventories, property and equipment,intangible assets and income taxes.  Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying value of assetsand liabilities that are not readily apparent from other sources.  Results may differ from these estimates dueto actual outcomes being different from those on which we based ourassumptions.

 

r.              Fair value of financialinstruments:

The carrying amounts of accounts receivableand accounts payable approximate fair value due to the short-term maturity ofthese instruments.  The carrying amountof the long–term debt approximates fair value as the borrowing rates arevariable and are currently available for debt with similar terms andmaturities.

 

s.             Concentration of credit risk:

Financial instruments that potentiallysubject the Company to concentrations of credit risk consist principally ofcash and cash equivalents, short term investments and accounts receivable.  The Company places its short-terminvestments with high quality financial institutions and limits the amount ofcredit exposure to any one institution. Concentration of credit risk with respect to accounts receivable isdiscussed in Note 13.  Generally, theCompany does not require collateral from its customers; however, collateral orother security for accounts receivable may be obtained in certain circumstanceswhen considered necessary.

 

t.              New accounting pronouncements:

In June 2001, the FASB approved SFAS Nos.141 and 142 entitled “Business Combinations” and “Goodwill and Other IntangibleAssets”, respectively.  SFAS No. 141,among other things, eliminates the pooling of interests method of accountingfor business acquisitions entered into after June 30, 2001.  SFAS No. 142 requires companies to use afair-value approach to determine whether there is an impairment of existing andfuture goodwill.  SFAS No. 141 isapplied to all business combinations initiated after June 30, 2001.  SFAS No. 142 is effective for fiscal yearsbeginning after December 15, 2001.  As aresult of the adoption of SFAS No. 142, beginning in 2002 the Company will nolonger amortize the negative goodwill resulting from the Myelos acquisition,which reduced general and administrative expense by approximately $1,000,000per quarter for financial reporting purposes. Under SFAS No. 142, the negative goodwill balance of $15,953,000remaining at December 31, 2001 will be maintained on the Balance Sheet as adeferred credit until it is either netted against the contingent payments, ifany, made to the former Myelos shareholders or reflected in net income as anextraordinary item should the contingent payments not become due.  The adoption of SFAS No. 141 had no impacton the Company’s consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations”. SFAS No. 143 addresses accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This statementis effective for fiscal years beginning after June 15, 2002.  The Company is currently assessing theimpact of this new standard, although it does not expect it to affect itsresults of operations.

In July 2001, the FASB issued SFAS No. 144,“Impairment or Disposal of Long-Lived Assets,” which is effective for fiscalyears beginning after December 15, 2001. The provisions of this statement provide a 

 

31

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single accountingmodel for impairment of long-lived assets. The Company is currently assessing the impact of this new standard,although it does not expect it to affect its results of operations.

 

NOTE 2 – RESTATEMENT OF CONSOLIDATEDFINANCIAL STATEMENTS

The Company has determined to restate itsfinancial statements for each of the years ended December 31, 1999, 2000 and2001.  The principal adjustments arediscussed below.

The accompanying consolidated financialstatements include expenses of $680,000 in 1999, $1,379,000 in 2000 and$1,058,000 in 2001 for development and start-up costs associated withestablishing alternate manufacturing sources for its approved drug Oxandrin andfor a new tablet formulation, which costs were originally capitalized withinother long-term assets.  Theseadjustments are included as a component of research and development in theaccompanying consolidated statement of operations.

In 1999 the Company wrote off $1,894,000 ofmanufacturing development costs associated with a product under development,which costs were originally capitalized, when it terminated research on thisproduct.  These costs have now beenexpensed in the year incurred as a component of research and development inaccordance with SFAS No. 2, Accounting for Research and Development Costs.  The accompanying financial statements havebeen adjusted to eliminate the effect of this write-off from the 1999 consolidatedstatements of operations and to adjust the accumulated deficit as of December31, 1998 to write off this cost, net of tax effect.

The accompanying consolidated financialstatements have been restated to reflect compensation charges of $318,000 in1999, $1,592,000 in 2000 and $1,024,000 in 2001, arising from modification ofthe period of vesting and exercisability of certain stock option awards tocertain employees and former employees made in connection with the terminationof their employment and post-employment consulting arrangements, which expenseshould have been recognized at the time of the modification as a component ofresearch and development and marketing and sales in the accompanyingconsolidated financial statements in accordance with APB Opinion No. 25 andrelated interpretations and SFAS No. 123 and related interpretations.  Additionally, additional paid-in-capital andaccumulated deficit as of December 31, 1998 have each been increased by $2,209,000to reflect the effect of stock option modifications prior to 1999.

The accompanying consolidated financialstatements have been restated to reverse the effect of a 1999 product sale, andthe subsequent inventories repurchase in 2001, to a distributor of $2,000,000and the related cost of goods sold of $385,000 from the 1999 consolidatedfinancial statements because of significant uncertainties concerning therealization of the invoiced amount at the time of sale.

The accompanying consolidated financialstatements have been restated to defer in accordance with the Company's policyunder SAB 101 and amortize over the estimated term of 10 years a $5,000,000up-front contract fee related to a development and distribution agreement thatwas originally recognized in its entirety as revenue in 2000.  The Company originally considered this torepresent a milestone payment.  Theaccompanying consolidated financial statements include contract fee revenuefrom this contract of $313,000 in 2000 and $500,000 in 2001.

The accompanying consolidated financialstatements have been restated to reflect the reestablishment of $844,000 ofproperty and equipment received in connection with Myelos acquisition that waspreviously written off against negative goodwill and subsequent depreciationand amortization of such assets totalling $229,000 and additional amortizationof negative goodwill of $138,000 in 2001. The depreciation and amortization of the Myelos assets are included as acomponent of research and development in the accompanying consolidatedstatement of operations.  Therecognition of the additional amortization of negative goodwill is included asa reduction of general and administrative expense in the accompanying statementof operations.

 

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The following tables present the impact ofthe restatements on a condensed basis (in thousands except per share amounts):

 
|                            |   | **2000**                    |    | **2001**     |   |
|---------------------------------|--------|-----------------------------|---------|--------------|--------|
|                            |   | **As  Previously Reported** |    | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| **Balance  Sheet:**             |   |                        |    |         |   |   |   |   |   |
| Total current assets            |   | $                           | 172,072 |         | $      | 172,073 |   | $ | 163,848 |   | $ | 163,848 |   |
| Total assets                    |   | 213,225                     |    | 209,960      |   | 236,670 |   | 235,086 |   |
| Total current liabilities       |   | 18,728                      |    | 17,984       |   | 25,070 |   | 24,376 |   |
| Total liabilities               |   | 53,872                      |    | 57,315       |   | 73,807 |   | 77,546 |   |
| Accumulated deficit             |   | (14,817                     | )       | (25,644      | )      | (45,104 | ) | (55,570 | ) |
| Total stockholders’ equity |   | 159,353                     |    | 152,645      |   | 162,863 |   | 157,540 |   |
|                                 |        |                             |         |              |        |  |  |  |  |  |  |  |  |

 
|                                                                                       |   | **1999**                    |   | **2000**     |   | **2001**                    |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------|--------|--------------|--------|-----------------------------|--------|
|                                                                                       |   | **As  Previously Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| **Statement  of Operations:**                                                              |   |                        |   |         |   |                        |   |   |   |   |   |   |   |
| Revenues                                                                                   |   | $                           | 85,320 |         | $      | 83,320                      |   | $ | 84,944 |   | $ | 80,257 |   | $ | 101,965 |   | $ | 102,246 |   |
| Expenses                                                                                   |   | 66,561                      |   | 65,091       |   | 64,574                      |   | 67,516 |   | 126,881 |   | 127,439 |   |
| Income (loss) before income taxes and cumulative effect of change in  accounting principle |   | 18,759                      |   | 18,229       |   | 20,370                      |   | 12,741 |   | (24,916 | ) | (25,193 | ) |
| Tax expense                                                                                |   | 4,897                       |   | 4,821        |   | 4,475                       |   | 3,798 |   | 5,371 |   | 4,733 |   |
| Net income (loss)                                                                          |   | 13,862                      |   | 13,408       |   | 7,717                       |   | 765 |   | (30,287 | ) | (29,926 | ) |
| Net earnings (loss) per common share:                                                      |   |                        |   |         |   |                        |   |   |   |   |   |   |   |
| Basic                                                                                      |   | 0.26                        |   | 0.26         |   | 0.14                        |   | 0.01 |   | (0.53 | ) | (0.52 | ) |
| Diluted                                                                                    |   | 0.26                        |   | 0.25         |   | 0.14                        |   | 0.01 |   | (0.53 | ) | (0.52 | ) |
|                                                                                            |        |                             |        |              |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

As a result of the above adjustments, theCompany’s December 31, 1998 additional paid in capital and accumulated deficitchanged from the previously reported amounts of $161,164,000 and $(36,396,000)to $163,373,000 and $(39,817,000), respectively.

