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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-24676
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CARACO PHARMACEUTICAL LABORATORIES, LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2505723
(State of Incorporation) (I.R.S. Employer Identification No.)
1150 ELIJAH MCCOY DRIVE, DETROIT, MI 48202
(Address of principal executive office)
(313) 871-8400
(Registrant's telephone number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, No Par Value
Warrants to purchase Common Stock
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ___
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-B IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY AMENDMENTS TO
THIS FORM 10-KSB. [ ]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $2,663,633
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE
BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR
TO THE DATE OF THE FILING.
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$16,409,045
(BASED UPON THE AVERAGE BID-ASK PRICE OF THE REGISTRANT'S
COMMON SHARES ON THE OTC BULLETIN BOARD ON MARCH 19, 1999)
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
AS OF MARCH 15, 1999, THERE WERE 14,585,818 COMMON SHARES OUTSTANDING
Documents Incorporated By Reference:
Portions of the Annual Report to Stockholders for the Year Ended
December 31, 1998 are incorporated by reference into Part II.
Portions of the definitive Proxy Statement dated April 27, 1999 in
connection with the Annual Meeting of Stockholders to be held on June 2, 1999,
are incorporated by reference into Part III.
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CARACO PHARMACEUTICAL LABORATORIES, LTD.
FORM 10-KSB
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or the
"Corporation") is a corporation organized under Michigan law in 1984, to engage
in the business of developing, manufacturing and marketing generic drugs for the
ethical (prescription) and over-the-counter (non-prescription or "OTC") markets.
A generic drug is a pharmaceutical product which is the chemical and
therapeutic equivalent of a brand-name drug as to which the patent and/or market
exclusivity has expired. Generics are well accepted for substitution of brand
products as they sell at a discount to the branded product's price and for their
equivalence in quality and bioavailability.
Up to 1996, a significant source of funding for the Corporation has been
from private placement offerings and from the Economic Development Corporation
of the City of Detroit (the "EDC"), which, pursuant to Section 108 of the
Housing and Community Development Act of 1974, loaned approximately $9.1 million
to the Corporation in accordance with a Development and Loan Agreement dated
August 10, 1990 (the "EDC Agreement"), and amended August 5, 1997 (the "Amended
EDC Agreement"). (See "EDC Financing" below). In 1997, the Corporation and an
Indian specialty pharmaceutical company, Sun Pharmaceutical Industries Ltd.
("Sun Pharma") completed an agreement whereby in exchange for 5,300,000 shares
of Caraco common stock, Sun Pharma agreed to invest $7.5 million into the
Corporation over a period of approximately two years in four installments.
Caraco received the final installment in 1998. Sun Pharma will also provide the
Corporation with products in exchange for shares of Common Stock. (See "Sun
Pharmaceutical Industries Ltd." below.) The Corporation commenced a private
placement of common stock in 1998 to raise up to $5 million. As of December 31,
1998, the Corporation has raised $1,161,000.
CURRENT STATUS OF CORPORATION
The Corporation continues to sustain substantial operating losses, and
its ability to continue as a going concern is dependent on raising additional
funds and achieving profitable operations (See "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations.") Debt at
December 31, 1998 includes a note payable to the EDC in the amount of $8,880,000
related to funds advanced to the Corporation pursuant to the EDC Agreement. The
Amended EDC Agreement included deferral of scheduled principal and interest
payments for the period April 1996 to January 1999 until February 1999 to aid
the Corporation in achieving adequate cash flows to assure Caraco's ability to
fund its current operations and continue to develop products. (See "EDC
Financing" below.) The Corporation is currently renegotiating the repayment
schedule with the EDC and, as such, has not made the scheduled February and
March 1999 payments of approximately $168,000 each. The Corporation intends to
commence payments upon final resolution of the restructured terms. As disclosed
above, Sun Pharma has, as of December, 1998, remitted a total of $7.5 million to
the Corporation for the
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purchase of common shares. Sun Pharma has also agreed to lend the Corporation up
to $5.3 million as an unsecured loan, on an as needed basis at an annual
interest rate of 10%. As of December 31, 1998, Sun Pharma has loaned the
Corporation $300,000 of the $5.3 million. Caraco is currently focusing its
efforts on developing additional products, strengthening its current
relationships and developing new alliances with industry partners in order to
increase usage of its underutilized plant capacity and increase revenues. Caraco
intends to seek adequate financing to fund the foregoing objectives and current
operations.
OVERVIEW OF THE GENERIC DRUG INDUSTRY
Sales of generic drugs have increased in recent years because of a number
of factors including (i) modification of state laws to permit or require
substitution of generic drugs by pharmacists; (ii) enactment of Abbreviated New
Drug Applications (ANDAs) procedures for obtaining Food and Drug Administration
("FDA") approval to manufacture generic prescription drugs; (iii) changes in
governmental and third-party payor health care reimbursement policies to
encourage cost containment; (iv) increased acceptance of generic drugs by
physicians, pharmacists and consumers; and (v) the increasing number of formerly
patented drugs which have become available to generic competition. Moreover,
every year branded drugs with significant sales volumes come off-patent.
CARACO'S PRODUCTS AND PRODUCT STRATEGY
Caraco's present product portfolio includes nine products in 14 strengths
in 33 package sizes. In 1997, the Corporation introduced Metoprolol Tartrate
(See "Hexal-Pharma GmbH & Co., Kg" below) and Paromomycin into its product line.
The Corporation developed an ANDA product, Selegeline Hcl, for Apotex, Inc. (See
"Apotex, Inc." below) which was approved by the FDA in June, 1997. The
Corporation is currently manufacturing the product for Apotex for sale under the
Apotex label.
In 1998, the Corporation introduced two (2) DESIs into the marketplace
and completed two (2) ANDA submissions to the FDA. Currently, three (3) DESI
products have been developed and are ready for marketing.
During 1998, Sun Pharma's dedicated development laboratory in Bombay was
actively working on multiple ANDA submissions and the introduction of DESI
products for 1999 in connection with its agreement with the Corporation. (See
"Sun Pharmaceutical Laboratories Ltd." below.) To date, Sun Pharma has
facilitated the transfer of technology to Caraco with respect to four ANDAs and
two DESI products. To date, including the transfer of technology by Sun Pharma,
the Corporation has 21 products in various stages of active development. There
is no assurance, however, that any of these products will be marketed. The
Corporation expects to develop four (4) to six (6) products each year.
The Corporation is in the process of negotiating strategic alliances with
two pharmaceutical companies for product development, manufacturing and/or
marketing.
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HEXAL-PHARMA GMBH & CO., KG
The Corporation and Hexal-Pharma GmbH & Co., KG, a German pharmaceutical
company and its United States affiliate (together, "Hexal") entered into an
agreement dated as of October 1, 1993, pursuant to which Hexal has agreed to
convey to the Corporation the formulations, technology, manufacturing processes
and know-how, and other relevant information, and to pay for the bioequivalency
studies required for the preparation of ANDAs for each of two specified generic
drugs (the "Products"). Hexal will receive royalties on the yearly sales of each
Product. The Corporation filed an ANDA in March 1995, in which it received
approval from the FDA in December 1996. The product, Metoprolol Tartrate, was
introduced in 1997. (See "Caraco's Products and Product Strategy".) Hexal has
decided not to proceed with the development of the second product.
In addition, the Corporation has granted to Hexal, for each Product (i) a
Sign-Up Option to purchase 100,000 shares of Common Stock at $3.50 a share; and
(ii) a Product Option to purchase shares at an exercise price of $1 3/8 as of
December 10, 1996, per share. These options may be exercised and payment for
shares may be made only out of royalties (and any interest earned on the
royalties while held by the Corporation) payable to Hexal for sales of the
related product.
The Agreement provides that the Corporation will hold all royalties until
receipt of Hexal's written instructions either to pay the royalties in cash or
to apply the royalties held to the exercise of the related options. While a
Sign-Up Option remains unexercised, the Corporation will accrue the amount of
royalties attributable to the related Product. If Hexal shall fail to deliver to
the Corporation, within 36 months after a given year's royalties on sales of
that Product become payable, its written instructions to apply those funds to
the exercise of the related Sign-Up Option, the number of shares subject to that
option shall be reduced by that many number of shares which the accrued
royalties paid in cash could have purchased. Thereafter, each year's royalties
for sales of a Product will be held by the Corporation for a maximum of five
years, during which period Hexal may direct that the royalties be paid to it in
cash or applied to the exercise of the related Product Option. Any royalties
paid in cash to Hexal may not thereafter be applied to the exercise of a Sign-Up
or a Product Option.
CLONMEL CHEMICALS CO., LTD. (IRELAND)
On October 22, 1993, the Corporation entered into an agreement with
Clonmel Chemicals Co., Ltd. ("Clonmel"), pursuant to which Clonmel provided to
the Corporation, with respect to each of two generic pharmaceutical products,
formulations that have been previously tested, the formulation and manufacturing
methods, in process controls, finished product specifications, analytical
methods and stability data required for the Corporation to manufacture its own
bio-batches (sample batches of the product in amounts necessary for testing on
humans) for use in the preparation and filing with the FDA of ANDAs with respect
to these products. Pursuant to the agreement, Caraco must bear all costs of
developing the products and filing the ANDAs and must pay Clonmel $10,000 on
delivery of complete files containing the foregoing data, another $20,000 on
completion of a successful bioequivalency study (which study will be at Caraco's
expense), and a final $20,000 upon receipt of FDA approval of the related ANDA.
