<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission File No. 0-24676
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2505723
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1150 ELIJAH MC COY DRIVE, DETROIT, MICHIGAN 48202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313) 871-8400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Common Stock outstanding at November 11, 1996: 7,842,106 shares
The Exhibit Index is located on page 16
The total number of pages is 18
<PAGE> 2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 187,106
Accounts receivable, net of allowances of $32,247 47,415
Inventories 336,723
Prepaid expenses and deposits 144,823
------------
TOTAL CURRENT ASSETS 716,067
------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Buildings and improvements 6,682,725
Equipment 3,803,087
Furniture and fixtures 156,908
------------
Total 10,642,720
Less accumulated depreciation (2,227,172)
------------
8,415,548
Land 197,305
------------
PROPERTY, PLANT AND EQUIPMENT, NET 8,612,853
------------
MARKETABLE SECURITIES 128,739
------------
TOTAL ASSETS $ 9,457,659
============
</TABLE>
See accompanying notes.
-1-
<PAGE> 3
- --------------------------------------------------------------------------------
LIABILITIES AND DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 1,431,629
Short-term notes payable 300,000
Long-term debt 8,880,000
Accrued expenses:
Interest 384,861
Other 18,569
------------
TOTAL CURRENT LIABILITIES 11,015,059
------------
COMMITMENTS AND CONTINGENCIES
DEFICIT
Preferred stock, no par value, authorized 5,000,000 shares;
issued and outstanding, 285,714 Series A shares 1,000,000
Common stock, no par value, authorized 10,000,000 shares;
issued and outstanding, 7,842,106 shares 19,646,974
Subscription receivable (14,087)
Deficit accumulated during the development stage (22,029,363)
Unrealized loss on available-for-sale marketable securities (160,924)
------------
TOTAL DEFICIT (1,557,400)
------------
TOTAL LIABILITIES AND DEFICIT $ 9,457,659
============
</TABLE>
See accompanying notes.
-2-
<PAGE> 4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Cumulative from
September 30, September 30, Inception
--------------------------------------------------------- (2/22/84 to
1996 1995 1996 1995 9/30/96)
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 337,326 $ 1,159,631 $ 1,046,007 $ 3,597,572 $ 10,247,253
Cost of goods sales 420,802 901,445 1,331,441 2,522,515 9,833,363
----------- ----------- ----------- ------------ ------------
GROSS (LOSS) PROFIT (83,476) 258,186 (285,434) 1,075,057 413,890
----------- ----------- ----------- ------------ ------------
Selling, general and
administrative expenses 460,565 607,772 1,539,684 1,755,465 12,319,992
----------- ----------- ----------- ------------ ------------
Research and development costs 608,807 592,682 1,480,502 1,645,313 6,293,186
OPERATING LOSS (1,152,848) (942,268) (3,305,620) (2,325,721) (18,199,288)
----------- ----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 774 1,021 6,273 2,246 225,628
Interest expense (169,907) (176,966) (498,675) (546,385) (4,385,054)
Other - (42,562) 1,023 (42,541) (52,592)
Gain (loss) on sale of
equipment - - - 84,283 (48,209)
----------- ----------- ----------- ------------ ------------
OTHER EXPENSE - NET (169,133) (218,507) (491,379) (502,397) (4,260,227)
----------- ----------- ----------- ------------ ------------
Loss before cumulative effect
of change in accounting
principle (1,321,981) (1,160,775) (3,796,999) (2,828,118) (22,459,515)
Cumulative effect of change
in accounting principle - - - - 430,152
----------- ----------- ----------- ------------ ------------
NET LOSS $(1,321,981) $(1,160,775) $(3,796,999) $(2,828,118) $(22,029,363)
=========== =========== =========== =========== ============
Net loss per common share ($0.17) ($0.17) ($0.50) $ (.47) ($6.54)
=========== =========== =========== =========== ============