NOTE3 – SEVERANCE PAY

BTG-Israel participates in a definedcontribution pension plan and makes regular deposits with a pension fund tosecure pension rights on behalf of some of its employees.  The custody and management of the amounts sodeposited are independent of the Company and accordingly such amounts funded(included in expenses on an accrual basis) and related liabilities are notreflected in the balance sheets.  TheCompany’s obligation for severance pay, in addition to the amount funded, isincluded within long-term liabilities in the accompanying consolidated balancesheets.

In respect of its other employees,BTG-Israel purchases individual insurance policies intended to cover itsseverance obligations.  The amountfunded in the insurance policy and its obligation for severance pay to thoseemployees is reflected in the consolidated balance sheets as severance payfunded and severance pay, respectively.

 

33

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The liability of the Company for severancepay is calculated on the basis of the latest salary paid to its employees andthe length of time they have worked for the Company.  The liability is covered by the amounts deposited, includingaccumulated income thereon, as well as by the unfunded liability.

The expense related to severance and pensionpay for the years ended December 31, 1999, 2000 and 2001, was $1,039,000,$1,434,000 and $1,648,000, respectively.

 

                NOTE 4 – PROPERTYAND EQUIPMENT, NET

                                                                                                                                                                                                                
|                                            |   | **December  31,**  |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   | **2000**           |   | **2001** |   |
|                                            |   | **(in thousands)** |   |
| Laboratory and manufacturing equipment          |   | $                  | 19,250 |   | $ | 28,098 |   |
| Office equipment                                |   | 3,922              |   | 4,842 |   |
| Air conditioning and other                      |   | 2,951              |   | 4,613 |   |
| Leasehold improvements                          |   | 7,631              |   | 8,054 |   |
|                                            |   | 33,754             |   | 45,607 |   |
| Land, building and construction in progress (1) |   | 15,806             |   | 29,265 |   |
|                                            |   | 49,560             |   | 74,872 |   |
| Accumulated depreciation and amortization       |   | (21,741            | )      | (23,813 | ) |
| Total                                           |   | $                  | 27,819 |   | $ | 51,059 |   |

 

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(1)                The related asset, which isa production facility in Israel intended to meet FDA GMP requirements, is notready for its intended use and therefore no depreciation and amortization hasbeen accumulated as of December 31, 2001. Includes $2,815,000 and $717,000 of capitalized interest, labor andother costs as of December 31, 2001 and 2000, respectively.  Products which the Company intends tomanufacture at this facility cannot be shipped into the United States until theFDA has inspected and approved this facility. As a result of the current violence is Israel, the FDA has for oneperiod of time suspended its inspections in Israel.  This balance includes $6,250,000 of land costs associated withthis facility.

(2)                AtDecember 31, 2001, the Company had outstanding commitments of $4,467,000 relatedto completion of the construction in progress of its new facility.

 

Depreciation expense was approximately$1,896,000, $1,982,000 and $2,295,000 for the years ended December 31, 1999,2000 and 2001, respectively.

 

NOTE5 – ACQUISITIONS AND INVESTMENTS

(a)           Acquisition of Myelos Corporation.

On March 19, 2001, the Company acquiredMyelos Corporation, a privately-held biopharmaceutical company focused on thedevelopment of novel therapeutics to treat diseases of the nervous system.  Under the terms of the acquisitionagreement, the Company paid Myelos shareholders $35,000,000 in a combination ofcash and stock ($14,000,000 in cash and $21,000,000 through the issuance ofapproximately 2,344,700 shares of the Company’s common stock (based on a valueof $8.9564, representing the average closing price of the Company’s commonstock for the 20 trading day period ending one day prior to February 21, 2001,the date the acquisition agreement was executed)).  In addition, the Company has agreed to pay the Myelos shareholdersan additional $30,000,000 if the Company is able to file a New Drug Applicationwith respect to Prosaptide to treat neuropathic pain or neuropathy, of which atleast $14,000,000 will be paid through the issuance of shares of Company commonstock.  The remaining $16,000,000 can bepaid, at the Company’s option, in cash, shares of Company common stock or acombination thereof.  The Company hasalso agreed that if Prosaptide is approved by the United States Food and DrugAdministration for the treatment of neuropathic pain or neuropathy, the Companywill pay the Myelos shareholders 15% of net sales of Prosaptide during the 12month period beginning on the earlier of (i) the 25th full monthafter commercial introduction of Prosaptide in the United States for thetreatment of neuropathic pain or neuropathy and (ii) April 1, 2010. At least50% of this payment must be in shares of Company common stock, with theremainder payable, at the Company’s option, 

 

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in cash, shares ofCompany common stock or a combination thereof. In no event is the Company required to issue more than 10,962,000 sharesof its common stock; any equity required to be issued in excess of that amountwill be issued in shares of Company preferred stock.  The preferred stock would be non-voting, non-convertible,non-transferable, non-dividend paying (except to the extent a cash dividend ispaid on the Company common stock), with no mandatory redemption for a period of20 years and one day from the closing date of the acquisition, and a right toshare in proceeds in liquidation, up to the liquidation amount.

The transaction was treated as a “purchase”for accounting purposes.  The purchaseprice for accounting purposes is approximately $34,387,000 (includingacquisition costs of $1,387,000), based on a value for the approximately2,344,700 shares of Company common stock issued in the acquisition of $8.1172,representing the average closing price of the Company’s common stock for thefour day period preceding the date the terms of the acquisition were agreed to(February 21, 2001).  In connection withthe merger and based on an independent valuation, the Company allocated$45,600,000 to in-process research and development projects of Myelos, representingthe estimated fair value based on risk-adjusted cash flows of the acquiredtechnology.  At the date of the mergerthe technology acquired in the acquisition was not fully commercially developedand had no alternative future uses. Accordingly, the value was expensed as of the acquisition date.  The Company recorded negative goodwill of$18,914,000 on its balance sheet, primarily because the amount written off asin-process research and development acquired exceeded the purchase price foraccounting purposes.  This negativegoodwill is being amortized over its expected useful life of five years.  In accordance with SFAS No. 142,amortization of the negative goodwill will cease beginning January 1, 2002, andthe balance remaining will be maintained as a deferred credit until it iseither netted against the contingent payments or reflected in net income as anextraordinary item should the contingent payments not become due because thetechnology did not meet the milestones which trigger payment.

The Company allocated values to thein-process research and development based on an independent valuation of theresearch and development project.  Thevalue assigned to these assets was determined by estimating the costs todevelop the acquired technology into a commercially viable product, estimatingthe resulting net cash flows from the product, and discounting the net cashflows to their present value.  Therevenue projection used to value the in-process research and development wasbased on estimates of relevant market size and growth factors, expected trendsin technology, and the nature and expected timing of new product introductionsby the Company and its competitors.  Theresulting net cash flows from such product are based on management’s estimatesof cost of sales, operating expenses and income taxes from such product.  The Company believes that the assumptionsused in the forecasts were reasonable at the time of the merger.  No assurance can be given, however, that theunderlying assumptions used to estimate sales, development costs orprofitability, or the events associated with such product, will transpire asestimated.  For these reasons, actualresults may vary from projected results. The most significant and uncertain assumptions relating to thein-process research and development relate to the ability to successfullydevelop a product and the projected timing of completion of, and revenuesattributable to, that product.

Thefollowing unaudited pro forma consolidated results of operations for the yearsended December 31, 2000 and 2001 were prepared assuming the acquisition ofMyelos occurred on January 1, 2000 (excluding the effect of the write-off ofin-process research and development). The pro forma results of operations arenot necessarily indicative of the consolidated results which actually wouldhave occurred if the acquisition had been consummated at the beginning of theyear presented, nor does it purport to represent the results of operations forfuture periods.

 

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|                                                                                              |   | **Year ended  December 31,**              |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                              |   | **2000**                                  |   | **2001** |   |
|                                                                                              |   | **As  Reported**                          |   | **Pro Forma** |   | **As  Reported** |   | **Pro Forma** |   |
|                                                                                              |   | **(In  thousands except per share data)** |   |
| Total revenues                                                                                    |   | $                                         | 80,257 |   | $ | 80,257 |   | $ | 102,246 |   | $ | 102,246 |   |
| Income before non-recurring charges directly related to the Myelos  acquisition                   |   | $                                         | 765    |   | $ | 1,487 |   | $ | 15,674 |   | $ | 15,344 |   |
| Basic income before non-recurring charges directly related to the  Myelos acquisition per share   |   | $                                         | 0.01   |   | $ | 0.03 |   | $ | 0.27 |   | $ | 0.27 |   |
| Diluted income before non-recurring charges directly related to the  Myelos acquisition per share |   | $                                         | 0.01   |   | $ | 0.03 |   | $ | 0.27 |   | $ | 0.26 |   |

 

The pro forma resultsinclude the effect of the amortization of negative goodwill.

