UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2004
{ } TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1150 ELIJAH MCCOY DRIVE, DETROIT, MICHIGAN 48202
(Address of principal executive offices) (Zip Code)
TELEPHONE: (313) 871-8400
Registrant's telephone number, including area code
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes {X} No { }
As of July 16, 2004, registrant had 24,587,228 shares of common stock issued and
outstanding.
CARACO PHARMACEUTICAL LABORATORIES LTD.
BALANCE SHEETS
BALANCES AS AT
JUNE 30, DECEMBER 31,
2004 2003
---------- -------------
UNAUDITED AUDITED
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,587,268 $ 4,206,282
Accounts receivable, net 6,028,565 4,538,473
Inventories 13,105,154 9,610,810
Prepaid expenses and deposits 407,658 562,030
------------ -------------
TOTAL CURRENT ASSETS 21,128,646 18,917,595
------------ -------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305 197,305
Building and improvements 8,887,170 7,917,986
Equipment 8,380,795 6,991,024
Furniture and fixtures 515,004 364,140
------------ -------------
Total 17,980,274 15,470,455
Less: accumulated depreciation 6,377,530 5,963,780
------------ -------------
NET PROPERTY, PLANT & EQUIPMENT 11,602,744 9,506,675
------------ -------------
TOTAL ASSETS $ 32,731,390 $ 28,424,270
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,880,211 $ 1,386,161
Accounts payable - Sun Pharma 5,257,279 3,839,815
Accrued expenses 1,313,992 4,917,216
Current portion of bank loans payable 11,250,000 8,750,000
Current portion of EDC debt 0 1,115,213
------------ -------------
TOTAL CURRENT LIABILITIES 19,701,482 20,008,405
------------ -------------
LONG-TERM LIABILITIES
EDC debt 0 5,270,277
Bank loans payable 3,125,000 8,125,000
------------ -------------
TOTAL LONG-TERM LIABILITIES 3,125,000 13,395,277
------------ -------------
TOTAL LIABILITIES 22,826,482 33,403,682
------------ -------------
STOCKHOLDERS' EQUITY / (DEFICIT)
Common stock, no par value, authorized 50,000,000 shares;
issued and outstanding shares - 24,582,828 and 24,577,828 shares 41,447,907 41,442,311
Convertible Series B Preferred Stock, no par value, authorized
5,000,000 shares; issued and outstanding - 2,176,000 and -0- shares 15,594,970 0
Additional paid in capital 2,718,735 2,718,735
Accumulated deficit (49,856,704) (49,140,458)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY / (DEFICIT) 9,904,908 (4,979,412)
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT) $ 32,731,390 $ 28,424,270
============ =============
See accompanying notes
-2-
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
NET SALES $28,360,953 $20,611,537 $14,799,865 $11,889,937
Cost of goods sold 11,111,175 8,653,413 5,720,474 4,427,464
----------- ----------- ----------- -----------
Gross profit 17,249,777 11,958,124 9,079,391 7,462,473
----------- ----------- ----------- -----------
Selling, general and administrative expenses 2,693,078 3,089,820 1,410,723 2,140,036
R&D cost 2,493,830 1,526,719 1,360,500 626,788
R&D cost - affiliate (Note 7) 12,491,600 0 4,663,440 0
----------- ----------- ----------- -----------
Operating (loss) / income (428,731) 7,341,585 1,644,729 4,695,649
----------- ----------- ----------- -----------
Other (expense)/income
Interest expense (317,175) (817,722) (135,633) (375,470)
Interest income 16,625 7,043 14,610 5,978
Other income 13,035 0 2,968 0
----------- ----------- ----------- -----------
Net other expense (287,515) (810,679) (118,055) (369,492)
----------- ----------- ----------- -----------
NET (LOSS) / INCOME $ (716,246) $ 6,530,906 $ 1,526,674 $ 4,326,157
=========== =========== =========== ===========
NET (LOSS) / INCOME PER COMMON SHARE
Basic (0.03) 0.27 0.06 0.18
Diluted (0.03) 0.26 0.05 0.17
See accompanying notes
-3-
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF STOCKHOLDERS' (DEFICIT) /EQUITY FOR THE
SIX MONTHS ENDED JUNE 30, 2004
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- ------------------------ PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------------ ----------- ----------- ----------- ------------ ---------------
BALANCES AT JANUARY 1, 2004 - - 24,577,828 $41,442,311 $ 2,718,735 $ (49,140,458)
Issuances of common stock
upon exercise of stock options 5,000 5,596
Issuances of preferred stock to
affiliate in exchange for product
technology transfers 2,176,000 15,594,970
Net loss (716,246)
--------- ----------- ---------- ----------- ------------ ---------------
BALANCES AT JUNE 30, 2004 2,176,000 $15,594,970 24,582,828 $41,447,907 $ 2,718,735 $ (49,856,704)
========= =========== ========== =========== ============ ===============
TOTAL
STOCKHOLDERS'
(DEFICIT) / EQUITY
------------------
BALANCES AT JANUARY 1, 2004 $ (4,979,412)
Issuances of common stock
upon exercise of stock options 5,596
Issuances of preferred stock to
affiliate in exchange for product
technology transfers 15,594,970
Net loss (716,246)
------------
BALANCES AT JUNE 30, 2004 $ 9,904,908
============
See accompanying notes
-4-
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
------------------------------