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Clonmel has granted the Corporation the exclusive right to manufacture and
market these products in the United States, including its territories and Puerto
Rico, and in Canada; and the Corporation has agreed to pay royalties to Clonmel
on net sales (as defined) of these products for five years from the date on
which the marketing of the respective product commences. The formulations were
delivered to the Corporation in 1994 and a bioequivalency study of one of the
products was conducted and an ANDA was filed in January 1997. The second product
is not currently being pursued due to changing market conditions and technical
issues. There can be no assurance that the Corporation will receive FDA approval
of the ANDA which has been filed or when FDA approval will be forthcoming; nor
that the Corporation will be able to manufacture and sell the product
profitably. The Corporation anticipates product introduction in the marketplace
in the year 2000.
APOTEX, INC.
In June 1994, the Corporation announced its agreement to develop and
manufacture one or more generic drug products for Apotex U.S.A., the New York
based subsidiary of Apotex, Inc., reportedly the largest wholly-Canadian-owned
pharmaceutical company. The Corporation formulated the first product Selegeline
Hcl in 1995 and an ANDA was filed in March 1996. The ANDA was approved by the
FDA in June 1997, and the product is currently being marketed by Apotex. (See
"Caraco's Products and Product Strategy".)
SUN PHARMACEUTICAL INDUSTRIES LTD.
In 1997, Sun Pharma and the Corporation entered into an agreement
pursuant to which, during a five year period, Sun Pharma shall sell to Caraco
the right to develop, manufacture and sell 25 generic pharmaceutical products,
(provided that any product which is a DESI (drug efficiency study
implementation) product only counts as 1/3 of a product), in exchange for
544,000 shares of Caraco Common Stock for each product (181,333 shares, for each
DESI product). As of December 31, 1998, Sun Pharma has earned 1,269,333 shares
for two ANDAs and one DESI product. Such shares will be issued in 1999.
In connection therewith Sun Pharma has invested in a dedicated
development laboratory employing 26 scientists (six PhDs, pharmacy graduates,
analytical chemists and regulatory professionals) in Bombay, India, to
facilitate speedy development of new products and smooth technology transfer.
(See also "Caraco's Products and Product Strategy".)
EDC FINANCING
Pursuant to Section 108 of the Housing and Community Development Act of
1974, the EDC loaned approximately $9.1 million to the Corporation in 1990 in
accordance with the EDC Agreement. These funds were used to pay the direct costs
of acquiring land and constructing thereon the Corporation's pharmaceutical
manufacturing facility and executive offices. (See Item 2. "Description of
Property.") In 1993, repayment of this indebtedness was personally guaranteed by
the Corporation's founder and former Chairman of the Board and his spouse. (See
"Current Status of Corporation", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 5 of Notes to Financial
Statements.)
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On August 5, 1997, the Corporation and EDC restructured the Corporation's
loan from the EDC, pursuant to a Second Note and Modification Agreement
("Modification Agreement"), in connection with the Corporation's default on such
loan. Among other things, the Modification Agreement modified the previous note
then in effect (the "Note") to provide that the regularly scheduled monthly
payments which would otherwise be due and payable during the period from April
1, 1996 through and including January 1, 1999 (the "Deferred Payments") would be
deferred until February 1, 1999. On February 1, 1999, Caraco is required to
resume making regularly scheduled monthly payments of principal and interest,
together with additional payments of principal and interest in an amount
sufficient to amortize the total amount of: (i) the Deferred Payments, and (ii)
accrue interest on that portion of the currently outstanding indebtedness that
would have been amortized by the Deferred Payments, commencing on the date when
due under the terms of the original loan agreement, at the rate set forth in the
note over a period of 42 consecutive months commencing on February 1, 1999 and
ending on July 1, 2002 ("Additional Payments"). In the event, however, that with
respect to the first quarter of operation in which Caraco's operating income
before federal income taxes plus depreciation exceeds $500,000 on the first day
of the six months succeeding such quarter, the regularly scheduled payment
required to be made shall resume and the Additional Payments shall commence,
provided, however, that the Additional Payments shall be reduced to the amount
necessary to amortize the total of the sums set forth in (i) and (ii) above over
a 42 month period commencing on the first day of the six months succeeding such
quarter. During the month of December 1998 the Corporation approached the EDC
regarding reconsideration of the repayment terms. The Corporation is currently
renegotiating the repayment schedule with the EDC and, as such, has not made the
scheduled February or March 1999 payments of approximately $168,000 each. The
Corporation intends to commence payments upon final resolution of the
restructured terms.
The mortgage is a first priority mortgage lien against the property and
may not be subordinated to the lien on any other mortgage or encumbrance except
as otherwise provided in the Modification Agreement. In addition, Caraco has
granted EDC a continuing security interest in all of its assets, accounts,
equipment, proceeds thereof, ANDAs and in the products to be provided by Sun to
Caraco under its agreement with Caraco. See "Sun Pharmaceutical Industries
Limited" above. In addition to other covenants, Caraco has agreed that its
capital expenditures will not exceed $2 million without the consent of the EDC
and it will not redeem any of its outstanding shares, pay any dividends with
respect to its outstanding common shares or merge or consolidate with any other
corporation or other entity without the prior written consent of the EDC.
MARKETING
The Corporation's marketing objective has been to create a distribution
system by which to obtain access to a wide range of purchasers of generic
pharmaceutical products. Internally, this requires at least a minimum sales
force (see "sales" below); externally, it requires forging relationships, often
contractual in nature, with wholesalers, distributors, governmental agencies,
and buying groups, among others. Management is aware that, despite any success
in creating these distribution links, sales volume will remain low until the
Corporation can offer a broader range of products needed by drug purchasers in
significant amounts. In anticipation of its ability, through strategic alliances
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and its own internal product development efforts to broaden its product line, it
has been putting distribution links in place.
Drug wholesalers, with an estimated 75% of the drug market, comprise a
strategic link in the pharmacy distribution chain. They are used by drug
manufacturers because they are a cost effective means of reaching thousands of
drug purchasers and are used by most drug purchasers because they constitute a
reasonably local, stocking source for hundreds or thousands of products from
multiple manufacturers.
The top five drug wholesalers in 1998 accounted for over $45 billion in
sales. Caraco's product line is now represented in these top drug wholesalers;
McKesson Drug, Bergen Brunswig, Cardinal, Ameri Source and Bindley. Caraco's
products are now stocked by many other drug wholesalers, partly as a result of
the Corporation's arrangements discussed below with buying groups.
Federal and state agencies purchase a large amount of generic
pharmaceutical products. All of the Corporation's products are now listed for
purchase at prices bid by the Corporation in the Federal Supply Schedule, the
Federal Bureau of Prisons Prime Vendor Program, the Veterans Administration
Prime Vendor Program, the Department of Defense and by various state agencies.
To date, revenues from these agencies have been insignificant.
A large number of buying groups of retail pharmacists, hospitals, nursing
homes and other regional or functionally similar categories of drug purchasers
use their members' combined purchasing power to induce drug manufacturers or
other vendors to submit bid prices at which their members may individually
purchase products through designated wholesalers. The Corporation as part of its
ongoing marketing efforts, is pursuing arrangements with additional wholesalers
and expanding its sales network of buying groups, wholesalers, hospitals and
hospital chains, nursing and retirement home groups, state and federal
government agencies, and retail pharmacies. As and if the Corporation's
financial resources permit the increase in personnel, these efforts will be
expanded as discussed below.
SALES AND CUSTOMERS
Still a small organization with a relatively limited product line, Caraco
has only a small sales organization. At the present time, the Corporation's
sales department consists of five employees. As the product line grows and sales
increase, management intends to increase its sales personnel as its resources
permit. This will enable the Corporation to expand sales coverage to more
generic drug purchasers which, in turn, the Corporation believes, will generate
additional sales volume.
Shipments to one wholesale customer accounted for approximately 13% and
20% of net sales in 1998 and 1997, respectively. Balances due from this customer
represented approximately 13% and 9% of accounts receivable at December 31, 1998
and 1997, respectively.
Shipments to another wholesale customer accounted for approximately 17%
and 24% of net sales in 1998 and 1997, respectively. Balances due from this
customer
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represented approximately 2% and 16% of accounts receivable at December
31, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT
The development of new prescription ANDA products, including formulation,
stability testing and the FDA approval process, averages from two to five years.
A drug is "bioequivalent" to a brand-name drug if the rate and extent of
absorption of the drug are not significantly different from those of the
brand-name drug. Although the Corporation performs its own stability testing,
the Corporation's FDA-required testing for bioequivalence is done through
independent testing laboratories. Each dosage level of a specific drug generally
requires separate bioequivalence studies, although more than one dosage level
can be included in a single ANDA.
An outline of research and development expenses for 1997 and 1998 follows
(000's):
1998 1997
Employee Costs $1,212 $ 760
Raw Materials/Supplies 377 146
Bioequivalency Studies 421 0
Laboratory Expenses 447 404
Other 393 136
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$2,850 $1,446
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REGULATION
The research and development, manufacture and marketing of the
Corporation's products are subject to extensive regulation by the FDA and by
other federal, state and local entities, which regulate, among other things,
research and development activities and the testing, manufacture, labeling,
storage, recordkeeping, advertising and promotion of pharmaceutical products.
The Federal Food, Drug and Cosmetic Act, the Public Health Services Act,
the Controlled Substances Act and other federal statutes and regulations govern
or influence all aspects of the Corporation's business. Noncompliance with
applicable requirements can result in fines and other judicially imposed
sanctions, including product seizures, injunction actions and criminal
prosecutions. In addition, administrative remedies can involve voluntary recall
of products, and the total or partial suspension of products as well as the
refusal of the government to approve pending applications or supplements to
approved applications. The FDA also has the authority to withdraw approval of
drugs in accordance with statutory due process procedures.