 

(b)           Investment in OmrixBiopharmaceuticals, Inc.

In January 2001, in order to obtain a periodof exclusivity to negotiate a possible strategic relationship with OmrixBiopharmaceuticals, Inc., the Company loaned $2,500,000 to Omrix and agreed toconvert the loan into, and to purchase an additional $2,500,000 of, shares of Omrixpreferred stock if it did not pursue a relationship.  The Company determined not to pursue a strategic relationshipwith Omrix, and on March 31, 2001 converted the existing loan into, andpurchased an additional $2,500,000 of, shares of Omrix preferred stock, whichis convertible into approximately 4.5% of Omrix common stock (on afully-diluted basis).  This investmentis carried at cost and is included as a component of other long-term assets.Omrix is a privately-held company that develops and markets a unique surgicalsealant and a number of immunology products based on blood plasma processingtechnology.  Omrix currently sells itsproducts in Europe, South America and the Middle East.

During the fourth quarter of 2001, theCompany determined that the decline in the value of its investment in Omrix wasother than temporary and, accordingly, wrote-down the value of this investmentby $3,000,000 based on management’s evaluation of current market conditions andOmrix’s operations and forecasts.

 

NOTE6 – LONG-TERM DEBT

In June 2000 the Company entered into a$20,000,000 revolving credit facility with Bank Hapoalim B.M. to finance aportion of the cost of completing its new production facility.  Short-term borrowings under the facility aredue 12 months from the date of borrowing and long-term borrowings are duebetween two and five years from the date of borrowing.  Loans under the facility bear interest atthe rate of LIBOR plus 0.5% in the case of short-term borrowings and LIBOR plus1% in the case of long-term borrowings. Amounts repaid under the facility can be reborrowed.  The credit facility is secured by the assetsof BTG-Israel and has been guaranteed by the Company.  At December 31, 2001 the Company had long-term borrowings of$20,000,000 outstanding under the facility, of which $1,111,000 is included incurrent portion of long-term debt.  AtDecember 31, 2001, the loans are at an average interest rate of approximately3.5% and the principal is payable as follows: in 2002 - $1,111,000; in 2003 -$6,667,000; in 2004 - $6,667,000 and in 2005 - $5,555,000.

 

NOTE7 – STOCKHOLDERS’ EQUITY

In the years ended December 31, 1999, 2000and 2001, the Company issued 1,087,000 shares, 1,223,000 shares and 873,000shares, respectively, of the Company’s common stock upon the exercise ofoutstanding stock options and received proceeds of $5,689,000, $7,915,000 and$5,760,000, respectively.

In 1998 the Company adopted a stockholderrights plan intended to deter hostile or coercive attempts to acquire theCompany.  Under the plan, if any personor group acquires more than 20% of the Company’s common stock without approvalof the Board of Directors under specified circumstances, the Company’s otherstockholders have the right to purchase shares of the Company’s common stock,or shares of the acquiring 

 

36

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company, at asubstantial discount to the public market price.  The stockholder rights plan is intended to ensure fair value toall stockholders in the event of an unsolicited takeover offer.

 

NOTE8 – EMPLOYEE BENEFITS

(a)           Employee Stock Purchase Plan

In April 1998, the Company adopted the 1998Employee Stock Purchase Plan (the “1998 ESPP”).  The 1998 ESPP is qualified as an employee stock purchase planunder Section 423 of the Internal Revenue Code of 1986, as amended.  The total number of shares reserved forissuance under the 1998 ESPP is 3,000,000 shares.

All full–timeemployees of the Company are eligible to participate in the 1998 ESPP.  From time to time, the Board of Directorsmay fix a date or a series of dates on which the Company will grant rights topurchase shares of common stock under the 1998 ESPP (“Rights”) at prices notless than 85% of the lesser of (i) the fair market value of the shares on thedate of grant of such Rights or (ii) the fair market value of the shares on thedate such Rights are exercised.  Rightsgranted under the 1998 ESPP will run for a maximum of 27 months.  No employee may be granted a Right thatpermits such employee to purchase shares under the 1998 ESPP having a fairmarket value that exceeds $25,000 (determined at the time such Right isgranted) for each calendar year in which such Right is outstanding, and noRight granted to any participating employee may cover more than 12,000 shares.  In 1999, 2000 and 2001 the Company issued251,000 shares, 339,000 shares and 268,000 shares, respectively, of commonstock under the 1998 ESPP.

(b)           401(k) Profit-Sharing Plan

The Company also has a 401(k) profit-sharingplan.  As of December 31, 2001, the401(k) plan permits employees who meet the age and service requirements tocontribute up to $10,500 of their total compensation on a pretax basis, whichis matched 50% by the Company.  TheCompany’s contribution to the plan amounted to approximately $391,000 and$348,000 for the years ended December 31, 2001 and 2000, respectively.

 

NOTE9 – STOCK OPTIONS

In 1992 the Company adopted theBio-Technology General Corp. 1992 Stock Option Plan (the “1992 Stock OptionPlan”).  The 1992 Stock Option Plan permitsthe granting of options to purchase up to an aggregate of 12,000,000 shares ofthe Company’s common stock to key employees (including employees who aredirectors) and consultants of the Company. Under the 1992 Stock Option Plan, the Company may grant either incentivestock options, at an exercise price of not less than 100% of the fair marketvalue of the underlying shares on the date of grant, or non-qualified stockoptions, at an exercise price not less than the par value of the common stockon the date of grant.  Options generallybecome exercisable ratably over two or four-year periods, with unexercisedoptions expiring after the earlier of 10 years or shortly after termination ofemployment.  Terminated options areavailable for reissuance.

In 2001 the Company adopted the 2001 StockOption Plan (the “2001 Stock Option Plan”). The 2001 Stock Option Plan permits the granting of options to purchaseup to an aggregate of 10,000,000 shares of the Company’s common stock toemployees (including employees who are directors) and consultants of theCompany.  Under the 2001 Stock OptionPlan, the Company may grant either incentive stock options, at an exerciseprice of not less than 100% of the fair market value of the underlying shareson the date of grant, or non-qualified stock options, at an exercise price notless than 85% of the fair market value of the underlying shares on the date ofgrant.  Options generally becomeexercisable ratably over two or four-year periods, with unexercised optionsexpiring after the earlier of 10 years or shortly after termination ofemployment.  Terminated options areavailable for reissuance.  Under thisplan, 9,283,000 shares remain available for future grant.

The Company also established a Stock OptionPlan for New Directors (the “New Director Plan”) that, upon an individual’sinitial election or appointment to the Board of Directors, provides for thegrant of an option to purchase 20,000 shares of common stock at an exerciseprice equal to the market value of the common stock on the date of grant.  Options become exercisable over a three–yearperiod.

In June 1997 the Company adopted theBio-Technology General Corp. 1997 Stock Option Plan for Non-Employee Directors(the “Directors Plan”).  The DirectorsPlan provides that each non-employee director 

 

37

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will automaticallyreceive an option to purchase 7,500 shares of the Company’s common stock oneach date such person is re-elected a director of the Company.  The exercise price of each option is equalto the market value of the common stock on the date of grant.  Options become exercisable over a three-yearperiod.  An aggregate of 500,000 sharesof common stock has been reserved for issuance under the Directors Plan.  The Board of Directors terminated theDirectors Plan in February 2002, and instead provided that each non-employeedirector would receive under the 2001 Stock Option Plan an option to purchase5,000 shares of the Company’s common stock on the last business day of eachquarter, commencing with the quarter ended March 31, 2002.  The exercise price of each option is equal to the market value of the commonstock on the date of grant, and options become fully exercisable on the firstanniversary of the date of grant.

The Company accounts for all plans under APBOpinion No. 25, under which no compensation cost has been recognized as alloptions granted during 1999, 2000 and 2001 were granted at the fair marketvalue of the Company’s common stock. Had compensation cost for these plans and the Company’s 1998 ESPP beendetermined in accordance with SFAS No. 123, the Company’s net income and EPSwould have been reduced as follows:
|              |   |        |   | **Year Ended  December 31,**              |   |
|-------------------|--------|-------------|--------|-------------------------------------------|--------|
|              |   |        |   | **1999**                                  |   | **2000** |   | **2001** |   |
|              |   |        |   | **(in  thousands except per share data)** |   |
| Net income (loss) |   | As reported |   | $                                         | 13,408 |   | $ | 765 |   | $ | (29,926 | ) |
|              |   | Pro forma   |   | 3,595                                     |   | (9,744 | ) | (43,657 | ) |
| Basic EPS:        |   | As reported |   | $                                         | 0.26   |   | $ | 0.01 |   | $ | (0.52 | ) |
|              |   | Pro forma   |   | 0.07                                      |   | (0.18 | ) | (0.76 | ) |
| Diluted EPS:      |   | As reported |   | $                                         | 0.25   |   | $ | 0.01 |   | $ | (0.52 | ) |
|              |   | Pro forma   |   | 0.07                                      |   | (0.18 | ) | (0.76 | ) |

 

Under SFAS No. 123, the fair value of eachoption is estimated on the date of grant using the Black–Scholesoption-pricing model with the following weighted average assumptions used forgrants in 1999, 2000 and 2001: (i) expected life of option of seven years; (ii)dividend yield of 0%; (iii) expected volatility of 58%, 59% and 62%; and (iv)risk-free interest rate of 5.66%, 5.62% and 3.50%, respectively.