2004 2003
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) / income $ (716,246) $ 6,530,906
Adjustments to reconcile net (loss) / income to
net cash provided by operating activities
Depreciation 413,749 316,261
Common shares issued in lieu of cash for compensation 0 32,450
Variable compensation expense for stock options 0 851,800
Preferred shares issued to affiliate for R&D cost 12,491,600 0
Changes in operating assets and liabilities
which provided / (used) cash:
Accounts receivable (1,490,092) (3,914,949)
Inventories (3,494,344) 375,536
Prepaid expenses and deposits 154,372 (441,715)
Accounts payable 1,911,514 68,467
Accrued expenses (499,854) (106,615)
------------- -----------
Net cash provided by operating activities 8,770,699 3,712,141
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,509,819) (712,947)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans 6,000,000 1,600,000
Net bank loans paid (8,500,000) 0
Proceeds from exercise of stock options 5,596 305,403
Payment of preferred stock dividends 0 (350,380)
Payments of EDC debt (6,385,490) (604,350)
Net loans repaid to stockholders 0 (240,000)
------------- -----------
Net cash (used in) / provided by financing activities (8,879,894) 710,673
------------- -----------
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (2,619,014) 3,709,867
Cash and cash equivalents, beginning of period 4,206,282 534,228
------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,587,268 $ 4,244,095
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
During the six months ended June 30, 2004, 544,000 shares of preferred stock
were issued to Sun Global in satisfaction of the related liability for one
product transfer that had been accrued at December 31, 2003 in the amount of
$3,103,370.
See accompanying notes
-5-
CARACO PHARMACEUTICAL LABORATORIES, LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of December 31, 2003 is audited. All other financial
statements contained herein are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for the full year.
The financial statements contained herein should be read in conjunction with the
financial statements and notes thereto included in the Corporation's Annual
Report on Form 10-KSB for the year ended December 31, 2003.
The accounting policies followed by the Corporation with respect to the
unaudited interim financial statements are consistent with those stated in the
2003 Caraco Pharmaceutical Laboratories, Ltd., Annual Report on Form 10-KSB.
2. ORGANIZATION AND NATURE OF BUSINESS
Caraco Pharmaceutical Laboratories, Ltd. ("Caraco," the "Company" or the
"Corporation" which is also referred to as we, us or our), is a Michigan
corporation engaged 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 at their
equivalence in quality and bioavailability.
Our present product portfolio includes 18 products in 35 strengths in 82 package
sizes. We are currently marketing 17 of the products in 33 strengths and 78
package sizes. The products are intended to treat a variety of disorders
including the following: hypertension, arthritis, epilepsy, diabetes, depression
and pain management.
A significant source of our funding has been from private placement offerings
and loans. Since August 1997, Sun Pharmaceutical Industries Limited, a specialty
pharmaceutical corporation organized under the laws of India ("Sun Pharma"), has
contributed equity capital and has advanced us loans. In addition, among other
things, Sun Pharma has acted as a guarantor on loans to Caraco, has supplied us
with a substantial portion of raw materials for our products, helped us obtain
machinery and equipment to enhance our production capacities at competitive
prices and transferred certain generic products to us. (See "Current Status of
the Corporation" and "Sun Pharmaceutical Industries, Limited" below.)
3. CURRENT STATUS OF THE CORPORATION
Net sales for the three months and six months ended June 30, 2004 were $14.8
million and $28.4 million, respectively, as compared to $11.9 million and $20.6
million, respectively, for the corresponding periods of 2003. We have earned an
operating income of $1.6 million and incurred an operating loss of $0.4 million,
respectively, for the three months and six months ended June 30, 2004 as
compared to operating income of $4.7 million and $7.3 million, respectively, for
the corresponding periods of 2003. After interest expense, we have earned net
income of $1.5 million and incurred a net loss of $0.7 million, respectively,
for the three months and six months ended June 30, 2004 as compared to net
income of $4.3 million and $6.5 million, respectively, for the corresponding
periods of 2003. Net cash generated from operating activities was $8.8 million
for the six months ended June 30, 2004 as compared to $3.7 million for the
corresponding period in 2003. At June 30, 2004, stockholders' equity increased
to $9.9 million, as compared to $3.7 million as of
-6-
March 31, 2004 and to a stockholders' deficit of $5.0 million at December 31,
2003. (See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.")