Weighted average number of
common shares outstanding 7,900,856 6,719,504 7,536,731 5,980,963 3,369,356
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
-3-
<PAGE> 5
CARACO PHARMACEUTICAL LAORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock During the
----------------------- --------------------------- Subscription Development
Shares Amount Shares Amount Receivable Stage
----------------------- ------------------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception
(February 22, 1984) -- $ -- -- $ -- $ -- $ --
Issuance of 2,433,471
shares of common stock
for stock subscription
receivable -- -- 2,433,471 2,500 (2,500) --
--------- ------------- ---------- --------------- --------------
Balance at
December 31, 1984 -- -- 2,433,471 2,500 (2,500) --
Net loss -- -- -- -- -- (3,832)
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1985 -- -- 2,433,471 2,500 (2,500) (3,832)
Net loss -- -- -- -- -- (50)
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1986 -- -- 2,433,471 2,500 (2,500) (3,882)
Net loss -- -- -- -- -- (1,270)
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1987
Net loss -- -- 2,433,471 2,500 (2,500) (5,152)
Collection of subscription -- -- -- -- -- (81,297)
receivable -- -- -- -- 2,500 --
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1988 -- -- 2,433,471 2,500 -- (86,449)
Net loss -- -- -- -- -- (146,978)
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1989
Additional stockholder -- -- 2,433,471 2,500 -- (233,427)
contribution -- -- -- 97,500 -- --
Net loss -- -- -- -- -- (666,314)
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1990 -- -- 2,433,471 100,000 -- (899,741)
Net loss -- -- -- -- -- (2,271,108)
--------- ------------- ---------- --------------- ------------- --------------
Balance at
December 31, 1991
Issuance of
common stock -- -- 2,433,471 100,000 -- (3,170,849)
Stock issued upon -- -- 539,055 2,480,449 -- --
conversion of debt -- -- 143,947 692,382 -- --
Net loss -- -- -- -- -- (3,568,135)
--------- ------------- ---------- --------------- ------------- --------------
<CAPTION>
Unrealized Loss on
Marketable
Securities Total
-------------------- -----------------
<S> <C> <C>
Balance at inception
(February 22, 1984) $ -- $ --
Issuance of 2,433,471
shares of common stock
for stock subscription
receivable -- --
-------------- -----------
Balance at
December 31, 1984 -- --
Net loss -- (3,832)
-------------- -----------
Balance at
December 31, 1985 -- (3,882)
Net loss -- (50)
-------------- -----------
Balance at
December 31, 1986 -- (3,882)
Net loss -- (1,270)
-------------- -----------
Balance at
December 31, 1987
Net loss -- (5,152)
Collection of subscriptio -- (81,297)
receivable -- 2,500
-------------- -----------
Balance at
December 31, 1988 -- (83,949)
Net loss -- (146,978)
-------------- -----------
Balance at
December 31, 1989
Additional stockholder -- (230,927)
contribution -- 97,500
Net loss -- (666,314)
-------------- -----------
Balance at
December 31, 1990 -- (799,741)
Net loss -- (2,271,108)
-------------- -----------
Balance at
December 31, 1991
Issuance of
common stock -- (3,070,849)
Stock issued upon -- 2,480,449
conversion of debt -- 692,382
Net loss -- (3,568,135)
-------------- -----------
</TABLE>
(Continued)
-4-
<PAGE> 6
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock During the
---------------------------- ---------------------- Subscription Development
Shares Amount Shares Amount Receivable Stage
---------------------------- ---------------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 -- -- 3,116,473 3,272,831 -- (6,738,984)
Issuance of common stock -- -- 529,947 2,182,256 -- --
Net loss -- -- -- -- -- (3,769,940)
--------- --------- ---------- ---------- ----------- -----------
Balance at
December 31, 1993 -- -- 3,646,420 5,455,087 -- (10,508,924)
Issuance of common stock -- -- 1,400,000 7,924,251 -- --
Issuance of preferred stock 285,714 1,000,000 -- -- -- --