Transactions under the Plan, the 1992 StockOption Plan, the 2001 Stock Option Plan, the New Director Plan and theDirectors Plan during 1999, 2000 and 2001 were as follows:
|                                           |   | **Year ended  December 31,** |   |
|------------------------------------------------|--------|------------------------------|--------|
|                                           |   | **1999**                     |   | **2000** |   | **2001** |   |
|                                           |   | **Shares  (‘000s)**     |   | **Weighted  Average Exercise  Price** |   | **Shares  (‘000s)** |   | **Weighted  Average Exercise Price** |   | **Shares  (‘000s)** |   | **Weighted  Average Exercise Price** |   |
| Options outstanding at beginning of year       |   | 6,332                        |   | $ | 7.33 |   | 7,487 |   | $ | 7.38 |   | 7,037 |   | $ | 8.39 |   |
| Granted                                        |   | 2,752                        |   | 6.78 |   | 1,506 |   | 11.85 |   | 2,095 |   | 11.89 |   |
| Exercised                                      |   | (1,087                       | )      | 5.23 |   | (1,223 | ) | 6.47 |   | (873 | ) | 6.59 |   |
| Terminated                                     |   | (510                         | )      | 8.10 |   | (733 | ) | 8.39 |   | (342 | ) | 9.42 |   |
| Options outstanding at end of year             |   | 7,487                        |   | 7.38 |   | 7,037 |   | 8.39 |   | 7,917 |   | 9.47 |   |
| Exercisable at end of year                     |   | 2,804                        |   |   |   | 2,706 |   |   |   | 4,319 |   |   |   |
| Weighted average fair value of options granted |   |                         |   | 4.34 |   |   |   | 7.62 |   |   |   | 7.65 |   |
|                                                |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Ofthe 7,917,000 options outstanding as of December 31, 2001:

- 2,367,000 have exercise prices between$2.37 and $7.50 with a weighted average exercise price of $6.09 and a weightedaverage remaining contractual life of 5.98 years. Of these 2,367,000 options,1,831,000 are exercisable; their weighted average exercise price is $5.82.

 

38

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- 2,962,000 options have exercise pricesbetween $7.56 and $10.62 with a weighted average exercise price of $8.73 and aweighted average remaining contractual life of 6.94 years.  Of these 2,962,000 options, 1,885,000 areexercisable; their weighted average exercise price is $8.36.

- 2,587,000 options have exercise pricesbetween $10.81 and $20.44 with a weighted average exercise price of $13.40 anda weighted average remaining contractual life of 8.57 years. Of these 2,587,000options, 603,000 are exercisable; their weighted average exercise price is$14.22.

- During 1999, 2000 and 2001 the Companymade modifications of the period of vesting and exercisability of approximately242,000 stock option awards, 446,000 stock option awards and 273,000 stockoption awards, respectively, for certain employees in connection with thetermination of their employment and post-employment consultingarrangements.  As a result of thesemodifications, the Company recognized stock compensation expense of $318,000,$1,592,000 and $1,024,000 during 1999, 2000 and 2001, respectively.

 

39

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NOTE10 – FOREIGN OPERATIONS

The Company’s operations are treated as oneoperating segment as it only reports profit and loss information on anaggregate basis to chief operating decision makers of the Company.  Information about the Company’s operationsin the United States and Israel is presented below:
|                                        |   | **U.S.**                            |   | **Israel**   |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------|--------|-------------------------------------|--------|--------------|--------|------------------|--------|------------------|--------|
|                                        |   | **(in  thousands of U.S. dollars)** |   |
| Year ended December 31, 1999:               |   |                                |   |         |   |             |   |             |   |
| Revenues                                    |   | §71,250                        |   | 12,070       |   |             |   | 83,320           |   |
| Intercompany transactions                   |   | 800                                 |   | 2,290        |   | (3,090           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |                                |   | 10,795       |   | (10,795          | )      |             |   |
| Depreciation and amortization               |   | 1,601                               |   | 1,413        |   |             |   | 3,014            |   |
| Interest income                             |   | 4,561                               |   | 72           |   |             |   | 4,633            |   |
| Income tax expense                          |   | 4,533                               |   | 288          |   |             |   | 4,821            |   |
| Net income                                  |   | 9,091                               |   | 3,262        |   | 1,055            |   | 13,408           |   |
| Identifiable assetso                        |   | 158,301                             |   | 28,640       |   | (24,403          | )      | 162,538          |   |
| Foreign liabilitieso                        |   |                                |   | ‡7,027  |   |             |   | 7,027            |   |
| Investment in subsidiaries (cost basis)     |   | 15,310                              |   |         |   | (15,310          | )      |             |   |
|                                        |   |                                |   |         |   |             |   |             |   |
| Year ended December 31, 2000:               |   |                                |   |         |   |             |   |             |   |
| Revenues                                    |   | §69,908                        |   | 10,349       |   |             |   | 80,257           |   |
| Intercompany transactions                   |   | 1,272                               |   | 4,009        |   | (5,281           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |                                |   | 12,712       |   | (12,712          | )      |             |   |
| Depreciation and amortization               |   | 1,389                               |   | 1,472        |   |             |   | 2,861            |   |
| Interest income                             |   | 7,425                               |   | 71           |   |             |   | 7,496            |   |
| Income tax expense                          |   | 3,719                               |   | 79           |   |             |   | 3,798            |   |
| Net income                                  |   | (1,815                              | )      | 2,061        |   | 519              |   | 765              |   |
| Identifiable assetso                        |   | 175,555                             |   | 45,921       |   | (11,516          | )      | 209,960          |   |
| Foreign liabilitieso                        |   |                                |   | ‡28,034 |   |             |   | 28,034           |   |
| Investment in subsidiaries (cost basis)     |   | 15,298                              |   |         |   | (15,298          | )      |             |   |
|                                        |   |                                |   |         |   |             |   |             |   |
| Year ended December 31, 2001:               |   |                                |   |         |   |             |   |             |   |
| Revenues                                    |   | §89,378                        |   | 12,868       |   |             |   | 102,246          |   |
| Intercompany transactions                   |   | 318                                 |   | 4,863        |   | (5,181           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |                                |   | 13,498       |   | (13,498          | )      |             |   |
| Depreciation and amortization               |   | 1,376                               |   | 1,561        |   |             |   | 2,937            |   |
| Interest income                             |   | 7,198                               |   | 274          |   |             |   | 7,472            |   |
| Income tax expense                          |   | 3,398                               |   | 1,335        |   |             |   | 4,733            |   |
| Net income (loss)                           |   | (35,205                             | )      | 4,612        |   | 667              |   | (29,926          | )      |
| Identifiable assetso                        |   | 189,415                             |   | 61,261       |   | (15,590          | )      | 235,086          |   |
| Foreign liabilitieso                        |   |                                |   | ‡32,639 |   |             |   | 32,639           |   |
| Investment in subsidiary (cost basis)o      |   | 15,298                              |   |         |   | (15,298          | )      |             |   |

 

----

§   Includes export sales of$25,645,000, $27,515,000 and $31,664,000 in 1999, 2000 and 2001, respectively.

o  At year end.‡    Excludes liability to parent.

 

40

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NOTE 11 – COMMITMENTS AND CONTINGENTLIABILITIES

a.             TheCompany has leased approximately 23,000 square feet of office space in NewJersey for its executive office, having an average annual rental expense ofapproximately $415,000.  The leaseexpires in October 2003.  In addition,the Company is obligated to pay its proportional share of any annual increase intaxes and operating expenses.  TheCompany also leases approximately 2,000 square feet in New York City, primarilyfor its investor and public relations activities, having an average annualrental expense of $100,000 and expiring in September 2003.  Myelos leases approximately 10,000 square feetin San Diego, California, having an average annual rental expense of $104,000and expiring in October 2004. BTG-Israel currently leases approximately 95,000 square feet of spacefor its research, development and production facilities in Israel, having anaverage annual rental expense of $1,112,000. The lease of substantially all of this space will expire in December2002; the lease for the remainder of the space will expire in December 2003.

