-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OL2WtHLTD8NFSqPzOvKZKcVHIV076enOrVM9n9iBXQn6NsPl8xf4xNiXgywOFg2+ RkwB9VkEpA+22juMfx7KOg== 0000950124-01-001848.txt : 20010402 0000950124-01-001848.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950124-01-001848 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARACO PHARMACEUTICAL LABORATORIES LTD CENTRAL INDEX KEY: 0000887708 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 382505723 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-24676 FILM NUMBER: 1586762 BUSINESS ADDRESS: STREET 1: 1150 ELIJAH MCCOY DR CITY: DETROIT STATE: MI ZIP: 48202 BUSINESS PHONE: 3138718400 MAIL ADDRESS: STREET 1: 1150 ELIJAH MCCOY DRIVE CITY: DETROIT STATE: MI ZIP: 48202 10KSB40 1 k61255e10ksb40.txt ANNUAL REPORT ENDED 12/31/00 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- 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, 2000 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-24676 --------------------- 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) -------------------- 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 (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. [ X] STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $2,377,546 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. $4,219,659 (BASED UPON THE AVERAGE BID-ASK PRICE OF THE REGISTRANT'S COMMON SHARES ON THE OTC BULLETIN BOARD ON MARCH 27, 2000) 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 27, 2001, THERE WERE 21,173,818 COMMON SHARES OUTSTANDING Documents Incorporated By Reference: Portions of the definitive Proxy Statement dated April 29, 2001, in connection with the Annual Meeting of Stockholders to be held on June 4, 2001, are incorporated by reference into Part III. 2 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. A significant source of funding for the Corporation has been from private placement offerings and loans, including a loan 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 on March 1, 1994 and August 5, 1997 (the "Amended EDC Agreement"). (See "Current Status of Corporation" and the "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 invested $7.5 million into the Corporation. Sun Pharma also agreed to provide the Corporation with products in exchange for shares of Common Stock. (See "Sun Pharmaceutical Industries Ltd." below.). Sun Pharma and its affiliates have also loaned and/or assisted Caraco in obtaining loans from third parties (See "Current Status of Corporation" below). 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, 2000 includes a note payable to the EDC in the amount of $6,580,000 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 any of the scheduled payments. During 2000 while it has been renegotiating with the EDC, the Corporation has paid $2.3 million to the EDC. Such payments have not brought the Corporation current in its obligations to the EDC, and such payments were made without prejudice to the rights of the EDC to exercise all remedies available to the EDC for failure to make the scheduled payments. While the terms of the restructured loan -2- 3 are being renegotiated, the Corporation intends to continue to make payments to the EDC, again without prejudice to the rights of the EDC. Upon a final agreement of the restructured terms of the loan, of which there can be no assurance, the Corporation shall then commence making the requested restructured payments. As of February 28, 2001, the Corporation is indebted to the EDC in the amount of $6,280,000 plus accrued interest. As disclosed above, Sun Pharma had, as of December 31, 1998, remitted a total of $7.5 million to the Corporation for the purchase of common shares. On October 15, 1998 Sun Pharma also made a loan to the Corporation up to $5.3 million at an annual interest rate of 10% (which loan was amended to provide Sun Pharma with a security interest). The loan matures and is due and payable on the earlier of October 15, 2003. Prior to this, an affiliate of Sun Pharma made a loan to the Corporation of $650,000 at an annual interest rate of 10%. During 2000, Sun Pharma assisted Caraco in obtaining line of credit loans from ICICI Bank Limited and The Bank of Nova Scotia, each in the amount of up to $5.0 million. The Corporation has utilized, during 2000, $5 million from ICICI Bank Limited and $3.85 million from The Bank of Nova Scotia. In March 2001, the Bank of Nova Scotia increased its existing unsecured $5.0 million credit facility to Caraco by an additional $5.0 million to be used for general corporate purposes. The amounts borrowed (up to $10 million) under the Bank of Nova Scotia credit facility must be repaid in four semi-annual installments on February 4, 2004, August 24, 2004, February 24, 2005 and August 25, 2005. The loan may not be prepaid until August 24, 2003. Interest is at LIBOR plus 30 basis points, and is payable at one, two, three or six months periods at Corporation's option. Caraco intends to continue 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 13 products in 20 strengths in 34 package sizes. Of these 13 products, four have been temporarily discontinued until the Corporation successfully completes the next FDA inspection. The Corporation has submitted nine ANDA's to the FDA for approval. During 2000, Sun Pharma's dedicated development laboratory in Bombay was actively working on multiple ANDA submissions 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 -3- 4 respect to 10 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. 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 -4- 5 $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. 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 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). To date, Sun Pharma has facilitated the transfer of technology to Caraco with respect to 10 products. As of December 31, 2000 Sun Pharma has been issued 4,714,682 shares for eight (8) ANDAs and two (2) DESI products. In connection therewith Sun Pharma has invested in a dedicated development laboratory employing 26 scientists (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", "Current Status of Corporation", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 5 of Notes to Financial Statements".) On March 1, 1994, the EDC Agreement was amended to extend the maturity date to July 1, 2002. 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 was 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 -5- 6 (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 any of the scheduled payments. During 2000 while it has been renegotiating with the EDC, the Corporation has paid $2.3 million to the EDC. Such payments have not brought the Corporation current in its obligations to the EDC, and such payments were made without prejudice to the rights of the EDC to exercise all remedies available to the EDC for failure to make the scheduled payments. The Corporation intends to continue to make payments to the EDC again without prejudice to the rights of the EDC. Upon a final agreement of the restructured terms of the loan, of which there can be no assurance , the Corporation shall then commence making the requested restructured payments. As of February 28, 2001, the Corporation is indebted to the EDC in the amount of $6,280,000 plus accrued interest. 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 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. -6- 7 The top five drug wholesalers in 2000 accounted for over $100 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. 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 Presently, Caraco has only a small in-house sales organization. In time as new products are added to the existing product line, management plans to expand its customer sales effort through adding additional sales personnel and/or contracting with an independent sales and marketing firm. Shipments to one wholesale customer accounted for approximately 17% and 15% of net sales in 2000 and 1999, respectively. Balances due from this customer represented approximately 9% and 10% of accounts receivable at December 31, 2000 and 1999, respectively. Shipments to another wholesale customer accounted for approximately 8% and 11% of net sales in 2000 and 1999, respectively. Balances due from this customer represented approximately 8% and 3% of accounts receivable at December 31, 2000 and 1999, 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 bioequivalence is done through independent testing laboratories. -7- 8 An outline of research and development expenses incurred directly by Caraco for 2000 and 1999 follows (000's):