FDA approval is required before any dosage form of any new unapproved
drug, including a generic equivalent of a previously approved drug, can be
marketed. All applications for FDA approval must contain information relating to
product formulation, stability, manufacturing processes, packaging, labeling and
quality control. To obtain FDA approval for an unapproved new drug, a
prospective manufacturer must also demonstrate compliance with the FDA's current
good manufacturing practices ("cGMP") regulations as well as provide substantial
evidence of safety and efficacy of the drug product. Compliance with cGMP's is
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required at all times during the manufacture and processing of drugs. Such
compliance requires considerable Corporation time and resources in the areas of
production and quality control.
There are generally two types of applications that would be used to
obtain FDA approval for pharmaceutical products:
New Drug Application ("NDA"). Generally, the NDA procedure is
required for drugs with active ingredients and/or with a dosage form,
dosage strength or delivery system of an active ingredient not
previously approved by the FDA. Caraco does not expect to submit an NDA
in the foreseeable future.
Abbreviated New Drug Application ("ANDA"). The Waxman-Hatch
Act established a statutory procedure for submission of ANDAs to the
FDA covering generic equivalents of previously approved brand-name
drugs. Under the ANDA procedure, an applicant is not required to submit
complete reports of preclinical and clinical studies of safety and
efficacy, but instead is required to provide bioavailability data
illustrating that the generic drug formulation is bioequivalent to a
previously approved drug. Bioavailability measures the rate and extent
of absorption of a drug's active ingredient and its availability at the
site of drug action, typically measured through blood levels. A generic
drug is bioequivalent to the previously approved drug if the rate and
extent of absorption of the generic drug are not significantly
different from that of the previously approved brand-name drug.
The FDA may deny an ANDA if applicable regulatory criteria are not
satisfied. Product approvals may be withdrawn by the FDA if compliance with
regulatory standards is not maintained or if new evidence demonstrating that the
drug is unsafe or lacks efficacy for its intended uses becomes known after the
product reaches the market.
Changes in FDA policy and requirements have increased the time and
expense involved in obtaining ANDA approvals and in complying with FDA's cGMP
standards. The ANDA filing and approval process now averages approximately two
to five years. FDA approval is required before each dosage form of any new drug
can be marketed. Applications for FDA approval must contain information relating
to bioequivalency, product formulation, raw material suppliers, stability,
manufacturing processes, packaging, labeling and quality control. FDA procedures
require full-scale manufacturing equipment to be used to produce test batches
for FDA approval. Validation of manufacturing processes by the FDA also is
required before a company can market new products. The FDA conducts pre-approval
and post-approval reviews and plant inspections to enforce these rules.
Supplemental filings are required for approval to transfer products from one
manufacturing site to another and may be under review for a year or more. In
addition, certain products may only be approved for transfer once new
bioequivalency studies are conducted.
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The Generic Drug Enforcement Act of 1992 establishes penalties for
wrongdoing in connection with the development or submission of an ANDA by
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA, and to temporarily
deny approval and suspend applications to market off-patent drugs. The FDA has
authority to withdraw approval of an ANDA under certain circumstances and to
seek civil penalties. The FDA can also significantly delay the approval of a
pending ANDA under certain circumstances and to seek civil penalties. The FDA
can also significantly delay the approval of a pending ANDA under its "Fraud,
Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy."
Manufacturers of drugs must also comply with the FDA's cGMP standards or risk
sanctions such as the suspension of manufacturing or the seizure of drug
products and the FDA's refusal to approve additional ANDAs.
The Drug Enforcement Agency ("DEA") conducts inspections bi-annually.
During the DEA's 1998 inspection of the Corporation, no items of noncompliance
were noted. Although management believes that the Corporation is in compliance
with the FDA's cGMP's, there can be no assurance that, as the Corporation
endeavors to engage in increasing drug manufacturing activities, it will be able
to maintain a successful compliance program. The evolving and complex nature of
regulatory requirements, the broad authority and discretion of the FDA and the
generally high level of regulatory oversight results in a continuing possibility
that from time to time the Corporation will be adversely affected by regulatory
actions despite its ongoing efforts and commitment to achieve and maintain full
compliance with all regulatory requirements. If the Corporation should fail to
maintain full compliance, it may be the target of any of the range of
enforcement remedies available to the government described above.
Each domestic drug product manufacturing establishment must be registered
with the FDA. Establishments handling controlled substances must be licensed by
the DEA.
The Corporation is also subject to regulation under other federal, state
and local regulations regarding work place safety, environmental protection and
hazardous substance controls, among others. Specifically, the Corporation is
licensed by the Michigan Board of Pharmacy as a manufacturer and wholesaler of
prescription drugs and as a distributor of controlled substances. It is also
licensed by the Michigan Liquor Control Commission to use alcohol in the
manufacture of drugs.
The Corporation believes that it is in compliance with environmental
laws.
SUPPLIERS AND MATERIALS
The principal components used in the Corporation's business are active
and inactive pharmaceutical ingredients and certain packaging materials. Many of
these components are available only from sole source suppliers. Development and
approval of the Corporation's pharmaceuticals are dependent upon the
Corporation's ability to procure active ingredients and certain packaging
materials from FDA approved sources. Because the FDA approval process requires
manufacturers to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval of a new
supplier would be required if active ingredients or such packaging materials
were no
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longer available from the specified supplier. The Corporation has been,
and continues to be, active in identifying and validating alternative suppliers
for its active ingredients.
Although to date no significant difficulty has been encountered in
obtaining components required for products and sources of supply are considered
adequate, there can be no assurance that the Corporation will continue to be
able to obtain components as required.
COMPETITION
The market for generic drugs is highly competitive. There is intense
competition in the generic drug industry in the United States which is eroding
price and profit margins. The Corporation competes with numerous pharmaceutical
manufacturers, including both generic and brand-name manufacturers, many of
which have been in business for a longer period of time than the Corporation,
have a greater number of products on the market and have considerably greater
financial, technical, research, manufacturing, marketing and other resources.
The principal competitive factor in the generic pharmaceutical market is
the ability to be the first company, or among the first companies, to introduce
a generic product after the related patent expires. Other competitive factors
include price, quality, methods of distribution, reputation, customer service
(including maintenance of inventories for timely delivery) and breadth of
product line. Approvals for new products may have a synergistic effect on a
company's entire product line since orders for new products are frequently
accompanied by, or bring about, orders for other products available from the
same source. The Corporation believes that price is a significant competitive
factor, particularly as the number of generic entrants with respect to a
particular product increases. As competition from other manufacturers
intensifies, selling prices typically decline.
EMPLOYEES
As of December 31, 1998, the Corporation had 43 full-time employees, of
which 12 are engaged in research and development, seven in quality assurance,
five in quality control, two in administration, five in sales and marketing, two
in materials management, three in facility management, and seven in
manufacturing. Most of the Corporation's scientific and engineering employees
have had prior experience with pharmaceutical or medical products companies. No
employee is represented by a union, and the Corporation has never experienced a
work stoppage.
PRODUCT LIABILITY AND INSURANCE
The Corporation currently has in force general and product liability
insurance, with coverage limits of $5 million per incident and in the aggregate.
The Corporation's insurance policies provide coverage on a claim made basis and
are subject to annual renewal. Such insurance may not be available in the future
on acceptable terms or at all. There can be no assurance that the coverage
limits of such policies will be adequate to cover the Corporation's liabilities,
should they occur.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Corporation's 70,611 square foot facility, which was designed and
constructed to the Corporation's specifications and completed in 1992, contains
its production, packaging, research and corporate office. It is on a four acre
site acquired by the Corporation from the EDC of the City of Detroit pursuant to
a mortgage loan. (See "EDC Financing" above.) This manufacturing facility has a
special building and systems design, with each processing area equipped with
independent zone and air handling units to provide temperature and humidity
control to each room. These air handling units are designed to prevent product
cross contamination through the use of pre-filter and final HEPA filter banks.
All processing air quarters are maintained in a negative pressure mode using
laminar air flow design. This system of air flow provides a measurable control
of air borne particulate entrapment in each room.
Environmental segregation of individual rooms within a particular zone is
accomplished by the use of duct HEPA filter booster fan units that facilitate
the isolation and confinement of room activities. These special dynamics provide
an added dimension and flexibility in product selection and processing
techniques. The design allows all processing areas, with a modest capital
addition, to be equipped with purified breathing air systems to facilitate the
use of custom handling and control as product requirements warrant. That capital
addition will not be made until consummation of a strategic alliance, with
specific product requirements, which would make such addition financially sound.
ITEM 3. LEGAL PROCEEDINGS.
The Corporation is not a party to any litigation which, individually or
in the aggregate, is believed to be material to the Corporation's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporation did not submit any matters to a vote of security holders
in the fourth quarter of the fiscal year, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low bid information for the
Corporation's Common Stock for each full quarter from January 1, 1997 through
December 31, 1998, as disclosed on the OTC Bulletin Board. The quotations
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not represent actual transactions.
PERIOD HIGH BID LOW BID
Quarter Ended March 31, 1997 1 5/16 1 1/8
Quarter Ended June 30, 1997 3/4 13/20
Quarter Ended September 30, 1997 1 3/16 1 3/16
13
<PAGE> 14
PERIOD HIGH BID LOW BID
Quarter Ended December 31, 1997 3/4 5/8
Quarter Ended March 31, 1998 7/8 17/20
Quarter Ended June 30, 1998 15/16 9/10
Quarter Ended September 30, 1998 17/20 4/5
Quarter Ended December 31, 1998 5/8 3/5
As of March 15, 1999 there were approximately 143 holders of the
Corporation's Common Stock.