Pursuant to our products agreement with Sun Pharma Global, Inc. ("Sun Global"),
a wholly-owned subsidiary of Sun Pharma, we have selected, during the second
quarter of 2004, eight additional products over and above the seven products
selected in the first quarter of 2004. This makes a selection of a total of 15
products out of the 25 products to be transferred to us by Sun Global. Of these,
four products have passed bio-equivalency studies, including three products
during the six months ended June 30, 2004. Under the products agreement, Sun
Global has earned 544,000 preferred shares for each such product. (See "Sun
Pharmaceutical Industries Limited" and " Item 2. - Future Outlook." below)
During the six months ended June 30, 2004, we filed ANDAs with the FDA for three
of the four above-mentioned products. This brings the total number of ANDAs
pending approval by the FDA to four.
During the six months ended June 30, 2004, we received approvals for an
additional strength of one product in our portfolio and one new product from the
FDA. (See "Organization and Nature of Business" above).
During the six months ended June 30, 2004, we appointed three new independent
directors to comply with the requirements of the Sarbanes-Oxley Act of 2002 and
the regulations of the American Stock Exchange. The new independent directors
replace the three independent directors who resigned in late 2003. The new
independent directors are William C. Brooks, Timothy Manney and Georges Ugeux.
During the six months ended June 30, 2004, Sun Pharma acquired 3,452,291
additional shares of common stock and 1,329,066 stock options from two former
directors and a significant stockholder (See `Sun Pharmaceutical Industries
Limited' below).
During the six months ended June 30, 2004, the Company repaid the entire $4.4
million loan balance due to ICICI Bank Limited and the $6.4 million mortgage
loan balance due to the Economic Development Corporation of the City of Detroit
(the "EDC"). The payoffs were funded from internal cash flow and by utilizing
$6.0 million of a new $10.0 million credit line arranged with Citibank, N.A. Of
this $6.0 million, the Company has repaid $1.0 million during the second quarter
of 2004.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 149, which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments imbedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6 (b) of SFAS No. 133,
clarifies when a derivative contains a financing component, amends a definition
to conform to language used in FASB interpretation No. 45, and amends certain
other existing pronouncements. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003. The subject matter of SFAS No. 149 is not
currently applicable to the Corporation; accordingly, it is not expected that
the provisions of SFAS No. 149 will have a material impact on the financial
position, results of operations or cash flows of the Corporation.
In May 2003 the FASB issued SAFS No. 150, which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both debt and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was effective for the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. The subject matter
of SFAS No. 150 is not currently applicable to the Corporation; accordingly, it
is not expected that provisions of statement No. 150 will have a material impact
on the financial position, results of operations or cash flows of the
Corporation.
-7-
5. COMPUTATION OF EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares outstanding during each period and considers a dual presentation and
reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the
potential dilution of all common stock equivalents.
The basic and diluted weighted average numbers of common shares outstanding for
the six months ended June 30, 2004 were 24,578,333. The basic and diluted
weighted average numbers of common shares outstanding for the three months ended
June 30, 2004 were 24,578,333 and 28,259,327, respectively. The basic and
diluted weighted average numbers of common shares outstanding for the three and
six months ended June 30, 2003 were 23,830,923 and 24,909,282, respectively.
6. MORTGAGE NOTE WITH EDC
Our manufacturing facility and executive offices were constructed in 1991 and
financed by $9.1 million loan pursuant to a Development and Loan Agreement dated
August 10, 1990 (the "Agreement") from the EDC. The loan was collateralized by a
first mortgage, effectively, on all of the Corporation's property and equipment
purchased pursuant to the Agreement.
On April 13, 2004, the Company repaid the entire $6.1 million loan balance due
to the EDC (effective rate of interest of 3.36%). This was funded by utilizing
part of a new $10.0 credit line arranged with Citibank, N.A. (effective rate of
interest of 2.25%). Accordingly, all liens and other restrictions previously
imposed on the Company by the EDC have been removed.
7. SUN PHARMACEUTICAL INDUSTRIES LIMITED
Pursuant to a stock purchase agreement, Sun Pharma had, as of December 31, 1998,
remitted a total of $7.5 million to us for the purchase of 5.3 million common
shares.
Sun Pharma and its affiliates had loaned us, since August 1997, approximately
$10.0 million at interest rates ranging from of 8.0% to 10% per annum, payable
quarterly. Prior to December 31, 2003, we repaid all of such loans.
Sun Pharma had also assisted us, by acting as guarantor, in obtaining line of
credit loans from ICICI Bank Limited and The Bank of Nova Scotia in the amounts
of $5.0 million and $12.5 million, respectively. As of March 31, 2004, we have
repaid all of such loan to ICICI Bank Limited and made a scheduled installment
payment of $3.1 million to The Bank of Nova Scotia.