Net loss -- -- -- -- -- (3,630,058)
--------- --------- ---------- ---------- ----------- -----------
Balance at
December 31, 1994
Issuance of common stock
Contribution of
administrative expenses by 285,714 1,000,000 5,046,420 13,379,338 -- (14,138,952)
Chairman, Emeritus -- -- 1,809,387 4,110,063 (14,087) --
Net loss -- -- -- 56,000 -- --
Unrealized loss on -- -- -- -- -- (4,093,362)
marketable securities -- -- -- -- -- --
--------- --------- ---------- ---------- ----------- -----------
Balance at
December 31, 1995 285,714 1,000,000 6,855,807 17,545,401 (14,087) (18,232,364)
Issuance of
common stock (unaudited) -- -- 986,299 2,101,573 -- --
Net loss (unaudited) -- -- -- -- -- (3,796,999)
--------- --------- ---------- ---------- ----------- -----------
Balance at September 30,
1996 (unaudited) 285,714 1,000,000 7,842,106 19,646,974 (14,087) (22,029,363)
========= ========= ========== ========== =========== ===========
<CAPTION>
Unrealized Loss on
Marketable
Securities Total
-------------------- -----------
<S> <C> <C>
Balance at
December 31, 1992 -- (3,466,153)
Issuance of common stock -- 2,182,256
Net loss -- (3,769,940)
------------------- ----------
Balance at
December 31, 1993 -- (5,053,837)
Issuance of common stock -- 7,924,251
Issuance of preferred stoc -- 1,000,000
Net loss -- (3,630,058)
------------------- ----------
Balance at
December 31, 1994
Issuance of common stock
Contribution of
administrative expenses by -- 240,356
Chairman, Emeritus -- 4,095,976
Net loss -- 56,000
Unrealized loss on -- (4,093,382)
marketable securities (160,924) (160,924)
------------------- ----------
Balance at
December 31, 1995 (160,244) 138,026
Issuance of
common stock (unaudited) -- 2,101,573
Net loss (unaudited) -- (3,796,999)
------------------- ----------
Balance at September 30,
1996 (unaudited) (160,924) (1,557,400)
=================== ==========
</TABLE>
See accompanying notes.
-5-
<PAGE> 7
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED (UNAUDITED)
SEPTEMBER 30, CUMULATIVE
------------------------------- (2/22/84 TO
1996 1995 9/30/96)
CASH FLOWS FROM OPERATING ACTIVITIES: -------------- ------------ --------------
<S> <C> <C> <C>
Net loss $(3,796,999) $(2,828,118) $(22,029,363)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of change in
accounting principle - - (430,152)
Depreciation 384,300 384,300 2,825,979
(Gain) loss on sale of equipment - (84,283) 48,230
Expenses paid by Chairman, emeritus - - 56,000
Changes in operating assets and
liabilities which provided (used) cash:
Accounts receivable 361,165 (237,434) (47,415)
Inventories 42,637 (71,163) (336,723)
Prepaid expenses and deposits 16,820 (68,868) (144,823)
Accounts payable 442,235 429,607 1,431,629
Accrued expenses 187,650 (72,614) 419,429
----------- ---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,362,192) (2,548,573) (18,207,209)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (64,539) (102,048) (2,381,247)
Proceeds from sale of equipment - 195,000 195,000
----------- ---------- -----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (64,539) 92,952 (2,186,247)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,101,573 1,807,678 18,541,224
Proceeds from issuance of preferred stock - - 1,000,000
Proceeds from long-term debt - - 868,601
Repayments of long-term debt (120,000) - (629,263)
Net short-term borrowings 300,000 300,000 800,000
----------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,281,573 2,107,678 20,580,562
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (145,158) (347,943) 187,106
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 332,264 567,274 -
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $187,106 $219,331 $187,106
=========== ========== ===========
Supplemental disclosures of cash flows
information:
Cash paid for interest $164,966 $716,475 $4,153,025
=========== ========== ===========
</TABLE>
See accompanying notes.
