AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2003
REGISTRATION NO. 333-91968
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
PRE-EFFECTIVE AMENDMENT NO. 3
TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
CARACO PHARMACEUTICAL LABORATORIES LTD.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MICHIGAN 2834 38-2505723
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1150 ELIJAH MCCOY DRIVE, DETROIT, MICHIGAN 48202
(313) 871-8400
(Address and telephone number of principal executive offices)
------------------------------
MR. NARENDRA N. BORKAR
CHIEF EXECUTIVE OFFICER
1150 ELIJAH MCCOY DRIVE, DETROIT, MICHIGAN 48202
(313) 871-8400
(Name, address and telephone number of agent for service)
-----------------------------
COPIES OF ALL COMMUNICATIONS TO:
FRED B. GREEN
BODMAN, LONGLEY & DAHLING LLP
34TH FLOOR, 100 RENAISSANCE CENTER, DETROIT, MICHIGAN 48243
TELEPHONE: (313) 392-1056
FACSIMILE: (313) 393-7579
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: from time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
ii
PROSPECTUS
5,000,000 SHARES
COMMON STOCK
CARACO PHARMACEUTICAL LABORATORIES LTD.
Of the 5,000,000 shares of common stock, no par value offered hereby,
4,365,000 shares are being sold by Caraco Pharmaceutical Laboratories Ltd. and
635,000 shares are being sold by certain of our shareholders (the "Selling
Shareholders"). We will not receive any of the proceeds from the sale of shares
of common stock by the Selling Shareholders.
Our common stock is listed on the OTC Bulletin Board under the symbol
"CARA." On April 8, 2003, the last reported closing price of our common stock on
the OTC Bulletin Board was $3.00.
SEE "RISK FACTORS" ON PAGES 4 TO 11 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Price to Public(i) Proceeds to Caraco (ii)
Per Share....... $ 4.00 $ 4.00
Total Minimum... $ 400,000 $ 400,000
Total Maximum... $17,460,000 $17,460,000
(i) This is the price offered by Caraco. Selling Shareholders will sell
their shares at the then market prices or negotiated prices.
(ii) Before deducting offering expenses payable by Caraco estimated to be
approximately $111,000.
This is a best-efforts, minimum-maximum offering by us. There is no
minimum number of shares that must be sold by the Selling Shareholders. Our
officers and selected brokers and dealers, if any, must sell a minimum offering
of 100,000 shares (the "Minimum Offering"). Funds received from subscribers from
the sale of our common stock will be held in escrow by Bank One, Michigan.
Unless collected funds sufficient to purchase at least the Minimum Offering of
our shares are received by the escrow agent from accepted subscribers within 180
days from the date of commencement of the offering, all purchase payments for
such shares will be returned in full to subscribers, without interest or
deduction. We may, however, extend the offering, in our sole discretion, for an
additional 90 days. If the Minimum Offering is sold within the foregoing period,
our offering may continue until the remaining shares are sold or March 31, 2004,
whichever occurs first. However, we may terminate our offering at any earlier
time if we choose to do so.
PROSPECTUS DATED APRIL ____, 2003
iii
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
The Company.................................................................1
Recent Developments.........................................................2
The Offering................................................................3
Offices and Websites........................................................4
RISK FACTORS..................................................................5
Risks Relating to Our Company...............................................5
Risks Relating to Our Industry..............................................9
Risks Relating to this Offering and Our Common Stock........................9
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS...................13
PLAN OF DISTRIBUTION.........................................................15
Sales by Caraco............................................................15
Sales by Selling Shareholders..............................................16
SELLING SHAREHOLDERS.........................................................17
USE OF PROCEEDS..............................................................18
DIVIDEND POLICY..............................................................19
PRICE RANGE OF COMMON STOCK..................................................19
SELECTED FINANCIAL DATA......................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................21
Overview...................................................................21
Liquidity and Capital Resources............................................25
BUSINESS.....................................................................27
Overview of the Generic Drug Industry......................................27
Caraco's Products and Product Strategy.....................................28
Hexal-Pharma GmbH & Co., KG................................................30
Sun Pharmaceutical Industries Limited......................................30
Marketing..................................................................31
Sales and Customers........................................................32
Research and Development...................................................32
Regulation.................................................................36
Suppliers and Materials....................................................37
Competition................................................................38
Employees..................................................................38
Product Liability and Insurance............................................38
Property and EDC Financing.................................................39
The Facility...............................................................40
Litigation.................................................................40
Executive Officers and Directors...........................................41
Board Committees...........................................................42
Director Compensation......................................................43
Executive Compensation.....................................................43
Option Grants in Last Fiscal Year..........................................44
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values...................................................44
iv
Employment Agreements......................................................44
Change in Control Arrangements.............................................45
Stock Option Plans.........................................................46
1999 Equity Participation Plan.............................................46
Other Options..............................................................47
Transactions of Directors, Executive Officers and
Certain Beneficial Holders of Caraco.....................................48
Security Ownership of Certain Beneficial Owners............................48
Security Ownership of Management and Directors.............................49
DESCRIPTION OF CAPITAL STOCK.................................................51
Authorized Shares..........................................................51
Common Stock...............................................................51
Preferred Stock............................................................52
Options....................................................................52
Registration Rights........................................................52
Anti-Takeover Provisions of Michigan Law and our
Articles of Incorporation................................................53
Limitation on Liability of Directors and Indemnification...................54
Transfer Agent and Registrar...............................................55
LEGAL MATTERS................................................................55
EXPERTS......................................................................55
WHERE YOU CAN FIND MORE INFORMATION..........................................55
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT..................................................................... F-1
v
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK
FACTORS" AND THE FINANCIAL STATEMENTS AND THE RELATED NOTES.
THE COMPANY
We are a Michigan corporation, incorporated in 1984, engaged in the
business of developing, manufacturing and marketing generic drugs for
prescription and non-prescription markets. Operations are conducted in an
approximately 72,000 square foot facility, which was designed and constructed to
our specifications and completed in 1992. The facility contains our production,
packaging, research and corporate offices, all located on a 4-acre site.
Our present product portfolio includes 13 prescription products in 22
strengths in 46 package sizes. The products and their use for the indications
are set forth in the table below:
GENERIC NAME PURPOSE
Guaifenesin LA* Decongestant
Metroprolol Tartrate Hyper-Tension
Miraphen PSE Decongestant
Paromomycin Sulfate Antibacterial
Salsalate Decongestant
CMT Arthritis/NSAID
Guai/DM Decongestant
Clonazepam Seizure, Panic Disorders
Flurbiprofen Arthritis/NSAID
Carbamazepine Epilepsy
Oxaprozin Rheumotoid Disease
Metformin Hydrochloride Diabetes
Tramadol Hydrochloride Analgesic
The FDA has informed us and sixty-six other manufacturers and
distributors of Guaifenesin that all of us must cease manufacturing Guaifenesin
by May 23, 2003 and cease all sales past November 2003. We sold approximately
$1.65 million of Guaifenesin during the year ended December 31, 2002.
A significant source of our funding has been from private placement
offerings and loans. In 1991, we received a $9.1 million loan from the Economic
Development Corporation of the City of Detroit ("EDC"). Sun Pharmaceutical
Industries Limited, a specialty pharmaceutical corporation organized under the
laws of India ("Sun Pharmaceutical") which beneficially owns approximately 49%
of our outstanding shares, has contributed in 1997 and 1998 a total of $7.5
million to us for the purchase of 5.3 million shares of common stock, has
current loans outstanding to us of approximately $9.7 million and has assisted
us in obtaining line of credit loans, by acting as guarantor, in the amount of
$17.5 million.
1
We market our products through wholesale buying groups, distributors
and mail order companies. As a result, our product line is now represented in
major drug wholesalers, such as the McKesson Corporation, Amerisource Bergen and
Cardinal Health.
RECENT DEVELOPMENTS
During the last two quarters of 2001, the Food and Drug Administration,
(the "FDA") approved 3 of our Abbreviated New Drug Applications ("ANDA" or
"ANDAs"). During 2002, the FDA approved 6 additional ANDAs. In February 2003,
the FDA approved an additional ANDA.
Four of the ANDAs have not yet been marketed and are not included in
the above disclosure of our product portfolio. The products and their use for
the indications are set forth in the table below:
GENERIC NAME PURPOSE
Ticlopidine Hydrochloride Cardiology
Meperidine Hydrochloride Analgesic
Clozapine Schizophrenia
Digoxin Cardiology
These products, when launched, will increase our product portfolio to
17 prescription products in 29 strengths in 61 package sizes.
During 2002, we filed a total of 3 ANDAs with the FDA. We have 3
currently pending ANDAs with the FDA, most of which, we believe, may be approved
by 2003 year-end.
During the first quarter of 2002, we received an increase of $2.5
million in our term loan from the Bank of Nova Scotia, bringing the total term
loan to $12.5 million.
In addition, during the first six months of 2002, we completed a
private placement of 635,000 shares of common stock resulting in aggregate
proceeds to us of $1,692,000.
We have been in default of our mortgage loan of approximately $7.8
million from the Economic Development Corporation of the City of Detroit (the
"EDC") since February 1999, however, based on a resolution passed at a meeting
of the Board of Directors of the EDC on September 25, 2002, the EDC approved a
six year extension of the loan with interest rates starting at 2.75% and
increasing to 5.16%. Under the approval, the EDC would retain a first mortgage
on our property and a first lien on our furniture, fixtures and equipment and
intellectual property. The EDC resolution, which provides that the transaction
must be completed by January 1, 2003, will not become effective until a
definitive agreement incorporating the above terms has been agreed to by the
parties. On March 19, 2003, the EDC extended the deadline to May 1, 2003 and
agreed that the transaction, when it is finalized, would be effective as of
January 1, 2003.
On November 21, 2002, we entered into a products agreement with Sun
Pharma Global, Inc. ("Sun Global"), a wholly-owned subsidiary of Sun
Pharmaceutical. The previous products agreement with Sun Pharmaceutical had
expired. Under the agreement, which was approved by our independent directors,
Sun Global has agreed to provide us with 25 new generic drugs over a five year
period. In return, Sun Global will
2
receive 544,000 shares of a newly created preferred stock for each generic drug
transferred. The preferred shares are convertible into common shares after three
years on a one-to-one basis.
We underwent FDA inspection in November 2002 and we were found to be in
substantial compliance with current good manufacturing practices ("cGMPs").
Although we did receive an FDA 483, a written list of observations, we do not
believe the observations are material and we have taken appropriate remedial
actions.
Our net sales for the twelve months ended December 31, 2002 and 2001
were $22,380,964 and $5,922,431, respectively, reflecting an increase of almost
278%. Our net losses for the twelve months ended December 31, 2002 and 2001 were
$2,256,004 and $5,757,463, respectively, reflecting a reduction of almost 61%.
The net losses for the twelve month period ended December 31, 2002 included a
non-cash research and development expense (technology transfer cost) of
$3,887,423 for the 1,632,000 shares of common stock issued to Sun Global for
three product transfers made to us during 2002. There was no similar expense for
the corresponding period of 2001.
THE OFFERING
Common Stock Offered by Caraco...... 4,365,000 Shares
Minimum Offering by Caraco............ Until a minimum of 100,000
shares are sold (the
"Minimum Offering"), all
proceeds will be deposited
into escrow. If the Minimum
Offering is not sold within
180 days from the
commencement of the
offering, all purchase
payments for such shares
will be returned in full to
subscribers, without
interest or deduction. We
may, however, extend the
offering, in our sole
discretion, for an
additional 90 days. If the
Minimum Offering is sold
within the foregoing period,
our offering may continue
until the remaining shares
are sold or March 31, 2004,
whichever occurs first.
Type of Offering by Caraco............... The shares will be offered
on a best efforts basis by
our officers who will not
receive any commissions or
remuneration for selling
shares. In addition, shares
may also be offered through
brokers or dealers who may
receive compensation in the
form of commissions and fees
not to exceed 8% of the
selling price of the shares.
Common Stock Offered by the Selling
Shareholders................................ 635,000 Shares
Common Stock to be Outstanding after the
Offering................................. 28,127,532 Shares. This
amount is based upon shares
outstanding as of December
31, 2002 and excludes
2,916,199 shares issuable
upon the exercise of
outstanding options.
Use of Proceeds by Caraco............... Caraco will not receive any
of the proceeds from the
sale of shares by the
Selling Shareholders. The
net proceeds from our sale
of common stock will be used
for capital improvements,
research
3
and development, for working
capital and debt repayment.
See "Use of Proceeds."
OTC Bulletin Board Quotation
Symbol.......................... CARA
Risk Factors.................... You should read the "Risk
Factors" section as well as
the other cautionary
statements throughout the
entire prospectus, so that
you understand the risks
associated with an
investment in our
securities.