In August 1997, we entered into an agreement with Sun Pharma for the transfer of
technology for 25 generic pharmaceutical products over a period of five years
through August 2002 in exchange for 544,000 shares of our common stock for each
ANDA product (when bio-equivalency studies were successfully completed) and
181,333 shares for each DESI product. The products provided to us by Sun Pharma
were selected by mutual agreement. Under such agreement, we conducted, at our
expense, all tests including bio-equivalency studies. Pursuant to such
agreement, Sun Pharma delivered to us the technology for 13 products. This
agreement has expired and, as noted immediately below, we have entered into a
new agreement with Sun Global.
In November 2002, we entered into a new products agreement with Sun Global for
the transfer of the technology for 25 generic products over a period of 5 years.
Under such agreement, we conduct, at our expense, all tests including
bio-equivalency studies. Sun Global receives 544,000 shares of a new class of
preferred stock (convertible into common stock after three years) for each ANDA
product transferred upon the ANDA successfully passing the bio-equivalency
studies. The preferred shares are non-voting and do not receive dividends.
-8-
The new products agreement with Sun Global was amended by the Independent
Committee in the first quarter of 2004 to eliminate the provision requiring that
the Independent Committee concur in the selection of each product, and provide
instead, that each product satisfy certain objective criteria developed by
management and approved by the Independent Committee. Pursuant to such objective
criteria, we selected seven products during the first quarter of 2004 that we
had been working on during 2003, but had not been formally selected under the
products agreement prior to its amendment. Subsequently, during the second
quarter, we have selected eight additional products, making a total of 15
products. Of these, four products have passed bio-equivalency studies, including
three products during the six months ended June 30, 2004. Sun Global has thereby
earned 544,000 preferred shares for each product.
Sun Pharma has established Research and Development Centers in Mumbai and
Baroda, India where the development work for products is performed.
Sun Pharma supplies us with a substantial portion of our raw materials and
certain formulations. In addition, Sun Pharma assists us in acquiring machinery
and equipment to enhance our production capacities.
Sun has also provided us with qualified technical professionals, many of whom
are currently working at the facility.
During the first quarter of 2004, Sun Pharma acquired 3,452,291 additional
shares of common stock and 1,329,066 stock options from two former directors and
a significant stockholder, thereby increasing its beneficial ownership from
approximately 48% to 63%. Based on the current number of shares of common stock
and options outstanding, if the 2,176,000 shares of Series B preferred stock
were converted to common stock, Sun Pharma's beneficial ownership would increase
to approximately 67%. The Series B preferred stock is convertible three
years from its date of issuance or following a person (other than Sun Pharma
and its affiliates) acquiring control of the Corporation.
8. TERM LOAN FROM ICICI BANK
The Corporation had obtained a term loan of $5 million from ICICI Bank Limited
with the guarantee of Sun Pharma. This term loan had been used to finance
research and development activities, upgrade facilities, repay loans and meet
working capital requirements. Interest payments, based on Libor + 140 basis
points (effective rate at the time of repayment (see below) was 2.40%), were due
quarterly, with quarterly principal payments scheduled to be made from December
2003 through September 2005.
During the six months ended June 30, 2004, we have repaid the entire loan due to
ICICI Bank Limited out of funds generated from operations.
9. TERM LOAN FROM THE BANK OF NOVA SCOTIA
The Corporation had obtained term loans of $12.5 million from The Bank of Nova
Scotia with the guarantee of Sun Pharma. This term loan had been used to finance
research and development activities, upgrade facilities, repay other loans and
meet working capital requirements. Interest payments, based on an average of
Libor + 175 basis points (current effective rate is 2.75%), are due quarterly,
with semi-annual principal payments scheduled to be made from February 2004
through September 2005. The first installment due during the six months ended
June 30, 2004 in the amount of $3.1 million was repaid to The Bank of Nova
Scotia out of funds generated from operations. That portion of the loan, which
is due within one year from June 30, 2004, approximately $6.3 million, has been
classified as current on the accompanying balance sheet.
10. LINE OF CREDIT FROM CITIBANK N.A.
The Corporation has obtained a new $10.0 million line of credit from Citibank,
N.A. with a secured irrevocable and unconditional standby letter of credit
provided by Sun Pharma. The line of credit shall be used to finance working
capital requirements, higher cost debt redemption and for financing capital
expenditures. Interest payments are due monthly. The line of credit is revolving
and for 1 year. Outstanding balances on the line of credit may be repaid at any
time. The rate of interest is Libor + 125 basis points (current effective rate
being 2.25%). As of June 30, 2004 we have borrowed $5.0 million from Citibank,
which is due within one year from June 30, 2004, and has been classified as
current on the accompanying balance sheet.
-9-
11. COMMON STOCK ISSUANCES
We issued 5,000 and 368,263 shares of common stock to our employees upon
exercise of their stock options during the second quarter of 2004 and 2003,
respectively. No common stock was issued to the directors as compensation for
attendance at board and committee meetings during the second quarter of 2004 as
compared to 11,000 shares issued during the second quarter of 2003.