2000 1999 Employee Costs $ 576 $ 726 Raw Materials/Supplies 138 584 Bioequivalency Studies 644 1,065 Laboratory Expenses 120 228 Other 1,596 1,925 ------ ------ TOTAL $3,074 $4,528 ====== ======
The R&D expenses shown above do not include the cost of the products transferred by Sun to Caraco in 2000 and 1999 of $220,864 and $1,804,667, respectively 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, record keeping, 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 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 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: -8- 9 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. FDA policy and its stringent 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 takes 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. 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. -9- 10 The Drug Enforcement Agency ("DEA") conducts inspections bi-annually. The Corporation underwent an FDA inspection during 1999, at which time it received an FDA483 (List of Observations). The Corporation responded to those observations and met with the Detroit District Director of the FDA. During the 1st quarter of 2000, the FDA conducted another inspection. The Corporation received another FDA 483, to which the Corporation responded in June 2000. In July 2000, the Corporation received a warning letter from the FDA relating to deviations and/or deficiencies in the cGMPs. The area of concern relate to record-keeping systems, testing standards, staff training and proficiency and quality systems. In response to the FDA 483s and warning letter, the Corporation retained the services of a FDA compliance-consulting firm in 1999 to help it address the cGMP compliance issues and develop the implementation plan to respond to the noted deficiencies and/or deviations. The Corporation has responded to the FDA indicating the corrective measures and plan to rectify the deviations and deficiencies referred to above. The Corporation is attempting to overcome the shortcomings and comply with applicable regulatory requirements. During the week of March 19, 2001, the FDA commenced its anticipated inspection of the Corporation. However, there is no assurance that when the FDA completes its inspection, it will make a determination that the Corporation has satisfied the applicable deviations and/or deficiencies in the GMPs. Until it does, among other things, the FDA will not confirm any approvals of the pending ANDAs. 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 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. -10- 11 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, 2000, the Corporation had 58 full-time employees, of which 13 are engaged in research and development, 9 in quality assurance, 2 in quality control, 6 in administration, 3 in sales and marketing, 3 in materials management, 3 in facility management, and 19 in manufacturing. Most of the Corporation's scientific and engineering employees have had prior experience with pharmaceutical or medical products companies. All of the hourly employees of materials management, facility management and manufacturing are represented by a union. 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. 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 -11- 12 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 airflow design. This system of airflow 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, 1999 through December 31, 2000, 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, 1999 1.375 .50 Quarter Ended June 30, 1999 1.375 1.00 Quarter Ended September 30, 1999 1.3125 .625 Quarter Ended December 31, 1999 1.00 .625 Quarter Ended March 31, 2000 1.125 .6875 Quarter Ended June 30, 2000 .9375 .3281
-12- 13 Quarter Ended September 30, 2000 .5469 .2656 Quarter Ended December 31, 2000 .4844 .2031
As of March 15, 2001 there were approximately 177 holders of the Corporation's Common Stock. During the year ended December 31, 2000, the Corporation issued 1,105,333 shares to Sun Pharma pursuant to an agreement under which Sun Pharma agreed to sell to the Corporation the right to develop, manufacture and sell 25 generic pharmaceutical products. (See Item 1 - "Sun Pharmaceutical Industries, Ltd." below.) The shares 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. During 2000, certain nonemployee directors of the Corporation earned 1,200 shares of common stock for attending board meetings. The shares of common stock were issued January 2001 pursuant to exemptions from registration under Section 4(2), Section 4(5) 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 OF PLAN OF OPERATIONS The following discussion and analysis provides information that the management believes is relevant to an understanding of the Corporation's results of operations and financial condition. The discussion should be read in conjunction with the financial statements and notes thereto. The discussion in the 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 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; (xi) success in attaining full compliance with regard to regulatory -13- 14 and cGMP compliance as envisaged by the FDA in its observation in form 483 and warning letter to the Corporation and (xii) 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. During 2000, Sun Pharma assisted Caraco in obtaining loans from ICICI Bank Limited and the Bank of Nova Scotia of $5 million each. Out of these loans, the Corporation utilized $5 million from ICICI Bank Limited and $3.85 million from Bank of Nova Scotia during 2000. The loans were primarily utilized by the Corporation to fund the operations, research and development of new products and finance the FDA compliance activities (see below) by the Corporation. The Corporation had an inspection by the FDA in February 2000. Upon completion of the inspection in March 2000, the FDA issued an FDA 483 to the Corporation relating to deficiencies and/or deviations in cGMP's. Subsequently in July 2000, the FDA issued a warning letter to the Corporation for cGMP deficiencies and/or deviations. Management directed its entire focus towards FDA compliance during the year 2000. A substantial portion of the resources of the Corporation were diverted towards regulatory compliance with a planned slowdown in Research and Development as well as production activities. While taking corrective measures for the observations made by the FDA, the Corporation initiated steps to emphasize the pharmaceutical compliance culture at all levels of the organization. The management of the Corporation has taken the following measures: - Retained a reputed consulting group to advise, train and audit the operations for compliance. - Recruited 3 highly educated and experienced individuals to head the Quality Control, Quality Assurance and Regulatory departments. - Recruited experienced personnel in manufacturing, Quality Control and Quality Assurance to monitor and control compliance. - Intensive training of organizational personnel in cGMPs. - Invested funds in upgrading