OFFICES AND WEBSITES
Our principal executive offices are located at 1150 Elijah McCoy Drive,
Detroit, Michigan 48202, and our telephone number is (313) 871-8400. Our main
website is located at www.caraco.com. The information on our website is not a
part of this prospectus.
4
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks and uncertainties described below in addition to the other
information contained in this prospectus, including the section entitled
"Cautionary Statement Concerning Forward-looking Statements" before deciding
whether to invest in shares of our common stock. If any of the following risks
actually occur, our business, financial condition or operating results could be
harmed. In that case, the trading price of our common stock could decline and
you may lose part or all of your investment. These risks and uncertainties
described below are not the only ones facing Caraco. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial may
also impair our business operations and adversely affect the market price of our
common stock.
RISKS RELATING TO OUR COMPANY
WE HAVE A HISTORY OF OPERATING LOSSES.
We commenced manufacturing and sales operations in 1992. Since that
time, we have sustained substantial operating losses. However, for the first
time since inception, during the second, third and fourth quarters of 2002, we
have achieved sales necessary to support operations. For the year ended December
31, 2002, our net sales were $22,380,964 and our net losses were $2,256,004
compared to $5,922,431 and $5,767,464, respectively, for 2001. As of December
31, 2002, we had a shareholders' deficit of $19,623,290. In addition, we are
highly leveraged. As of December 31, 2002, we had total liabilities of
$39,476,439 and a working capital deficit of $1,647,253 compared with a negative
working capital deficit of $6,039,331 at the corresponding period of 2001. The
negative working capital position as of December 31, 2002 was mainly due to a
classification of $5,850,000 in loans payable to Sun Pharmaceutical and its
affiliates as current as they become due in October 2003. The working capital
deficit of 2001 was mainly due to the classification of the entire balance of
the EDC debt and related accrued interest as current. The notes to the financial
statements provide as follows about us (the "Corporation"). "Realization of a
major portion of its assets is thus dependent upon the Corporation's ability to
meet its further financing requirements and the success of further operations.
Management believes that continued improvement in profitability and cash flow,
along with, sustained financial and operating support from Sun Pharma, are key
factors in the Corporation's ability to continue to operate in the normal course
of business. While management has a basis to reasonably believe that Sun
Pharma's substantial investment in Caraco provides Sun Pharma with sufficient
economic incentive to continue to assist Caraco in developing its business, and
Sun Pharma has expressed its intent to continue to support Caraco's operations
in the near term, as it has done in the past, there can be no assurance that
such support will, in fact, continue for a period of time sufficient to ensure
Caraco's ultimate business success. For example, Sun Pharma, which is subject to
prevailing regulatory process in India, may be constrained from fully pursuing
its business interest outside of India." There can be no assurance that we will
be able to raise additional capital or increase our sales significantly or
achieve profitability. Over the near term, we will be required to increase our
product portfolio. Our ability to achieve profitability is dependent upon our
ability to develop products which are commercially viable, obtain regulatory
approvals for those products and to manufacture and market them successfully. To
date, we have received limited revenues from the sales of pharmaceutical
products and although we believe that our expanded product line and plans to
enhance revenue and attain efficiencies of scale will cause us to increase
revenues and achieve profitability in 2003, there is no assurance when, if ever,
we will generate significant revenues or achieve profitability. See also the
risk factor below entitled: "The payment of shares of preferred stock to Sun
Global in exchange for the products it transfers to Caraco may significantly
increase research and
5
development expenses and thereby reduce earnings or create a loss." Actual
results may differ materially from those expected by us.
WE ARE CURRENTLY IN DEFAULT OF OUR LOAN OF APPROXIMATELY $7.8 MILLION FROM THE
ECONOMIC DEVELOPMENT CORPORATION OF THE CITY OF DETROIT (THE "EDC").
We have been in default on our loan from the EDC since February 1999.
As of December 31, 2002, our note payable to the EDC is approximately $7.8
million. Since February 1999, we have been making monthly payments to the EDC of
$100,000, currently aggregating $4.7 million through 2002. Such payments,
however, have not brought us current in our obligations to the EDC and such
payments are being made without prejudice to the rights of the EDC to exercise
all avenues available to the EDC for failure to make the scheduled payments. It
is our intent to continue to make the $100,000 monthly payments to the EDC,
again, without prejudice to the rights of the EDC. However, based on a
resolution passed at a meeting of the Board of Directors of the EDC on September
25, 2002, the EDC approved a six year extension of the loan with interest rates
starting at 2.75% and increasing to 5.16%. Under the approval, the EDC would
retain a first mortgage on our property and a first lien on our furniture,
fixtures and equipment and intellectual property. However, the EDC would release
its lien on our accounts receivable and inventory. The EDC resolution, which
provides that the transaction must be completed by January 1, 2003, will not
become effective until a definitive agreement incorporating the above terms has
been agreed to by the parties. On March 19, 2003, the EDC extended the deadline
to May 1, 2003 and agreed that the transaction, when it is finalized, would be
effective as of January 1, 2003. If the transaction is not completed, and the
EDC were to exercise its rights and accelerate the repayment of the entire loan,
it would have a material adverse effect on operations, however, we may determine
to use all or a portion of the net proceeds from this offering to repay all or a
portion of the EDC loan. See "Use of Proceeds."
WHILE SUN PHARMACEUTICAL HAS PROVIDED SIGNIFICANT SUPPORT TO US, IT IS UNDER NO
LEGAL OBLIGATION TO CONTINUE TO DO SO.
Since its acquisition of a major portion of our common stock in August
1997, Sun Pharmaceutical has made a significant investment in Caraco through
$7.5 million in capital contributions, $9.7 million in currently outstanding
loans and $17.5 million in guarantees of loans. As of December 31, 2002, Sun
Pharmaceutical beneficially owns approximately 49% of our outstanding shares.
Sun Pharmaceutical, however, is not legally obligated to continue to fund our
operations. While management believes that because of Sun Pharmaceutical's
substantial investment in Caraco, Sun Pharmaceutical has sufficient economic
incentive to continue to assist and support us in developing our business and
while Sun Pharmaceutical has generally expressed an intent to continue to
support our operations in 2003, as it has done in the past, there can be no
assurance that such support will, in fact continue for a period of time
sufficient to ensure our ultimate business success. Sun Pharmaceutical is
subject to the prevailing regulatory process in India and may be constrained
from fully pursuing its business interests outside of India. If we are unable to
successfully raise capital and Sun Pharmaceutical does not or is not able to
continue to fund our operations, it may have a material adverse effect on our
operations, including the suspension of Sun Global's obligations to deliver
products to us under its agreement with us.
6
WE ARE MAKING THE CURRENT OFFERING TO FUND AN EXPANSION OF OUR OPERATIONS BUT WE
MAY BE UNABLE TO RAISE SUCH FUNDS.
This offering is being made in order to provide us with sufficient
funds to grow our business. The funds are intended to be used for capital
improvements, research and development expenses, working capital needs and debt
repayment. We cannot be certain, however, that this offering will be successful
or that any other financing will be available when needed. As disclosed under
"Use of Proceeds" below, if the Minimum Offering is subscribed, it is
anticipated that the net proceeds will be used for the research and development
expenses of one bioequivalency study for one new product. If we fail to raise
any additional financing or only achieve the Minimum Offering, it will have the
effect of delaying, suspending or terminating part of our product development
programs and inhibiting our flexibility to make debt repayments. There is no
certainty that Sun Pharmaceutical will be able to support us at such time. See
immediately preceding risk factor. We believe that we will have sufficient cash
flow, however, to continue current operations.
OUR OBJECTIVE IS TO DEVELOP 3 TO 6 NEW PRODUCTS FOR FILING WITH THE FDA PER YEAR
AND TO INTRODUCE 3 TO 4 PRODUCTS INTO THE MARKETPLACE EACH YEAR.
Our future results of operations depend, to a significant extent, upon
our ability to select, successfully manufacture and market commercially viable
generic pharmaceutical products. Research and development is time consuming and
costly, and there is no assurance that bioequivalency studies of such products
will be successful. Even if successful, we must then obtain regulatory approval
from the FDA for each product that we intend to commercialize. The granting of
approvals by the FDA for generic pharmaceuticals has been subject to substantial
delays and rigorous scrutiny. Moreover, we are subject to periodic inspection of
our facilities and operations and testing of our products by the FDA. In
November 2002 and in April 2001, we completed FDA inspections and were found to
be substantially compliant in good manufacturing practices. For the period March
1999 to April 2001, however, we were not substantially compliant. Until we
corrected the situation by, among other things, hiring an FDA consulting firm
and new personnel to head the areas of quality control, quality assurance and
regulation, the FDA did not grant approval of any then pending ANDAs, our
research and development activities and development of new products were
significantly reduced, our revenues were significantly reduced and we had to
borrow funds to meet our cash flow requirements. The federal government has
extensive enforcement powers over pharmaceutical manufacturers, including the
power to seize products, to prohibit product sales and to halt operations. Any
manufacturer failing to comply with FDA requirements would be unable to obtain
approvals for the introduction of new products. We cannot predict the extent to
which we may be affected by legislative and regulatory developments concerning
our products or the healthcare field generally. Should regulatory compliance
issues arise or regulatory changes occur, our business could be adversely
affected. Even if we are successful in getting our products approved by the FDA,
there is no assurance that we will be able to successfully produce and market
such products. See discussion of competition below.
SUN PHARMACEUTICAL AND ITS AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH
RESPECT TO THEIR TRANSACTIONS WITH CARACO.
Sun Pharmaceutical beneficially owns approximately 49% of the currently
outstanding shares of Caraco. Four of the eight members of the Board of
Directors of Caraco are affiliated with Sun Pharmaceutical. The Chief Executive
Officer of Caraco is affiliated with Sun Pharmaceutical and the Chief Financial
and Chief Operating Officer of Caraco was formerly employed by Sun
Pharmaceutical. As a result, Sun Pharmaceutical is subject to a number of
conflicts of interests. As noted, Sun Global entered into a products agreement
with us pursuant to which Sun Global will receive shares of a newly created
Series B preferred stock. Among other things, pursuant to the terms of the
Series B preferred stock, Sun Global has a liquidation preference ahead of
7
the holders of our common stock to our assets and surplus funds, if any, after
the payment of all outstanding debt. Accordingly, upon a liquidation, there may
not be available assets to distribute to holders of common stock after payment
of all debt and the Series B preferred stock liquidation preference. The
preferred stock also prohibits us from issuing any securities having a
preference ahead of the Series B preferred stock without the consent of a
majority of the outstanding shares of the Series B preferred stock.
Sun Pharmaceutical is engaged in the same business as Caraco and there
may be conflicts in determining which products will be transferred to Caraco by
Sun Pharmaceutical's wholly-owned subsidiary, Sun Global, pursuant to its
products agreement and which to keep, and how much to charge for active raw
materials it sells to Caraco. We are also considering manufacturing on a
contract basis certain products of which the technology and ownership would
belong to Sun Pharmaceutical. There may also be conflicts in determining when
and how its loans to Caraco shall be repaid, whether to continue to perform
research at its Mumbai facility on behalf of Caraco, and whether and how much it
shall fund Caraco's operations and which Sun Pharmaceutical employees, if any,
it determines to transfer to Caraco. Although Caraco and Sun Pharmaceutical
attempt, to the extent possible, to avoid conflicts by causing Caraco directors
who are affiliated with Sun Pharmaceutical to abstain from voting on matters in
which Sun Pharmaceutical is an interested party, and requiring all business
relationships to be on terms no less favorable than with unaffiliated parties,
such requirements will not necessarily deter Sun Pharmaceutical from taking
actions it believes are in Sun Pharmaceutical's best interests but which may be
detrimental to Caraco. This could include keeping products with a greater
potential for itself. It could also include situations in which, although other
shareholders believe it would be advantageous for Caraco to take certain
actions, for example, a merger or sale of significant assets, Sun Pharmaceutical
would not agree and would block it. Caraco believes, that with respect to most
matters, Sun Pharmaceutical's substantial investment in Caraco will provide it
with an economic incentive to assist Caraco and to favor arrangements which are
beneficial to both Sun Pharmaceutical and Caraco.
THE PAYMENT OF SHARES OF PREFERRED STOCK TO SUN GLOBAL IN EXCHANGE FOR THE
PRODUCTS IT TRANSFERS TO CARACO MAY SIGNIFICANTLY INCREASE RESEARCH AND
DEVELOPMENT EXPENSES AND THEREBY REDUCE EARNINGS OR CREATE A LOSS.