-6-
<PAGE> 8
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The balance sheet as of September 30, 1996 and the related statements of
operations, stockholders equity/deficit and cash flows for the nine months
ended September 30, 1996 and 1995 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements has been included. Such adjustments consisted of only
normal recurring items. Interim results are not necessarily indicative of
results for the full year.
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1996 and 1995 should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995.
The accounting policies followed by the Company with respect to the
unaudited interim financial statements are consistent with those stated in
the 1995 Caraco Pharmaceutical Laboratories, Ltd. Annual Report on Form
10-KSB.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business.
The Company has not currently achieved sales necessary to support
operations. The Company has, as of September 30, 1996, a deficit of
$1,557,400 and a working capital deficit of $10,298,992. Realization of a
major portion of the assets is dependent upon the Company's ability to meet
its future financing requirements and the success of future operations, the
outcome of which cannot be determined at this time. These and other factors
raise substantial doubt about the Company's ability to continue as a going
concern in the absence of sufficient additional funds and the achievement of
profitable operations. The accompanying financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
2. LOSS FROM DEFALCATION
On October 18, 1994, the Company filed a Form 8-K with the U.S. Securities
and Exchange Commission ("SEC") which stated (1) management's discovery of
misappropriations of approximately $514,000 of Company funds by its former
Controller and his brother and (2) the agreement by Dr. C. Arnold Curry,
Chairman Emeritus, to purchase for cash in the total amount of the loss, the
Company claims against those who may be responsible for the $514,000 loss.
In connection with the reported 1994 losses, all amounts outstanding have
been collected in full.
-7-
<PAGE> 9
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. LOSS FROM DEFALCATION (CONTINUED)
On November 1, 1996, the Company was notified by the SEC that its
Enforcement Division has tentatively decided not to recommend that the
Commission authorize an enforcement action against the Company and the SEC's
investigation had revealed that the defalcation which was reported October
18, 1994, had occurred in 1993, as well as in the first half of 1994, and
that the defalcation in 1993 had totaled at least $300,000. It is also
possible that the Commission might institute an enforcement proceeding
against one or more former employee(s) of the Company who are no longer
associated with the Company.
The Company has made appropriate filings with the SEC.
3. STOCKHOLDERS' DEFICIT
On March 31, 1996, the Company converted a $250,000 stockholder loan into
111,111 shares of its common stock at $2.25 per share.
In connection with a private placement offering that was completed effective
March 31, 1996, the Company sold 572,444 shares of unregistered common stock
which netted the Company approximately $1,250,000. All cash proceeds were
received in April 1996.
On May 13, 1996, the Company sold privately 44,444 shares of common stock
for $100,000.
On May 31, 1996, the Company sold privately 250,000 shares of common stock
for $500,000.
On July 11, 1996, the Company and the Indian specialty pharmaceutical
company, Sun Pharmaceutical Industries Ltd. announced that they had signed
two non-binding letters of intent pursuant to which Sun Pharma would make an
initial investment in Caraco common stock of $4,000,000 and sell it certain
rights for up to 20 generic pharmaceuticals products. This transaction is
subject to certain conditions, including completion of Sun Pharma's due
diligence, clearance from the Indian government, and negotiation and
execution of definitive documents. The parties intend to consummate the
transaction within 150 days.
As of July 29, 1996, the Company's common stock and warrants are quoted on
the OTC Bulletin Board following a delisting of its securities from the
NASDAQ Small Cap Market for not maintaining minimum capital and surplus
requirements of $1 million. The Company intends to raise additional capital
and seek reinstatement on NASDAQ.
