<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File No. 0-24676
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2505723
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1150 ELIJAH MC COY DRIVE, DETROIT, MICHIGAN 48202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313) 871-8400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Common Stock outstanding at August 9, 1999 -- 16,181,295 shares
<PAGE> 2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 804,812 $ 490,885 $ 1,684,258 $ 1,029,005
Cost of goods sold 785,709 472,908 1,644,567 1,017,532
--------------------------------------------------------
GROSS PROFIT (DIFFERENTIAL) 19,103 17,977 39,691 11,473
--------------------------------------------------------
Selling, general & administrative expenses 459,328 691,299 930,507 1,109,859
Research & development costs 1,031,472 772,483 2,201,121 1,203,742
--------------------------------------------------------
OPERATING LOSS (1,471,697) (1,445,805) (3,091,937) (2,302,128)
--------------------------------------------------------
Other income (expense)
Interest expense (235,404) (185,417) (442,025) (406,820)
Interest income 3,040 4,898 8,523 10,277
--------------------------------------------------------
OTHER EXPENSE - NET (232,364) (180,519) (433,502) (396,543)
--------------------------------------------------------
NET LOSS $(1,704,061) $(1,626,324) $(3,525,439) $(2,698,671)
========================================================
NET LOSS PER BASIC AND DILUTED COMMON SHARE $ 0.11 $ 0.12 $ 0.22 $ 0.20
========================================================
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE> 3
CARACO PHARMACEUTICAL LABORATORIES, LTD.
BALANCE SHEET (UNAUDITED)
ASSETS JUNE 30,
1999
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 621,500
Accounts receivables, net of allowances of $100,000 408,864
Inventories 1,700,605
Prepaid expenses and deposits 57,856
------------
TOTAL CURRENT ASSETS 2,788,825
------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305
Building and improvements 6,682,725
Equipment 4,047,070
Furniture and fixtures 165,319
------------
Total 11,092,419
Less: accumulated depreciation 3,572,171
------------
NET PROPERTY, PLANT & EQUIPMENT 7,520,248
------------
TOTAL ASSETS $ 10,309,073
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,330,810
Accrued expenses 186,943
Accrued interest 927,489
Current portion of long-term debt 1,197,344
------------
TOTAL CURRENT LIABILITIES 3,642,586
------------
LONG-TERM LIABILITIES
Note payable - net of current portion 7,682,656
Notes payable to stockholders 4,390,000
Accrued interest 1,178,574
Preferred stock dividends payable 150,000
------------
TOTAL LONG-TERM LIABILITIES 13,401,230
------------
TOTAL LIABILITIES 17,043,816
------------
STOCKHOLDERS' DEFICIT
Preferred stock, no par value, authorized 5,000,000 shares; 1,000,000
issued and outstanding, 285,714 Series A shares
Common stock, no par value, authorized 20,000,000 shares; 29,421,840
issued and outstanding, 16,209,695 shares
Preferred stock dividends (150,000)
Accumulated deficit (37,006,583)
------------
TOTAL STOCKHOLDERS' DEFICIT (6,734,743)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 10,309,073
============
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE> 4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,525,439) $(2,698,671)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 283,800 246,444
Non cash interest expense 339,990
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable 64,326 (329,754)
Inventories (431,062) (220,407)
Prepaid expenses and deposits 130,919 134,253
Accounts payable 482,494 (86,613)
Accrued expenses 141,993 224,149
------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,512,979) (2,730,599)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (135,097) (248,289)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 396,000 2,720,000
Proceeds from long-term debt 2,050,000
------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 2,446,000 2,720,000
------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (202,076) (258,888)
Cash and cash equivalents, beginning of period 823,576 422,856
------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 621,500 $ 163,968
====================================
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE> 5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)
<TABLE>
<CAPTION>
COMMON
PREFERRED STOCK COMMON STOCK STOCK PREFERRED
---------------------------------------------- SUBSCRIPTION STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DIVIDENDS DEFICIT TOTAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 285,714 $ 1,000,000 13,507,083 $ 27,830,340 $(4,220,000) $ (60,000) $(28,509,571) $ (3,959,231)
Preferred dividend (30,000) (30,000)
Issuances of common stock 2,720,000 2,720,000
Net loss (2,698,671) (2,698,671)
Balance at June 30, 1998 285,714 $ 1,000,000 13,507,083 $ 27,830,340 $(1,500,000) $ (90,000) $(31,208,242) $ (3,967,902)
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1999 285,714 $ 1,000,000 14,528,000 $ 29,025,840 $ -- $(120,000) $ (33,481,145) $ (3,575,305)
Preferred dividend (30,000) -- (30,000)
Issuances of common stock 1,681,695 396,000 396,000
Net loss (3,525,438) (3,525,438)
Balance at June 30, 1999 285,714 $ 1,000,000 16,209,695 $ 29,421,840 $ -- $(150,000) $ (37,006,583) $ (6,734,743)
=======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE> 6
CARACO PHARMACEUTICAL LABORATORIES LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of June 30, 1999 and the related statements of operations,
stockholders' deficit and cash flows for the six months ended June 30, 1999 and
1998 are unaudited. In the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. Interim results are not
necessarily indicative of results for the full year.