Pursuant to its products agreement with Caraco, Sun Global transfers
technology to Caraco. Sun Global receives 544,000 shares of preferred stock
(convertible into common stock after three years) for each ANDA product
transferred. The value of the shares issued to Sun Global for the transfer of
the products shall be included in research and development expenses. Depending
on the number of products transferred and the price attributable thereto, the
issuance of preferred stock to Sun Global could cause Caraco's research and
development expenses to increase to an amount which would significantly decrease
profit or create a loss. Preferred shares can be earned by Sun Global even if
the product is not successfully produced and marketed.
CLAIMS BY OTHERS THAT OUR PRODUCTS INFRINGE THEIR PATENTS OR OTHER INTELLECTUAL
PROPERTY RIGHTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The pharmaceutical industry has been characterized by frequent
litigation by patent and other intellectual property rights. Any claims of
patent infringement would be time-consuming and could likely result in costly
litigation, divert the time and attention of our technical personnel and
management and cause product development delays. An adverse determination in a
judicial or administrative proceeding could prevent us from developing,
manufacturing and selling some of our products, which could harm our business,
financial condition and operating results. There is no such litigation currently
pending against us.
8
PRODUCT LIABILITY CLAIMS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The design, development and manufacture of pharmaceutical products
involve an inherent risk of product liability claims and associated adverse
publicity. Subsequent to the introduction of a product or with respect to new
products under development, there may occur adverse drug reactions which were
not identified prior thereto which could have a material adverse effect on our
sales of such products. Insurance coverage is expensive, difficult to obtain and
may not be available in the future on acceptable terms. Although we currently
maintain liability insurance for all of our products, in the amount of up to $10
million per incident and in the aggregate, there can be no assurance that the
coverage limits of our insurance policies will be adequate. Claims brought
against us, whether fully covered by insurance or not, could have a material
adverse affect upon us. See "Business - Litigation."
RISKS RELATING TO OUR INDUSTRY
BECAUSE OUR INDUSTRY IS VERY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
SUBSTANTIALLY GREATER CAPITAL RESOURCES AND MORE EXPERIENCE IN RESEARCH AND
DEVELOPMENT, MANUFACTURING AND MARKETING THAN US, WE MAY NOT SUCCEED IN
DEVELOPING OUR PROPOSED PRODUCTS AND BRINGING THEM TO MARKET.
Competition in the pharmaceutical industry is intense. Potential
competitors in the United States are numerous and most have substantially
greater capital resources and more experience in research and development,
manufacturing and marketing than us. We believe that our primary competitors are
EON Labs, Inc., Ivax Pharmaceuticals, Inc., Mylan Laboratories, Inc. and Taro
Pharmaceutical Industries, Ltd. Because selling prices of generic drug products
typically decline as competition intensifies, the achievement of profitable
operations will be dependent, in part, on our ability to maintain efficient
production capabilities and to develop and introduce, or to obtain access
through strategic alliances with others, new products in a timely manner. New
drugs or future developments in alternative drug development technologies may
provide therapeutic or cost advantages to competing products. There can be no
assurance that developments by others will not render our products or
technologies non-competitive or obsolete.
WE ARE DEPENDENT UPON KEY PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE.
Our success will be largely dependent upon the efforts of Narendra N.
Borkar, our Chief Executive Officer and Jitendra N. Doshi, our Chief Operating
Officer and Chief Financial Officer. Mr. Borkar's current employment agreement
expires on September 22, 2003. We do not have key person life insurance on any
of our key personnel. Our future success also will depend in large part on our
ability to identify, attract and retain other highly qualified managerial,
technical and sales and marketing personnel. Competition for these individuals
is intense. The loss of the services of any of our key personnel, the inability
to identify, attract or retain qualified personnel in the future or delays in
hiring qualified personnel, could make it more difficult for us to manage our
business and meet key objectives, such as the timely introduction of our
proposed products, which would harm our business, financial condition and
operating results.
9
RISKS RELATING TO THIS OFFERING AND OUR COMMON STOCK
BECAUSE OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD, YOUR ABILITY TO
SELL YOUR SHARES IN THE SECONDARY TRADING MARKET MAY BE LIMITED.
Our common stock currently is quoted on the over-the-counter market on
the OTC Bulletin Board. Consequently, the liquidity of our common stock is
impaired, not only in the number of shares that are bought and sold, but also
through delays in the timing of transactions, and coverage by security analysts
and the news media, if any, of our company. As a result, prices for shares of
our common stock may be lower than might otherwise prevail if our common stock
was quoted on the Nasdaq Stock Market or traded a national securities exchange,
like the New York Stock Exchange or American Stock Exchange.
BECAUSE OUR SHARES ARE "PENNY STOCKS," YOU MAY HAVE DIFFICULTY SELLING THEM IN
THE SECONDARY TRADING MARKET.
Federal regulations under the Securities Exchange Act of 1934 regulate
the trading of so-called "penny stocks," which are generally defined as any
security not listed on a national securities exchange or Nasdaq, priced at less
than $5.00 per share and offered by an issuer with limited net tangible assets
and revenues. Since our common stock currently is quoted on the OTC Bulletin
Board at less than $5.00 per share, our common stock is a "penny stock" and may
not be traded unless a disclosure schedule explaining the penny stock market and
the risks associated therewith is delivered to a potential purchaser prior to
any trade.
In addition, because our common stock is not listed on Nasdaq or any
national securities exchange and currently trades at less than $5.00 per share,
trading in our common stock is subject to Rule 15g-9 under the Exchange Act.
Under this rule, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include:
- obtaining financial and investment information from the investor;
- obtaining a written suitability questionnaire and purchase agreement
signed by the investor; and
- providing the investor a written identification of the shares being
offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. The application of these
comprehensive rules will make it more difficult for the broker-dealers to sell
our common stock and our stockholders, therefore, may have difficulty in selling
their shares in the secondary trading market.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET, INCLUDING THE SHARES OFFERED UNDER THIS PROSPECTUS AND UNDER OTHER
REGISTRATION STATEMENTS, COULD LOWER OUR STOCK PRICE AND IMPAIR OUR ABILITY TO
RAISE FUNDS IN NEW STOCK OFFERINGS.
Future sales of a substantial number of shares of our common stock in
the public market, including the shares offered under this prospectus and under
other registration statements, or the perception that such sales could occur,
could aversely affect the prevailing market price of our common stock and could
make it more difficult for us to raise additional capital through the sale of
equity securities.
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.
Our common stock is quoted on the OTC Bulletin Board. The market price
of our common stock may fluctuate significantly in response to a number of
factors, some of which are beyond our control. These factors include:
10
- progress of our products through the regulatory process;
- announcements of technological innovations or new products by us or
our competitors;
- government regulatory action affecting our products or our
competitors' products;
- developments or disputes concerning patent or proprietary rights;
- actual or anticipated fluctuations in our operating results;
- changes in our financial estimates by securities analysts;
- general market conditions for emerging growth and pharmaceutical
companies;
- broad market fluctuations; and
- economic conditions in the United States.
From July 1, 2000 through December 31, 2002, the closing sales price of
our stock has ranged from $0.20 to $4.65.
PROVISIONS IN OUR CHARTER DOCUMENTS AND MICHIGAN LAW COULD DISCOURAGE OR PREVENT
A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.
Provisions of our articles of incorporation and bylaws, as well as
provisions of Michigan law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our shareholders. These
provisions include:
- our Board of Directors has the authority to issue common stock and
preferred stock and to determine the price, rights and preferences
of any new series of preferred stock without further shareholder
approval;
- our Board of Directors is divided into three classes, with each
class serving staggered three-year terms;
- super majority voting is required to amend key provisions of our
articles of incorporation and bylaws;
- there are limitations on who can call special meetings of
shareholders; and
- in order to nominate a director or make a proposal at a
shareholders' meeting, a shareholder must give us advance notice.
We refer you to "Description of Securities - Anti-Takeover Provisions
of Michigan Law and our Articles of Incorporation" for more information on the
specific provisions of our articles of incorporation, our bylaws and Michigan
law that could discourage, delay or prevent a change of control of our company.
SUN PHARMACEUTICAL AND ITS AFFILIATES AND OUR DIRECTORS AND EXECUTIVE OFFICERS
OWN A SUFFICIENT NUMBER OF SHARES OF OUR CAPITAL STOCK TO CONTROL OUR COMPANY,
WHICH COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.
Sun Pharmaceutical and its affiliates and our directors and executive
officers currently own or control approximately 65% of our outstanding voting
power. This percentage excludes the effect of shares issuable upon the exercise
of outstanding options and the issuance of any additional shares to Sun Global
for product technology transfers. Accordingly, these shareholders, individually
and as a group, may be able to influence the
11
outcome of shareholder votes, involving votes concerning the election of
directors, the adoption or amendment of provisions in our articles of
incorporation and bylaws and the approval of certain mergers or other similar
transactions, such as a sale of substantially all of our assets. Such control by
existing shareholders could have the effect of delaying, deferring or preventing
a change in control of our company.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF THEIR INVESTMENT.
We expect that the public offering price per share will significantly
exceed the net tangible book value per share of the outstanding common stock.
Accordingly, purchasers of common stock in this offering will:
- pay a price per share that substantially exceeds the value of our
assets after subtracting our liabilities; and
- assuming a purchase price of $4.00 per share, contribute
approximately 30.0% of the total amount to fund us to date, but will
only own approximately 15.5% of the shares outstanding. The shares
outstanding exclude shares issuable upon the exercise of outstanding
options and the conversion of preferred stock and the issuance of
any additional shares to Sun Global for product technology
transfers.
EXERCISE OF OUTSTANDING OPTIONS WILL DILUTE EXISTING SHAREHOLDERS AND COULD
DECREASE THE MARKET PRICE OF OUR COMMON STOCK.
As of December 31, 2002, we had issued and outstanding 23,762,532
shares of common stock and outstanding options of 2,916,199 additional shares of
common stock at an average exercise price of approximately $1.78 per share. To
the extent these outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. The existence of the outstanding
options and convertible preferred stock may adversely affect the market price of
our common stock and the terms under which we could obtain additional equity
capital.
WE LIKELY WILL ISSUE ADDITIONAL EQUITY SECURITIES WHICH WILL DILUTE YOUR SHARE
OWNERSHIP.
We likely will issue additional equity securities through the exercise
of options that are outstanding or may be outstanding, through the conversion of
preferred stock that may become outstanding pursuant to the terms of the
products agreement between Sun Global and us, and possibly to raise capital.
These additional issuances will dilute your share ownership.
WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON COMMON STOCK IN THE FORESEEABLE
FUTURE AND, THEREFORE, ANY RETURN ON YOUR INVESTMENT IN OUR COMMON STOCK MUST
COME FROM INCREASES IN THE FAIR MARKET VALUE AND TRADING PRICE OF OUR COMMON
STOCK.
We have never paid a cash dividend on our common stock. We do not
intend to pay cash dividends on our common stock in the foreseeable future and,
therefore, any return on your investment in our common stock must come from
increases in the fair market value and trading price of our common stock.
Further, the EDC loan restricts the payment of dividends without its consent.
MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THIS OFFERING AND
COULD SPEND OR INVEST THE NET PROCEEDS IN WAYS IN WHICH THE SHAREHOLDERS MAY NOT
AGREE.
12
We expect to use most of the net proceeds from this offering for
expenses related to capital improvements, research and development and working
capital purposes and debt payment. As noted, we could decide to pay off all or
part of the Sun Pharmaceutical debt or the EDC debt. Our management has broad
discretion as to the use of proceeds of this offering and could spend or invest
the net proceeds from this offering in ways in which the shareholders may not
agree.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning our
financial condition, results of operations and business, the anticipated
financial and other benefits of this offering and the plans and objectives of
our management following this offering, including, without limitation,
statements pertaining to:
- our anticipated future profitability;
- our need to raise additional capital through future equity
financings;
- our spending capital on research and development of new products;
- our expectations of future FDA approvals of pending ANDAs;
- our expectations of introducing new products into the marketplace;
- our existing cash and any net proceeds from this offering and
whether and how long these funds will be sufficient to fund our
growth; and
- restructuring of the EDC loan.
These and other forward-looking statements are primarily in the
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Generally, you
can identify these statements because they use phrases like "anticipates,"
"believes," "expects," "future," "intends," "plans," and similar terms. These
statements are only predictions. Although we do not make forward-looking
statements unless we believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy, and actual results may differ materially from those we
anticipated due to a number of uncertainties, many of which are unforeseen. You
should not place undue reliance on these forward-looking statements which apply
only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including, among others, the risks we face as described in the section
entitled "Risk Factors" and elsewhere in this prospectus.