the plant and machinery to further improve the operations and production capacities. - Thorough review and revision of procedures and systems for increasing reliability of operations and compliance. This emphasis on FDA compliance is to continue until such time that the compliance culture is well embedded in the entire organization. The management of the Corporation believes that its emphasis on compliance benefits the Corporation in the short and long run. The planned slowdown of research and development in the Corporation has not affected the research and development of new products at Sun Pharma in India. Their developmental activities continue. Assuming the Corporation comes into compliance with cGMP and receives the approval of the FDA, the Corporation -14- 15 intends to continue its compliance efforts, refocus on Research and Development and production and have any new products and technology developed by Sun Pharma, transferred to the Corporation for further development and submission to FDA. As a result of ongoing research and development efforts and products received from Sun Pharma, the Corporation presently has submitted nine (9) ANDAs to the U.S. Food and Drug Administration for approval. Further, the Corporation has three (3) products in advanced stages of development. Altogether the Corporation has twenty-one (21) products under development, including the products mentioned above. The FDA will approve no ANDAs and technology unless the Corporation comes into compliance with cGMP. NET SALES Net sales for the year's 2000 and 1999 were $2,377,546 and $2,895,022, respectively. This decrease can be mainly attributed to absence of contract manufacturing activity, the discontinuance of one of its products (see "Cost of Sales" below), the temporary suspension of production of four other products, and the increased resources of the Corporation shifting from production to FDA compliance, which is separately commented upon above and below. The management is committed to, and personnel have been directed to focus on FDA compliance. COST OF SALES While net sales reduced by 17% in 2000 compared to 1999, the Cost of Sales levels for 2000 and 1999 were $2,678,900 and $3,091,245 respectively or 112.6% and 107% of sales for the two years. This percentage increase can be mainly attributed to absence of contract manufacturing activity and the increased resources of the Corporation shifting from production to FDA compliance, which is separately commented upon above and below. Also, due to lower production during the year 2000 the plant continued to be underutilized, which increased the cost of sales. In addition, the FDA announced the voluntary discontinuance of manufacturing and marketing of products containing Phenyl Propanalomine (PPA) in November 2000. One of the Corporation's products had this ingredient. Management announced immediate discontinuance of the manufacture and marketing of the product. The raw materials and finished goods relating to this product have been written off during the year 2000. GROSS PROFIT (DIFFERENTIAL) The Corporation posted a gross profit differential of $301,354 during 2000 as compared to $196,223 in 1999. This increase can be mainly attributed to absence of contract manufacturing activity, the increased resources of the Corporation shifting from production to FDA compliance and the discontinuance and/or temporary suspension by the Corporation of certain production. RESULTS OF OPERATIONS Net losses for the years 2000 and 1999 were $7,622,708 and $9,739,984, respectively. The net losses were principally related to inadequacy of sales volume to absorb fixed operating costs, research and development costs, and costs incurred by the Corporation relating to compliance matters and lower production. Also, recruitment of senior level personnel during the year in key positions of Directors of Quality Control and -15- 16 Quality Assurance, which were a part of the compliance measures, had an impact on the losses. The Corporation intends to recruit more personnel in other areas during the coming few months of the next year in continuance of the compliance measures. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) Selling, general and administrative expenses for the years 2000 and 1999 were $2,508,737 and $2,159,116, respectively, representing an increase of almost 17% over the previous year. The increase in SG&A is mainly due to the expenses incurred for FDA compliance, including the retention of an FDA consulting firm as well as recruitment of senior level personnel in key positions in the Corporation described above. RESEARCH AND DEVELOPMENT EXPENSES Research and Development expenses were $3,295,435 for 2000 as compared to $6,332,390 in 1999. The R&D expenses incurred directly by the Corporation during the years 2000 and 1999 are $3.074 million and $4.528 million, respectively. As a result of lower product transfers in 2000 (2 ANDA product transfers) as compared to 8 in 1999 (6 ANDA products and 2 DESI products), the costs for the transfer are significantly lower, and hence the R&D costs are lower. The other reason for the lower R&D expenses is also due to shift of focus of the organization towards compliance. The Corporation is currently working on three ANDAs for submission to the FDA during 2001. As of December 2000 the Corporation has submitted nine ANDAs to the FDA for approval. In addition, Sun Pharma continues its efforts to develop new products for the Corporation in India. There is no assurance that bio-equivalence studies of the three ANDAs will be successful, the products will receive FDA approval or that the products will be commercially successful. Moreover, until the Corporation satisfies certain FDA cGMP compliance matters, the FDA will not approve any of the pending ANDAs. See "FDA Compliance" below. INTEREST INCOME Interest income for 2000 and 1999 was $38,010 and $ 32,764 respectively. This income was generated from short-term interest earning deposits. INTEREST EXPENSE Interest expense was $1,555,192 and $1,085,019 for 2000 and 1999, respectively. This is incurred primarily in connection with the Corporation's mortgage obligation to the EDC, interest on notes payable to Sun Pharma and Sun Global as well as a new lines of credit granted to the Corporation through the assistance of Sun Pharma by ICICI Bank and the Bank of Nova Scotia. -16- 17 FDA COMPLIANCE The Corporation underwent an FDA inspection during 1999, at which time it received an FDA 483 (List of Observations). The Corporation responded to those observations and met with the Detroit District Director of the FDA. During the 1st quarter of 2000, the FDA conducted another inspection. The Corporation received another FDA 483, to which the Corporation responded in June 2000. In July 2000, the Corporation received a warning letter from the FDA relating to deviations and/or deficiencies in the cGMPs. The areas of concern relate to record-keeping systems, testing standards, staff training and proficiency and quality systems. In response to the FDA 483s and warning letter, the Corporation retained the services of a FDA compliance-consulting firm in 2000 to help it address the cGMP compliance issues and develop the implementation plan to respond to the noted deficiencies and/or deviations. The Corporation has responded to the FDA indicating the corrective measures and plan to rectify the deviations and deficiencies referred to above. Failure to rectify the deficiencies and/or deviations may result in enforcement action by the FDA. The Corporation is attempting to overcome the shortcomings and comply with applicable regulatory requirements. During the week of March 19, 2001, the FDA commenced its anticipated inspection of the Corporation. However, there is no assurance that when the FDA completes its inspection, it will make a determination that the Corporation has satisfied the applicable deviations and/or deficiencies in the GMPs. Until it does, among other things, the FDA will not confirm any approvals of the pending ANDAs. As discussed above, the Corporation is continuing to commit its resources towards FDA compliance. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Corporation had negative working capital of $9,107,469 compared with a negative working capital of $12,291,880 of the corresponding date of 1999. The negative working capital for the year ended December 31, 2000 was mainly due to the classification of the EDC debt and related accrued interest as current. To enable the Corporation to fund its research and development activities, repayment of term loans and the increased working capital needs, Sun Pharma has assisted the Corporation in obtaining credit lines of $5 million each with ICICI Bank of India and Bank of Nova Scotia. As of December 31, 2000 the Corporation has received $5,000,000 from ICICI Bank and $3,850,000 through these credit facilities. As reported in 1999, satisfaction of loans of $1,290,000 from shareholder directors plus the accrued interest thereon has been accomplished by issuing them shares in lieu of cash and thus has had no impact on cash requirements during 2000. Further, Sun Pharma continues to support the Corporation in its activities and is trying to negotiate and help the Corporation raise additional funds required for the financial needs of the Corporation. In this connection, -17- 18 in March 2001, Sun Pharma assisted Caraco in obtaining from the Bank of Nova Scotia an increase of its existing unsecured $5.0 million credit facility by an additional $5.0 million. FUTURE OUTLOOK The management's plan for improving profitability, cash flow positions and operations include infusion of further additional funding from Sun Pharma and obtaining additional lines of credit through Sun Pharma's commitment. The management's plans for the year 2001 include: - Continued focus on FDA compliance. - Continued Research and Development from Sun Pharma's Bombay-based R&D center to support the Corporation's R&D activity. - Focus on R&D for three ANDAs for submission to the FDA by year-end 2001 - Increase the width and depth of the product portfolio to service customers. - Improvements in the sales volumes, better capacity utilizations, better-cost absorptions and improved margins due to the improved product portfolios and product mixes. - Improvements in the customer reach and satisfaction through reliable product deliveries. ITEM 7. FINANCIAL STATEMENTS The financial statements included in this report are set forth on 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 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 "Information About Nominees and Incumbent Directors", "Committees and Meetings of Directors", Executive Officers and "Section 16(a) Beneficial Ownership Reporting Compliance", 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 "Compensation of Executive Officers", which is incorporated herein by reference. -18- 19 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 sections "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management and Directors", which are 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 "Transactions of Directors and Executive Officers with Caraco", which is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3.01 Registrant's Amended and Restated Articles of Incorporation, as amended. (2) 3.02 Registrant's Amended and Restated Bylaws. (2) 3.03 Certificate of Amendment to the Articles of Incorporation filed February 13, 1997. (4) 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. (1) 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. .(1) 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. (1) 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. (1) 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. (1) -19- 20 10.06 Agreement, dated as of October 1, 1993, among Registrant, Hexal-Pharma GmbH & Co., KG, and Hexal Pharmaceuticals, Inc. (1) 10.07 Agreement, dated October 20, 1993, between Registrant and Clonmel Chemicals Co., Ltd. (1) 10.08 Form of 1993 Stock Option Plan. (1) 10.09 Employment Agreement, dated October 22, 1993, with Robert Kurkiewicz. (1) 10.10 Warrant Purchase Agreement dated November 30, 1994, with Jay F. Joliat. (2) 10.11 Series A Preferred Stock Purchase Agreement dated November 30, 1994, with Jay F. Joliat. (2) 10.12 Joint venture agreement dated on March 11, 1996, with Sun Pharmaceutical Industries, Inc. (3) 10.13 Secured Promissory Note dated December 23, 1996 with Sun Pharma Global, Inc. (4) 10.14 Security Agreement dated December 23, 1996 with Sun Pharma Global Inc. (4) 10.15 Stock Purchase Agreement by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as of April 23, 1997. (5) 10.16 Products Agreement by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated a s of April 23, 1997. (5) 10.17 Registration Rights Agreement dated as April 1997. (5) 10.18 Stock Pledge Agreement dated as July 28, 1997. (5) 10.19 Second Note and Mortgage Modification Agreement. (6) 10.20 Amendment to Employment Agreement of Robert Kurkiewicz dated as of April 1, 1997. (5) 10.21 Employment Agreement dated September 22, 1998 with Narendra N. Borkar. (7) 10.22 1999 Equity Participation Plan. (8) 10.23 Agreement between ICICI Bank and the Corporation for the term loan of $5 million. (9) 10.24 Term Sheet between Bank of Nova Scotia and the Corporation for the term loan of $10 million.+ - ---------- + Filed herewith -20- 21 (1) 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. (2) 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. (3) 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. (4) 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. (5) Incorporated by reference from Exhibits to Registrant's Form 10-QSB dated as of August 13, 1997. (6) 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. (7) Incorporated by reference from Exhibits to Registrant's Form 10-QSB dated as of November 13, 1998. (8) Incorporated by reference from Exhibit A to Registrant's Proxy Statement dated April 28, 1999. (9) Incorporated by reference from Exhibits to Registrant's Form 10-QSB for the quarter ended June 30, 2000. (b) Reports on Form 8-K None. -21- 22 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 30th day of March, 2001 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/Dilip Shanghvi Chairman of the Board Dilip Shanghvi /s/Sailesh T. Desai Director Sailesh T. Desai /s/David A. Hagelstein Director David A. Hagelstein /s/Phyllis Harrison-Ross Director Phyllis Harrison-Ross /s/Jay F. Joliat Director Jay F. Joliat /s/Sudhir Valia Director Sudhir Valia S-1 23 CARACO PHARMACEUTICAL LABORATORIES, LTD. INDEX TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT Balance Sheet - December 31, 2000 Statements of Operations for the Years Ended December 31, 2000 and 1999 Statements of Stockholders' Deficit for the Years Ended December 31, 2000 and 1999 Statements of Cash Flows for the Years Ended December 31, 2000 and 1999 Notes to Financial Statements 24 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, 2000, and the related statements of operations, stockholders' deficit and cash flows for the years ended December 31, 2000 and 1999. 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, 2000 and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999 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, P.C. Farmington Hills, Michigan February 23, 2001 F-1 25 CARACO PHARMACEUTICAL LABORATORIES, LTD. BALANCE SHEET - -------------------------------------------------------------------------------