In June 2002, the Company entered into a newlease for approximately 53,000 square feet of office space for its headquartersin New Jersey, having an average annual rental expense of $444,000 and expiringin June 2012.  In connection with thislease arrangement, the Company was required to provide a security deposit byway of an irrevocable letter of credit for $1,280,000.

Rent expense was approximately $1,679,000,$1,787,000 and $1,830,000 for the years ended December 31, 1999, 2000 and 2001,respectively.

The future annual minimum rentals (exclusiveof amounts for real estate taxes, maintenance, etc. and the new lease signed inJune 2002) for each of the next three years are as follows:  2002—$1,728,000; 2003—$582,000; and2004—$589,000.  There is also a bankguarantee outstanding in favor of the lessor of the Israeli facility for$720,000 secured by the assets of BTG-Israel.

b.             TheCompany is obligated, for products resulting from research and developmentprojects partially funded by the Chief Scientist, to pay royalties to theIsraeli government of 3%-5% on commercial sales, if any, of these products ifproduced in Israel up to the amount so funded, or royalties of 4%-6% ifproduced outside Israel up to 120%-300% of the amount so funded.  As of December 31, 2001, the Company isobligated to repay to the Chief Scientist, out of revenue from future productsales, a minimum of $7,752,000 of research and development funding for productsthat are currently being sold and a minimum of $6,502,000 of research anddevelopment funding for products currently under development if these productswill be sold. During the years ended December 31, 1999, 2000 and 2001, theCompany accrued approximately $353,000, $529,000 and $304,000, respectively, asroyalties to the Chief Scientist.

The Company is also committed to payroyalties on future sales, if any, of certain of its products to licensees fromwhich the Company licensed these products.

c.             AtDecember 31, 2001, the Company had employment agreements with seven seniorofficers.  Under these agreements, theCompany has committed to total aggregate base compensation per year ofapproximately $1,950,000 plus other normal customary fringe benefits andbonuses.  These employment agreementsgenerally have a term of three years and are automatically renewed forsuccessive one-year periods unless either party gives the other notice ofnon-renewal.

d.             TheCompany has received notification of claims filed against certain of itspatents in the normal course of operations. Management believes that these claims have no merit, and the Companyintends to defend them vigorously and does not expect significant adverseimpact on its financial position, results of operations or cash flows as aresult of the outcome.  However, were anunfavorable ruling to occur in any quarterly period, there exists thepossibility of a material adverse impact on the operating results.

 

41

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NOTE 12 – OTHER CURRENT LIABILITIES
|                            |   | **December  31,**   |   |
|---------------------------------|--------|---------------------|--------|
|                            |   | **2000**            |   | **2001** |   |
|                            |   | **(in  thousands)** |   |
| Salaries and related expenses   |   | $                   | 4,006  |   | $ | 3,836 |   |
| Accrued subcontracting payable  |   | 3,077               |   | 3,516 |   |
| Governmental and state agencies |   | 802                 |   | 875 |   |
| Legal and professional fees     |   | 657                 |   | 978 |   |
| Royalties and commissions       |   | 1,947               |   | 1,512 |   |
| Other                           |   | 666                 |   | 451 |   |
|                            |   | $                   | 11,155 |   | $ | 11,168 |   |

 

NOTE 13 – CONCENTRATIONS

 

In 1999, 2000 and 2001, one customer for humangrowth hormone, located solely in Japan, represented $10,507,000, $12,975,000and $16,292,000, or 13%, 17% and 17% of revenues (exclusive of interestincome), respectively.  In 1999, 2000and 2001, one customer for OXANDRIN and DELATESTRYL, located solely in theUnited States, represented $32,813,000, $33,422,000 and $43,718,000, or 41%,45% and 46% of revenues (exclusive of interest income), respectively.  In 2001, one additional customer forOXANDRIN, located solely in the United States, represented $10,383,000, or 11%of revenues (exclusive of interest income). In 1999, 13% of revenues (exclusive of interest income) resulted fromthe license of product distribution rights to a licensee.  In 2001, the Company’s product salesconsisted primarily of sales of OXANDRIN, human growth hormone, BIOLON andDELATESTRYL in the amount of approximately $47,150,000, $23,862,000, $8,226,000and $7,253,000, or 54%, 27%, 9% and 8% of total product sales,respectively.  One customer accountedfor  60% and 36% of total accountsreceivable as of December 31, 2000 and 2001, respectively.  Another customer accounted for 34% of totalaccounts receivable as of December 31, 2001. BTG currently has one supplier for its OXANDRIN product and no supplierfor its DELATESTRYL product.

 

NOTE14 – INCOME TAXES

At December 31, 2001, BTG had a capitalloss carry over of approximately $2,000,000 available to offset future capitalgains, which expires at various times with respect to various amounts through2006, a net operating loss carry over of approximately $20,000,000 available tooffset future taxable income in limited amounts per year, which expires atvarious times from 2009 through 2021, and a research and experimental(“R&E”) credit carryover of approximately $2,067,000 available to reducefuture income taxes, which expires at various times with respect to variousamounts through 2020.

Provision for income taxes has not been madefor U.S. or additional foreign taxes on undistributed earnings ofBTG-Israel.  Those earnings have beenand will continue to be permanently reinvested.  It is not practicable to determine the amount of additional taxthat might be payable on the foreign earnings. The cumulative amount of reinvested earnings was approximately$12,500,000 at December 31, 2001.

 

42

----

 

The components of current and deferred income tax expense (benefit) areas follows:

 
|                     |   | **Year Ended  December 31,** |   |
|--------------------------|--------|------------------------------|--------|
|                     |   | **1999**                     |   | **2000** |   | **2001** |   |
|                     |   | **(in  thousands)**          |   |
| Current                  |   |                         |   |   |   |   |   |
| State                    |   | $                            | 598    |   | $ | 647 |   | $ | 1,067 |   |
| Federal                  |   | 2,695                        |   | 6,302 |   | 12,959 |   |
| Foreign                  |   | 390                          |   | 1,152 |   | 1,891 |   |
|                     |   | 3,683                        |   | 8,101 |   | 15,917 |   |
| Deferred:                |   |                         |   |   |   |   |   |
| State                    |   | (19                          | )      | (183 | ) | (463 | ) |
| Federal                  |   | 1,247                        |   | (3,362 | ) | (10,164 | ) |
| Foreign                  |   | (90                          | )      | (758 | ) | (557 | ) |
|                     |   | 1,138                        |   | (4,303 | ) | (11,184 | ) |
| Total income tax expense |   | $                            | 4,821  |   | $ | 3,798 |   | $ | 4,733 |   |

 

The domestic and foreigncomponents of income (loss) before income taxes and cumulative effect of changein accounting principle are as follows:

 
|     |   | **Year Ended  December 31,** |   |
|----------|--------|------------------------------|--------|
|     |   | **1999**                     |   | **2000** |   | **2001** |   |
|     |   | **(in thousands)**           |   |
| Domestic |   | $                            | 14,515 |   | $ | 9,423 |   | $ | (32,519 | ) |
| Foreign  |   | 3,714                        |   | 3,318 |   | 6,606 |   |
|     |   | $                            | 18,229 |   | $ | 12,741 |   | $ | (25,193 | ) |

 

 

Reconciliation of income taxes between the statutory and effective taxrates on income before income taxes is as follows:
|                                                  |   | **Year Ended  December 31,** |   |
|-------------------------------------------------------|--------|------------------------------|--------|
|                                                  |   | **1999**                     |   | **2000** |   | **2001** |   |
|                                                  |   | **(in  thousands)**          |   |
| Income tax at U.S. statutory rate                     |   | $                            | 6,380  |   | $ | 4,459 |   | $ | (8,818 | ) |
| State and local income taxes (net of federal benefit) |   | 375                          |   | 302 |   | 386 |   |
| Non-deductible expenses                               |   | 157                          |   | 317 |   | 428 |   |
| R&E credit                                        |   | (772                         | )      | (720 | ) | (1,229 | ) |
| Foreign income subject to a reduced rate of tax       |   | (987                         | )      | (756 | ) | (1,728 | ) |
| In process research and development acquired          |   | —                       |   | — |   | 15,504 |   |
| Goodwill amortization                                 |   | —                       |   | — |   | (1,066 | ) |
| Foreign taxes in respect of previous years            |   | —                       |   | — |   | 1,530 |   |
| Foreign compensation                                  |   | 111                          |   | 557 |   | 358 |   |
| Foreign tax benefit                                   |   | —                       |   | — |   | (759 | ) |
| Other                                                 |   | (443                         | )      | (361 | ) | 127 |   |
| Income tax expense                                    |   | $                            | 4,821  |   | $ | 3,798 |   | $ | 4,733 |   |

 

 

43

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The components of deferred income tax assets (liabilities) are asfollows:

 
|                                                               |   | **December  31,**   |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | **2000**            |   | **2001** |   |
|                                                               |   | **(in  thousands)** |   |
| Net operating loss carry over                                      |   | $                   | — |   | $ | 6,843 |   |
| Capital loss carry over                                            |   | 328                 |   | 1,014 |   |
| R&E credit                                                     |   | 2,630               |   | 2,067 |   |
| Valuation of securities                                            |   | —              |   | 3,600 |   |
| Deferred revenues                                                  |   | 3,478               |   | 3,778 |   |
| Accrued amounts                                                    |   | 2,338               |   | 2,803 |   |
| Unrealized loss on investment included in other comprehensive loss |   | 2,087               |   | — |   |
| Other                                                              |   | —              |   | (226 | ) |
|                                                               |   | 10,861              |   | 19,879 |   |
| Depreciation and amortization                                      |   | (65                 | )      | (113 | ) |
|                                                               |   | 10,796              |   | 19,766 |   |
| Valuation allowance                                                |   | (2,415              | )      | — |   |
|                                                               |   | $                   | 8,381  |   | $ | 19,766 |   |

 

At December 31, 2001, BTG-Israel wasundergoing a tax audit for the fiscal years 1997 through 2000.  As a result, the Company has recorded in theyear ended December 31, 2001, a provision for additional tax liabilities forthose years.