On September 22, 1998, in connection with his execution of an employment
agreement, Narendra N. Borkar, the Chief Executive Officer of the Corporation,
was granted a stock bonus of 50,000 shares of Common Stock and granted a stock
option to purchase up to 150,000 shares of Common Stock at an exercise price of
$.66 per share. The option vests 20% per year over a five-year period commencing
on September 22, 1999. The option terminates on September 22, 2004. The grant of
the Common Stock and the grant of the stock option were made pursuant to
exemptions from registration under Section 4(2), Section 4(6) and Regulation D
under the Securities Act of 1933.
In December 1998, the Corporation commenced a private placement offering
to accredited investors of shares of Common Stock. Through December 31, 1998,
1,319,317 share of Common Stock were issued pursuant to exemptions from
registration under Section 4(2), Section 4(6) and Regulation D under the
Securities Act of 1933.
DIVIDEND POLICY
The Corporation has not declared or paid any dividends and does not
intend to declare or pay any dividends in the foreseeable future. The
Corporation intends to employ all available funds in the development of its
business. The Corporation's Series A Preferred Stock contains provisions
restricting the payment of dividends to the holders of the Common Stock unless
the holders of the Series A Preferred Stock have been paid the dividends to
which they are entitled. Dividends have been accrued, but not paid, on the
Series A Preferred Stock on a cumulative basis since January 1, 1997. In
addition the loan agreement with the EDC includes a covenant restricting the
payment of dividends during the Deferral Period (see "EDC Financing").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis provides information that
management believes is relevant to an understanding of the Corporation's
consolidated results of operation and financial condition. The discussion should
be read in conjunction with the consolidated statements and notes thereto.
The discussion in this section contains forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934. The
forward-looking statements include statements regarding the intent, belief and
current expectations of the Corporation and its management. Such forward-looking
statements are not guarantees of the future performance of the Corporation, and
involve a number of risks and uncertainties. Actual results could differ
14
<PAGE> 15
materially from those indicated by such forward-looking statements. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are: (i) that the information
is of a preliminary nature and may be subject to further adjustment; (ii)
variations in quantity results; (iii) success in obtaining additional financing;
(iv) success in amending the EDC Agreement; (v) governmental restrictions on the
sale of certain products; (vi) obtaining FDA approvals (vii) successful
manufacturing and marketing of commercially viable products on a timely basis;
(viii) dependence on key personnel; (ix) development by competitors of new or
superior products or new technology for the production of products or the entry
into the market of new competitors; (x) integrity and reliability of the
Corporation's data; and (xi) other risks identified from time to time in the
Corporation's reports and registration statements filed with the Securities and
Exchange Commission.
OVERVIEW
The Corporation has historically experienced limited sales, operating
losses and cash flow difficulties. Funding for operations and new-product
development has been severely restricted. The management team spent most of 1997
and 1998 finding investors and partners to provide necessary equity funding to
enable the Corporation to continue operations. In 1997, the management team
completed several pivotal financing agreements on behalf of the Corporation.
Among them were agreements with Sun Pharma of India, the EDC, and several
shareholder directors.
In 1997, Sun Pharma entered into an agreement to purchase 5.3 million
shares of Caraco's common stock for $7.5 million in cash. The $7.5 million was
paid to Caraco and related shares were issued in 1997 and 1998. The funds were
utilized for reduction of past due trade accounts and taxes, enhance research
and development, and other general corporate purposes. In addition, Sun Pharma
agreed to transfer technology for 25 drugs, over five years, in exchange for
544,000 shares of Caraco common stock for each ANDA product and 181,333 shares
of Caraco stock for each DESI product. During 1998 Sun Pharma has earned the
right to receive 1,269,333 common shares having delivered two (2) ANDA and one
(1) DESI product. Such shares will be issued in 1999. (See "Current Status of
Corporation" and "Sun Pharmaceutical Industries Ltd.")
The EDC loaned approximately $9.1 million to the Corporation in 1990 to
acquire land and construct the Corporation's current manufacturing and executive
offices. In 1997, the EDC agreed to restructure the Corporation's mortgage and
equipment loan, then totaling $8.8 million, wherein principal and interest
payments were deferred to February 1999. During the month of December 1998 the
Corporation approached the EDC regarding reconsideration of the repayment terms,
which were scheduled to begin February 1999. The Corporation is currently
renegotiating the repayment schedule with the EDC and, as such, has not made the
scheduled February and March 1999 payments. The Corporation intends to commence
payments upon final resolution of the amended terms. (See "EDC Financing".)
In 1996 and 1997, three shareholder directors and Sun Pharma Global
loaned approximately $2 million to the Corporation on an unsecured basis for
working capital purposes. The directors and Sun Pharma Global have agreed to
convert interest totaling
15
<PAGE> 16
$533,366, due August 1999, into payment in common shares of the Corporation's
stock, at the rate of $1.50 per share.
In October 1998, the Corporation borrowed $300,000 on an unsecured
basis from Sun Pharma for working capital purposes. Interest at 10% will be paid
on an annual basis.
In addition to financing activities, principal management efforts in
1998 focused on sales and marketing, research and development, and operational
improvements specifically in manufacturing, quality control, and quality
assurance.
NET SALES
Net sales for the years ended December 31, 1998 and 1997 were
$2,663,633 and $871,573, respectively. The approximate 205% increase was
attributable to several factors: the availability of funds leading to better
product availability; improved sales and marketing; favorable market conditions
for generic drugs in general and the Corporation's mix of generic drugs in
particular; sales to new customers including new distributors, retail drug store
chains and managed care entities; the full-year impact of sales of two new
products, and the partial year impact of sales of one new product; along with
contract manufacturing for third parties. Sales increased each quarter over the
prior year's comparable quarters. Fourth quarter sales were $1.1 million,
reflecting an annualized rate $4.4 million.
COST OF SALES
Though net sales rose 205% in 1998 over 1997, the cost of sales for
1998 rose by only 34% over 1997. Cost of sales for the years ended December 31,
1998 and 1997 were $2,244,932, or 84% of net sales, compared to $1,673,102, or
192% of net sales, in 1997. The improvement in 1998 resulted from various
factors, including strict cost controls in manufacturing and utility expense
areas, purchasing of raw materials at competitive prices, improved inventory
management, higher manufacturing volumes, and better plant utilization. Plant
capacity utilization has been enhanced by the introduction of new products,
increased batch sizes and contract manufacturing for third parties.
GROSS PROFIT (DIFFERENTIAL)
In the year 1998, the Corporation posted a positive gross profit of
$418,701, compared with a gross loss of ($801,529) for 1997. The improvement in
1998 represents higher sales volumes, higher-margin product mix, and strict cost
control measures, as noted above.
RESULTS OF OPERATIONS
Net losses for the years ended December 31, 1998 and 1997 were
($4,971,574), and ($4,778,275), respectively. The net losses were principally
related to inadequacy of sales volume to absorb fixed operating expenses, and
higher research and development costs, particularly higher personnel costs
associated with new product development. Research and development personnel at
16
<PAGE> 17
the Corporation's headquarters complex totaled 12 at year end 1998, versus 3 at
year end 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
SG&A Expenses at $1,778,866 in 1998 were maintained at almost the same
level of 1997 of $1,704,623. The nominal increase is attributable to increases
in employee compensation costs, legal fees and consulting charges for
professional services. These slightly higher costs were offset somewhat by a
reduction in the number of employees.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES
Research and Development Expenses for 1998 rose 97% to $2,850,301, from
$1,446,862 in 1997. The increase reflects the availability of funds and the
Corporation's commitment to new product development as a means to increase and
diversify its product offerings. Included in the research and development
expenses were those for staff comprising 12 drug researchers, noted above, and
direct expenses for the development of generic drugs and preparation of drug
applications to the FDA. In 1998, the Corporation introduced two new products
into the marketplace, completed two ANDA submissions to the FDA and had a total
of 21 generic drugs in various stages of active development.
INTEREST INCOME
Interest income for 1998 was $42,209, compared with $6,417 for 1997.
Interest income results from short-term interest earning deposits.
INTEREST EXPENSE
Interest expense of $803,317 and $817,586 for the years ended December
31, 1998 and 1997 respectively was incurred primarily in connection with the
Corporation's mortgage obligation to the Economic Development Corporation of
Detroit.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Corporation's working capital was $405,818
compared with working capital of $239,243 at December 31, 1997. The increase
principally reflects the Corporation's higher sales volume and funding from Sun
Pharma relative to its 1997 agreement with the Corporation. Subsequent to
December 31, 1998, Sun Pharma agreed to establish a $5.3 million unsecured
credit line facility for use by Caraco for research and development, working
capital and other corporate purposes.
FUTURE OUTLOOK
Management's plan with regard to improving profitability, cash flows
and operations include infusion of additional funding from Sun Pharma in the
amount of $5.3 million unsecured credit and generating operating profits by:
1. Focusing on research and development with a staff of 12 scientists as
compared to three in the previous year. Additionally, continued support
17
<PAGE> 18
from Sun Pharmaceutical Industries having 26 researchers working in
India supporting Caraco's research and development efforts. These
personnel have a proven background in the pharmaceutical development.
2. The research and development team has already established
bio-equivalence of three ANDA products, out of which two have been
filed with the FDA for approval. Further, three DESI products have been
developed and are ready for marketing. The team is presently working on
21 products which are in different stages of development. There is no
assurance, however, that any of these products will be developed and
marketed. The Corporation expects to complete the development of four
to six products each year.
3. The Corporation intends to increase the width and depth of product
portfolio to serve the customers effectively.
4. With the increase in the number of products, as well as anticipated
volume increases for existing products, it is expected that
manufacturing capacity utilization will improve substantially,
resulting in better cost absorption and improved margins.
5. The Corporation will strive to enhance customer reach and achieve
customer satisfaction through reliable product deliveries.