The financial statements as of June 30, 1999 and for the six months ended June
30, 1999 and 1998 should be read in conjunction with the financial statements
and notes thereto included in the Corporation's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
The accounting policies followed by the Corporation with respect to the
unaudited interim financial statements are consistent with those stated in the
1998 Caraco Pharmaceutical Laboratories, Ltd., Annual Report on Form 10-KSB.
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
Sun Pharma agreed to invest $7,500,000 in cash in exchange for 5,300,000 shares
of Caraco common stock. Sun also agreed to sell 25 products over a period of 5
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)). Sun Pharma has delivered all the $7.5 million investment.
The Corporation has never achieved sales necessary to support operations. The
Corporation has, as of June 30, 1999, a stockholders' deficit of $6,734,743.
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.
Management's plans include reducing the stockholders' deficit with the infusion
of additional funding and generating operating profits by:
- - Focusing on research and development with a staff of 14 scientists as
compared to 6 in the corresponding period of previous year.
Additionally, continued support from Sun Pharma having 26 researchers
working in India supporting Caraco's research and development efforts.
These personnel have a proven background in the pharmaceutical
development.
- - The research and development team has already established
bio-equivalence of four ANDA products, of which three have been filed
with the FDA for approval. The team has established bio-equivalence for
two more ANDA products in July 1999. Further, four DESI products have
been developed and are ready for launch. 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.
6
<PAGE> 7
- - The Corporation intends to increase the width and depth of its product
portfolio to serve customers effectively.
- - 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, 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 manufacturing and development of new pharmaceutical
products.
2. COMPUTATION OF LOSS PER SHARE
Loss per share is computed using the weighted average number of common shares
outstanding during each period and considers a dual presentation and
reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the
potential dilution of all common stock equivalents. 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 period.
The weighted average number of common shares outstanding (basic and diluted) for
the periods ended June 30, 1999 and June 30, 1998 were 16,032,480 and
13,507,083, respectively.
3. MORTGAGE NOTE
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 was to 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.
7
<PAGE> 8
- - 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 June 30, 1999).
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
million 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. In July 1999, EDC sent to the Corporation a
draft of the third mortgage modification agreement for its review. The
Corporation reviewed the draft with its attorneys and has forwarded the document
to EDC with certain modifications. Pending resolution of the amended terms, the
Corporation has not made the scheduled February through July 1999 payments. The
Corporation intends to commence payments upon final resolution of the amended
terms.
4. 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., ("Sun"), a wholly owned subsidiary of Sun
Pharma. These demand notes, which accrue interest at 10% and are unsecured, were
restructured 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. The
Corporation and the note holders are reviewing their options and no decision has
been made regarding converting the notes to cash or stock at this time.
As of June 30, 1999 the Corporation has borrowed $2,350,000 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; and therefore, the notes payable to stockholders have been classified as
long-term.
The notes with Sun Pharma 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 opportunity in collateral and principal payments based on each creditors'
respective share of total debt.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
Sales
Net sales for the periods ended June 30, 1999 and 1998 were $1,684,258 and
$1,029,005 respectively. For the second quarter ended June 30, 1999 net sales
were $804,812 compared to $490,885 for the corresponding quarter of the previous
year showing an increase of 64%. The increase of 64% is directly attributable to
improved cash position leading to better product availability. In addition, the
Corporation's focused marketing efforts, mix of generic drugs, sales to new
customers, sales of new products, and improved market conditions for generic
drugs have contributed to the sales increase.
Gross Profit (Differential)
The Corporation posted a gross profit of $39,691 for the first six months of
1999, compared to $11,473 during the same period of 1998. Gross profit for the
quarter ended June 30, 1999 was $19,103 compared to $17,977 recorded in the
corresponding quarter in 1998. During the second quarter of 1999, the
Corporation determined that production has reached sufficient levels that
labor should be included in inventory costs. The margin in 1999 takes into
account capitalized cost of labor in the inventories of bulk tablets and
finished goods amounting to approximately $135,000.
Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses for the periods ended June 30, 1999
and June 30, 1998 were $930,507 and $1,109,859 respectively, representing a
reduction of 16%. For the quarter ended June 30, 1999 SG&A was $459,328 as
against $691,299 for a similar period in 1998. The reduction in expenses is
mainly due to the restructuring carried out by the corporation during the first
half of 1998. The 1998 expenses included severance package of $92,000, cost of 3
extra personnel and relocation expenses paid to certain employees.