ASSETS DECEMBER 31 2 0 0 0 ----------- CURRENT ASSETS Cash and cash equivalents $ 186,768 Accounts receivable, net of allowances of $157,000 466,446 Inventories 1,411,921 Prepaid expenses and deposits 63,384 ----------- TOTAL CURRENT ASSETS 2,128,519 ----------- PROPERTY, PLANT AND EQUIPMENT - AT COST Land 197,305 Buildings and improvements 6,784,027 Equipment 4,356,478 Furniture and fixtures 195,410 ----------- Total 11,533,220 Less accumulated depreciation 4,438,987 ----------- NET PROPERTY, PLANT AND EQUIPMENT 7,094,233 ----------- TOTAL ASSETS $ 9,222,752 ===========
The accompanying notes are an integral part of these financial statements. F-2 26 - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT DECEMBER 31 2 0 0 0 ------------- CURRENT LIABILITIES Accounts payable $ 561,102 Accounts payable, Sun Pharma 355,897 Accrued expenses 247,978 Short-term borrowings 75,000 Notes payable to stockholders, current portion 50,000 EDC loan payable 6,580,000 Accrued interest 3,441,011 ------------- TOTAL CURRENT LIABILITIES 11,310,988 ------------- LONG-TERM LIABILITIES Notes payable to stockholders 5,950,000 Loans payable to financial institutions 8,850,000 Preferred stock dividends payable 240,000 ------------- TOTAL LONG-TERM LIABILITIES 15,040,000 ------------- TOTAL LIABILITIES 26,350,988 ------------- COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 11) 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 30,000,000 shares, issued and outstanding 21,172,618 shares 32,955,601 Preferred stock dividends (240,000) Accumulated deficit (50,843,837) ------------- TOTAL STOCKHOLDERS' DEFICIT (17,128,236) ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,222,752 =============
F-3 27 CARACO PHARMACEUTICAL LABORATORIES, LTD. STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 ------------------------------ 2 0 0 0 1 9 9 9 -------------- ------------- Net sales $ 2,377,546 $ 2,895,022 Cost of goods sold 2,678,900 3,091,245 -------------- ------------- GROSS PROFIT DIFFERENTIAL (301,354) (196,223) Selling, general and administrative expenses 2,508,737 2,159,116 Research and development costs 3,295,435 6,332,390 -------------- ------------- OPERATING LOSS (6,105,526) (8,687,729) -------------- ------------- OTHER INCOME (EXPENSE) Interest expense (1,555,192) (1,085,019) Interest income 38,010 32,764 -------------- ------------- OTHER EXPENSE - NET (1,517,182) (1,052,255) -------------- ------------- NET LOSS $ (7,622,708) $ (9,739,984) ============== ============= Net loss per basic and diluted common share $ (0.39) $ (0.58) ============== =============
The accompanying notes are an integral part of these financial statements. F-4 28 CARACO PHARMACEUTICAL LABORATORIES, LTD. STATEMENTS OF STOCKHOLDERS' DEFICIT - -------------------------------------------------------------------------------
PREFERRED PREFERRED STOCK COMMON STOCK STOCK ACCUMULATED ---------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT DIVIDENDS DEFICIT TOTAL --------- ----------- ----------- ------------- ----------- -------------- -------------- Balances at January 1, 1999 285,714 $ 1,000,000 14,528,000 $29,025,840 $ (120,000) $ (33,481,145) $ (3,575,305) Preferred stock dividends - - - - (60,000) - (60,000) Issuances of shares via private placements - - 412,362 396,000 - - 396,000 Shares issued to directors in lieu of compensation - - 2,600 2,959 - - 2,959 Shares issued to employees in lieu of compensation - - 4,000 3,000 - - 3,000 Issuance of shares to Sun Pharma - - 3,609,333 1,804,666 - - 1,804,666 Net loss - - - - - (9,739,984) (9,739,984) --------- ----------- ----------- ------------- ----------- -------------- -------------- Balances at December 31, 1999 285,714 1,000,000 18,556,295 31,232,465 (180,000) (43,221,129) (11,168,664) Preferred stock dividends - - (60,000) - (60,000) Shares issued for expenses - - 120,990 103,496 - - 103,496 Shares issued for retirement of debt - - 1,390,000 1,390,000 - - 1,390,000 Issuance of shares to Sun Pharma - - 1,105,333 229,640 - - 229,640 Net loss - - - - - (7,622,708) (7,622,708) --------- ----------- ----------- ------------- ----------- -------------- -------------- Balances at December 31, 2000 285,714 $ 1,000,000 21,172,618 $32,955,601 $ (240,000) $ (50,843,837) $ (17,128,236) ========= =========== =========== ============= =========== ============== ==============
The accompanying notes are an integral part of these financial statements. F-5 29 CARACO PHARMACEUTICAL LABORATORIES, LTD. STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 ------------------------------- 2 0 0 0 1 9 9 9 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (7,622,708) $ (9,739,984) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 574,442 576,182 Common shares issued for interest expense 86,000 119,043 Common shares issued for product formula 229,640 1,804,666 Common shares issued for compensation 17,496 5,959 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable (102,258) 109,002 Inventories 293,171 (435,549) Prepaid expenses and deposits 13,951 (7,603) Accounts payable (614,134) 682,817 Accrued expenses and interest 681,108 1,196,858 -------------- -------------- NET CASH USED IN OPERATING ACTIVITIES (6,443,292) (5,688,609) -------------- -------------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of property, plant and equipment (215,459) (360,448) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank term loans 8,850,000 - Net short-term borrowings 75,000 - Net (repayments) borrowings on loans from stockholders (225,000) 5,275,000 Repayment of EDC loan (2,300,000) - Proceeds from issuances of common stock - 396,000 -------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,400,000 5,671,000 -------------- -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (258,751) (378,057) Cash and cash equivalents, beginning of year 445,519 823,576 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 186,768 $ 445,519 ============== ==============
The accompanying notes are an integral part of these financial statements. F-6 30 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 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, 2000. A significant source of funding for the Corporation has been from private placement offerings, stockholder and financial institution loans and from the Economic Development Corporation of the City of Detroit (the "EDC"), which loaned approximately $9.1 million to the Corporation in accordance with a Development and Loan Agreement dated August 10, 1990 (see Note 5). During 2000, the Corporation also obtained term loans for $10 million from two foreign banks, of which $8,850,000 has been borrowed at December 31, 2000. The Corporation and an Indian specialty pharmaceutical company, Sun Pharmaceutical Industries, Ltd. ("Sun Pharma") completed an agreement, in 1997, whereby Sun Pharma has invested $7,500,000 into common stock of the Corporation, and is required to exchange the formula for 25 products over a period of five years to the Corporation 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). At December 31, 2000, Sun Pharma has delivered the formula for 10 products, and holds approximately 48% of the outstanding common stock of the Corporation. 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, develop new products and continue to raise in the near term the necessary funds to keep the Corporation in business. Net sales in 1999 included approximately $195,000 related to contracted manufacturing activities. No contract manufacturing activities occurred during 2000. 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. F-7 31 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Corporation has never achieved sales necessary to support operations. The Corporation has, as of December 31, 2000, a stockholders' deficit of $17,128,236. 