The Company anticipates using tax planning strategies to utilize itscapital loss carryforwards.  These taxplanning strategies have been considered by the Company when determining itsvaluation allowance.

NOTE15 – QUARTERLY DATA (UNAUDITED)

Asdisclosed in Note 2, the Company has restated its 2000 and 2001 financialstatements.  Following are the quarterlyresults of operations for the years ended December 31, 2000 and 2001 aspreviously reported and restated for the effect of the adjustments disclosed inNote 2:

 

44

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|                                                            |   | **March 31,**               |   |
|-----------------------------------------------------------------|--------|-----------------------------|--------|
|                                                            |   | **2000**                    |   | **2001** |   |
|                                                            |   | **As  Previously Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| Revenues:                                                       |   |                        |   |   |   |   |   |   |   |
| Product sales                                                   |   | $                           | 12,507 |   | $ | 12,507 |   | $ | 29,887 |   | $ | 29,887 |   |
| Contracts fees                                                  |   | 1,838                       | (1)    | 1,838 |   | 289 |   | 414 |   |
| Other                                                           |   | 2,418                       |   | 2,418 |   | 3,560 |   | 3,341 |   |
|                                                            |   | 16,763                      |   | 16,763 |   | 33,736 |   | 33,642 |   |
| Expenses:                                                       |   |                        |   |   |   |   |   |   |   |
| Research and development                                        |   | 5,397                       |   | 6,036 |   | 5,930 |   | 5,927 |   |
| Cost of products sales                                          |   | 2,336                       |   | 2,336 |   | 5,139 |   | 3,524 |   |
| General and administrative                                      |   | 3,446                       |   | 3,446 |   | 3,277 |   | 3,272 |   |
| Marketing and sales                                             |   | 3,256                       |   | 3,256 |   | 4,741 |   | 4,741 |   |
| Other                                                           |   | 684                         |   | 684 |   | 46,263 |   | 46,263 |   |
|                                                            |   | 15,119                      |   | 15,758 |   | 65,350 |   | 63,727 |   |
|                                                            |   | 1,644                       |   | 1,005 |   | (31,614 | ) | (30,085 | ) |
| Income tax expense (benefit)                                    |   | 559                         | (2)    | 468 |   | 4,515 |   | 4,820 |   |
|                                                            |   | 1,085                       |   | 537 |   | (36,129 | ) | (34,905 | ) |
| Cumulative effect of change in accounting principle             |   | 8,178                       |   | 8,178 |   | — |   | — |   |
| Net income (loss)                                               |   | $                           | (7,093 | ) | $ | (7,641 | ) | $ | (36,129 | ) | $ | (34,905 | ) |
|                                                            |   |                        |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                               |   |                        |   |   |   |   |   |   |   |
| Basic                                                           |   | $                           | (0.13  | )(3) | $ | (0.14 | ) | $ | (0.66 | ) | $ | (0.63 | ) |
| Diluted                                                         |   | $                           | (0.12  | )(4) | $ | (0.13 | ) | $ | (0.66 | ) | $ | (0.63 | ) |
| Weighted average number of common and common equivalent shares: |   |                        |   |   |   |   |   |   |   |
| Basic                                                           |   | 53,748                      |   | 53,748 |   | 55,117 |   | 55,117 |   |
| Diluted                                                         |   | 57,373                      |   | 57,373 |   | 55,117 |   | 55,117 |   |
| SAB 101 Adjustments:                                            |   |                        |   |   |   |   |   |   |   |
| (1) As reported                                                 |   | $                           | 2,475  |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | (637                        | )      |   |   |   |   |   |   |
|                                                            |   | $                           | 1,838  |   |   |   |   |   |   |   |   |
| (2) As reported                                                 |   | $                           | 796    |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | (237                        | )      |   |   |   |   |   |   |
|                                                            |   | $                           | 559    |   |   |   |   |   |   |   |   |
| (3) As reported                                                 |   | $                           | 0.03   |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | (0.16                       | )      |   |   |   |   |   |   |
|                                                            |   | $                           | (0.13  | ) |   |   |   |   |   |   |   |
| (4) As reported                                                 |   | $                           | 0.03   |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | (0.15                       | )      |   |   |   |   |   |   |
|                                                            |   | $                           | (0.12  | ) |   |   |   |   |   |   |   |
|                                                            |   |                        |   |   |   |   |   |   |   |

 

 

45

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|                                                            |   | **June 30,**               |   |
|-----------------------------------------------------------------|--------|----------------------------|--------|
|                                                            |   | **2000**                   |   | **2001** |   |
|                                                            |   | **As Previously Reported** |   | **Restated** |   | **As Previously Reported** |   | **Restated** |   |
| Revenues:                                                       |   |                       |   |   |   |   |   |   |   |
| Product sales                                                   |   | $                          | 14,082 |   | $ | 14,082 |   | $ | 25,303 |   | $ | 25,303 |   |
| Contracts fees                                                  |   | 7,713                      | (1)    | 2,776 |   | 290 |   | 415 |   |
| Other                                                           |   | 3,048                      |   | 3,048 |   | 2,614 |   | 2,614 |   |
|                                                            |   | 24,843                     |   | 19,906 |   | 28,207 |   | 28,332 |   |
| Expenses:                                                       |   |                       |   |   |   |   |   |   |   |
| Research and development                                        |   | 5,635                      |   | 5,987 |   | 7,185 |   | 8,866 |   |
| Cost of products sales                                          |   | 1,911                      |   | 1,911 |   | 3,819 |   | 3,819 |   |
| General and administrative                                      |   | 3,182                      |   | 3,182 |   | 2,641 |   | 2,597 |   |
| Marketing and sales                                             |   | 5,315                      |   | 5,315 |   | 4,557 |   | 4,557 |   |
| Other                                                           |   | 281                        |   | 281 |   | 265 |   | 265 |   |
|                                                            |   | 16,324                     |   | 16,676 |   | 18,467 |   | 20,104 |   |
|                                                            |   | 8,519                      |   | 3,230 |   | 9,740 |   | 8,228 |   |
| Income tax expense (benefit)                                    |   | 2,922                      | (2)    | 2,588 |   | 2,747 |   | 2,279 |   |
| Net income (loss)                                               |   | $                          | 5,597  |   | $ | 642 |   | $ | 6,993 |   | $ | 5,949 |   |
|                                                            |   |                       |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                               |   |                       |   |   |   |   |   |   |   |
| Basic                                                           |   | $                          | 0.10   | (3) | $ | 0.04 |   | $ | 0.12 |   | $ | 0.10 |   |
| Diluted                                                         |   | $                          | 0.10   | (4) | $ | 0.04 |   | $ | 0.12 |   | $ | 0.10 |   |
| Weighted average number of common and common equivalent shares: |   |                       |   |   |   |   |   |   |   |
| Basic                                                           |   | 54,303                     |   | 54,303 |   | 57,388 |   | 57,388 |   |
| Diluted                                                         |   | 57,015                     |   | 57,015 |   | 58,899 |   | 58,899 |   |
| SAB 101 Adjustments:                                            |   |                       |   |   |   |   |   |   |   |
| (1) As reported                                                 |   | $                          | 7,500  |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | 213                        |   |   |   |   |   |   |   |
|                                                            |   | $                          | 7,713  |   |   |   |   |   |   |   |   |
| (2) As reported                                                 |   | $                          | 2,843  |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | 79                         |   |   |   |   |   |   |   |
|                                                            |   | $                          | 2,922  |   |   |   |   |   |   |   |   |
| (3) As reported                                                 |   | $                          | 0.10   |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | —                     |   |   |   |   |   |   |   |
|                                                            |   | $                          | 0.10   |   |   |   |   |   |   |   |   |
| (4) As reported                                                 |   | $                          | 0.10   |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | —                     |   |   |   |   |   |   |   |
|                                                            |   | $                          | 0.10   |   |   |   |   |   |   |   |   |
|                                                            |   |                       |   |   |   |   |   |   |   |