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) lack of success in
obtaining additional financing; (iv) inability to renegotiate and extend our
loan with the EDC; (v) governmental restrictions on the sale of certain
products; (vi) not obtaining FDA approvals for new products or delays in
receiving FDA approvals; (vii) lack of 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
cheaper products or new technology for the production of products or the entry
into the market of new competitors; (x) market and customer acceptance and
demand for new pharmaceutical products; (xi) availability of raw materials;
(xii) timing and success of product development and launch; (xiii) integrity and
reliability of our data; (xiv) lack of success in attaining full compliance with
regard to regulatory and cGMP compliance; and (xv) other risks
13
identified from time to time in our reports and registration statements filed
with the Securities and Exchange Commission.
We are not obligated to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as otherwise required by law. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus and other
statements made from time to time from us or our representatives, might not
occur. For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
14
PLAN OF DISTRIBUTION
SALES BY CARACO
We are offering the shares on a "best efforts minimum-maximum" basis
directly through our officers, who will not receive any commissions or other
remuneration of any kind for selling shares in this offering, other than
reimbursement of offering expenses incurred by them. This offering is a self
underwritten offering, which means that it does not involve the participation of
an underwriter to market, distribute or sell the shares offered under this
prospectus. We may sell shares directly by us and/or we may offer the shares
through brokers or dealers, who may receive compensation in the form of
commissions. We do not currently have any understandings or arrangements with
any person to act as a broker or dealer in this offering. Any broker or dealer
that participates in the distribution of shares may be deemed to be an
underwriter, and any profits on the sale of the shares by any such broker or
dealer and any commissions received by any such broker or dealer may be deemed
to be underwriting compensation under the Securities Act of 1933, as amended
(the "Securities Act"). If one or more brokers or dealers are engaged, the total
commission and fees paid to such brokers and dealers in connection with the sale
of the shares offered under this prospectus will not exceed 8% of the selling
price of the shares.
The shares may not be offered or sold in certain jurisdictions unless
they are registered or otherwise comply with the applicable securities laws of
such jurisdictions by exemption, qualification or otherwise. We intend to sell
the shares only in the states in which this offering has been qualified or an
exemption from the registration requirements is available, and purchases of
shares may be made only in those states. To comply with the securities laws of
certain jurisdictions, as applicable, the shares may be required to be offered
and sold only through registered or licensed brokers or dealers. If such brokers
or dealers are engaged, the total commission and fees paid to such brokers and
dealers in connection with the sale of shares will not exceed 8% of the selling
price of the shares.
Until 100,000 shares (the "Minimum Offering") have been sold, all funds
received from subscribers for our common stock will be held in escrow by Bank
One, Michigan, as escrow agent, pursuant to an agreement with the escrow agent.
Pending disbursement, subscription proceeds will be deposited in a non-interest
bearing account. All funds received after the Minimum Offering has been
obtained, will be deposited directly with us for immediate use.
Unless collected funds sufficient to purchase at least the Minimum
Offering are received by the escrow agent from accepted subscribers within 180
days from the date of commencement of the offering, the offering will terminate
and all funds received from subscribers will be promptly returned in full by the
escrow agent directly to subscribers, without interest or deduction, as provided
in the escrow agreement. We may, however, extend the offering, in our sole
discretion, for an additional 90 days. Provided that at least 100,000 shares of
common stock are sold within the foregoing period, we may continue to offer our
common stock for sale until 4,365,000 shares are sold or March 31, 2004,
whichever occurs first. However, we may terminate our offering at any earlier
time if we choose to do so. For services performed by it pursuant to the escrow
agreement, we have paid the escrow agent fees in the amount of $1,500.
To purchase common stock in this offering, a prospective investor must
(1) complete and sign a subscription agreement and any other documents that we
may require and (2) deliver such documents, together with payment in an amount
equal to the full purchase price of the shares of common stock being purchased,
to
15
the officer or broker or dealer, as applicable. Until the Minimum Offering is
sold, checks should be made payable to "Bank One, Michigan, Escrow Agent." After
the Minimum Offering, checks should be made payable directly to "Caraco." WE
WILL DETERMINE, IN OUR SOLE DISCRETION, TO ACCEPT OR REJECT SUBSCRIPTIONS WITHIN
FIVE DAYS FOLLOWING THEIR RECEIPT. FUNDS OF AN INVESTOR WHOSE SUBSCRIPTION IS
REJECTED WILL BE PROMPTLY RETURNED DIRECTLY TO SUCH PERSON, WITHOUT INTEREST OR
DEDUCTION, PURSUANT TO THE TERMS OF THE ESCROW AGREEMENT. NO SUBSCRIPTION MAY BE
WITHDRAWN, REVOKED OR TERMINATED BY THE PURCHASER. WE RESERVE THE RIGHT TO
REFUSE TO SELL OUR COMMON STOCK TO ANY PERSON AT ANY TIME.
We anticipate that we will indemnify brokers or dealers against any
costs or liabilities incurred by them by reasons of misstatements or omissions
to state material facts in connection with statements made in the registration
statement or the prospectus. We also anticipate that brokers or dealers will, in
turn agree to indemnify us against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
prospectus, based on information relating to the brokers or dealers and
furnished in writing. To the extent that this indemnification may purport to
provide exculpation from possible liabilities arising from the federal
securities laws, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and therefore unenforceable.
SALES BY SELLING SHAREHOLDERS
The Selling Shareholders acquired their shares of Caraco common stock
directly from us in private transactions in March, April and May 2002. To our
knowledge, none of the Selling Shareholders has entered into any agreement,
arrangement or understanding with any particular broker or market maker with
respect to the shares offered under this prospectus, nor do we know the identity
of any broker or market maker that will participate in the offering. The shares
of common stock may be offered and sold from time to time by the Selling
Shareholders or by their respective pledgees, donees, transferees and other
successors in interest.
The Selling Shareholders will act independently of us in making
decisions with respect to the timing, manner, size and price of each sale. Sales
may be made over the OTC Bulletin Board, in the over-the-counter market, in
privately negotiated transactions or otherwise, at then prevailing market
prices, at prices relating to prevailing market prices or at negotiated prices.
Sales may be made directly or through agents designated from time to time or
through dealers or underwriters to be designated or in negotiated transactions.
The shares may be sold by one or more of, or a combination of, the following
methods:
- a block trade in which the broker or dealer engaged by a Selling
Shareholder will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to
facilitate the transaction;
- purchases by the broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
- privately negotiated transactions.
Caraco has been advised by the Selling Shareholders they have not, as
of the date of this prospectus, entered into any arrangement with a broker or
dealer for the sale of shares through a block trade, special offering, or
secondary distribution of a purchase by a broker or dealer. In effecting sales,
brokers or dealers engaged by the Selling Shareholders may arrange for other
brokers or dealers to participate.
16
In connection with distributions of the shares or otherwise, the
Selling Shareholders may, if permitted by law, also enter into hedging
transactions. For example, the Selling Shareholder may:
- enter into transactions involving short sales of the shares of
common stock by brokers or dealers;
- sell shares of common stock short and redeliver these shares to
close out the short position;
- enter into option or other types of transactions that require the
Selling Shareholders to deliver shares of common stock to a broker
or dealer, who will then resell or transfer the shares of common
stock under this prospectus; or
- loan or pledge shares of common stock to a broker or dealer, who
may sell the loaned shares, or in the event of default, sell the
pledged shares.
Brokers or dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Shareholders or the
purchasers of the common stock in amounts to be negotiated in connection with
the sale. Brokers or dealers and any other participating brokers or dealers may
be deemed to be underwriters within the meaning of the Securities Act in
connection with the sales, and any commission, discount or concession may be
deemed to be underwriting discounts or commissions under the Securities Act. In
addition, any securities covered by this prospectus which qualify for sale under
Rule 144 of the Securities Act may be sold under Rule 144 rather than under this
prospectus. No period of time has been fixed within which the shares covered by
this prospectus may be offered and sold.
We have informed the Selling Shareholders that the anti-manipulation
rules under the Securities Exchange Act of 1934, including Regulation M
thereunder, may apply to their sales of shares in the market and have furnished
each of the Selling Shareholders with a copy of these rules. We have also
informed the Selling Shareholders of the need for delivery of copies of this
prospectus in connection with any sale of shares of common stock hereunder.
This offering will terminate on the earlier to occur of:
- the date on which all shares offered have been sold by the Selling
Shareholders; or
- the date on which all shares held by a Selling Shareholder may be
sold by such Selling Shareholder in compliance with Rule 144 under
the Securities Act within any three-month period.
We will pay the expenses of registering the shares under the Securities
Act, including registration and filing fees, printing expenses, fees and
disbursements of our counsel and accountants, all of our internal expenses, and
all legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to be
offered are to be registered or qualified. The Selling Shareholders will bear
all discounts, commissions or other amounts payable to underwriters, brokers,
dealers or agents.
SELLING SHAREHOLDERS
All of the Selling Shareholders named below acquired shares of our
common stock being offered under this prospectus directly from us in private
transactions in March, April and May 2002. The following table sets
17
forth information known to us with respect to the beneficial ownership of Caraco
common stock as of December 31, 2002, by the Selling Shareholders.
The percentage of beneficial ownership for the following table is based
on 23,762,532 shares of common stock outstanding as of December 31, 2002. To our
knowledge, each person named in the table has sole voting and investment power
with respect to all shares of common stock shown in the table to be beneficially
owned by such person.
None of the Selling Shareholders has had any position, office or other
material relationship with us within the past three years. The table assumes
that the Selling Shareholders will sell all of the shares offered by them in
this offering, however, the Selling Shareholders may offer all or part of the
shares for resale from time to time. We are unable to determine the exact number
of shares that will actually be sold or when or if these sales will occur. We
will not receive any of the proceeds from the sales of the shares offered under
this prospectus.
Selling Shareholder Shares of Common Stock Number of Shares
Beneficially Owned Prior to Being Offered Shares Beneficially Owned after
the Offering Completion of the Offering
---------------------------- ---------------- --------------------------------
Total Shares Percentage Number Percentage
Beneficially
Owned
------------- ----------- ------ ----------
Daniel Bauer 30,000 * 30,000 0 0
Berlin Capital Growth, LP 250,000 1.1% 250,000 0 0
LeRoy Carter 30,000 * 30,000 0 0
Verle Carter 25,000 * 25,000 0 0
J. George Investments, LLC 300,000 1.3% 300,000 0 0
*less than 1.0%
USE OF PROCEEDS
Caraco will not receive any of the proceeds from the sale of shares by
the Selling Shareholders. If all 4,365,000 shares of common stock offered by
Caraco are sold pursuant to this offering, we will receive gross proceeds of
approximately $17,460,000 million. The gross proceeds will be reduced by legal,
accounting and other miscellaneous expenses of approximately $111,000. If we
utilize the services of registered brokers and dealers, the gross proceeds will
be further reduced by the commissions payable to such brokers and dealers. Set
18
forth below is an estimate of how we intend to use the net proceeds of the
offering, assuming the gross proceeds of $17,460,000: $2 million towards capital
improvements, $5 million towards research and development, $5-7 million towards
working capital requirements and the balance for debt elimination. If the net
proceeds are less than fully subscribed, we shall determine the proper
allocation among the foregoing proposed uses. If we are unable to restructure
the EDC loan, we may determine to pay off the EDC loan. We may also determine to
pay off all or a portion of the $5.85 million in loans from Sun Pharmaceutical
and Sun Global which are due October 2003. This may reduce the amounts available
for the other proposed uses. If only the Minimum Offering of 100,000 shares
($350,000) is subscribed, it is anticipated that the net proceeds will be used
for the research and development expenses of one bioequivalency study; in such
case, we would need to seek additional financing to grow our business. See "Risk
Factors."
DIVIDEND POLICY
We never have declared or paid any cash dividends on our common stock.
We currently intend to retain all future earnings for the operation and
expansion of our business. We do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future. Any payment of cash
dividends on the common stock will be at the discretion of the Board of
Directors and will depend upon our results of operations, earnings, capital
requirements, contractual restrictions and other factors deemed relevant by our
Board of Directors. No dividend may be declared without the consent of the EDC.
PRICE RANGE OF COMMON STOCK
Our common stock trades in the over-the-counter market on the OTC
Bulletin Board, under the symbol "CARA." The following table sets forth, in U.S.
dollars and in dollars and cents (in lieu of fractions), the high and low bid
prices for each of the calendar quarters indicated. These bid prices were
obtained from the Nasdaq OTCBB. These quotations reflect inter-dealer prices,
without retail mark up, mark down or commissions and may not represent actual
transactions.
2002 HIGH LOW
First Quarter $4.96 $1.10
Second Quarter $3.73 $2.25
Third Quarter $3.07 $1.73
Fourth Quarter $2.77 $1.72
2001 HIGH LOW
First Quarter $0.60 $0.20
Second Quarter $0.85 $0.32
Third Quarter $0.70 $0.55
Fourth Quarter $1.11 $0.58
2000 HIGH LOW
First Quarter $1.09 $0.69
Second Quarter $1.09 $0.26
Third Quarter $0.53 $0.25
Fourth Quarter $0.31 $0.20
As of March 31, 2003, there were approximately 155 holders of record of
our common stock.