6. The Corporation is presently evaluating alliances with leading
companies for manufacturing and development of new pharmaceutical
products.
YEAR 2000
The Corporation uses computer hardware and financial and manufacturing
software that it purchased from third party suppliers. Such suppliers have
confirmed to the Corporation that such products are Year 2000 compliant.
Consequently, the Corporation does not expect to incur any significant costs to
become Year 2000 compliant. The Corporation has no information concerning the
Year 2000 compliance status of its suppliers or customers. If any of the
Corporation's significant suppliers or customers do not successfully and timely
become Year 2000 compliant, the Corporation's business or operations could be
adversely affected. The Corporation has not yet generated any disaster
contingency plans related to the Year 2000 compliance issue.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements included in this report are set forth following
the index to financial statements included in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
18
<PAGE> 19
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT.
The information with respect to directors and executive officers of the
Corporation is included in the Corporation's definitive Proxy Statement under
the sections "Election of Directors", "Meetings and Committees of the Board of
Directors", and "Compliance with Section 16(a)", which are incorporated herein
by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information regarding executive compensation is included in the
Corporation's definitive Proxy Statement under the section "Executive
Compensation", which is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to the security ownership of certain
beneficial owners and management is included in the Corporation's definitive
Proxy Statement under the section "Security Ownership of Certain Beneficial
Owners and Management", which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information with respect to certain relationships and related
transactions are included in the Corporation's definitive Proxy Statement under
the Section "Certain Relationships and Related Transactions", which is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
3.01 Registrant's Amended and Restated Articles of Incorporation, as
amended**
3.02 Registrant's Amended and Restated Bylaws**
3.03 Certificate of Amendment to the Articles of Incorporation filed
February 13, 1997.*****
10.01 Development and Loan Agreement, dated August 10, 1990, between
Registrant and The Economic Development Corporation of the City of
Detroit; First Amendment thereto, dated December 3, 1990; Second
Amendment thereto, dated April 2, 1993; and supplemental letter,
dated October 26, 1993 and agreement.*
10.02 Amended and Restated Section 108 Guaranty Agreement, dated as of
August 10, 1990, of C. Arnold Curry and Cara Jean Curry in favor of
the Economic Development Corporation of the City of Detroit.*
19
<PAGE> 20
10.03 Registrant's Amended and Restated Purchase Money Promissory Note,
dated as of August 10, 1990, in the principal amount of $157,500,
to the order of the Economic Development Corporation of the City of
Detroit.*
10.04 Registrant's Amended and Restated Section 108 Note, dated August
10, 1990 in the principal amount of $9,000,000, payable to The
Economic Development Corporation of the City of Detroit.*
10.05 Amended and Restated Purchase Money Mortgage, dated as of August
10, 1990, between Registrant as mortgagor and The Economic
Development Corporation of the City of Detroit.*
10.07 Agreement, dated as of October 1, 1993, among Registrant,
Hexal-Pharma GmbH & Co., KG, and Hexal Pharmaceuticals, Inc.*
10.08 Agreement, dated October 20, 1993, between Registrant and Clonmel
Chemicals Co., Ltd.*
10.09 Form of 1993 Stock Option Plan.*
10.12 Employment Agreement, dated October 22, 1993, with Robert
Kurkiewicz.*
10.17 Warrant Purchase Agreement dated November 30, 1994, with Jay F.
Joliat.**
10.18 Series A Preferred Stock Purchase Agreement dated November 30,
1994, with Jay F. Joliat.**
10.20 Security Agreement dated January 12, 1995, with David A.
Hagelstein.**
10.21 Security Agreement dated February 2, 1995, with David A.
Hagelstein.**
10.22 Warrant to Purchase Common Stock of Caraco Pharmaceutical
Laboratories, Ltd. dated January 12, 1995, with David A.
Hagelstein.**
10.23 Contract Manufacturing Agreement dated May 1994, with Apotex USA,
Inc.**
10.27 Security Agreement dated February 15, 1996 with Jay F. Joliat.***
10.28 Secured Promissory Note dated February 15, 1996 with Jay F.
Joliat.***
10.29 Joint venture agreement dated on March 11, 1996, with Sun
Pharmaceutical Industries, Inc.***
10.32 Secured Promissory Note dated August 21, 1996 with David A.
Hagelstein.*****
10.33 Secured Promissory Note dated August 21, 1996, with Jay F.
Joliat.*****
10.34 Secured Promissory Note dated August 21, 1996, with John R.
Morris.*****
20
<PAGE> 21
10.35 Loan Commitment Letter dated August 21, 1996 with David A.
Hagelstein, Jay F. Joliat and John R. Morris.*****
10.36 Secured Promissory Note dated October 18, 1996 with Jay F.
Joliat.*****
10.37 Loan Agreement dated October 18, 1996 with Jay F. Joliat.*****
10.38 Secured Promissory Note dated November 15, 1996 with David A.
Hagelstein as Trustee of the TTEE David Hagelstein Trust UA
10-27-93.*****
10.39 Secured Promissory Note dated November 15, 1996 with Jay F.
Joliat.*****
10.40 Secured Promissory Note dated November 15, 1996 with John R.
Morris.*****
10.42 Subordination Agreement, dated December 23, 1996, between Sun
Pharma Global, Inc., Jay F. Joliat, individually, and as Trustee of
the Jay F. Joliat Qualified Terminable Interest Marital Trust,
u/a/d 4/8/82, David A. Hagelstein, individually, and as Trustee of
the TTEE David Hagelstein Trust, u/a/d 10/27/93 and John R.
Morris.*****
10.43 Secured Promissory Note dated December 23, 1996 with Sun Pharma
Global, Inc. *****
10.44 Security Agreement dated December 23, 1996 with Sun Pharma Global
Inc.*****
10.46 Secured Promissory Note dated January 30, 1997 with Jay F. Joliat,
as Trustee of the Jay F. Joliat Qualified Terminable Interest
Marital Trust u/a/d April 8, 1982.*****
10.47 Inter-Creditor Agreement, dated January 30, 1997, between Sun
Pharma Global, Inc., Jay F. Joliat, individually, and as Trustee of
the Jay F. Joliat Qualified Terminable Interest Marital Trust,
u/a/d 4/8/82, David A. Hagelstein, individually, and as Trustee of
the TTEE David Hagelstein Trust, u/a/d 10/27/93. *****
10.48 Security Agreement dated January 30, 1997 with Jay F. Joliat, as
Trustee of the Jay F. Joliat Qualified Terminable Interest Marital
Trust u/a/d April 8, 1982.*****
10.49 Secured Promissory Note dated February 3, 1997 with Jay F. Joliat,
as Trustee of the Jay F. Joliat Qualified Terminable Interest
Marital Trust u/a/d April 8, 1982.*****
10.50 Secured Promissory Note dated February 11, 1997 with David A.
Hagelstein as Trustee of the TTEE David Hagelstein Trust UA
10-27-93.*****
10.51 Security Agreement dated February 11, 1997, individually, with
David A. Hagelstein as Trustee of the TTEE David Hagelstein Trust
UA 10-27-93.*****
10.52 Allonge to Promissory Note of August 21, 1996 - Jay F. Joliat.*****
21
<PAGE> 22
10.53 Allonge to Promissory Note of August 21, 1996 - David A.
Hagelstein.*****
10.54 Allonge to Promissory Note of August 21, 1996 - John R.
Morris.*****
10.55 Allonge to Promissory Note of October 18, 1996 - Jay F.
Joliat.*****
10.56 Allonge to Promissory Note of November 15, 1996 - Jay F.
Joliat.*****
10.57 Allonge to Promissory Note of November 15, 1996 - John R.
Morris.*****
10.58 Allonge to Promissory Note of November 15, 1996 - David A.
Hagelstein.*****
10.59 Allonge to Promissory Note of November 15, 1996 - John R.
Morris.*****
10.60 Stock Purchase Agreement by and between Caraco Pharmaceutical
Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as
of April 23, 1997.******
10.61 Products Agreement by and between Caraco Pharmaceutical
Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated s
of April 23, 1997.******
10.62 Registration Rights Agreement dated as April 1997.******
10.63 Stock Pledge Agreement dated as July 28, 1997.******
10.64 Contribution Agreement dated as of March 27, 1997.******
10.65 Addendum to Contribution Agreement dated as of July 27, 1997.******
10.66 Second Note and Mortgage Modification Agreement.*******
10.67 Debt Conversion Agreement.*******
10.70 Amendment to Employment Agreement of Robert Kurkiewicz dated as of
April 1, 1997.
10.71 Employment Agreement dated September 22, 1998 with Narendra N.
Borkar.********
27 Financial Data Schedule
- ----------
* Incorporated by reference from Exhibits to Registrant's
Registration Statement on Form SB-2, as amended, which was
originally filed on November 5, 1993 as Commission File No.
33-71398C.
** Incorporated by reference from Exhibits to Registrant's Form 10-KSB
which was originally filed on or about March 30, 1995 as Commission
File no. 0-24676.
22
<PAGE> 23
*** Incorporated by reference from Exhibits to Registrant's Form 10-KSB
which was originally filed on or about March 30, 1996 as Commission
File no. 0-24676.
**** Incorporated by reference from Exhibits to Registrant's
Registration Statement of Form SB-2 filed on July 12, 1996 with the
SEC.
***** Incorporated by reference from Exhibits to Registrant's Form 10-KSB
which was originally filed on or about March 30, 1997, as
Commission File No. 0-24676.
****** Incorporated by reference from Exhibits to Registrant's Form 10-QSB
dated as of August 13, 1997.
******* Incorporated by reference from Exhibits to Registrant's Form 10-KSB
which was originally field on or about March 30, 1998, as
Commission File No. 0-24676.