12. PREFERRED STOCK ISSUANCES
We issued 2,176,000 shares of preferred stock to Sun Global during the six
months ended June 30, 2004, of which 544,000 were earned in 2003. No shares of
preferred stock were issued to Sun Global during the corresponding period in
2003.
13. SALES AND CUSTOMERS
Certain of our customers purchase our products through designated wholesale
customers, which act as intermediary distribution channels for our products. For
example, the Veterans Administration, which has entered into the sales contract
discussed below, selected Amerisource Bergen as its designated wholesaler.
Shipments to two wholesale customers accounted for approximately 76% and 77% of
sales during the six months ended June 30, 2004 and June 30, 2003, respectively.
Balances due from these wholesalers represented approximately 85% of gross
accounts receivable at June 30, 2004 and 66% of gross accounts receivables at
December 31, 2003. No other single customer represented more than 10% of our net
sales during the past two years.
14. LITIGATION
As previously disclosed, on February 12, 2003, C. Arnold Curry filed a complaint
in the Wayne County Circuit Court alleging breach of a written employment
agreement. Mr. Curry is seeking 175,000 shares of our common stock (35,000
shares for each of the first five ANDAs approved by the FDA). We, and plaintiff,
have each filed a motion for summary disposition. A hearing on the motions has
been set for November 2004. No trial date has been scheduled. We intend to
vigorously defend ourselves against this claim, which we believe has no merit.
As previously disclosed, we were named as one of two defendants and as one of
several defendants in two separate product liability suits, involving Miraphen,
which contains phenylpropanolamine (PPA), one in federal court in Pennsylvania
and another in state court in New Jersey, respectively. These lawsuits sought
damages generally for personal injury as well as punitive damages under a
variety of liability theories including strict products liability, breach of
warranty and negligence. The plaintiff in the federal lawsuit stipulated to a
dismissal of the lawsuit and the case was formally dismissed by the federal
court in December 2003. Also, the plaintiff in the state lawsuit stipulated to a
dismissal of the lawsuit and the case was formally dismissed by the state court
on April 8, 2004.
We are involved in certain legal proceedings from time to time incidental to our
normal business activities. While the outcome of any such proceedings cannot be
accurately predicted, we do not believe the ultimate resolution of any existing
matters should have a material adverse effect on our financial position or
results of operations.
-10-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Stockholders and Board of Directors
Caraco Pharmaceutical Laboratories, Ltd.
Detroit, Michigan
We have reviewed the balance sheet of Caraco Pharmaceutical Laboratories, Ltd.
as of June 30, 2004 and the related statements of operations, stockholders'
equity and cash flows for the three-month and six-month periods ended June 30,
2004 and June 30, 2003. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Caraco
Pharmaceutical Laboratories, Ltd. as of December 31, 2003, and the related
statements of operations, stockholders' deficit and cash flows for the year then
ended (not presented herein), and in our report dated February 23, 2004, we
expressed an unqualified opinion on those financial statements.
REHMANN ROBSON
Troy, Michigan
July 14, 2004
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information that 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 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Company's 2003 annual report on Form 10-KSB and the unaudited interim financial
statements included in Item 1 of this Quarterly Report on Form 10-Q.
OVERVIEW
We have generated cash from operations of $8.8 million for the six months ended
June 30, 2004 as compared to $3.7 million for the corresponding period of 2003.
This $8.8 million is the net cash generated after $1.5 million utilized in
increase of accounts receivable and $3.5 million utilized in increase of
inventories. This cash was available and used primarily to pay off Company debt
and to fund our capital expenditures. We incurred a net loss of $0.7 million
during the six months ended June 30, 2004 compared to earning net income $6.5
million during the corresponding period of 2003. The loss was primarily due to
non-cash research and development expense (R&D) of $12.5 million for the six
months ended June 30, 2004 compared to no similar expense during the
corresponding period of 2003. This non-cash R&D expense related to 3 products
passing their bio-equivalency studies during the six months ended June 30, 2004
as compared to none during the corresponding period of 2003.
FDA COMPLIANCE AND PRODUCT APPROVALS
During November 2002, the FDA conducted an inspection of our facility and found
us to be substantially in compliance with cGMP regulations. While the FDA did
issue us an FDA 483 list of observations, we do not believe they are material
and we have taken appropriate remedial actions.
We have submitted 18 ANDAs to the FDA for approval since August 1997, including
3 filed during the six months ended June 30, 2004. Of these, 14 have been
approved and four are pending approval.
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 2003
NET SALES.