-8-
<PAGE> 10
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. SHORT-TERM NOTE PAYABLE
On August 31, 1996, the Company borrowed $300,000 from three (3) directors
of the Company. The note is secured by certain assets of the Company,
accrues interest at a per annum rate of 14%, payable monthly. Should the
loan become in default the interest rate increases to 18%. The note is due
upon demand or the one year anniversary of the closing date.
5. SUBSEQUENT EVENT
Long-term Debt
The Economic Development Corporation ("EDC") of the City of Detroit,
administers the $9,000,000 Housing and Urban Development ("HUD") loan (the
"Note") to the Company on behalf of the City of Detroit. The Note is
secured by a lien on the building and a portion of the Company's equipment.
On November 1, 1996, the EDC agreed to defer payments on the loan for the
period March 1996 through January 1999 subject to the completion of the Sun
Pharmaceutical agreement. The deferral is designed to aid the Company and
Sun in achieving adequate cash flow during the next few years to assure its
ability to both fund its current operations and continue its new product
ANDA approval process. Monthly payments are to resume in February 1999 or
sooner should the Company reach profitability levels of $750,000 in any
quarter through March 31, 1998 and a level of $500,000 in the quarters ended
June 30, 1998 and September 30, 1998. When payments are resumed they will
include a portion of the deferral which will be apportioned over the
remaining term of the Loan.
As a condition of the deferral, the Note will now have additional security
on all the Company's existing equipment and the Company will be required to
uphold several additional covenants which include maintaining a tangible net
worth of not less than $1,000,000 (excluding debt subordinated to the EDC),
maintaining a debt ratio of not more than 10 to 1 (excluding debt
subordinated to the EDC), limiting capital expenditures to under $2,000,000
and abstaining from share redemption during the payment deferral period.
Completion of payment deferral agreement is subject to certain conditions
that the Company has not met as of the date of this filing, as such, the
Note is classified as current until such conditions are met.
* * * * * *
-9-
<PAGE> 11
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net losses for the quarters ended September 30, 1996 and 1995 were
$1,321,981 and $1,160,775, respectively. The increase in the net
loss in 1996 is due to the Company's continued inability to
raise money needed to properly sustain ongoing operations. The
Company continues to seek additional funding requirements to meet its
business objectives.
Net sales for the quarter ended September 30, 1996 and 1995 were
$337,326 and $1,159,631, respectively. The decrease in sales is
attributable to the Company's inability to raise funds required
to purchase raw materials needed to produce product for sale and the
adverse affect of market price erosion on the current product line.
At September 30, 1996 the Company had an open sales order backlog of
approximately $185,000, which should be eliminated by the end of
1996.
Cost of sales for the quarters ended September 30, 1996 and 1995 were
$420,802 or 124.7% of sales, and $901,445 or 77.7% of sales,
respectively. The increase percentage in cost of sales between
periods was a result of the impact of market price erosion and the
under absorption of fixed production overhead costs due to
significantly lower manufacturing volumes due to the Company's
continued depleted cash position and its inability to purchase
materials required for production.
Selling, general and administrative expenses for the quarters ended
September 30, 1996 and 1995 were $460,565 and $607,772, respectively.
The decrease in 1996 is a result of the Company's continued cost
cutting efforts to reduce the 1995 burden rate.
Research and development expenses for the quarters ended September
30, 1996 and 1995 were $608,807 and $592,682, respectively. The
Company continues to fund its aggressive product development
strategy, as funds permit, as a means to accelerate its planned
future growth. However, such expenditures and research projects were
severely impacted and/or delayed by the Company's limited available
working capital.
Interest expense for the quarters ended September 30, 1996 and 1995
were $169,907 and $176,966, respectively. The decrease in 1996 is
attributable to the elimination of 1995 short-term borrowings used to
fund equipment purchases.
At September 30, 1996 the Company's working capital deficit was
$10,298,992 compared with working capital of $4,064 at September 30,
1995. The difference is attributable to the Company's continued
losses from operations and reclassification of long-term debt to
current, as discussed in Note 5.