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SELECTED FINANCIAL DATA
The selected statements of operations data shown below for the years
ended December 31, 2002, 2001 and 2000 and the balance sheet data as of December
31, 2002 and 2001 are derived from our audited financial statements included
elsewhere in this prospectus. When you read this selected consolidated financial
data, it is important that you also read the historical financial statements and
related notes included in this prospectus, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Historical
results are not necessarily indicative of future results.
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31
----------------------- ----------------------
2002 2001 2000
---- ---- ----
(AS RESTATED)*
Net sales $ 22,380,964 $ 5,922,431 $ 2,377,546
Cost of goods sold 12,047,410 4,186,059 2,678,900
------------ ------------ ------------
Gross profit (loss) 10,333,554 1,736,372 (301,354)
Selling, general and administrative expenses 3,827,707 2,680,494 2,508,737
Research and development costs (affiliate) 3,887,423 - 401,472
Research and development costs 3,348,789 3,079,804 3,065,795
Operating loss (730,365) (4,023,926) (6,277,358)
Interest cost - net of interest income (1,525,639) (1,733,537) (1,517,182)
------------ ------------ ------------
Net loss $ (2,256,004) $ (5,757,463) $ (7,794,540)
============ ============ ============
Net loss per basic and diluted common share $ (0.10) $ (0.29) $ (0.41)
Weighted average common shares outstanding 22,031,425 21,173,522 19,755,021
20
BALANCE SHEETS DECEMBER 31
-------------- -----------
2002 2001
---- ----
Cash and cash equivalents $ 534,228 $ 241,110
Other current assets 11,571,411 4,574,764
Property, plant & equipment (net) 7,747,510 6,694,082
Current liabilities 13,752,892 10,855,205
Long term liabilities 25,723,547 23,600,000
Accumulated deficit (60,012,796) (57,756,792)
Stockholders deficit (19,623,290) (22,945,249)
*Caraco recorded a prior period adjustment to restate common stock and
the accumulated deficit as of January 1, 2000 in connection with the
valuation of its common shares issued to Sun Pharmaceutical in exchange
for product technology transfers received through that date. The
restatement served to increase the accumulated deficit and capital
previously reported at that date by $983,660. The 2000 operating
results have been restated by increasing the net loss by $171,832 in
connection with the valuation of common shares issued to Sun
Pharmaceutical in exchange for the product technology transfer during
2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this registration statement and the
cautionary statements concerning forward-looking statements presented in the
sections entitled "Risk Factors" and "Cautionary Statement Concerning
Forward-looking Statements."
OVERVIEW
2002 was a year of record revenues for us. While we still experienced net
losses, our cash flow improved significantly. In comparison we have historically
experienced limited sales, operating losses and cash-flow difficulties.
During 2001 and 2000, Sun Pharmaceutical assisted Caraco in obtaining loans from
ICICI Bank Limited and The Bank of Nova Scotia of $5.0 million and $12.5
million. We have utilized the $5.0 million from ICICI Bank Limited during 2000
and $10.9 million from The Bank of Nova Scotia during 2002, 2001 and 2000. Also,
Sun Pharmaceutical provided loans of an additional $1.40 million and $2.45
million to us during 2002 and 2001, respectively. The loans were primarily
utilized by us to fund the operations, research and development of new products
and finance the increased working capital needs resulting from the increase in
our product portfolio following FDA approvals of 3 products during the last two
quarters of 2001 and 6 products in 2002. In February 2003, the FDA approved an
additional ANDA. We also filed 3 ANDA applications to the FDA
21
during 2002, bringing the total pending approvals to 3. We continue to negotiate
with the EDC to restructure our loan which has been in default and continue to
pay the EDC $100,000 a month with aggregate payments to the EDC through 2002,
totaling $4.7 million. See "Business Property" and "Business - EDC Financing"
for a discussion of the EDC resolution approving a restructuring of the loan.
FDA COMPLIANCE AND PRODUCT APPROVALS
Towards the end of the first and beginning of the second quarters of 2001, and
in November 2002, the FDA conducted inspections of our facility. During these
inspections, we were found to be substantially in compliance with the cGMP
regulations. While the FDA did issue us an FDA 483 list of observations after
each inspection, we do not believe they are material and we have taken
appropriate remedial actions. During 2002, the FDA approved 6 ANDAs. In February
2003, the FDA approved an additional ANDA. 3 ANDAs are currently pending
approval.
TWELVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH TWELVE MONTHS ENDED DECEMBER
31, 2001
NET SALES. Net sales for the twelve months ended December 31, 2002 and
2001 were $22,380,964 and $5,922,431, respectively, reflecting an increase of
almost 278%. The increase is due to the higher production and marketing of our
existing and newly approved products following the achievement of substantial
compliance with cGMPs. Currently, we manufacture and market six of the nine
ANDAs which were approved by the FDA during 2001 and 2002. Net sales of these
newly approved products were almost 45% of total net sales for the twelve months
ended December 31, 2002. The majority of the net sales increase from sales of
new products were from net sales of Metformin Hydrochloride and Tramadol
Hydrochloride, 55% and 5% of net sales for the twelve months ended December 31,
2002, respectively.
Net sales have also improved for the following reasons:
- Net sales of Metoprolol Tartrate have increased significantly to
$6.60 million during the twelve months of 2002 as compared to
$1.85 during the same period of 2001.
- We have been successful in obtaining larger sales contracts in
2002 with an agency of the U.S. government and with one large mail
order company, however, the sales of Metformin Hydrochloride to
such agency have been made at lower profit margins. (See
discussion on "Gross Profit" below)
- With our larger base of products, we have been able to attract
both new customers as noted above, and larger orders.
GROSS PROFIT. We earned a gross profit of $10,333,554 during the twelve
months ended December 31, 2002 as compared to a gross profit of $1,736,372
during the corresponding period in 2001. The improvement was primarily due to
higher sales volumes with improved margins due to product mix in the current
period as compared to the corresponding period of 2001 and ability to absorb
operational overheads due to higher sales.
As a result of increased sales, the gross profit margin has also
improved when comparing the gross profit margins for the twelve month periods
ending December 31, 2002 and 2001. Gross profit margin for the twelve months
ended December 31, 2002 was 46% as compared to almost 29% for the twelve months
ended December 31, 2002. The increases were the result of:
22
- Change in sales mix to higher profit margin products such as
Metoprolol Tartrate, Tramadol Hydrochloride and Oxaprozin.
- Reduction in manufacturing costs due to increased batch sizes. For
example, Metoprolol Tartrate batch sizes have increased by
approximately four fold.
- Improved efficiency in the overall manufacturing process
associated with higher utilization of plant capacity.
- Utilization of newly installed larger and faster equipment to
achieve economics of scale.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the twelve months ended December 31, 2002 and 2001,
respectively were $3,827,727 and $2,680,494 respectively, representing an
increase of 43%. Selling, general and administrative expenses have effectively
decreased to 14.8% of net sales during the twelve months ended December 31, 2002
from almost 37% of net sales during the same period in 2001.
The actual increase of approximately $1,147,213 between the selling,
general and administrative expenses incurred during 2002 in comparison to 2001
was due to additional legal and professional costs ($250,000) primarily in
connection with the negotiations of a new product agreement with Sun Global,
litigation defense, SEC and blue sky registration, and negotiations with the
EDC, costs of introducing new products into the market ($150,000), additional
sales personnel ($40,000), increases in the salaries of sales and administrative
staff ($80,000), recording of variable compensation expense on the extension of
the term of a director's stock options ($262,000), and the balance for royalties
and costs associated with development of improved services and quality measures
to customers.
RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development
expenses of $3,348,789 for the twelve months ended December 31, 2002 were higher
by 9% when compared with $3,079,804 incurred during the corresponding period of
2001. We incurred non-cash research and development expenses (technology
transfer cost) of $3,887,424 for the 1,632,000 shares of common stock issued to
Sun Global for three product transfers made to us during 2002. There was no
similar expense for the corresponding period of 2001. The major reason for the
additional cash research and development expenses were the costs for three
bio-study projects, for which we recorded expenditures of approximately $593,000
during 2002.
INTEREST EXPENSE. Interest expense, which was incurred in connection
with our mortgage obligation to the EDC, interest on notes payable to Sun
Pharmaceutical and Sun Global as well as on term loans granted to us by ICICI
Bank and the Bank of Nova Scotia, and guaranteed by Sun Pharmaceutical, was
$1,539,075 and $1,748,922, for the twelve months ended December 31, 2002 and
2001, respectively. The decrease in the amount of interest is due to a lower
LIBOR rate on the loans from ICICI Bank of India and Bank of Nova Scotia,
despite an increase in borrowing levels. Also, effective April 1, 2001, Sun
Pharmaceutical and Sun Global reduced the rate of interest payable to them from
10% to 8%.
RESULTS OF OPERATIONS. The net losses for the twelve months ended
December 31, 2002 and 2001 were $2,256,004 and $5,757,464, respectively,
reflecting a reduction of almost 61%. The net losses for the twelve month
periods are directly related to net sales, which were inadequate to absorb our
interest costs and the impact of our non-cash technology transfer cost of
$3,887,424 recorded during the twelve months ended December 31, 2002. The
significantly lower net losses in the current twelve-month period as compared to
the previous period are primarily due to significantly higher sales volumes and
better-cost absorption due to
23
increased sales and an improved product mix. Also, the utilization in the third
and fourth quarters of 2002 of $1.59 million of new equipment installed during
the twelve months ended December 31, 2002 helped to improve productivity.
A number of uncertainties exist that may influence our future operating
results, including general economic conditions, changes in conditions affecting
the pharmaceutical industry primarily related to generic drug competition,
obtaining additional financing, government restrictions on sale of certain
products, obtaining new FDA approvals, development by competitors of new or
superior products or new technology for production of products or the entry into
the market of new competitors.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
NET SALES. Net sales for the years ended December 31, 2001 and 2000
were $5,922,431 and $2,377,546, respectively. While this represents a 150%
increase over the previous year due to increased production and marketing of our
existing products, it was still at a low level. During the third quarter, we
began the manufacture and marketing of 2 of the 3 FDA approved products. The
sales of these products were only a small part of the gross sales during the
last six months of 2001. Sales of Metroprolol Tartrate, Guaifenesin and
Paramomycin Sulfate started to see substantial increases due to the facility
being cGMP approved. Gross sales from these products increased $2.5 million,
$965,000 and $703,000, respectively in 2001 from 2000 levels. This represented
$3.25 million of additional net sales in 2001 or 92% of the $3.5 million
increase.
GROSS PROFIT/ LOSS. We earned a gross profit of $1,736,372 for the year
ended December 31, 2001, compared to a gross loss of $301,354 during the same
period of 2000. The improvement was primarily due to higher sales volumes in the
current period as compared to those during the corresponding period of 2000 and
ability to absorb operational overheads due to higher sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 2001 were $2,680,494 compared to $2,508,738 in 2000
for a slight increase of 7%. The increase was mainly a result of higher selling
expenses of approximately $50,000 due to increased sales and increased
expenditures of $90,000 incurred for maintaining FDA compliance.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of
$3,079,804 for the year ended December 31, 2001 were approximately the same,
when compared with $3,467,267, respectively, incurred during the corresponding
period of 2000. However, during 2001, we did not incur any non-cash expense in
relation to shares of common stock issued in exchange for the product technology
transfer by Sun Pharmaceutical. During 2000, such non-cash expenses totaled
$401,472 as restated. The 2000 research and development expenses, and the net
cash expenses, as restated were increased in connection with the valuation of
the common stock issued to Sun Pharmaceutical in exchange for the product
technology transfer.
INTEREST EXPENSE. Interest expense, which was incurred in connection
with our mortgage obligation to the EDC, interest on notes payable to Sun
Pharmaceutical and Sun Pharma Global as well as on term loans granted to us by
ICICI Bank and the Bank of Nova Scotia, and guaranteed by Sun Pharmaceutical,
was $1,748,922 and $1,555,192, for the years ended December 31, 2001 and 2000,
respectively. The increase is primarily the result of higher borrowing levels.
Effective April 1, 2001, Sun Pharmaceutical and its affiliates reduced the rate
of interest payable to them from 10% to 8% per annum. Interest income for 2001
and 2000 was $15,385 and $38,010, respectively.