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 plan with regard to improving profitability, cash flows and operations include infusion of additional funding from Sun Pharma and obtaining additional bank lines of credit. Management's plan for 2001 includes: - Continued focus on FDA compliance. - Continued research and development with Sun Pharma in India supporting Caraco's research and development efforts. - The Corporation expects to focus on the research and development for three (3) ANDA products with an anticipated submission to the FDA by year end. - The Corporation intends to increase the width and depth of product portfolio to serve the 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. 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. F-8 32 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. The Corporation from time to time may have cash balances which exceed federally insured limits. 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 historical results. 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 and then recognized upon performance of services. Inventories Inventories are stated at the lower of cost determined by the first in, first-out method, or market. 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, 2000 and 1999, options to purchase 2,486,155 and 2,569,355 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. A reconciliation of the denominators used in the basic and diluted share calculation follows for the years ended December 31:
2 0 0 0 1 9 9 9 --------------- -------------- Denominator: Weighted average shares outstanding, basic 19,755,021 16,725,271 Incremental shares from assumed exercise of options - 76,861 --------------- -------------- Weighted average shares outstanding, diluted 19,755,021 16,802,132 =============== ==============
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, assuming the Corporation is successful in continuing to operate as a going concern. F-9 33 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 tax net operating losses. 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 carrying amounts of short-term borrowings, notes payable to stockholders, and loans payable approximate their fair values because the interest rates are representative of, or change with, market rates. 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. Common Stock Issued to Sun Pharma Common stock is issued to Sun Pharma in exchange for the formula for products delivered to the Corporation. Shares are recorded as research and development costs at the fair value on the date of issuance. 2. SUPPLEMENTAL CASH FLOWS INFORMATION Non-cash Investing and Financing Activities The Corporation issued 1,476,000 shares of common stock during 2000 in exchange for the satisfaction of $1,390,000 principal and accrued interest on loans from stockholders. Interest expense satisfied in exchange for these shares was $86,000. F-10 34 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Other Cash Flows Information Cash paid for interest for the years ended December 31, 2000 and 1999 was approximately $760,000 and $0, 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, 2000, are summarized as follows: Accounts receivable $ 623,446 --------------- Allowances: Doubtful accounts 6,000 Sales returns and allowances 20,000 Price adjustments 131,000 --------------- Total allowances 157,000 --------------- Accounts receivable, net of allowances $ 466,446 ===============
4. INVENTORIES Inventories consist of the following amounts at December 31, 2000: Raw materials $ 889,742 Work in process 417,391 Finished goods 104,788 --------------- Total $ 1,411,921 ===============
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. During 2000 and 1999, the Corporation purchased approximately $707,000 and $397,000, respectively, of its raw materials from Sun Pharma. The Corporation also purchased approximately $25,800 of raw materials from an entity owned by a shareholder during 2000. F-11 35 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5. DEBT (INCLUDING RELATED PARTIES) Short-term Borrowings Short-term borrowings consist of unsecured draws on a credit facility from Trans Financial Service Limited with interest charged at 10%. Principal and interest payments are payable on demand. EDC Loan Debt at December 31, 2000 includes a note payable to the Economic Development Corporation (EDC) of the City of Detroit (classified as a current obligation of $6,580,000 at December 31, 2000), 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. 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 amendment included the deferral of scheduled principal and interest payments until February 1, 1999, at which time additional deferred principal and interest due under the terms of the original agreement were required in amounts sufficient to amortize the total deferred amount through July 2002. Additionally the amendment included 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 6.17% at December 31, 2000). As a condition of the deferral, the EDC was provided additional security on all the Corporation's existing equipment and the Corporation agreed 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 December of 1998, the Corporation approached the EDC regarding renegotiation of the repayment terms. The Corporation is currently renegotiating the repayment schedule with the EDC and, as such, has not made any of the scheduled payments. During 2000, the Corporation has made $2,300,000 of payments to the EDC. All payments on the EDC loan to date have been applied against the principal balance for financial statements purposes. The Corporation continues to accrue interest at stipulated rates. Upon the renegotiation of the debt, some amount may be required to be reclassified between accrued interest and principal. Such payments have not brought the Corporation current in its obligations to the EDC, and such payments were made without prejudice to the rights of the EDC to exercise all remedies available to the EDC for failure to make the scheduled payments. While the terms of F-12 36 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- the restructured loan are being negotiated, the Corporation intends to continue to make payments to the EDC, again without prejudice to the rights of the EDC. Upon a final agreement of the restructured terms of the loan, of which there can be no assurance, the Corporation expects to then commence making the requisite agreed upon payments. Stockholder Notes Payable Stockholder notes payable consist of the following obligations as of December 31, 2000: Promissory note payable to Sun Pharma with the entire principal balance due October 2003. Interest is charged at 10% and is payable in semi-annual installments. $ 5,300,000 Promissory note payable to Sun Pharma Global, Inc., a wholly-owned subsidiary of Sun Pharma with interest charged at 10%. 650,000 Promissory note payable to stockholder director, with interest charged at 10%, principal payments are payable in installments, with a final payment due March 1, 2001. 50,000 -------------- Total shareholder notes payable 6,000,000 Less amounts due within one year 50,000 --------------- Stockholder notes due after one year $ 5,950,000 ===============
Notes payable to Sun Pharma and Sun Pharma Global, Inc. are subordinated to the EDC loan, these parties currently have no intent of demanding payment within the upcoming year; therefore, such notes have been classified as long-term. Interest incurred on stockholder notes amounted to $697,363 and $477,212 in 2000 and 1999, respectively. F-13 37 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Loans Payable Loans payable consist of the following obligations as of December 31, 2000: Term loan payable to ICICI Bank of India, with quarterly principal payments of $625,000 commencing on December 31, 2003 and ending on September 30, 2005. Interest is adjusted semi-annually and is charged at the LIBOR rate plus 140 basis points (effective rate of 7.9% at December 31, 2000), and is due in quarterly installments. $ 5,000,000 $5 million term loan payable to Bank of Nova Scotia, with semi-annual principal payments of $1,250,000 commencing in February 2004 and ending in September 2005. Interest is charged at the LIBOR rate plus 30 basis points (effective rate of 6.8% at December 31, 2000), and is due in quarterly installments. An additional annual fee is charged, on the average outstanding balance at the LIBOR rate plus 125 basis points. 3,850,000 ----------------- Total loans payable $ 8,850,000 =================