Net sales for the three months and six months ended June 30, 2004 were $14.8
million and $28.4 million, respectively, as compared to $11.9 million and $20.6
million, respectively for the corresponding periods of 2003, reflecting
increases of 24% and 38%, respectively. The increases are due to the higher
production and marketing of most of our products. In addition, with our larger
base of products, we have been able to attract both new customers and larger
orders. As of June 30, 2004, we manufacture and market all except one of the
approved products. Sales of three products accounted for 89% of our net sales
during the six months ended June 30, 2004 as compared to 86% during the six
months ended June 30, 2003.
GROSS PROFIT.
We earned a gross profit of $9.1 million and $17.3 million during the three
months and six months ended June 30, 2004, respectively, as compared to a gross
profit of $7.5 million and $12.0 million during the corresponding periods in
2003, reflecting increases of 21% and 44%, respectively. The improvement was
primarily due to higher sales volumes and better-cost absorption of operational
overheads.
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The gross profit as a percentage of net sales has also improved for the six
months ended June 30, 2004 as compared to the corresponding period of 2003. The
percentage for the six months ended June 30, 2004 was 61% as compared to 58% for
the corresponding period in 2003. The increase was the result of:
- Reduction in material costs.
- Changes in product mix to higher profit margin products.
- Better cost absorption of manufacturing costs.
- Further improved efficiency in the overall manufacturing process
associated with higher utilization of plant capacity.
- Utilization of newly installed larger and faster equipment to
achieve economies of scale.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses for the three months and six months
ended June 30, 2004 were $1.4 million and $2.7 million, respectively, as
compared to $2.1 million and $3.1 million, respectively, for the same periods in
2003. This represents decreases of 33% and 11%, respectively. Selling, general
and administrative expenses, as a percentage of net sales, during the six months
ended June 30, 2004 have decreased to 9.5% compared to 15% during the
corresponding period of 2003. The decrease in selling, general and
administrative expenses was primarily due to the absence of variable
compensation expense during the six months ended June 30, 2004.
RESEARCH AND DEVELOPMENT EXPENSES.
Cash research and development expenses during the three months and six months
ended June, 2004 were $1.4 million and $2.5 million, respectively, as compared
to $0.6 million and $1.5 million, respectively, during the corresponding periods
of 2003. The reason for the higher cash research and development expenses was
higher expenditures for bio-study costs during the relevant periods of 2004
compared to none during the corresponding periods of 2003.
Non-cash research and development expenses of $12.5 million (technology transfer
costs) have been recorded for the six months ended June 30, 2004 for 1,632,000
shares of preferred stock earned by Sun Global for 3 products transfers during
the six months ended June 30, 2004. There were no non-cash research and
development expenses during the corresponding period of 2003.
OPERATING INCOME
We earned operating income of $1.6 million and incurred an operating loss of
$0.4 million during the three months and six months ended June 30, 2004 as
compared to operating income of $4.7 million and $7.3 million during the
corresponding periods in 2003. The decreases were primarily due to higher
non-cash research and development expense of $4.7 million and $12.5 million,
respectively, in 2004 as compared to no similar expense during the corresponding
periods in 2003.
INTEREST EXPENSE.
Interest expense on loans was $0.1 million and $0.3 million, respectively, for
the three months and six months ended June 30, 2004 compared to $0.4 million and
$0.8 million, respectively, for the corresponding periods of 2003. The reduction
in interest expense is primarily due to our repaying the loan of $10 million to
Sun Pharma and its affiliates, the loan of $4.4 million to ICICI Bank Limited,
the total outstanding loan of $6.4 million to the EDC and $3.1 million to The
Bank of Nova Scotia during 2003 and 2004.
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RESULTS OF OPERATIONS.
We earned net income of $1.5 million and incurred a net loss of $0.7 million,
respectively for the three months and six months ended June 30, 2004 as compared
to earning net income of $4.3 million and $6.5 million for the corresponding
periods of 2003.
The significantly reduced results of operations in the six months ended June 30,
2004 are primarily due to non-cash research and development expense of $12.5
million compared to no similar expense in the corresponding period of 2003.
LIQUIDITY AND CAPITAL RESOURCES.
During the six months ended June 30, 2004, we generated net cash from operations
of $8.8 million as compared to $3.7 million during the corresponding period of
2003. The higher cash generation was primarily due to higher sales and improved
cost absorptions in our operations. This $8.8 million is the net cash generated
after $1.5 million utilized in increase of accounts receivable and $3.5 million
utilized in increase of inventories.
In addition to repaying the entire debt of $4.4 million to ICICI Bank Limited,
repaying a portion of the EDC loan of $6.1 million on April 13, 2004 and making
a scheduled payment of $3.1 million to The Bank of Nova Scotia, operations have
generated cash sufficient to fund our capital expenditures of $2.5 million
during the six months ended June 30, 2004. The capital expenditures were
primarily for expanding manufacturing facilities and purchasing related
equipment.
At June 30, 2004, the Corporation had positive working capital of $1.4 million
compared to a negative working capital of $1.1 million at December 31, 2003. The
positive working capital position is primarily due to repayments of $8.8 million
of debt obligations classified as current at December 31, 2003 and reductions in
current liabilities from 2003 related primarily to technology transfer costs.