******** Incorporated by reference from Exhibits to Registrant's Form 10-QSB
dated as of November 13, 1998.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
18th day of March, 1999.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
By: /s/ Narendra N. Borkar
---------------------------------------------
Narendra N. Borkar
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated above.
/s/ Narendra N. Borkar
- ----------------------- Director and Chief Executive Officer (Principal
Narendra N. Borkar Executive Officer and Principal Financial Officer)
/s/ David W. Adamany
- -----------------------
David W. Adamany Director
/s/ David A. Hagelstein
- -----------------------
David A. Hagelstein Director
23
<PAGE> 24
/s/ Phyllis Harrison-Ross
- --------------------------
Phyllis Harrison-Ross Director
/s/ Jay F. Joliat
- --------------------------
Jay F. Joliat Director
/s/ John R. Morris
- --------------------------
John R. Morris Director
- --------------------------
Dilip S. Shanghvi Chairman of the Board
- --------------------------
Shantilal Shanghvi Director
- --------------------------
Sudhir Valia Director
24
<PAGE> 25
CARACO PHARMACEUTICAL LABORATORIES, LTD.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT F-1
Balance Sheet - December 31, 1998 F-2
Statements of Operations for the years ended December 31, 1998 and 1997 F-4
Statements of Stockholders' Deficit for the years ended December 31, 1998
and 1997 F-5
Statements of Cash Flows for the years ended December 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
CARACO PHARMACEUTICAL LABORATORIES, LTD.
Detroit, Michigan
We have audited the accompanying balance sheet of Caraco Pharmaceutical
Laboratories, Ltd. (a Michigan corporation) as of December 31, 1998, and the
related statements of operations, stockholders' deficit and cash flows for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caraco Pharmaceutical
Laboratories, Ltd. as of December 31, 1998 and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Corporation will continue as a going concern. As described in Note 1 to the
financial statements, conditions exist that raise substantial doubt about the
Corporation's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
REHMANN ROBSON, PC
Farmington Hills, Michigan
March 12, 1999
F-1
<PAGE> 27
CARACO PHARMACEUTICAL LABORATORIES, LTD.
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
1 9 9 8
-------------------
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 823,576
Accounts receivable, net of allowances of $100,000 473,190
Inventories 1,269,543
Prepaid expenses and deposits 188,775
-------------------
TOTAL CURRENT ASSETS 2,755,084
-------------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305
Buildings and improvements 6,682,725
Equipment 3,911,973
Furniture and fixtures 165,319
-------------------
Total 10,957,322
Less accumulated depreciation 3,288,372
-------------------
NET PROPERTY, PLANT AND EQUIPMENT 7,668,950
-------------------
TOTAL ASSETS $10,424,034
====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 28
CARACO PHARMACEUTICAL LABORATORIES, LTD.
BALANCE SHEET
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT DECEMBER 31,
1 9 9 8
------------------
CURRENT LIABILITIES
<S> <C>
Accounts payable $ 848,316
Accrued expenses 44,950
Accrued interest 510,000
Current portion of long-term debt 1,336,000
------------------
TOTAL CURRENT LIABILITIES 2,739,266
------------------
LONG-TERM LIABILITIES
Note payable - net of current portion 7,544,000
Notes payable to stockholders 2,340,000
Accrued interest 1,256,073
Preferred stock dividends payable 120,000
------------------
TOTAL LONG-TERM LIABILITIES 11,260,073
------------------
TOTAL LIABILITIES 13,999,339
------------------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 10)
STOCKHOLDERS' 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 20,000,000 shares;
issued and outstanding 14,528,000 shares 29,025,840
Preferred stock dividends (120,000)
Accumulated deficit (33,481,145)
------------------
TOTAL STOCKHOLDERS' DEFICIT (3,575,305)
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $10,424,034
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 29
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1 9 9 8 1 9 9 7
------------------- ------------------
<S> <C> <C>
Net sales $ 2,663,633 $ 871,573
Cost of goods sold 2,244,932 1,673,102
------------------- ------------------
GROSS PROFIT (DIFFERENTIAL) 418,701 (801,529)
Selling, general and administrative expenses 1,778,866 1,704,623
Research and development costs 2,850,301 1,446,862
------------------- ------------------
OPERATING LOSS (4,210,466) (3,953,014)
------------------- ------------------
OTHER INCOME (EXPENSE)
Interest expense (803,317) (817,586)
Interest income 42,209 6,417
Gain on disposal of equipment - 7,179
Other - (21,271)
------------------- ------------------
OTHER EXPENSE - NET (761,108) (825,261)
------------------- ------------------
NET LOSS $ (4,971,574) $ (4,778,275)
=================== ==================
Net loss per basic and diluted common share $ (0.40) $ (0.57)
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 30
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance at
January 1, 1997 285,714 $ 1,000,000 7,842,106 $ 19,646,974
Receipt of common stock
subscription - - - -
Preferred stock dividends - - - -
Issuances of common stock - - 5,664,977 8,183,366
Net loss - - - -
--------- ------------- ------------ --------------
Balance at
December 31, 1997 285,714 1,000,000 13,507,083 27,830,340
Preferred stock dividends - - - -
Issuances of common stock - - 1,370,917 1,195,500
Retirement of common stock - - (350,000) -
Net loss - - - -
--------- ------------- ------------ --------------
Balance at
December 31, 1998 285,714 $ 1,000,000 14,528,000 $ 29,025,840
========= ============= ============ ==============
</TABLE>
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON
STOCK PREFERRED
SUBSCRIPTION STOCK ACCUMULATED
RECEIVABLE DIVIDENDS DEFICIT TOTAL
---------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Balance at
January 1, 1997 $ (14,087) $ - $ (23,731,296) $ (3,098,409)
Receipt of common stock
subscription 14,087 - - 14,087
Preferred stock dividends - (60,000) - (60,000)
Issuances of common stock (4,220,000) - - 3,963,366
Net loss - - (4,778,275) (4,778,275)
--------------- ------------ --------------- -------------
Balance at
December 31, 1997 (4,220,000) (60,000) (28,509,571) (3,959,231)
Preferred stock dividends - (60,000) - (60,000)
Issuances of common stock 4,220,000 - - 5,415,500
Retirement of common stock - - - -
Net loss - - (4,971,574) (4,971,574)
--------------- ------------ --------------- -------------
Balance at
December 31, 1998 $ - $ (120,000) $(33,481,145) $ (3,575,305)
=============== ============ =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 31
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1 9 9 8 1 9 9 7
------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (4,971,574) $ (4,778,275)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 551,969 486,942
Non cash interest expense 204,000 210,323
Gain on disposal of equipment - (7,179)
Realized loss on sale of marketable securities - 7,240
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (323,543) (52,306)
Inventories (728,560) (250,718)
Prepaid expenses and deposits 51,875 82,010
Accounts payable (310,829) (402,615)
Accrued interest and other expenses 544,519 526,029
------------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (4,982,143) (4,178,549)
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (332,637) (31,863)
Proceeds from sale of property, plant and equipment - 14,000
Proceeds from sale of marketable securities - 74,760
------------------- ------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (332,637) 56,897
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 5,415,500 3,444,087
Net short-term borrowings (repayments) 300,000 (65,000)
Proceeds of long-term debt - 1,150,000
------------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,715,500 4,529,087
------------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 400,720 407,435
Cash and cash equivalents, beginning of year 422,856 15,421
------------------- ------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 823,576 $ 422,856
=================== ==================
Supplemental disclosures of cash flows information:
Cash paid for interest $ - $ 1,164
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 32
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Caraco Pharmaceutical Laboratories, Ltd. ("Caraco" or the
"Corporation") was incorporated on February 22, 1984, and has generated
limited revenue from planned principal operations. The Corporation,
since inception, has primarily been involved in planning, obtaining
financing, constructing a permanent facility, acquiring and validating
production equipment, hiring and training employees and beginning the
development of product lines. The Corporation was established to
develop, manufacture and market generic prescription and
over-the-counter pharmaceuticals in the United States. The process of
developing a line of proprietary drugs requires approvals by the Food
and Drug Administration (FDA) of Abbreviated New Drug Applications
(ANDA). While ANDA build-ups have proceeded, the Corporation has
generated limited sales revenue through December 31, 1998.
Net sales in 1998 included $333,000 related to contracted manufacturing
activities and in 1997 included $53,000 related to contracted research
and development.
The Corporation is subject to certain risks associated with companies
in the generic pharmaceutical industry. Profitable operations are
dependent on the Corporation's ability to market its products at
reasonable profit margins. In addition to achieving profitable
operations, the future success of the Corporation will depend, in part,
on its continuing ability to attract and retain key employees, obtain
timely approvals of its Abbreviated New Drug Applications (ANDA),
develop new products and continue to raise in the near term the
necessary equity capital to keep the Corporation in business.
Going Concern
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business.
In August 1997, the Corporation and an Indian specialty pharmaceutical
company, Sun Pharmaceutical Industries, Ltd. ("Sun Pharma") completed
an agreement whereby: a) in exchange for 5,300,000 shares of Caraco
common stock Sun Pharma agreed to invest $7,500,000 into the
Corporation over a period of approximately two years in four
installments; b) the number of products to be sold to the Corporation
by Sun Pharma is 25 over a period of five years in exchange for 544,000
shares of Caraco common stock to be issued for each product (181,333
shares, for each DESI (Drug Efficacy Study Implementation) product);
and c) two Caraco stockholder directors have each agreed to contribute
to the Corporation the equivalent of $500,000 in cash and/or in shares
of Caraco common stock, up to a maximum contribution of 250,000 shares
each.