The Corporation incurred approximately $62,500 in bank fees as stipulated in the Bank of Nova Scotia term loan. The Corporation also incurred syndication fees of approximately $21,000 securing these term loans, which are guaranteed by Sun Pharma. These fees have been paid on Caraco's behalf by Sun Pharma and as of December 31, 2000 approximately $62,500 remains payable to Sun Pharma and is included in accounts payable due to Sun Pharma. 6. INCOME TAXES At December 31, 2000 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 $15,400,000 has been established. Changes in the valuation allowance were approximately $1,900,000 and $3,300,000 in 2000 and 1999, respectively At December 31, 2000, net operating loss carryforwards of approximately $45,000,000 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-14 38 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. STOCKHOLDERS' DEFICIT Private Placement In connection with private placement offerings in 1999, the Corporation sold 412,362 shares of common stock netting $396,000. The shares were sold at prices ranging from $0.88 to $1.00 per share. Other Common Stock Issuances (Also See Note 2) During 2000 and 1999, the Corporation issued 1,105,333 and 3,609,333 shares of common stock, respectively, to Sun Pharma in exchange for the formula for eight ANDA and two DESI products delivered to Caraco. Such shares have been recorded as research and development expense, and have been included in the calculation of the weighted average number of common shares outstanding in the year the respective formula was delivered. During 2000, the Corporation issued 34,990 shares to an investor relations firm in exchange for services rendered. The Corporation recorded compensation expense of $17,496 based on the fair value of such shares on their issuance dates. 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 $3,000 was recorded during 1999 based on the fair value per share on the date of issuance. During 1999, the Corporation issued 2,600 shares of common stock to non-employee directors in exchange for services rendered. The Corporation recorded compensation expense of $2,959 in 1999 based on the fair values of such shares on their issuance dates. 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 annual dividends of $.21 per share on a cumulative basis. Accrued dividends on preferred stock at December 31, 2000 were $240,000. It is not expected that such dividends will be paid in 2001 and, accordingly, the related liability is not classified as current obligation on the accompanying balance sheet. F-15 39 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. COMMON STOCK OPTIONS AND WARRANTS Stock Option Plans The Corporation maintains the 1999 Plan and the 1993 Stock Option Plan in which the Corporation may grant options to employees and non-employee-directors for the purchase of up to 3,450,000 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:
2 0 0 0 1 9 9 9 -------------------------- -------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ---------- -------------- ---------- -------------- Outstanding, beginning of year 546,469 $ 1.88 406,721 $ 2.15 Granted - - 200,000 1.15 Terminated (136,138) 3.38 (60,252) 1.24 ---------- -------------- ---------- -------------- Outstanding, end of year 410,331 $ 1.51 549,469 $ 1.88 ========== ============== ========== ============== Options exercisable, end of year 174,881 $ 2.06 187,700 $ 3.25 ========== ============== ========== ==============
Options at December 31, 2000
Options Outstanding Options Exercisable ------------------------------------ ---------------------- Remaining Contractual Exercise Exercise Range of Exercise Prices Shares Life * Price * Shares Price * - --------------------------- ---------- ------------ ---------- ----------- -------- $0.94 to $1.00 118,375 3.4 years $ 0.94 47,725 $ 0.94 $1.01 to $2.00 242,000 3.7 years 1.21 78,400 1.31 $2.01 to $3.00 6,000 1.7 years 2.50 4,800 2.50 $3.01 to $4.00 20,000 1.1 years 4.00 20,000 4.00 $4.01 to $5.00 23,956 0.7 years 5.00 23,956 5.00 ---------- ------------ ---------- ----------- -------- Total 410,331 3.3 years $ 1.51 174,881 $ 2.06 ========== ============ ========== =========== ========
*Weighted average F-16 40 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Other Common Stock Option Agreements The Corporation has issued other stock options outside of the 1999 and 1993 Plans. 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:
2 0 0 0 1 9 9 9 --------------------------- ----------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------ ------------- ------------- -------------- Outstanding, beginning of year 2,450,824 $ 2.00 2,550,824 $ 3.38 Granted - - 600,000 1.40 Terminated (375,000) 1.42 (700,000) (6.50) ------------ ------------- ------------- -------------- Outstanding, end of year 2,075,824 $ 2.11 2,450,824 $ 2.00 ============ ============= ============= =============== Options exercisable, end of year 1,985,824 $ 2.18 2,330,824 $ 2.07 ============ ============= ============= ===============
Options at December 31, 2000
Options Outstanding Options Exercisable -------------------------------------- ----------------------- Remaining Contractual Exercise Exercise Range of Exercise Prices Shares Life * Price * Shares Price * - ----------------------------- ------------ ------------ ---------- ------------ -------- $0.66 to $1.00 250,000 3.8 years $ 0.75 160,000 $ 0.80 $1.01 to $2.00 799,158 3.5 years 1.48 799,158 1.48 $2.01 to $3.00 666,666 5.3 years 2.63 666,666 2.63 $3.01 to $4.00 360,000 2.9 years 3.50 360,000 3.50 ------------ ------------ ---------- ------------ -------- Total 2,075,824 4.0 years $ 2.11 1,985,824 $ 2.18 ============ ============ ========== ============ ========
*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. Had stock compensation expense been determined pursuant to the methodology provided in SFAS No. 123, using the Black-Scholes option pricing model, the following weighted average assumptions for grants in 1999 would have been employed: expected volatility of 95%, risk free interest rate of 5.5%, and expected lives of 6 years. The proforma effect on operations would have been an increase in the 1999 net loss of $304,000. 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 shares at an exercise price of $1.375 as of December 10, 1996, per share, as defined, upon the filing of an F-17 41 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. Hexal subsequently decided to proceed with the development of only one product. To date, there have been limited sales of the introduced product, but no options have been exercised. At December 31, 2000, royalties payable to Hexal, which are included in accrued expenses amount to approximately $157,000. 9. RELATED PARTY LEASES The Corporation entered into two non-cancelable operating leases during 2000, with Sun Pharma, to lease production machinery. The leases each require quarterly rental payments of $4,245 and expire during 2005. Net rental expense on these operating leases was $21,225 for the year ended December 31, 2000. The following is a schedule of annual future minimum lease payments required under the operating leases with remaining non-cancelable lease terms in excess of one year as of December 31: 2001 $ 33,960 2002 33,960 2003 33,960 2004 33,960 2005 12,735 -------------- Total minimum payments due $ 148,575 ==============