24
RESULTS OF OPERATIONS. Net losses for the years ended December 31, 2001
and 2000 were $5,757,463 and $7,794,540 as restated, respectively. This
represents a reduction of 35.4% over the previous year. The operating losses
were directly related to (1) net sales, which were inadequate to absorb our
fixed costs of the operational expenses and (2) the impact of research and
development spending. The losses were lower in 2001 compared to 2000 primarily
due to higher sales volumes and better-cost absorption due to increased sales,
despite higher interest expense. The 2000 operating results were restated by
increasing the net loss by $171,832 in connection with the valuation of common
shares issued to Sun Pharmaceutical in exchange for the product technology
transfer during 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had negative working capital of $1,647,253
compared with a negative working capital of $6,039,331 at the corresponding
period of 2001. The negative working capital position as of December 31, 2002
was mainly due to the classification of the $5.85 million in loans payable to
Sun Pharmaceutical and its affiliates as current as they become due in October
2003. The negative working capital position as of December 31, 2001 was mainly
due to the classification of the entire balance of the EDC debt and the related
accrued interest therein as current.
To enable us to fund our research and development activities, repay
certain term loans and fund working capital needs, Sun Pharmaceutical has become
a security guarantor for a credit line of $5 million from ICICI Bank of India
and $12.5 million from Bank of Nova Scotia. As of December 31, 2002 we have
received $5 million from ICICI Bank of India and $10.9 million from Bank of Nova
Scotia through these credit facilities. Further, we have received an additional
loan of $2.45 million during the fourth quarter of 2001 and $1.4 million during
the first quarter of 2002 from Sun Pharmaceutical to help us finance our R&D
activities, debt reduction and working capital requirements.
In addition, during the first six months of 2002, 635,000 shares of
common stock have been issued by us for cash of $1,692,000 pursuant to a private
placement to accredited investors.
FUTURE OUTLOOK
We have experienced difficult times in the past. With our having been
found to be in substantial compliance by the FDA with respect to cGMPs during
the second quarter of 2001 and fourth quarter of 2002, and also with the
approvals of nine ANDAs during 2001 and 2002, and one more during 2003,
management feels that our future outlook is brighter. Management's plan for
improving profitability, cash flow positions and operations include increased
sales and infusion of additional funding through the issuance of equity, if
required. Management believes that the new products agreement ("Products
Agreement") with Sun Global, pursuant to which products are paid for in a newly
created preferred stock and not in cash should benefit Caraco. As noted below,
in "Business-Sun Pharmaceutical Industries Ltd," under the Products Agreement,
we conduct, at our expense, all tests, including bioequivalency studies. The new
Products Agreement, which was approved by an independent committee of directors
of Caraco, provides that Sun Global, an affiliate of Sun Pharmaceutical, will
provide us with 25 ANDAs in exchange for convertible preferred stock (544,000
shares of preferred stock for each ANDA). The preferred stock has a number of
restrictive features. It is non-voting, does not pay dividends and, unless there
is a change in control, may not be converted for a period of 3 years from the
date it is earned. We believe that the new Products Agreement benefits us by,
among other things, preserving our cash resources. By acquiring products for
stock instead of cash or instead of for cash and for royalties, we should
thereby have
25
such cash available to support our operations. While the payment for products in
stock would have the effect of reducing earnings or causing a loss because the
stock will be valued on the respective dates on which it is earned and
constitute a non-cash research and development expense, we believe that the
advantages to us of preserving our cash for operations outweighs the non-cash
effect on earnings. We also believe that receiving products from Sun Global,
which products, it is believed, will be originated by Sun Pharmaceutical,
provides us with a partner with a proven track record; one that already has
provided us with quality products. In addition, the products to be selected must
receive the concurrence of the independent committee. This will help provide
independent input into the process of selecting products which appear likely to
be economically sound. Moreover, the new Products Agreement, which will have the
effect of increasing Sun Pharmaceutical's beneficial ownership in us, should, we
believe, provide it with the incentive to continue to help us succeed. Sun
Pharmaceutical 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. We expect Sun Pharmaceutical to
continue to support us in 2003 as it has in the past.
During 2002, we generated substantial revenues as compared to the past.
Capacity utilizations are improving and costs are being controlled. We expect
revenues to improve during 2003. Management's plans for the remainder of 2003
include:
- Continued focus on FDA compliance.
- Continued research and development activities.
- Increased market share for certain existing products and recently
introduced new products and enhanced customer reach and
satisfaction.
- Prompt introduction of newly approved products to the market.
- Striving to capture larger market share for existing products.
- Achieving operational efficiencies by attaining economies of
scale, cost reduction per unit, and obtaining additional cost
reductions for active raw materials acquired from competitors
and/or Sun Pharmaceutical.
- Increasing the width and depth of product portfolio to serve
customers effectively.
- 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
Pharmaceutical.
- Prompt restructuring of the EDC Loan.
- Locating and utilizing facilities of contract-manufacturers to
enhance production and therefore sales.
26
BUSINESS
General. We were organized under Michigan law in 1984, to engage in the
business of developing, manufacturing and marketing generic drugs for the
ethical or prescription and over-the-counter or 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 our funding has been from private placement
offerings and loans. Sun Pharmaceutical a specialty pharmaceutical corporation
organized under the laws of India which currently beneficially owns
approximately 49% of our outstanding shares, has contributed equity capital and
has advanced us loans. Also, pursuant to a products agreement with us, Sun
Pharmaceutical has transferred certain products to us. See "Current Status" and
"Sun Pharmaceutical Industries Limited" below. Our manufacturing facility and
executive offices were constructed pursuant to a $9.1 million loan in 1990 from
the EDC. See "Current Status" and "Property and - EDC Financing" below.
Current Status. For the first time since inception, during the second,
third and fourth quarters of 2002, we achieved sales necessary to support our
operations. Net sales for the twelve months ended December 31, 2002 were $22.4
million as compared to $5.9 million for the twelve months ended December 31,
2001. We have incurred a nominal operating loss of $730,365 for the twelve
months ended December 31, 2002 as compared to an operating loss of $4,023,926
for the twelve months ended December 31, 2001. After interest costs, we have
incurred a net loss of $2,256,004 for the twelve months ended December 31, 2002
as compared to a net loss of $5,757,463 for the twelve months ended December 31,
2001. At December 31, 2002, we had a stockholders' deficit of $19,623,290 as
compared to a deficit of $22,945,249 at December 31, 2001. We have continued to
be dependent on the support of Sun Pharma, but the financial support is reduced
due to the increased revenues and improved cash flows from internal operations.
See "Sun Pharmaceutical Industries, Ltd." and Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
We received 6 Abbreviated New Drug Application ("ANDA") approvals
during the twelve months ended December 31, 2002 and 1 ANDA approval during the
first quarter of 2003. See "Caraco's Products and Product Strategy" below. We
also filed 3 ANDAs with the FDA during the twelve months of 2002, bringing the
total pending approvals to 3.
Our debt includes term loans totaling $17.5 million, of which $15.9
million has been drawn down from two foreign banks and our note payable to the
EDC, stands at approximately $7.8 million as at December 31, 2002. See "Property
and EDC Financing" below for a discussion of the EDC resolutions approving a
restructuring of the loan.
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 ANDAs procedures
for obtaining 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
27
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
Our present product portfolio includes 13 prescription products in 22
strengths in 46 package sizes. The products and their use for the indications
are set forth in the table below:
GENERIC NAME PURPOSE
Guaifenesin LA* Decongestant
Metroprolol Tartrate Hyper-Tension
Miraphen PSE Decongestant
Paromomycin Sulfate Antibacterial
Salsalate Decongestant
CMT Arthritis/NSAID
Guai/DM Decongestant
Clonazepam Seizure, Panic Disorders
Flurbiprofen Arthritis/NSAID
Carbamazepine Epilepsy
Oxaprozin Rheumotoid Disease
Metformin Hydrochloride Diabetes
Tramadol Hydrochloride Analgesic
Miraphen PE Decongestant
*See "Recent Developments" with respect to
the FDA's letter to us and 66 other manufacturers and
distributors to cease sales of Guaifenesin LA after
November 2003.
We have submitted 13 ANDAs to the FDA for approval since August 1997,
including 3 filed during 2002. Of these 13 ANDAs, the FDA approved 3 during
2001, 6 during 2002 and one during the first quarter of 2003. Accordingly, we
have 3 pending ANDAs, most of which, we believe, may be approved by 2003
year-end. Of the 13 ANDAs, Sun Pharmaceutical has transferred the technology for
11 of them to us pursuant to its now expired products agreement. See "Sun
Pharmaceutical Industries Limited" below.
Four of the ANDAs have not yet been marketed and are not included in
the above disclosure of our product portfolio. The products and their use for
the indications are set forth in the table below:
GENERIC NAME PURPOSE
Ticlopidine Hydrochloride Cardiology
Meperidine Hydrochloride Analgesic
Clozapine Schizophrenia
Digoxin Cardiology
28
These products, when launched, will increase our product portfolio to 17
prescription products in 29 strengths in 61 package sizes.
Our strategy has been to analyze the marketplace and try to determine
opportunities depending on a particular product's potential market and the
number of competitors vying for that market.
29
HEXAL-PHARMA GMBH & CO., KG
Pursuant to an agreement between us and Hexal-Pharma GmbH & Co., KG, a
German pharmaceutical company and its United States affiliate (together,
"Hexal") dated as of October 1, 1993, Hexal agreed to convey to us 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").
We agreed to pay Hexal royalties on the yearly sales of each Product. We filed
an ANDA in March 1995 with respect to Metoprolol Tartrate, received approval
from the FDA in December 1996 and introduced it in 1997. Metoprolol Tartrate is
one of our 14 current products. See "Caraco's Products and Product Strategy."
Hexal has decided not to proceed with the development of the second Product.
Pursuant to the agreement, we have, for the Product (i) a Sign-Up
Option to purchase 100,000 shares of common stock at $3.50 per share; and (ii) a
Product Option to purchase shares at an exercise price of $3.50 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 us, payable to
Hexal for sales of the product. No options have yet been exercised. Royalties
payable to Hexal, which are included in accrued expenses, amount to $801,144 at
December 31, 2002.
We have recently learned that the formula provided to us by Hexal with
respect to Metoprolol Tartrate may be different than the formula currently used
for manufacturing, and we are investigating further whether or not we should
continue to accrue royalties based on the formula differences. If we find that
the formula as provided by Hexal is indeed different from ours, we would cease
to accrue any royalties.
SUN PHARMACEUTICAL INDUSTRIES LIMITED
Pursuant to a stock purchase agreement, Sun Pharmaceutical had, as of
December 31, 1998, remitted a total of $7.5 million to us for the purchase of
5.3 million common shares.
On October 15, 1998 Sun Pharmaceutical also made a loan to us of $5.3
million at an annual interest rate of 10%. This loan was amended to provide Sun
Pharmaceutical with a security interest subordinated to the loan of the EDC. The
loan is payable in full in October 2003. The rate of interest on the loan from
Sun Pharmaceutical has been reduced from 10% to 8% effective April 1, 2001. In
2001, Sun Pharmaceutical loaned us an additional $2.45 million at an interest
rate of 8%. During the first quarter of 2002, Sun Pharmaceutical loaned us an
additional $1.4 million at an interest rate of 8%. The $2.45 million and $1.4
million loans mature and are due and payable on August 31, 2006. Prior to this,
Sun Global, made a loan to us of $650,000 at an annual interest rate of 10%. We
have repaid $100,000 of this loan during 2001. The interest rate on this loan
has also been reduced by Sun Global from 10% to 8% effective April 1, 2001. The
loan is payable in full in October 2003.
Sun Pharmaceutical has assisted us in obtaining line of credit loans
from ICICI Bank Limited and The Bank of Nova Scotia in the amount of $5.0
million and $12.5 million, respectively. We have utilized, $5 million from ICICI
Bank Limited and $10.9 million from The Bank of Nova Scotia. The amounts
borrowed under the ICICI Bank Limited credit facility must be repaid in eight
equal quarterly installments beginning
30
December 31, 2003 and ending September 30, 2005. The amounts borrowed 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 140 basis points on the loan from ICICI Bank Limited and LIBOR plus
155 basis points on the loan from The Bank of Nova Scotia, and is payable at
one, two, three or six months periods at our option.
In August 1997, we entered into an agreement (the "Products
Agreement"), whereby Sun Pharmaceutical was required to transfer to us the
technology formula for 25 generic pharmaceutical products over a period of five
years through August 2002. We exchanged 544,000 shares of our common stock for
each ANDA product, generally when a bio-equivalency study is successfully
completed and 181,333 shares for each DESI ("Drug Efficacy Study
Implementation") product. The products provided to us from Sun Pharmaceutical
were selected by mutual agreement. Under such agreement, which has expired, we
conducted, at our expense, all tests including bioequivalency studies. Also,
under such agreement, Sun Pharmaceutical delivered to us the formula for 13
products. Sun Pharmaceutical currently beneficially owns approximately 49% of
our outstanding common stock.