-10-
<PAGE> 12
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A Development Stage Company)
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
On March 31, 1996, the Company converted a $250,000 stockholder loan
into 111,111 shares of its common stock at $2.25 per share. On March
31, 1996, the Company also sold privately to 20 investors an
aggregate of 572,444 shares of common stock for an aggregate
consideration of $1,288,000 in cash. On May 13, 1996 the Company
sold privately to one investor 44,444 shares of common stock for
$99,999, and on May 31, 1996 the Company sold privately to one
investor 250,000 shares of common stock for an aggregate of $500,000.
The above offerings were completed without an underwriter.
On August 31, 1996, the Company borrowed $300,000 from three (3)
directors of the Company. The note is secured by certain assets of
the Company, accrues interest at a per annum rate of 14%, payable
monthly. Should the loan become in default the interest rate
increases to 18%. The note is due upon demand or the one year
anniversary of the closing date, which ever is sooner.
Management estimates that, at its currently planned anticipated level
of operations, the Company will continue to experience operating
losses of between $1,000,000 and $1,500,000 per quarter through 1996
and, accordingly, that it needs approximately $6,000,000 of
additional funds to provide the required working capital to execute
its business plan for 1997. On July 11, 1996, the Company and the
Indian specialty pharmaceutical company, Sun Pharmaceutical
Industries Ltd. announced that they had signed two non-binding
letters of intent pursuant to which Sun Pharma would make an initial
investment in Caraco common stock of $4,000,000 and sell it certain
rights for 20 generic pharmaceuticals products. This transaction is
subject to certain conditions, including completion of Sun Pharma's
due diligence, clearance from the Indian government, and negotiation
and execution of definitive documents. The parties intend to
consummate the transaction in the near future and negotiations are
ongoing.
The Company and Sun Pharma also announced that during the
negotiations and due diligence, Sun Pharma would transfer four of the
proposed 20 products to Caraco as a demonstration of Sun Pharma's
commitment to the proposed transaction. Under a separate agreement
signed earlier this year, Caraco is to manufacture and market a
generic anticonvulsant drug from Sun Pharma in the United States,
with both companies sharing the development and registration.
The Economic Development Corporation ("EDC") of the City of Detroit,
administers the $9,000,000 Housing and Urban Development ("HUD") loan
(the "Note") to the Company on behalf of the City of Detroit. The
Note is secured by a lien on the building and a portion of the
Company's equipment.
On November 1, 1996, the EDC agreed to defer payments on the loan for
the period March 1996 through January 1999 subject to the completion
of the Sun Pharmaceutical agreement. The deferral is designed to aid
the Company and Sun in achieving adequate cash flow during the next
few years to assure its ability to both fund its current operations
and continue its new product ANDA approval process. Monthly payments
are to resume in February 1999 or sooner should the Company reach
profitability levels of $750,000 in any quarter through March 31,
1998 and a level of $500,000 in the quarters ended June 30, 1998 and
September 30, 1998. When payments are resumed they will include a
portion of the deferral which will be apportioned over the remaining
term of the Loan.
-11-
<PAGE> 13
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A DEVELOPMENT STAGE COMPANY)
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
As a condition of the deferral, the Note will now have additional
security on all the Company's existing equipment and the Company will
be required to uphold several additional covenants which include
maintaining a tangible net worth of not less than $1,000,000
(excluding debt subordinated to the EDC), maintaining a debt ratio of
not more than 10 to 1 (excluding debt subordinated to the EDC),
limiting capital expenditures to under $2,000,000 and abstaining from
share redemption during the payment deferral period.
Completion of payment deferral agreement is subject to certain
conditions that the Company has not met as of the date of this
filing.