F-7
<PAGE> 33
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1998, Sun Pharma had delivered all of the $7,500,000
investment, and the two stockholder directors have made their required
contributions. In addition, Sun Pharma has earned the right to receive
1,269,333 common shares having delivered two ANDA and one DESI product.
Such shares have been included in the calculation of the weighted
average number of common shares outstanding for the year ended December
31, 1998, and will be issued in 1999.
The Corporation has never achieved sales necessary to support
operations. The Corporation has, as of December 31, 1998, a
stockholders' deficit of $3,575,305. Realization of a major portion of
the assets is dependent upon the Corporation'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 factors raise
substantial doubt about the Corporation'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 of liabilities that might be necessary should the Corporation be
unable to continue as a going concern.
Management's plans with regard to these matters include an infusion of
additional funding from Sun Pharma in the amount of $5 million and
generating operating profits by:
- Focusing on research and development with a staff of 12
scientists as compared to 3 in the previous year. Additionally,
continued support from Sun Pharma having 26 researchers working
in India supporting Caraco's research and development efforts.
Management believes these personnel have a proven background in
the pharmaceutical development.
- The research and development team has already established
bio-equivalence of three ANDA products, two of which have been
filed with FDA for approval. Further, three DESI products have
been developed and are ready for marketing. The team is
presently working on 21 products which are in different stages
of development. There is no assurance, however, that any of
these products will be marketed. The Corporation expects
to complete the development of four to six products each
year.
- The Corporation intends to increase the width and depth of
its product portfolio to more effectively serve its customers.
- With the increase in number of products, as well as
anticipated volume increases for existing products, it is
expected that manufacturing capacity utilization will improve
substantially, resulting in better cost absorption and improved
margins.
- The Corporation will strive to enhance customer reach and
achieve customer satisfaction through reliable product
deliveries.
- The Corporation is presently evaluating alliances with
leading companies for the manufacture and development of new
pharmaceutical products.
F-8
<PAGE> 34
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Corporation considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash
equivalents.
Revenue Recognition
Sales are recognized upon the shipment of product with allowances
provided for returns and price adjustments in the normal course of
business based primarily upon actual subsequent activity. Amounts
billed by the Corporation, if any, in advance of performance in
connection with contracts to render certain manufacturing or research
and development services are deferred.
Inventories
Inventories are stated at the lower of cost determined by the first in,
first-out method, or market. Direct labor and indirect manufacturing
overhead costs have not been capitalized and inventoried due to the
relatively low levels of production volume and plant capacity
utilization to date.
Property, Plant and Equipment and Depreciation
Depreciation is computed using the straight line method over the
estimated useful lives of the related assets, which range from 5 to 40
years. Management annually reviews these assets for impairment and
reasonably believes the carrying value of these assets will be
recovered through cash flow from operations.
Federal Income Taxes
Deferred income tax assets and liabilities are determined based on the
difference between the financial statement and federal income tax basis
of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. The principal
difference between assets and liabilities for financial statement and
federal income tax return purposes is attributable to differing
depreciation methods and the net operating losses.
F-9
<PAGE> 35
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Loss Per Share
Loss per share is computed using the weighted average number of common
shares outstanding during each year and considers a dual presentation
and reconciliation of "basic" and "diluted" per share amounts. Diluted
reflects the potential dilution of all common stock equivalents.
At December 31, 1998 and 1997, options to purchase 2,957,545 and
2,902,110 shares, respectively, were excluded from the computation of
earnings per share because the options' exercise prices were greater
than the average market price of the common shares. Since the assumed
exercise of common stock options and warrants and the assumed
conversion of preferred stock and convertible stockholder notes into
common stock would be antidilutive, such exercise is not assumed for
purposes of determining diluted loss per share. Accordingly, diluted
and basic per share amounts are equal in each year.
The weighted average number of common shares outstanding (basic and
diluted) for the years ended December 31, 1998 and 1997 were 12,582,108
and 8,435,091, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Fair Values of Financial Instruments
The carrying values of cash equivalents, accounts receivable, and
accounts payable approximate their values due to the short-term
maturities of these financial instruments.
The Corporation does not believe it is practicable to estimate the fair
value of its note payable to the Economic Development Corporation of
the City of Detroit. Management believes the cost to do so would exceed
the benefits, particularly since such information is not needed to
manage the business. Further, management does not believe that
comparable financing would currently be available on similar terms.
Common Stock Issued to Directors
Common stock is issued from time to time in lieu of cash for directors
fees, and is recorded as compensation expense at the fair value on the
date of issuance.
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information" became effective
during 1998. The implementation of these standards did not have an
impact on the Corporation's results of operations, financial position
or the disclosure of financial information.
F-10
<PAGE> 36
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
2. SUPPLEMENTAL CASH FLOWS INFORMATION
Non-cash Investing and Financing Activities
During 1997, the Corporation issued 355,577 shares of common stock in
exchange for the satisfaction of interest incurred and to be incurred
on loans from stockholders through August 1, 1999. At December 31, 1998
and 1997, the cash equivalent value of the shares earned, at a per
share price of $1.50, results in prepaid interest of $119,043 and
$323,043, respectively.
3. ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Corporation sells its products using customary trade terms; the
resulting accounts receivable are unsecured. Accounts receivable and
related allowances, as of December 31, 1998, are summarized as follows:
<TABLE>
<S> <C>
Accounts receivable $ 573,190
----------------
Allowances:
Doubtful accounts 10,000
Sales returns and allowances 25,000
Price adjustments 65,000
----------------
Total allowances 100,000
----------------
Accounts receivable, net of allowances $ 473,190
================
</TABLE>
4. INVENTORIES
Inventories consist of the following amounts at December 31, 1998:
<TABLE>
<S> <C>
Raw materials $ 789,489
Work in process 305,962
Finished goods 174,092
-----------------
Total $ 1,269,543
=================
</TABLE>
The principal components used in the Corporation's business are active
and inactive pharmaceutical ingredients and certain packaging
materials. Many of these components are available only from sole source
suppliers, most of whom must be FDA approved. Qualification of a new
supplier could serve to delay the manufacture of the drug involved.
F-11
<PAGE> 37
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
5. DEBT INCLUDING RELATED PARTIES
EDC Loan
Debt at December 31, 1998 consists of a note payable to the Economic
Development Corporation (EDC) of the City of Detroit, related to funds
advanced to the Corporation pursuant to a Development and Loan
Agreement (the "Agreement") dated August 10, 1990 as amended. The note
is collateralized by a first mortgage, effectively, on all of the
Corporation's property and equipment purchased pursuant to the
Agreement and repayment is personally guaranteed by the Corporation's
founder and former Chairman of the Board and his spouse.
Effective April 2, 1993, and subsequently on August 5, 1997, the
Corporation and the EDC of the City of Detroit restructured the
Agreement discussed above. The amendments included:
- The deferral of scheduled principal and interest payments until
February 1, 1999.
- On February 1, 1999, the Corporation shall resume making the
regularly scheduled monthly payments of principal and interest
due under the note. Additional deferred principal and interest
due under the terms of the original agreement are also required
in amounts sufficient to amortize the total deferred amount
through July 2002.
- A reduction in the stipulated interest rate from the
inception of the loan through 1993 from 10% to 8.5%. The
interest rates from 1994 through July 2002 vary from 5% to 6.3%,
as described in the amendments (effective rate of 5.78% at
December 31, 1998).
As a condition of the deferral, the EDC was provided additional
security on all the Corporation's existing equipment and the
Corporation is required to comply with several additional financial and
operating covenants which include, limiting capital expenditures made
without the consent of the EDC to under $2,000,000 during the deferral
period, and abstaining from share redemption during the payment
deferral period. During the month of December 1998, the Corporation
approached the EDC regarding reconsideration of the repayment terms,
which were scheduled to begin in February 1999. The Corporation is
currently renegotiating the repayment schedule with the EDC and, as
such, has not made the scheduled February and March 1999 payments of
approximately $168,000 each. The Corporation intends to commence
payments upon final resolution of the amended terms.
Scheduled aggregate principal maturities of this note are summarized as
follows:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
----------- ------
<S> <C>
1999 $ 1,336,000
2000 1,486,275
2001 1,518,358
2002 4,539,367
-------------
Total $ 8,880,000
=============
</TABLE>
F-12
<PAGE> 38
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Stockholder Notes Payable
During 1997 and 1996, respectively, the Corporation borrowed $600,000
from two, and $890,000 from three, including the two previously
mentioned, stockholder directors of the Corporation. During 1997, the
Corporation also borrowed $550,000 from Sun Pharma Global, Inc., a
wholly owned subsidiary of Sun Pharma. These demand notes, which accrue
interest at 10% and are unsecured, were amended on September 15, 1997.
The amended agreements provide for the principal to be due on or before
August 1, 1999 in cash or an equivalent number of common shares of the
Corporation, at the discretion of the note holder, at a per share price
of $1.50. Interest at 10% was prepaid in exchange for equivalent number
of common shares of the Corporation at a per share price of $1.50 (see
Note 7).
During 1998 the Corporation borrowed $300,000 from Sun Pharma,
evidenced by an unsecured demand note which accrues interest at 10%.
The stockholders currently have no intent of demanding payment within
the upcoming year; therefore, the notes payable to stockholders have
been classified as long-term.
The notes with Sun and two of the three stockholder directors in the
amount of $1,840,000, are subject to the provisions of an
Inter-Creditor Agreement. Among other things, the Inter-Creditor
Agreement provides for an equal priority in collateral and principal
payments based on each creditors' respective share of total debt.
Interest incurred on stockholder notes amounted to $210,411 and
$211,487 in 1998 and 1997, respectively.