On November 21, 2002, we entered into a products agreement with Sun
Global. Under the agreement, which was approved by our independent directors,
Sun Global has agreed to provide us with 25 new generic drugs over a five year
period. Our rights to the products are limited to the United States and its
territories or possessions, including Puerto Rico. Sun Global retains rights to
the products in all other territories. Under such agreement, we conduct, at our
expense, all tests including bioequivalency studies. We are also obligated to
market the products consistent with our customary practices. and to provide
marketing personnel. In return for the technology transfer, Sun Global will
receive 544,000 shares of a newly created preferred stock for each generic drug
transferred when such drug has passed its bioequivalency study. The preferred
shares are non-voting, do not receive dividends and are convertible into common
shares after three years (or immediately upon a change in control) on a
one-to-one basis. See" Management's Discussion and Analysis of Financial
Condition and Results of Operations - Future Outlook."
Sun Pharmaceutical has established a Research and Development Center in
Mumbai with a staff of 30 persons, including PhDs, pharmacy graduates,
analytical chemists and regulatory professionals. Sun Pharmaceutical primarily
performs development work for us at this laboratory.
Sun Pharmaceutical also supplies us with certain raw materials and
machinery and equipment to enhance our production capacities. In the year ended
December 31, 2002, we purchased approximately $2,422,000 in raw materials and
$310,000 in machinery and equipment from Sun Pharmaceutical. Sun Pharmaceutical
has also provided us with qualified technical professionals. Twenty-one of our
technical professional employees were former Sun Pharmaceutical employees.
MARKETING
Our 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
and Customers" below. Externally, it requires forging relationships with
wholesaler buying groups, distributors and mail order companies, among others.
Management is aware that, despite any success in creating these distribution
links, sales volume will remain low until we can offer a broader range of
products needed by drug purchasers in significant amounts.
31
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.
Our product line is now represented by the following major top drug
wholesalers; McKesson Corporation, Amerisource - Bergen and Cardinal Health.
Caraco's products are now stocked by many other drug wholesalers, partly as a
result of our arrangements, discussed below, with buying groups.
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. As part of our
ongoing marketing efforts, we are pursuing arrangements with additional
wholesalers and expanding our sales network of buying groups.
Further, as part of our ongoing marketing efforts, we are pursuing
arrangements to expand our business with our current distributors and a
mail-order company.
Federal and state agencies purchase a large amount of generic
pharmaceutical products. All of our products are now listed for purchase at
prices bid by us 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.
SALES AND CUSTOMERS
Presently, we have only a small in-house sales organization comprised
of 4 persons. In time as new products are added to the existing product line, we
plan to expand our 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 65% and
35% of sales in 2002 and 2001, respectively. Balances due from this customer
represented approximately 80% and 40% of accounts receivable at December 31,
2002 and 2001, respectively.
We have entered into a sales contract with an agency of the U.S.
government. Our agreement with this customer is for the period of June 21, 2002
through June 20, 2003 ("base contract period"), with four 1-year option periods
and is for the purchase of one product. The agreement may be terminated by the
purchaser without cause and in such case, we would only be entitled to a
percentage of the contract price reflecting the percentage of the work
performed prior to the notice of termination, plus reasonable charges that have
resulted from the termination. The agreement provides that approximately $13.0
million of product should be shipped to the customer over the base contract
period, and further provides that certain penalties would be incurred if we are
unable to meet our sales commitment.
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.
32
Although the Corporation performs its own stability testing, bioequivalence is
done through independent testing laboratories.
An outline of research and development expenses incurred directly by
Caraco for 2002, 2001 and 2000 follows (000's):
2002 2001 2000
---- ---- ----
Salaries $ 678 $ 530 $ 576
Raw Materials/Supplies 165 131 138
Bioequivalency Studies 594 132 644
Laboratory 505 264 120
Technology Transfer, non-cash 3,887 0 401
Other 1,407 2,022 1,375
------ ----- ------
TOTAL $7,236 $3,079 $3,254
====== ====== ======
The 2002 research and development expenses shown above include the
non-cash cost of the products transferred by Sun Pharma to Caraco of $3,887,423
for 1,632,000 shares of our common stock. No technology transfer cost was
incurred in 2001.
Information with respect to two research and development projects in
2002 are presented below:
33
PROJECT INFORMATION - PRODUCT A
---------------------------------- ------------------------------- -------------------------------- ----------------
Costs Incurred on Product A Nature, Timing and costs to Risks and uncertainties of not Period in
DRUG FOR TREATMENT OF SPASTICITY complete project and completing development on which net cash
anticipated date of completion schedule and financial inflows are
consequences. expected to
commence
---------------------------------- ------------------------------- -------------------------------- ----------------
The additional cost for the Product A was completed on Mid-year 2004.
Raw Material Cost -$29,200 paid product will be approximately time and an ANDA was filed
in 2002 $25,000, which includes with the FDA. If the FDA does
stability testing and other not approve the submission, we
BIO STUDY COSTS regulatory costs. can either re-do the
$226,226 paid in 2002 bioequivalency study and incur
The ANDA was submitted to the all of the other referenced
FDA in May 2002. Normally, costs again, except for the
Other in-house Costs it takes 12-18 months for technology transfer costs, or
approval after the submission determine not to go forward.
Approximately $50,000 paid in of the ANDA to the FDA.
2002 for preparation of batches If the FDA does not timely
for R&D, manufacturing, quality approve the submission, it may
control, quality assurance, have the effect of delaying
regulatory departments and the marketing of the product
facility overhead and thereby cause us to miss a
window of opportunity.
Technology Transfer Cost
544,000 shares of common stock -
$1,408,960 in 2002.
TOTAL COST INCURRED
Approximately $1,714,386
---------------------------------- ------------------------------- -------------------------------- ----------------
34
PROJECT INFORMATION - PRODUCT B
--------------------------------- -------------------------------- -------------------------------- -----------------
Costs Incurred on Product B Nature, Timing and costs to Risks and uncertainties of not Period in which
DRUG FOR TREATMENT OF DEPRESSION complete project and completing development on net cash
anticipated date of completion schedule and financial inflows are
consequences. expected to
commence
--------------------------------- -------------------------------- -------------------------------- -----------------
The additional costs for the Product B was completed on End of 2004
Raw Material Cost -$117,400 product will be approximately time and an ANDA was filed
paid in 2002 $72,000, which includes two with the FDA. If the FDA does
payments for bio-study costs not approve the submission, we
BIO STUDY COSTS of approximately $47,000, can either re-do the
$191,838 paid in 2002 stability testing and other bioequivalency study and incur
regulatory costs. all of the other referenced
costs again, except for the
Other in-house Costs The ANDA was submitted technology transfer costs, or
to the FDA in November 2002. determine not to go forward.
Normally it takes 12-18
Approximately $50,000 paid in months for approval after
2002 for preparation of batches submission of the ANDA If the FDA does not timely
for R&D, manufacturing, quality to the FDA. approve the submission, it may
control, quality assurance, have the effect of delaying
regulatory departments and the marketing of the product
factory overhead and thereby cause us to miss a
window of opportunity.
Technology Transfer Cost
544,000 shares of common stock
$910,656 in fourth quarter of
2002.
TOTAL COST INCURRED
Approximately $1,269,894
--------------------------------- -------------------------------- -------------------------------- -----------------
35
REGULATION
The research and development, manufacture and marketing of our 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 our 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 cGMPs is
required at all times during the manufacture and processing of drugs. Such
compliance requires a considerable amount of our time and resources in the areas
of production and quality control.
There are generally two types of applications that would be used to
obtain FDA approval for pharmaceutical products:
New Drug Application ("NDA"). Generally, the NDA procedure is required
for drugs with active ingredients and/or with a dosage form, dosage
strength or delivery system of an active ingredient not previously
approved by the FDA. We do 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.
36
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 12 to 18
months. 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. The Drug Enforcement
Agency ("DEA") conducts inspections bi-annually.
We underwent FDA inspections during March and April 2001 and in
November 2002 and on each occasion we were found to be in substantial compliance
with cGMPs. We did receive FDA 483s but we do not believe the observations are
material and we have taken appropriate remedial actions. Subsequent to the end
of 2002, we received approval for one of the then pending ANDAs. We now have 3
ANDAs pending approval
Each domestic drug product manufacturing establishment must be
registered with the FDA. Establishments, like ours, handling controlled
substances must be licensed by the DEA. We are licensed by both the FDA and DEA.
We are also subject to regulation under other federal, state and local
regulations regarding work place safety, environmental protection and hazardous
substance controls, among others. Specifically, we are licensed by the Michigan
Board of Pharmacy as a manufacturer and wholesaler of prescription drugs and as
a distributor of controlled substances. We are also licensed by the Michigan
Liquor Control Commission to use alcohol in the manufacture of drugs.
We believe that we are in compliance with environmental laws.
SUPPLIERS AND MATERIALS
The principal components used in our 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 our pharmaceuticals are dependent upon our ability to procure active
ingredients and certain packaging materials from FDA approved sources. Because
the FDA approval process requires
37
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. We have been, and continue
to be, actively identifying and validating alternative suppliers for our active
ingredients. Our purchases of active materials are made from manufacturers in
the U.S. and from abroad, including Sun Pharmaceutical. See "Sun Pharmaceutical
Industries Limited." All purchases of active materials are made in U.S. Dollars.
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 we 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. We compete 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 us, have a greater number of products
in the market and have considerably greater financial, technical, research,
manufacturing, marketing and other resources. We believe that our primary
competitors are EON Labs, Inc., Ivax Pharmaceuticals, Inc., Mylan Laboratories,
Inc. and Taro Pharmaceutical Industries, Ltd.
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. We believe 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. We hope to compete by selecting appropriate products,
based on therapeutic segments, market sizes and number of competitors
manufacturing the products, and by keeping our prices competitive and by
providing reliability in the timely delivery, and in the quality, of our
products.
EMPLOYEES
As of December 31, 2002 and 2001, we had 128 and 76, respectively,
full-time employees who are engaged in research and development, quality
assurance, quality control, administration, sales and marketing, materials
management, facility management and manufacturing and packing. Most of our
scientific and engineering employees have had prior experience with
pharmaceutical or medical products companies, including Sun Pharmaceutical. See
"Sun Pharmaceutical Industries Ltd." A union represents some of the employees of
materials management, facility management and manufacturing and packaging
departments.
PRODUCT LIABILITY AND INSURANCE
We currently have in force general and product liability insurance,
with coverage limits of $10 million per incident and in the aggregate. Our
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.
38
There can be no assurance that the coverage limits of such policies will be
adequate to cover our liabilities, should they occur.
PROPERTY AND EDC FINANCING
Pursuant to Section 108 of the Housing and Community Development Act of
1974, the EDC loaned us approximately $9.1 million in 1990 in accordance with a
Development and Loan Agreement dated August 10, 1990 (the "EDC Agreement").
These funds were used to pay the direct costs of acquiring land and constructing
thereon our pharmaceutical manufacturing facility and executive offices. See
"Current Status," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Note 5 of Notes to Financial Statements."
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, we granted EDC
a continuing security interest in all of our assets, accounts, equipment,
proceeds thereof, ANDAs and in the products to be provided by Sun Pharma to us
under its then products agreement with us. See "Part I - Sun Pharmaceutical
Industries Ltd." above. In addition to other covenants, we agreed that our
capital expenditures would not exceed $2 million without the consent of the EDC
and that we will not redeem any of our outstanding shares, pay any dividends
with respect to our outstanding common or preferred shares or merge or
consolidate with any other corporation or other entity without the prior written
consent of the EDC.
On March 1, 1994, the EDC Agreement was amended to extend the maturity
date to July 1, 2002. On August 5, 1997, we restructured the loan from the EDC,
pursuant to a Second Note and Modification Agreement ("Modification Agreement"),
in connection with our 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, we were required to resume making regularly scheduled
monthly payments of principal and interest, together with additional payments of
principal and interest in an amount sufficient to amortize the total amount of:
(i) the Deferred Payments, and (ii) accrue interest on that portion of the
currently outstanding indebtedness that would have been amortized by the
Deferred Payments, commencing on the date when due under the terms of the
original loan agreement, at the rate set forth in the note over a period of 42
consecutive months commencing on February 1, 1999 and ending on July 1, 2002
("Additional Payments"). In the event, however, that with respect to the first
quarter of operation in which our 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 would resume
and the Additional Payments would commence, provided, however, that the
Additional Payments would 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.