As noted, the Corporation has repaid the entire loan of $4.4 million due to
ICICI Bank Limited and made a scheduled principal repayment of $3.1 million to
The Bank of Nova Scotia. As at June 30, 2004, $9.4 million of The Bank of Nova
Scotia loan is outstanding.
The Corporation has obtained a $10.0 million line of credit from Citibank, N.A.,
with a secured irrevocable and unconditional standby letter of credit provided
by Sun Pharma. We borrowed $6.0 million of the line of credit to pay off the
EDC, and have repaid $1.0 million to Citibank. It is anticipated that the $5
million available balance of the line of credit shall be used to finance working
capital requirements, higher cost debt redemption and for financing capital
expenditures.
FUTURE OUTLOOK
We are substantially cGMP compliant since 2001, and have received approvals for
twelve ANDAs during the last three years. We have expanded and upgraded our
facilities and expanded our customer base.
Management expects continued increases in sales and improvement in cash flows
during 2004. The pricing pressures, which resulted in lower gross margins in the
fourth quarter of 2003, are expected to continue in 2004 due to increased
competition. However, we still expect to meet our previously stated guidance of
20-25% revenue growth during 2004.
As disclosed, under the products agreement dated November 21, 2002, between Sun
Global and the Company, Sun Global has agreed to transfer the technology for 25
products to the Company over a five year period in exchange for 544,000
preferred shares (which are convertible after three years on a one-to-one basis
into common shares) per product, upon the passing of bio-equivalency studies.
Since the date of the products agreement, fifteen products have been selected
for development by the Company and four of these products have passed their
respective bio-equivalency studies (one in 2003 and three in the first six
months of 2004). If some of the remaining eleven products pass their
bio-equivalency studies in 2004, the fair value of the preferred shares earned
by Sun Global in exchange for such products could cause our non-
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cash research and development expenses to increase to an amount which would
significantly decrease profit or create a loss.
While the development of new products will increase our non-cash R&D expense and
will impact earnings per share, we anticipate the cash will be available, among
other things, to repay loans and reduce interest burden, meet increased working
capital requirements and finance capital investments. This in turn will
strengthen our balance sheet and build value for our stockholders.
The Company will continue to aggressively move forward on the development of the
products ("Products") presented and to be presented for consideration by Sun
Global pursuant to the products agreement. We believe that receiving products
from Sun Global, provides us with a partner who has a proven track record; one
that already has provided us with quality products. Moreover, Sun Pharma's
increased beneficial ownership in us, to approximately 63%, should, we believe,
provide it with the incentive to continue to help us succeed. Sun Pharma has
already provided us with millions of dollars in capital, loans, and guarantees
of loans, and with personnel, raw materials and equipment, which have
significantly helped us to date.
Management's plans for the remainder of 2004 include:
- Continued focus on FDA compliance.
- Continued research and development activities.
- Continued expenditures for capital investment including equipment
and expansion of capacity.
- Increased market share for certain existing products and recently
introduced new products and enhanced customer reach and
satisfaction.
- Prompt introduction of new approved products to the market.
- Achieving further operational efficiencies by attaining economies of
scale and cost reduction per unit.
- Increasing the number of products, as well as anticipated volume
increases for existing products, which, in turn, will improve
manufacturing capacity utilization.
- Considering alternative ways of increasing cash flow including
developing, manufacturing and marketing ANDAs owned by Sun Pharma.
- Locating and utilizing facilities of contract-manufacturers to
enhance production and therefore sales.
- Further reducing debt, if adequately supported by positive cash
flows.
FORWARD LOOKING STATEMENTS
This report, other than the historical financial and business information,
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act. Without
limitation, the words "believes," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. Those statements include
statements regarding our intent, belief, and current expectation. These
statements are not guarantees of future performance and are subject to risks and
uncertainties that cannot be predicted or quantified. Consequently, actual
results could differ materially from those expressed or implied by such
forward-looking statements.