The Corporation has additionally paid Sun Pharma approximately $33,500 during 2000 for various parts needed to operate production machinery. 10. MAJOR CUSTOMERS Shipments to one wholesale customer accounted for approximately 17% and 15% of net sales in 2000 and 1999, respectively. Balances due from this customer represented approximately 9% and 10% of accounts receivable at December 31, 2000 and 1999, respectively. Shipments to another wholesale customer accounted for approximately 8% and 11% of net sales in 2000 and 1999, respectively. Balances due from this customer represented approximately 8% and 3% of accounts receivable at December 31, 2000 and 1999, respectively. F-18 42 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 11. 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. 12. SUBSEQUENT EVENT The Corporation, in March 2001, increased its existing unsecured $5 million facility with the Bank of Nova Scotia by an additional $5 million. Proceeds of $1,000,000 were received during March 2001 on this additional amount. * * * * * F-19 43 EXHIBIT INDEX 3.01 Registrant's Amended and Restated Articles of Incorporation, as amended. (2) 3.02 Registrant's Amended and Restated Bylaws. (2) 3.03 Certificate of Amendment to the Articles of Incorporation filed February 13, 1997. (4) 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. (1) 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. .(1) 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. (1) 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. (1) 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. (1) 10.06 Agreement, dated as of October 1, 1993, among Registrant, Hexal-Pharma GmbH & Co., KG, and Hexal Pharmaceuticals, Inc. (1) 10.07 Agreement, dated October 20, 1993, between Registrant and Clonmel Chemicals Co., Ltd. (1) 10.08 Form of 1993 Stock Option Plan. (1) 10.09 Employment Agreement, dated October 22, 1993, with Robert Kurkiewicz. (1) 10.10 Warrant Purchase Agreement dated November 30, 1994, with Jay F. Joliat. (2) 10.11 Series A Preferred Stock Purchase Agreement dated November 30, 1994, with Jay F. Joliat. (2) 10.12 Joint venture agreement dated on March 11, 1996, with Sun Pharmaceutical Industries, Inc. (3) 44 10.13 Secured Promissory Note dated December 23, 1996 with Sun Pharma Global, Inc. (4) 10.14 Security Agreement dated December 23, 1996 with Sun Pharma Global Inc. (4) 10.15 Stock Purchase Agreement by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as of April 23, 1997. (5) 10.16 Products Agreement by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated a s of April 23, 1997. (5) 10.17 Registration Rights Agreement dated as April 1997. (5) 10.18 Stock Pledge Agreement dated as July 28, 1997. (5) 10.19 Second Note and Mortgage Modification Agreement. (6) 10.20 Amendment to Employment Agreement of Robert Kurkiewicz dated as of April 1, 1997. (5) 10.21 Employment Agreement dated September 22, 1998 with Narendra N. Borkar. (7) 10.22 1999 Equity Participation Plan. (8) 10.23 Agreement between ICICI Bank and the Corporation for the term loan of $5 million. (9) 10.24 Term Sheet between Bank of Nova Scotia and the Corporation for the term loan of $10 million. + - ---------- + Filed herewith -24- EX-10.24 2 k61255ex10-24.txt TERM SHEET BET BANK OF NOVA SCOTIA AND THE CORP 1 EXHIBIT 10.24 March 14, 2001 TERM SHEET I. PARTIES Borrower: Caraco Pharmaceuticals Laboratories Ltd., organized under the laws of the state of Michigan (the "Borrower") Lender: The Bank of Nova Scotia II. THE CREDIT FACILITY Facility Amount: USD 10,000,000 Purpose: The proceeds available under the Credit Facility may be used for general corporate purposes, including debt repayment. Termination Date: August 24, 2005 Minimum Draw Down Amount: USD 500,000 Final draw down: Any amounts not borrowed within 365 days of March 14, 2001 will no longer be available for draws. On March 14, 2002 the facility will term out. Repayment: Four semi-annual installments, of USD 2,500,000 each due on: February 24, 2004; August 24, 2004; February 24, 2005; and August 25, 2005 (Termination Date). Prepayment: Not permitted till the completion of 3 years from the Original Closing Date of August 24, 2000. III. COMMON TERMS APPLICABLE TO THE FACILITY Interest Rate: LIBOR - 30 bps Default Interest Rate: LIBOR - 200 bps (Occurs if the Borrower incurs an Event of Default 2 Interest Payment Dates: Interest periods for LIBOR loans shall be, at the Borrower's option, one, two, three or six months. Interest on LIBOR loans shall be payable on the last business day of the applicable interest period for such loans unless such interest exceeds three months then on the 90th day following the commencement of such interest period. Interest on alternate base rate loans shall be payable monthly in arrears. Annual Work Fee: Annual administrative fee in the amount of USD 10,000 due and payable no later than December 31 of each year. Security: Unsecured. Guarantees: A Guarantee in the amount of USD 10,000,000 is to be delivered on behalf of the Borrower by Sun Pharmaceuticals Industries Limited to BNS Mumbai. Additionally, BNS Mumbai shall provide a guarantee to The Bank of Nova Scotia Atlanta Office in the amount of USD 10,000,000 prior to any funding that exceeds USD 5,000,000. Representations and Warranties: Customary for the type of transaction proposed and others to be reasonably specified by the Bank of Nova Scotia. 1. The Borrower is to provide quarterly financial statements including an income statement, balance sheet and cash flow statement to be received no later than 45 days after each quarter end. 2. The Borrower is to provide audited financial year-end statements including an income statement, balance sheet, cash flow statement, and statement of retained earnings to be received no later than 120 days after the financial year end. 3. The Borrower is to provide a detailed annual forecast of its projected performance including an income statement, balance sheet, cash flow 2 3 statement, and summary of management assumptions to be received no later than 60 days after the financial year end. 4. The Borrower is to provide a quarterly management discussion and analysis of operating performance (including discussion of revenue, gross margins, and SG&A expenses) and financial position (including discussion of financial position and liquidity) to be received no later than 45 days after each quarter end and no later than 120 days after the financial year end. Events of Default: 1. Failure to pay principal or interest or the annual work fee when due and payable. 2. Failure to comply with the reporting requirements. Miscellaneous: 1. Indemnification of The Bank of Nova Scotia from and against any losses, claims, damages, liabilities or other expenses which arise out of or in connection with the Credit Facility, this Term Sheet or the Credit Documentation, including those which may arise from or in connection with any action, suit or proceeding (whether or not an Indemnified Party is a party or is subject thereto). 2. The Borrower will pay all of The Bank of Nova Scotia's fees and other out-of-pocket expenses (including the fees and out-of-pocket expenses of The Bank of Nova Scotia's legal counsel) arising out of or in connection with the Credit Facility, this Term Sheet or the Credit Documentation, including any such fees and expenses which may arise from or in connection with any action, suit or proceeding (whether or not an Indemnified Party is a party or is subject thereto). 3. Waiver of jury trial. 4. New York governing law; consent to exclusive New York jurisdiction; appointment of New York process agent. 3 -----END PRIVACY-ENHANCED MESSAGE-----