There is no assurance that the foregoing funds will be made available
to the Company timely or on financially satisfactory terms; or that
any of the Company's ANDAs will be approved by the FDA within
time parameters anticipated by management or at all; or that the
Company will be able to manufacture and sell profitably any product
resulting from FDA approval of an ANDA filed by the Company. To the
extent that capital requirements should exceed available capital, the
Company would be required to reduce its research and development
activity, reduce personnel and delay capital expenditures while
continuing to seek alternative sources of financing for its business.
-12-
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
The Economic Development Corporation (the "EDC") administers a
$9MM Housing and Urban Development ("HUD") loan to the Company
(the "Note"). Caraco has been informed by the EDC that the Note
is in default. The Note is secured by a lien on the building and
a portion of its equipment. As of November 1, 1966 Caraco is
presently eight monthly payments behind for a total of $753,508.
In early November 1996 the EDC agreed subject to completion of a
number of conditions including consummation of a proposed
transaction between the Company and Sun Pharmaceutical (see
below), to defer payments on the loan for the period March 1996
through January 1999. The deferral is designed to aid the Company
in having adequate cash flow during the next few years to assure
its ability to both fund its current operations and continue its
new product ANDA approval process. Regular Note payments are to
resume in February 1999 or sooner should the Company reach
profitability level of $750,000 in any quarter prior to February
1999. When payments are resumed they will include a portion of
the deferral which will be apportioned over the remaining term of
the Loan.
The proposed agreement with the EDC also requires that in addition
to the current security on the loan, the loan also be secured by
additional security on all the Company's equipment. In addition
the Company will be required to uphold several additional
covenants which include maintaining a tangible net worth of not
less than $1MM (excluding debt subordinated to the EDC),
maintaining a debt ratio of not more than 10 to 1 (excluding debt
subordinated to the EDC), limiting capital expenditures to under
$2MM and abstaining from share redemption during the payment
deferral period.
The Company is currently in negotiations with Sun Pharmaceutical
with respect to the sale of the Company's stock to Sun and the
purchase of Sun products for Company stock. There is no assurance
that agreements with Sun will be consummated. If agreements are
not consummated, this may result in material adverse consequences
to the Company, including a default of the EDC Loan.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
13
<PAGE> 15
On September 19, 1996 Caraco announced in a press release,
attached hereto as EXHIBIT A, that it had reduced its Board of
Directors from eleven to seven directors. At its Board of
Directors meeting of September 18, 1996 the Board of Directors
accepted the resignations of Betty R. Anderson, Ronald R. Dobbins,
Theodore H. Glenn, William R. Hurd and Robert P. Roselle and
elected Phyllis Harrison-Ross as a Director. Present directors
include David W. Adamany, C. Arnold Curry, Cara J. Curry, David
A. Hagelstein, Jay F. Joliat, John R. Morris and Phyllis
Harrison-Ross.
At the same Board of Directors meeting, the Board reorganized and
reconstituted the members of its committees to serve until the
next meeting of the Board of Directors following the 1997 Annual
Meeting of Shareholders and until their successors shall be
elected and shall have qualified. The Members of the Committees
are as follows:
Audit Committee
David W. Adamany (Chairperson)
Cara J. Curry
Jay F. Joliat
John R. Morris
Compensation Committee
David W. Adamany
Cara J. Curry
David A. Hagelstein (Chairperson)
John R. Morris
Phyllis Harrison-Ross
Finance Committee
C. Arnold Curry
Jay F. Joliat (Chairperson)
John R. Morris
Phyllis Harrison-Ross
Executive Committee
C. Arnold Curry
David W. Adamany (Chairperson)
David A. Hagelstein
Jay F. Joliat
On November 1, 1996 Caraco was notified by the SEC that the
Enforcement Division of the U.S. Securities and Exchange
Commission has tentatively decided not to recommend that the
Commission authorize an enforcement action against Caraco. The
investigation had revealed that the defalcation which was reported
October 18, 1994, had occurred in 1993, as well as in the first
half of 1994, and that the defalcation in 1993 had totalled at
least $300,000. It is also possible that the Commission might
institute an enforcement proceeding against one or more former
employee(s) of Caraco who are no longer associated with Caraco.