Letter of Credit
The Corporation has a $250,000 letter of credit agreement with NBD Bank
N.A. to support purchases of inventories. At December 31, 1998 there
was $144,000 outstanding under this agreement. Amounts outstanding
under this letter of credit are included in accounts payable.
6. INCOME TAXES
At December 31, 1998 a deferred income tax asset and related valuation
allowance, attributable primarily to the net operating loss
carryforwards (calculated using a 34% tax rate) of approximately
$10,200,000 has been established. Changes in the valuation allowance
were approximately $1,700,000 and $1,400,000 in 1998 and 1997,
respectively.
At December 31, 1998, net operating loss carryforwards of approximately
$30,000,000 are available to offset future federal taxable income, if
any, through future years. The Corporation's ability to utilize the net
operating loss carryforwards may be limited due to ownership changes.
F-13
<PAGE> 39
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
7. STOCKHOLDERS' DEFICIT
Sun Pharma
During 1997, the Corporation agreed to issue 5,300,000 shares of common
stock to Sun Pharma in exchange for $7,500,000 to be received by the
Corporation over a period of approximately two years in four
installments. During 1998 and 1997 cash proceeds of $4,220,000 and
$3,280,000 were received from Sun Pharma in consideration for 3,886,667
and 1,413,333 shares, respectively, of Caraco common stock.
Private Placement
In connection with a private placement offering in 1998, the
Corporation sold 1,319,317 shares of common stock valued at $.88 per
share netting approximately $1,161,000.
Other Common Stock Issuances
In connection with an employment agreement entered into in 1998 with
its Chief Executive Officer, the Corporation awarded a common stock
bonus of 50,000 shares. Compensation expense of $33,000 was recorded
based on the fair value of $0.66 per share on the date of issuance.
During 1998 and 1997, the Corporation issued 1,600 and 9,400 shares,
respectively, of common stock to non-employee directors in exchange for
services rendered. The Corporation recorded compensation expense of
$1,500 and $11,163 in 1998 and 1997, respectively, based on the fair
values of such shares on their issuance dates.
During 1997, the Corporation issued 355,577 shares of common stock at
$1.50 per share to satisfy interest incurred on loans from stockholders
(see Note 5). At December 31, 1998 and 1997, there were 79,362 and
215,362 shares, respectively, of common stock issued but not earned.
These shares represent consideration for future interest payments and
are classified as prepaid interest in the accompanying balance sheet,
as they will be earned ratably through August 1, 1999.
Preferred Stock
The Corporation has authorized 5,000,000 shares of preferred stock
which are issuable in series with the terms and amounts set at the
Board of Directors discretion.
Each share of preferred stock is nonvoting and is convertible, at the
option of the holder, into one share of common stock through January 1,
2004. The preferred shares require dividends of $.21 per share on a
cumulative basis. Accrued dividends on preferred stock at December 31,
1998 were $120,000. It is not expected that such dividends will be paid
in 1999 and, accordingly, the related liability is not classified as
current on the accompanying balance sheet.
F-14
<PAGE> 40
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
8. COMMON STOCK OPTIONS AND WARRANTS
1993 Stock Option Plan
Pursuant to the terms of an incentive stock option plan established in
April 1993 and subsequently amended in 1995, the Corporation may grant
options to employees and non-employee-directors for the purchase of up
to 450,000 shares of common stock. The exercise price of options
granted may not be less than the fair value of the common stock on the
date of grant. Options granted under this plan vest in annual
installments, from the date of grant, over a five year period, and
expire within six years from the date of the grant. Activity with
respect to these options is summarized as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
---------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 251,021 $ 3.10 324,085 $ 4.40
Granted 231,500 0.94 15,184 1.10
Terminated (75,800) 1.62 (88,248) 4.15
--------- --------- --------- ------------
Outstanding, end of year 406,721 $ 2.15 251,021 $ 3.10
========= ========= ========= ============
Options exercisable, end of year 129,534 $ 3.71 146,610 $ 2.96
========= ========= ========= ============
</TABLE>
Options at December 31, 1998
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
-------------------------- ----------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.94 to $1.00 231,997 5.6 years $ 0.94 1,500 $ 1.00
$1.01 to $2.00 62,000 2.6 years 1.48 47,600 1.50
$2.01 to $3.00 6,000 3.6 years 2.50 2,400 2.50
$3.01 to $4.00 30,000 2.4 years 3.92 22,000 3.89
$4.01 to $5.00 32,724 2.5 years 4.84 20,834 4.80
$6.01 to $7.00 44,000 1.1 years 6.16 35,200 6.16
---------- ---------- ---------- ---------- ----------
Total 406,721 4.1 years $ 2.15 129,534 $ 3.71
========== ========== ========== ========== ==========
</TABLE>
*Weighted average
F-15
<PAGE> 41
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
Other Common Stock Option Agreements
The Corporation has issued other stock options outside of the 1993
Stock Option Plan. These stock options have been issued with various
vesting schedules and expire at various dates through October 2006.
Activity with respect to these options is summarized as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 2,651,089 $ 3.58 2,426,931 $ 3.77
Granted 150,000 0.66 224,158 1.50
Terminated (250,265) 3.80 - -
------------ ------------ ------------ ------------
Outstanding, end of year 2,550,824 $ 3.38 2,651,089 $ 3.58
============ ============ ============ ============
Options exercisable, end of year 2,400,824 $ 3.55 2,651,089 $ 3.58
============ ============ ============ ============
</TABLE>
Options at December 31, 1998
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
---------------------------- -------------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.66 to $1.00 150,000 5.7 years $ 0.66 - $ -
$1.01 to $2.00 649,158 5.5 years 1.36 649,158 1.36
$2.01 to $3.00 681,666 8.2 years 2.63 681,666 2.63
$3.01 to $4.00 370,000 5.7 years 3.50 370,000 3.50
$6.01 to $7.00 700,000 0.2 years 6.50 700,000 6.50
------------ ------------ ------------ ------------ ------------
Total 2,550,824 4.8 years $ 3.38 2,400,824 $ 3.55
============ ============ ============ ============= ============
</TABLE>
*Weighted average
The Corporation follows the disclosure aspects of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". The Corporation continues to apply
Accounting Principles Board (APB) Opinion No. 25 in accounting for its
plans and, accordingly, no compensation cost has been recognized in the
financial statements for its outstanding stock options. Companies that
do not adopt a fair value method contemplated in SFAS No. 123 are
required to make pro-forma disclosures of net loss and loss per share
as if they had adopted the fair value accounting method. The pro-forma
effect on net loss and loss per share for each of the years ended
December 31, 1998 and 1997 is not significant.
Strategic Alliance Stock Option Arrangement
Pursuant to a strategic alliance formalized by an agreement for the
acquisition of certain technology with a third-party pharmaceutical
company ("Hexal"), the Corporation granted to Hexal, for each product
(i) a "sign-up" option to purchase 100,000 shares of the Corporation's
common stock at a price of $3.50 per share and (ii) a "product" option
to purchase a presently indeterminable number of common shares at an
exercise price equivalent to their fair value, as
F-16
<PAGE> 42
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS
defined, upon the filing of an ANDA related to each of the two
specified generic drugs. Such options may be exercised and payment for
shares may be made only out of royalties payable by the Corporation to
Hexal for sales, if any, of the related products. To date, there have
been limited sales of the products, but no options have been exercised.
Unit Purchase Agreements
As of December 31, 1998, 70,000 unit purchase agreements (units) are
outstanding. Each unit consists of two shares of common stock and a
warrant exercisable for one share of common stock at a price of $6.50.
All units are exercisable at $18.20 per share and expire in February
2000.
Employment Agreement Stock Options
In connection with an employment agreement entered into in 1998, the
Corporation granted to its Chief Executive Officer options for the
purchase of 150,000 shares of common stock at an exercise price of
$0.66 per share. The options vest ratably over a five-year period.
9. MAJOR CUSTOMERS
Shipments to one wholesale customer accounted for approximately 13% and
20% of net sales in 1998 and 1997, respectively. Balances due from this
customer represented approximately 13% and 9% of accounts receivable at
December 31, 1998 and 1997, respectively.
Shipments to another wholesale customer accounted for approximately 17%
and 24% of net sales in 1998 and 1997, respectively. Balances due from
this customer represented approximately 2% and 16% of accounts
receivable at December 31, 1998 and 1997, respectively.
10. OTHER MATTERS
The Corporation is involved in routine litigation incidental to its
business. Management believes the resolution of these matters will not
materially affect the financial statements.
11. SUBSEQUENT EVENTS
Subsequent to year-end, the Corporation received additional unsecured
proceeds of $300,000, from Sun Pharma, in consideration for notes
payable bearing interest at 10% per annum, with the principal balance
due on demand. Additionally, in connection with a private placement
offering in 1999, the Corporation sold 336,362 shares of common stock
netting proceeds of $320,000.
* * * * *
F-17
<PAGE> 43
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 823,576
<SECURITIES> 0
<RECEIVABLES> 573,190
<ALLOWANCES> (100,000)
<INVENTORY> 1,269,543
<CURRENT-ASSETS> 2,755,084
<PP&E> 10,957,322
<DEPRECIATION> 3,288,372
<TOTAL-ASSETS> 10,424,034
<CURRENT-LIABILITIES> 2,739,266
<BONDS> 0
0
1,000,000
<COMMON> 29,025,840
<OTHER-SE> (33,601,145)
<TOTAL-LIABILITY-AND-EQUITY> 10,424,034
<SALES> 2,663,633
<TOTAL-REVENUES> 2,663,633
<CGS> 2,244,932
<TOTAL-COSTS> 6,874,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (761,108)
<INCOME-PRETAX> (4,971,574)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,971,574)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,971,574)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