 

 

46

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|                                                            |   | **September  30,**          |   |
|-----------------------------------------------------------------|--------|-----------------------------|--------|
|                                                            |   | **2000**                    |   | **2001** |   |
|                                                            |   | **As  Previously Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| Revenues:                                                       |   |                        |   |   |   |   |   |   |   |
| Product sales                                                   |   | $                           | 18,206 |   | $ | 18,206 |   | $ | 15,541 |   | $ | 15,541 |   |
| Contracts fees                                                  |   | 213                         | (1)    | 338 |   | 289 |   | 414 |   |
| Other                                                           |   | 3,037                       |   | 3,037 |   | 4,301 |   | 4,301 |   |
|                                                            |   | 21,456                      |   | 21,581 |   | 20,131 |   | 20,256 |   |
| Expenses:                                                       |   |                        |   |   |   |   |   |   |   |
| Research and development                                        |   | 5,436                       |   | 7,042 |   | 5,562 |   | 5,847 |   |
| Cost of products sales                                          |   | 2,850                       |   | 2,850 |   | 2,710 |   | 2,710 |   |
| General and administrative                                      |   | 3,531                       |   | 3,531 |   | 2,062 |   | 2,018 |   |
| Marketing and sales                                             |   | 4,365                       |   | 4,365 |   | 3,046 |   | 3,046 |   |
| Other                                                           |   | 299                         |   | 299 |   | 642 |   | 642 |   |
|                                                            |   | 16,481                      |   | 18,087 |   | 14,022 |   | 14,263 |   |
|                                                            |   | 4,975                       |   | 3,494 |   | 6,109 |   | 5,993 |   |
| Income tax expense (benefit)                                    |   | 555                         | (2)    | 562 |   | 1,664 |   | 1,443 |   |
| Net income (loss)                                               |   | $                           | 4,420  |   | $ | 2,932 |   | $ | 4,445 |   | $ | 4,549 |   |
|                                                            |   |                        |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                               |   |                        |   |   |   |   |   |   |   |
| Basic                                                           |   | $                           | 0.08   | (3) | $ | 0.05 |   | $ | 0.08 |   | $ | 0.08 |   |
| Diluted                                                         |   | $                           | 0.08   | (4) | $ | 0.05 |   | $ | 0.07 |   | $ | 0.08 |   |
| Weighted average number of common and common equivalent shares: |   |                        |   |   |   |   |   |   |   |
| Basic                                                           |   | 54,493                      |   | 54,493 |   | 58,078 |   | 58,078 |   |
| Diluted                                                         |   | 56,993                      |   | 56,993 |   | 59,411 |   | 59,411 |   |
| SAB 101 Adjustments:                                            |   |                        |   |   |   |   |   |   |   |
| (1) As reported                                                 |   | $                           | — |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | 213                         |   |   |   |   |   |   |   |
|                                                            |   | $                           | 213    |   |   |   |   |   |   |   |   |
| (2) As reported                                                 |   | $                           | 476    |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | 79                          |   |   |   |   |   |   |   |
|                                                            |   | $                           | 555    |   |   |   |   |   |   |   |   |
| (3) As reported                                                 |   | $                           | 0.08   |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | —                      |   |   |   |   |   |   |   |
|                                                            |   | $                           | 0.08   |   |   |   |   |   |   |   |   |
| (4) As reported                                                 |   | $                           | 0.08   |   |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                        |   | —                      |   |   |   |   |   |   |   |
|                                                            |   | $                           | 0.08   |   |   |   |   |   |   |   |   |
|                                                            |   |                        |   |   |   |   |   |   |   |

** **

 

47

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|                                                            |   | **December  31,**                |   |
|-----------------------------------------------------------------|--------|----------------------------------|--------|
|                                                            |   | **2000**                         |   | **2001** |   |
|                                                            |   | **As Previously  Reported** |   | **Restated** |   | **As  Previously Reported** |   | **Restated** |   |
| Revenues:                                                       |   |                             |   |   |   |   |   |   |   |
| Product sales                                                   |   | $                                | 17,354 |   | $ | 17,354 |   | $ | 16,375 |   | $ | 16,375 |   |
| Contracts fees                                                  |   | 463                              |   | 590 |   | 288 |   | 413 |   |
| Other                                                           |   | 4,064                            |   | 4,064 |   | 3,228 |   | 3,228 |   |
|                                                            |   | 21,881                           |   | 22,008 |   | 19,891 |   | 20,016 |   |
| Expenses:                                                       |   |                             |   |   |   |   |   |   |   |
| Research and development                                        |   | 5,892                            |   | 6,266 |   | 6,899 |   | 7,137 |   |
| Cost of products sales                                          |   | 2,790                            |   | 2,790 |   | 2,335 |   | 2,335 |   |
| General and administrative                                      |   | 2,526                            |   | 2,526 |   | 2,449 |   | 2,405 |   |
| Marketing and sales                                             |   | 4,678                            |   | 4,678 |   | 4,553 |   | 4,662 |   |
| Other                                                           |   | 764                              |   | 735 |   | 12,806 |   | 12,806 |   |
|                                                            |   | 16,650                           |   | 16,995 |   | 29,042 |   | 29,345 |   |
|                                                            |   | 5,231                            |   | 5,012 |   | (9,151 | ) | (9,329 | ) |
| Income tax expense (benefit)                                    |   | 438                              |   | 180 |   | (3,555 | ) | (3,810 | ) |
| Net income (loss)                                               |   | $                                | 4,793  |   | $ | 4,832 |   | $ | (5,596 | ) | $ | (5,519 | ) |
|                                                            |   |                             |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                               |   |                             |   |   |   |   |   |   |   |
| Basic                                                           |   | $                                | 0.09   |   | $ | 0.09 |   | $ | (0.10 | ) | $ | (0.09 | ) |
| Diluted                                                         |   | $                                | 0.09   |   | $ | 0.09 |   | $ | (0.10 | ) | $ | (0.09 | ) |
| Weighted average number of common and common equivalent shares: |   |                             |   |   |   |   |   |   |   |
| Basic                                                           |   | 54,729                           |   | 54,729 |   | 58,294 |   | 58,294 |   |
| Diluted                                                         |   | 55,779                           |   | 55,779 |   | 58,294 |   | 58,294 |   |
|                                                            |   |                             |   |   |   |   |   |   |   |

 

 

NOTE16 – SUBSEQUENT EVENT

On September 20, 2002, the Company signed a definitive agreement toacquire Rosemont Pharmaceuticals, Limited, a leader in the UK market for oralliquid formulations of branded non-proprietary drugs.  Rosemont is a specialty pharmaceutical company based in Leeds,England, that develops, manufactures and markets prescription drugs in oralliquid form primarily for the domestic UK market.  The purchase price of £64 million or approximately $99 million(£61 million or approximately $95 million, net of Rosemont’s anticipated cashbalances on closing) will be paid out of the Company’s available cashresources.  The acquisition isanticipated to close by September 30, 2002. In 2001, Rosemont reported net revenues of £13.1 million ($20.3 million)and earnings before interest, taxes, depreciation and amortization of £5.6million ($8.7 million).  Productsmanufactured and marketed by Rosemont include CNS and cardiovascular drugs anda recently introduced patented oral liquid formulation of tamoxifen,trademarked Soltamox, for the treatment of early and advanced stage breastcancers.

 

48

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**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

 

 

 

49

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**PART IV**

 

**ITEM14.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8–K**

 

(a)  Financial Statements

 

(1) and (2) See “Index to Consolidated Financial Statements” at Item 8of this Annual Report on Form 10–K.

 

   (b)Reports on Form 8-K

 

             None.

 

   (c)Exhibits

 

Certain exhibits presented below contain information that has beengranted or is subject to a request for confidential treatment.  Such information has been omitted from theexhibit.  Exhibit Nos. 10.13, 10.14,10.15, 10.16, 10.17, 10.18, 10.19, 10.20, 10.21, 10.22, 10.23, 10.24, 10.25 and10.26 are management contracts, compensatory plans or arrangements.