Research and Development expenses
Research and Development expenses of $2,201,121 for the half year ended June 30,
1999 were higher by 83%, when compared with $1,203,742 incurred during the
corresponding period of 1998. R&D expenses for the quarter ended June 30, 1999
was $1,031,472 as against $772,483 in the corresponding period of the previous
year. The substantial increase was mainly due to increase in research personnel
which numbered 14 at the end of June 30, 1999 compared to six during the same
period in 1998. The increased spending represents the commitment of the
Corporation to increase its focus in Research and Development activities for
future success.
The Corporation is working on five promising candidates for ANDA submission
during 1999. As on June 30, 1999 the Corporation has submitted four ANDA
applications to the US FDA for approval. In addition the Corporation has plans
to commence development of six products comprising both ANDA and DESI products.
Although the products are developed with utmost care, the Corporation cannot
guarantee the success of the bio-equivalence studies, or FDA approval.
Interest Expense
Interest expense, which is incurred primarily in connection with the
Corporation's mortgage obligation to the EDC was $442,025 and $406,820 for
periods ended June 30, 1999 and 1998, respectively. Interest expense for the
quarter ended June 30, 1999 was $235,404 compared with $185,417 during the same
period in 1998.
9
<PAGE> 10
Results of Operations
Operating losses for the period ended June 30, 1999 and 1998 were $3,525,439 and
$2,698,671 respectively. For the second quarter ended June 30, 1999 the
operating loss was $1,704,061 as against $1,626,324 during the corresponding
period of 1998. The operating losses are directly related to (1) net sales,
which were inadequate to absorb the fixed costs of the Corporation's operational
expenses and (2) increased research and development spending.
A number of uncertainties exist that may influence the Corporation's future
operating results, including general economic conditions, changes in conditions
affecting the pharmaceutical industry primarily related to generic drug
competition, obtaining additional financing, government restrictions on sale of
certain products, obtaining FDA approvals, development by competitors of new or
superior products or new technology for production of products or the entry into
the market of new competitors.
Liquidity and Capital Resources
At June 30, 1999, the Corporation had negative working capital of $853,761
compared with working capital of $533,532 of the corresponding period of 1998.
The negative working capital for the half year ended June 30, 1999 was mainly
due to the maturity of a portion of EDC debt and related accrued interest which
has been classified as current. To enable the Corporation to fund its research
and development activities and the increased working capital needs Sun Pharma
has established a $5.3 million unsecured credit line facility to be disbursed on
an as needed basis over a period of one year. As of June 30, 1999 the
Corporation received $2,350,000 from Sun Pharma through this credit facility.
OTHER MATTERS
Year 2000 Compliance
The Corporation uses computer hardware and financial and manufacturing software
that it purchased from third party suppliers. The corporation with the
assistance of these third party suppliers has installed new hardware and
software during the second quarter of 1999 at a cost of $20,000. The suppliers
have confirmed to the corporation that the newly installed products are 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.
10
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders (the "Meeting") of Caraco
Pharmaceutical Laboratories, LTD. was held on June 2, 1999 at Detroit, Michigan.
Matters voted on at the Meeting and the votes cast for, against or abstained
were as follows:
A. Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
David W. Adamany 13,071,584 5,670
David A. Hagelstein 13,061,584 5,670
B. Approval of the 1999 Equity Participation Plan
---------------------------------------------
Votes For 11,238,871
Votes Against 302,850
Votes Abstained 18,300
Unvoted 1,517,233
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS
a. The following exhibit is filed as part of this report and is
attached hereto:
EXHIBIT 27 - Financial Data Schedule
b. There were no Form 8-K's filed during the second quarter of 1999.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
By:/s/Narendra N. Borkar
---------------------------------------------
Narendra N. Borkar
Chief Executive Officer (A duly
authorized signatory of the Company)
DATED: August 13, 1999
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT TABLE
NUMBER EXHIBIT PAGE
- -------------------------------------------------------------------------------
27 Financial Data Schedule 14
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 621,500
<SECURITIES> 0
<RECEIVABLES> 508,864
<ALLOWANCES> 100,000
<INVENTORY> 1,700,605
<CURRENT-ASSETS> 2,788,825
<PP&E> 11,092,419
<DEPRECIATION> 3,572,171
<TOTAL-ASSETS> 10,309,073
<CURRENT-LIABILITIES> 3,642,586
<BONDS> 0
0
1,000,000
<COMMON> 29,421,840
<OTHER-SE> (37,156,583)
<TOTAL-LIABILITY-AND-EQUITY> 10,309,073
<SALES> 1,684,258
<TOTAL-REVENUES> 1,684,258
<CGS> 1,644,567
<TOTAL-COSTS> 1,644,567
<OTHER-EXPENSES> 1,490,800
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 442,025
<INCOME-PRETAX> (3,525,439)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,525,439)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