14
<PAGE> 16
Item 6. Exhibits and Reports
a. The following exhibits are filed as a part of this report and are
attached hereto:
EXHIBIT A, Press Release dated September 19, 1996
b. None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
By: /s/Allan J. Hammer
-------------------------------------------
Allan J. Hammer
Chief Financial Officer (Principal
Accounting Officer and a duly
authorized signatory of the Company)
Dated: November 14, 1996
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT TABLE
NUMBER EXHIBIT
- -----------------------------------------------------------
<S> <C>
27 Financial Data Schedule
99 Press Release dated September 19, 1996
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 187,106
<SECURITIES> 128,739
<RECEIVABLES> 79,662
<ALLOWANCES> (32,247)
<INVENTORY> 336,723
<CURRENT-ASSETS> 716,067
<PP&E> 10,840,025
<DEPRECIATION> (8,415,548)
<TOTAL-ASSETS> 9,457,659
<CURRENT-LIABILITIES> 11,015,059
<BONDS> 0
1,000,000
0
<COMMON> 19,646,974
<OTHER-SE> (22,204,374)
<TOTAL-LIABILITY-AND-EQUITY> (1,557,400)
<SALES> 1,046,007
<TOTAL-REVENUES> 1,046,007
<CGS> 1,331,441
<TOTAL-COSTS> 1,331,441
<OTHER-EXPENSES> 3,020,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (498,675)
<INCOME-PRETAX> (3,796,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,796,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,796,999)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
<PAGE> 1
EXHIBIT 99
CARACO PHARMACEUTICAL LABORATORIES
FOR IMMEDIATE RELEASE CONTACT: William R. Hurd
(313) 871-8400
CARACO ANNOUNCES REDUCTION OF ITS BOARD OF DIRECTORS
Detroit, MI, September 19, 1996 -- Caraco Pharmaceutical
Laboratories, Ltd. (BULLETIN BOARD:CARA) today announced that it has reduced
its Board of Directors from 11 to 7 members. In doing so Caraco accepted
resignations from Betty R. Anderson, Ronald R. Dobbins, William R. Hurd,
Theodore H. Glenn and Robert P. Roselle. Present directors include David W.
Adamany, C. Arnold Curry, Cara J. Curry, David A. Hagelstein, Jay F. Joliat
and John R. Morris.
Dr. Phyllis Harrison-Ross was elected to Caraco's Board as its 7th
member. Dr. Harrison-Ross has more than 25 years in the Community Mental
Health profession. She presents a remarkably diverse career as a Hospital
Administrator, Researcher, Academician, Public Health Consultant, Forensic
Psychiatrist and Public Educator. Dr. Harrison-Ross trained as an Adult and
Child Psychiatrist as well as a Pediatrician, and continues to lend her
administrative and clinical talents to serving the diverse, hard-to reach and
underserved population of New York.
Caraco's Board stated that Dr. Harrison-Ross is a welcome addition
to the Board. Her broad background will bring valuable perspective and
insights to the Company and will help fashion the future plans of Caraco.
Caraco Pharmaceutical Laboratories, Ltd. is engaged in developing,
manufacturing and marketing generic drugs for the ethical and over-the-counter
markets. In August 1995, the Company signed a distribution agreement with
leading pharmaceutical and health care product distributor McKesson Drug
Company, a subsidiary of $13 billion McKesson Corp. (NYSE:MCK), which provides
Caraco with access to McKesson's existing distribution networks. Among
Caraco's 14 generic products, are Nifedipine, a calcium blocker for the
cardiovascular market, SureLac(TM), a lactase enzyme tablet which permits
enjoyment of dairy products without discomfort; and additional products used
for pain relief, sleeplessness, and coughs and colds.
###