Such risks and uncertainties including, but not limited to: (i) that the
information is of a preliminary nature and may be subject to further adjustment;
(ii) not obtaining FDA approval for new products or delays in receiving FDA
approvals; (iii) governmental restrictions on the sale of certain products; (iv)
dependence on key personnel; (v) development by competitors of new or superior
products or cheaper products or new technology for the production of products or
the entry into the market of new competitors; (vi) market and customer
acceptance and demand for new pharmaceutical products; (vii) availability of raw
materials in a timely manner, at competitive prices, and in required quantities;
(viii) timing and success of product development and launch; (ix) integrity and
reliability of the Company's data; (x) lack of success in attaining full
compliance with regard to regulatory and cGMP compliance; (xi) experiencing
difficulty in managing our
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recent rapid growth and anticipated future growth; (xii) dependence on limited
customer base; (xiii) occasional credits to certain customers reflecting price
reductions on products previously sold to them and still available as
shelf-stock; (xiv) possibility of an incorrect estimate of charge-backs and the
impact of such an incorrect estimate on net sales, gross profit and net income;
(xv) dependence on few products generating majority of sales; (xvi) product
liability claims for which the Company may be inadequately insured; (xvii)
subjectivity in judgment of management in applying certain significant
accounting policies derived based on historical experience, terms of contracts,
our observations of trends of industry, information received from our customers
and other sources, to estimate revenues, accounts receivable allowances
including chargebacks, rebates, income taxes, values of assets and inventories
and (xviii) other risks identified in this report and identified from time to
time in our reports and registration statements filed with the Securities and
Exchange Commission. These forward-looking statements represent our judgment as
of the date of this report. We disclaim, however, any intent or obligation to
update our forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use any derivative financial instruments. All of our direct sales are
in the United States and denominated in U.S. dollars. Our exposure to market
risk for a change in interest rates relates primarily to our debt instruments.
Our debt instruments, at June 30, 2004, are subject to variable interest rates,
which float based upon a spread over LIBOR. Management does not believe that any
risk inherent in these instruments is likely to have a material effect on our
financial statements.
ITEM 4. CONTROLS AND PROCEDURES
a. The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange
Act"). These rules refer to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a company in
the reports that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Our Chief Executive
Officer, who is also our Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report (the "Evaluation Date"), and has concluded that,
as of the Evaluation Date, our disclosure controls and procedures are effective
in providing him with material information relating to the Corporation known to
others within the Corporation which is required to be included in our periodic
reports filed under the Exchange Act.
b. There have been no changes in the Corporation's internal controls over
financial reporting that occurred during registrant's last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information in note 14 of Part I, Notes to Financial Statements, is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER AND AFFILIATE
PURCHASES OF EQUITY SECURITIES
During the quarter ended March 31, 2004, registrant issued 1,632,000 preferred
shares to Sun Global in exchange for the transfer of 3 products pursuant to our
products agreement with Sun Global. Such preferred shares were issued to Sun
Global pursuant to exemptions from registration under Section 4(2), Section 4(6)
and Regulation D under the Securities Act of 1933.
During the quarter ended June 30, 2004, registrant issued 544,000 preferred
shares to Sun Global in exchange for the transfer of 1 product pursuant to our
products agreement with Sun Global. Such preferred
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shares were issued to Sun Global pursuant to exemptions from registration under
Section 4(2), Section 4(6) and Regulation D under the Securities Act of 1933.
Pursuant to various stock and option purchase agreements between Sun Pharma and
three stockholders and their affiliates, Sun Pharma acquired in January and
February, 2004, 3,452,291 shares of common stock and rights to acquire options
for 1,679,066 shares of common stock. The shares were acquired for $9.00 per
share and the rights to the options were acquired for $9.00 less the exercise
price of each option.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Corporation was held on June 7,
2004 in Detroit, Michigan for the purpose of electing three directors for the
three-year terms expiring in 2007 and upon the election and qualification of
their successors.
NAME OF THE DIRECTOR VOTES "FOR" VOTES WITHHELD
-------------------- ----------- --------------
William C. Brooks 23,432,399 137,680
Timothy S. Manney 23,432,399 137,680
Sudhir V. Valia 23,164,269 405,810
The names of the other directors and their remaining terms are as follows:
NAME OF DIRECTOR TERM
---------------- ----
Dilip S. Shanghvi 2006
Jitendra N. Doshi 2006
Sailesh T. Desai 2005
Georges Ugeux 2005
ITEM 5. OTHER INFORMATION
Under SEC regulations, the Company ceased being a small business issuer in
February 2004 when Sun Pharma became the beneficial owner of more than a
majority of the Company's outstanding shares. At such time, the Company became a
controlled company under Amex regulations. As a controlled company, the Company
is not required to have independent directors comprise a majority of the board
of directors and is not required to have (i) director nominations made or
recommended by a nominating committee comprised solely of independent directors
or by a majority of the independent directors; or (ii) compensation of the CEO
and all other officers determined or recommended by a compensation committee
comprised solely of independent directors or by a majority of the independent
directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.10 Amendment to Amended and Restated By-Laws dated May 31, 2004
31.1 Certification of Chief Executive Officer and Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On April 30, 2004, the Corporation filed a Form 8-K disclosing in item 12
thereof its results of operations for the quarter ended March 31, 2004.
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
By: /s/ Jitendra N. Doshi
-----------------------------
Jitendra N. Doshi
Chief Executive Officer
and Chief Financial Officer
Dated: July 20, 2004
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EXHIBIT INDEX
3.10 Amendment to Amended and Restated Bylaws dated May 31, 2004.
31.1 Certification of Chief Executive Officer and Chief Financial Officer.
32.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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