 

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.               |   | Agreement and Plan of  Reorganization, dated as of February 21, 2001, by and among Bio-Technology  General Corp., MYLS Acquisition Corp. and Myelos Corporation.*(1)                                                                                                                                                                                                                                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1              |   | Certificate of  Incorporation of the Registrant, as amended. *(2)                                                                                                                                                                                                                                                                                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2              |   | By–laws of the  Registrant, as amended.*(3)                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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.*(3) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2              |   | Certificate of  Designations of the Series A Junior Participating Cumulative Preferred  Stock.*(3)                                                                                                                                                                                                                                                                                                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1             |   | Agreement, dated January  25, 1981, between Bio–Technology General (Israel) Ltd. and Yeda  Research and Development Co., Ltd. (“Yeda”). *(4)                                                                                                                                                                                                                                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2             |   | Letter from the Chief  Scientist to Bio–Technology General (Israel) Ltd. *(4)                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3             |   | Letter from the Company to  Yeda relating to bGH and hSOD. *(5)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4             |   | Agreement, dated January  20, 1984, between Bio–Technology General (Israel) Ltd., and the Chief  Scientist with regard to certain projects. *(6)                                                                                                                                                                                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5             |   | Agreement, dated July 9,  1984, between the Company and Yeda. *(6)                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6             |   | Agreement, dated as of  January 1, 1984, between the Company and Yissum. *(7)                                                                                                                                                                                                                                                                                                                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7             |   | Form of Indemnity  Agreement between the Company and its directors and officers. *(8)                                                                                                                                                                                                                                                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8             |   | Agreement, dated November  18, 1988, between the Company and Yeda. *(9)                                                                                                                                                                                                                                                                                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9             |   | Reacquisition of Rights  Agreement, effective June 12, 1991 between the Company and The Du Pont Merck  Pharmaceutical Company. *(10)                                                                                                                                                                                                                                                                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10            |   | Agreement, dated as of  November 9, 1992, between the Company and SmithKline Beecham Intercredit B.V.  *(11)                                                                                                                                                                                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11            |   | Research and Development  Services Agreement, dated as of January 1, 1996 by and between Bio-Technology  General Corp. and Bio-Technology General (Israel) Ltd.*(12)                                                                                                                                                                                                                                                                                                                           |

 

50

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|   |   |                                                                                                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12  |   | Manufacturing Services  Agreement, dated as of January 1, 1996, by and between Bio-Technology General  Corp. and Bio-Technology General (Israel) Ltd.*(12)   |
|   |   |                                                                                                                                                         |
| 10.13  |   | Bio–Technology  General Corp. Stock Option Plan, as amended through May 29, 1991.*(13)                                                                  |
|   |   |                                                                                                                                                         |
| 10.14  |   | Bio–Technology  General Corp. Stock Compensation Plan for Outside Directors, as amended  through March 1991. *(13)                                      |
|   |   |                                                                                                                                                         |
| 10.15  |   | Bio–Technology  General Corp. Stock Option Plan for New Directors, as amended through March  1991. *(13)                                                |
|   |   |                                                                                                                                                         |
| 10.16  |   | Bio-Technology General  Corp. 1992 Stock Option Plan, as amended.*(14)                                                                                       |
|   |   |                                                                                                                                                         |
| 10.17  |   | Bio-Technology General  Corp. 1997 Stock Option Plan for Non-Employee Directors.*(14)                                                                        |
|   |   |                                                                                                                                                         |
| 10.18  |   | Bio-Technology General  Corp. 1998 Employee Stock Purchase Plan.*(15)                                                                                        |
|   |   |                                                                                                                                                         |
| 10.19  |   | Bio-Technology General  Corp. 2001 Stock Option Plan. *(17)                                                                                                  |
|   |   |                                                                                                                                                         |
| 10.20  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Norman Barton. *(17)                                    |
|   |   |                                                                                                                                                         |
| 10.21  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  John Bond. *(17)                                        |
|   |   |                                                                                                                                                         |
| 10.22  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Sim Fass. *(17)                                         |
|   |   |                                                                                                                                                         |
| 10.23  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Ernest Kelly. *(17)                                     |
|   |   |                                                                                                                                                         |
| 10.24  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Robert Shaw. *(17)                                      |
|   |   |                                                                                                                                                         |
| 10.25  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Bernard Tyrell. *(17)                                   |
|   |   |                                                                                                                                                         |
| 10.26  |   | Employment Agreement,  dated as of January 23, 2000, by and between Bio-Technology General Corp.,  Bio-Technology General (Israel) Ltd. and Dov Kanner.*(16) |
|   |   |                                                                                                                                                         |
| 21     |   | Subsidiaries of  Bio-Technology General Corp. *(17)                                                                                                          |
|   |   |                                                                                                                                                         |
| 23     |   | Consent of KPMG LLP.                                                                                                                                         |

 

 

 Exhibits have been included incopies of this Report filed with the Securities and Exchange Commission.  Stockholders of the Company will be providedwith copies of these exhibits upon written request to the Company.

 

----

+              Confidential treatment has beengranted for portions of such document.

*              Previouslyfiled with the Commission as Exhibits to, and incorporated herein by referencefrom, the following documents:

 
| (1)  |   | Company’s Current Report  on Form 8-K, dated March 19, 2001.                       |
|------|--------|-----------------------------------------------------------------------------------------|
| (2)  |   | Company’s Quarterly Report  on Form 10–Q for the quarter ended June 30, 1994. |
| (3)  |   | Company’s Current Report  on Form 8-K, dated October 7, 1998.                      |
| (4)  |   | Registration Statement on  Form S–1 (File No. 2–84690).                       |
| (5)  |   | Company’s Annual Report on  Form 10–K for the year ended December 31, 1983.   |
| (6)  |   | Registration Statement on  Form S–1 (File No. 33–2597).                       |
| (7)  |   | Registration Statement on  Form S–2 (File No. 33–12238).                      |
| (8)  |   | Company’s Quarterly Report  on Form 10–Q for the quarter ended June 30, 1987. |
| (9)  |   | Company’s Annual Report on  Form 10–K for the year ended December 31, 1988.   |
| (10) |   | Registration Statement on  Form S–3 (File No. 33-39018).                           |
| (11) |   | Company’s Annual Report on  Form 10–K for the year ended December 31, 1992.   |
| (12) |   | Company’s Annual Report on  Form 10-K for the year ended December 31, 1998.        |
| (13) |   | Company’s Annual Report on  Form 10-K for the year ended December 31, 1991.        |
| (14) |   | Company’s Annual Report on  Form 10-K for the year ended December 31, 1997.        |
| (15) |   | Company’s Registration  Statement on Form S-8 (File No. 333-64541).                |
| (16) |   | Company’s Annual Report on  Form 10-K for the year ended December 31, 1999.        |
| (17) |   | Company’s Annual Report on  Form 10-K for the year ended December 31, 2001.        |

 

 

51

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          (d)     Financial Statement Schedule

 

See “Index to Consolidated Financial Statements and SupplementalSchedule” at Item 8 of this Annual Report on Form 10-K.  Schedules not included herein are omittedbecause they are not applicable or the required information appears in theConsolidated Financial Statements or notes thereto.

 

52

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   |   |   |   |   | Bio–Technology  General Corp. |
|--------|--------|--------|--------|--------|--------|------------------------------------|
|   |   |   |   |   |   |                               | (Registrant) |
|   |   |   |   |   |   |                               |   |
|   |   |   |   |   |   | By:                                | /s/ Sim Fass |
|   |   |   |   |   |   |                               | Sim Fass |
|   |   |   |   |   |   |                               | Chairman of the Board and  CEO |

 

 

September 24, 2002

 

 

 

 

53

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CERTIFCATIONS

 

I, Sim Fass, certify that:

 

1. I have reviewed this Annual Report on Form 10K/A of Bio-TechnologyGeneral Corp.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report; and

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report.

 

September 24, 2002

 
|   |   |   |   |   |   |   | /s/ Sim Fass                   |
|--------|--------|--------|--------|--------|--------|--------|--------------------------------|
|   |   |   |   |   |   |   | Sim Fass                       |
|   |   |   |   |   |   |   | Chairman of the Board and  CEO |

 

 

 

 

I, John Bond, certify that:

 

1. I have reviewed this Annual Report on Form 10K/A of Bio-TechnologyGeneral Corp.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report; and

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report.

 

September 24, 2002

 
|   |   |   |   |   |   |   | /s/ John Bond                       |
|--------|--------|--------|--------|--------|--------|--------|-------------------------------------|
|   |   |   |   |   |   |   | John Bond                           |
|   |   |   |   |   |   |   | Senior Vice  President—Finance |

 

 

 

 

I, Yehuda Sternlicht, certify that:

 

1. I have reviewed this Annual Report on Form 10K/A of Bio-TechnologyGeneral Corp.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report; and

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report.

 

 

September 24, 2002

 

 
|   |   |   |   |   |   |   | /s/ Yehuda Sternlicht                        |
|--------|--------|--------|--------|--------|--------|--------|----------------------------------------------|
|   |   |   |   |   |   |   | Yehuda Sternlicht                            |
|   |   |   |   |   |   |   | Vice President—Chief  Financial Officer |

 

 

54

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