39
During the month of December 1998 we approached the EDC regarding
reconsideration of the repayment terms. We are currently in default of the
Modification Agreement and have not made any of the scheduled payments, however,
in response to our proposal on September 25, 2002, the Board of Directors of the
EDC passed a resolution approving a six year extension of the loan of
approximately $7.8 million, with interest rates starting at 2.75% and increasing
to 5.16%. Under the approval, the EDC would retain a first mortgage on our
property, and a first lien on our furniture, fixtures and equipment and
intellectual property. However, the EDC would release its lien on our accounts
receivable and inventory. In addition, the EDC has generally informally agreed
to remove the $2 million restriction on capital expenditures, subject to certain
conditions, and to allow us to pay the cash dividends and any accrued interest
owed on the recently converted Series A preferred stock. The EDC resolution,
which provides that the transaction must be completed by January 1, 2003, would
not become effective until a definitive agreement incorporating the above terms
has been agreed to by the parties. On March 19, 2003, the EDC extended the
deadline to May 1, 2003 and agreed that the transaction, when it is finalized,
would be effective as of January 1, 2003. Until we sign a final agreement, we
intend to continue to make $100,000 monthly payments to the EDC. Since 2000 and
through 2002, such payments have totaled $4.7 million. Such payments have not
brought us current in our 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 FACILITY
Our approximately 72,000 square foot facility, which was designed and
constructed to our specifications and completed in 1992, contains our
production, packaging, research and corporate office. It is on a four-acre site.
The 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. We believe the facility is suitable and adequate for our current and
near term future use. We also believe that our facility is adequately covered by
insurance.
LITIGATION
Except for the following, we are not a party to any litigation, which,
individually or in the aggregate, is believed to be material to our business:
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 intend to vigorously defend
ourselves against these claims which we believe have no merit.
We have been named as one of two defendants and as one of
several defendants in two separate product liability suits,
involving Miraphen which contains
40
phenylpropanolame (PPA), one in federal court in Pennsylvania
and another in state court in New Jersey, respectively. These
lawsuits seek 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. We are being defended in these two PPA lawsuits by
our primary commercial general liability insurer subject to
aggregate policy limits in the amount of $10 million, however,
the insurance carrier has not formally confirmed its coverage
of our claims. The damages claimed exceed the policy limits.
Although the ultimate outcome of these cases and the potential
effect on us cannot be determined, we believe we have
substantial defenses to the claims and we will vigorously
defend the lawsuits
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information concerning our executive officers and
directors as of December 31, 2002:
NAME AGE TITLE
--------------------------------------------- ------------- -----------------------------------------------------------
Dilip S. Shanghvi(1) (2) 46 Chairman of the Board
Narendra N. Borkar(1) (3) 61 President, Chief Executive Officer and Treasurer
Jitendra N. Doshi(1)(3) 51 Chief Operating Officer, Chief Financial Officer and
Secretary
Robert Kurkiewicz 51 Senior Vice President - Technical
Sailesh T. Desai 47 Director
David A. Hagelstein(1) (2) (4) 60 Director since 1995
Phyllis Harrison-Ross(4) 65 Director since 1996
Jay F. Joliat(1) (2) (3) (4) 45 Director since 1995
Sudhir Valia(3) 45 Director since 1997
----------------------
(1) Member of the executive committee.
(2) Member of the compensation committee.
(3) Member of the finance committee.
(4) Member of the audit committee.
Dilip S. Shanghvi has served as Chairman of the Board of Directors of
Caraco since 1997. Mr. Shanghvi is the founder of Sun Pharmaceutical, its
Managing Director since its inception in 1993, responsible for marketing,
research and development and human resource development, and its Chairman since
1999. Mr. Valia is Mr. Shanghvi's brother-in-law.
Narendra N. Borkar has served as Chief Executive Officer of Caraco
since August 1997. Mr. Borkar is also the President and Treasurer of Caraco. Mr.
Borkar has been a director of Sun Pharmaceutical since 1997. From 1992 until
1997, Mr. Borkar was the head of the pharmaceutical business in India of Ciba
Geigy, now Novartis, a Swiss corporation, responsible for the overall
performance of the business unit including marketing, finance, technical,
medical and development.
41
Jitendra N. Doshi has been the Chief Financial Officer of Caraco since
November 2002 and the Chief Operating Officer of Caraco since June 2001. Mr.
Doshi commenced employment with Caraco as its Senior Vice President - Commercial
in April 2001. Mr. Doshi is also the Secretary of Caraco. From September 1999 to
April 2001, Mr. Doshi was employed by Sun Pharmaceutical, as General Manager -
Operations. From 1991 to 1999, Mr. Doshi was Managing Director of Aqua Bearing
Ltd., an auto parts manufacturer organized under the laws of the Commonwealth of
India.
Robert Kurkiewicz commenced employment with Caraco as its Vice
President - Quality Assurance in November 1993 and was promoted to Sr. Vice
President - Technical, October 1998.
Sailesh T. Desai has served as a full time director of Sun
Pharmaceutical, since 1999, responsible for domestic marketing of pharmaceutical
formulations. From 1994 to 1998, Mr. Desai was the principal shareholder and
Managing Director of Milmet Laboratories Limited, a manufacturer and marketer of
ophthalmic solutions which was organized under the laws of the Commonwealth of
India and merged into Sun Pharmaceutical Industries Limited in 1998.
David A. Hagelstein has been engaged in the management of his personal
real estate and business investments for the past thirty years. Mr. Hagelstein
is a consultant to several companies in the pharmaceutical and medical fields.
Phyllis Harrison-Ross a physician, has served more than 35 years in the
community mental health profession. Dr. Harrison-Ross presents a remarkably
diverse career as a hospital administrator, researcher, academician, public
health consultant, forensic psychiatrist and public educator. Dr. Harrison-Ross
trained as an adult and child psychiatrist as well as a pediatrician, and
continues to lend her administrative and clinical talents to service the
diverse, hard-to-reach and underserved population of New York in her private
practice of Behavioral Medicine and Telepsychiatry.
Jay F. Joliat has served as President, Chief Executive Officer and
Chairman of the Board of Directors since 1988 of Joliat & Company, a private
investment company involved in general securities management, venture capital,
real estate and business consulting. Mr. Joliat is also Chairman of the Board,
Chief Executive Officer and Treasurer since 1988 of a 14-unit restaurant
operation called Sign of the Beefcarver Restaurants, Inc.
Sudhir Valia has worked for Sun Pharmaceutical, as a full time director
responsible for finance, commercial, operations, projects and quality control
since April 1994. Mr. Valia is a qualified chartered accountant in India. Prior
to December 1993, Mr. Valia was a chartered accountant in private practice. Mr.
Shanghvi is Mr. Valia's brother-in-law.
BOARD COMMITTEES.
The Board of Directors has an executive committee, compensation
committee, finance committee and an audit committee.
Executive Committee. This Committee exercises, in the intervals between
the meetings of the Board of Directors, the powers of the Board of Directors,
subject to the Michigan Business Corporation Act, as it relates to the
management of the business and affairs of Caraco. The Executive Committee
members receive a monthly report from management and is in continual contact
with management.
42
Compensation Committee. This Committee makes recommendations to the
Board of Directors relating to the overall compensation arrangements for our
officers and staff. It also interprets our 1993 Stock Option Plan, as amended,
the 1999 Equity Participation Plan, and such other executive and employee stock
options as may, from time to time, be designated by the Board of Directors. In
doing so, it has the authority to designate officers, directors or key employees
eligible to participate, to prescribe the terms of any award of stock options,
and to make all other determinations in administering our plans.
Finance Committee. This Committee reviews our financial structure, and
make recommendations to the Board of Directors on financial, short and long term
investments and business planning matters.
Audit Committee. This Committee selects the firm of certified public
accountants to conduct audits of our accounts and affairs, reviews our
accounting objectives and procedures of Caraco and the findings and reports of
the independent certified public accountants.
DIRECTOR COMPENSATION
Our Directors who are employees or who are directors and/or employees
of Sun Pharmaceutical and its affiliates do not receive additional compensation
for their service on our Board of Directors and its Committees. Each of our
non-employee directors receives 1000 shares of our common stock for each Board
of Directors or Committee meeting in which he or she participates. Non-employee
directors are also reimbursed for out-of-pocket expenses incurred in connection
with attending Board and Committee meetings. In addition, non-employee directors
may also be awarded options for their service on the Board of Directors. On
September 8, 2001, the Board of Directors granted each of Messrs. Hagelstein and
Joliat and Dr. Harrison-Ross non-qualified stock options for 6,000 shares of our
common stock, at an exercise price of $0.68 per share. The options are
exercisable at the rate of 20% per year commencing one year from the date of
grant and may be exercised until September 8, 2007.
EXECUTIVE COMPENSATION
The following table shows, as to the Chief Executive Officer, and as to
the two most highly compensated executive officers whose salary plus bonus
exceeded $100,000 during the last fiscal year, information concerning all
compensation paid for services to Caraco during the last three fiscal years:
Annual Compensation Long Term Compensation
Awards Payouts
Securities
Name and Principal Other Annual Restricted Underlying LTP All Other
Position Year Salary Bonus Compensation Stock Awards Options Payouts Compensation
($) ($) ($) ($) (#) ($) ($)
Narendra N. Borkar 2002 128,385 0 0 0 0 0 9,960 (1)
Chief Executive Officer 2001 120,000 0 0 0 0 0 9,960 (1)
2000 120,000 0 0 0 0 0 9,960 (1)
Jitendra N. Doshi 2002 109,769 0 0 0 0 0 4,560(3)
Chief Operating Officer 2001 71,817 0 0 0 125,000(2) 0 3,040
43
Robert Kurkiewicz 2002 127,492 0 0 0 10,000(4) 0 4,560 (3)
Sr. Vice President 2001 122,400 0 0 0 0 0 4,560 (3)
Technical 2000 120,000 0 0 0 0 0 4,560 (3)
(1) $5,400.00 was contributed to Mr. Borkar for his retirement account and
$380.00 per month was given for car allowance.
(2) A stock option of 125,000 was awarded to Mr. Doshi in December 2001.
See "Certain Transactions of Directors, Executive Officers and Certain
Beneficial Owners of Caraco".
(3) $380.00 per month was given for car allowance.
(4) A stock option of 10,000 was awarded to Mr. Kurkiewicz in June 2001.
See "Certain Transactions of Directors, Executive Officers and Certain
Beneficial Owners of Caraco".
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted in 2002 to the named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information for the named executive officers with
regard to the aggregate stock options exercised during the year ended December
31, 2002, and the stock options held as of December 31, 2002.
Name Shares Acquired on Value Number of Securities Underlying Value of Unexercised
Exercise Realized ($) Unexercised Options at FY-End In-the-Money Options at FY-End
(#) Exercisable/Unexercisable ($) (1)
Exercisable/Unexercisable
Narendra N. Borkar 0 0 240,000/110,000 $423,600/$181,900
Jitendra N. Doshi 0 0 25,000/100,000 $35,500/$142,000
Robert Kurkiewicz 0 0 54,000/21,000 $100,980/$39,270
-------------
(1) The value is based on the difference between the exercise prices and
the closing sale price of Caraco's common stock on December 31, 2002.
EMPLOYMENT AGREEMENTS
Narendra N. Borkar, the Chief Executive Officer of Caraco, entered into
an employment agreement dated September 22, 1998. The employment agreement
provides Mr. Borkar with a salary at the rate of
44
$120,000 annually, a cash bonus in an amount up to 25% of the base salary
contingent upon achievement of corporate objectives, a stock bonus of 50,000
shares of Caraco common stock, a stock option of 150,000 shares, at an exercise
price of $.66 per share and a car allowance of $380.00 per month. The option
expires on September 22, 2004 and vests over a five-year period. On June 10,
2002, Mr. Borkar's salary was increased to $156,000 annually.
The employment agreement is for a term of five years, however, the
agreement automatically renews for successive one year periods unless terminated
by Caraco or Mr. Borkar upon ninety (90) days notice. In the event Caraco
terminates Mr. Borkar without cause, he will receive base salary payments, his
bonus and premium payments for life and health insurance benefits for six (6)
months from the date of termination. In addition, any stock options that would
become available for exercise at the end of the year during which such
termination occurred shall immediately vest. In the event of a change in control
of ownership of Caraco and a significant change in Mr. Borkar's duties, then Mr.
Borkar may terminate and receive a lump sum amount equal to his base salary for
six (6) months. Mr. Borkar would also be entitled to immediate vesting of any
stock option which would have been exercised at the close of the year during the
change in control.
Jitendra N. Doshi, the Chief Operating Officer of Caraco, entered into
an employment agreement dated August 30, 2002. The employment agreement provides
Mr. Doshi with a salary at the rate of $129,800 annually and a car allowance of
$380.00 per month. The employment agreement is for a term of five (5) years,
commencing on January 1, 2002 and ending on December 31, 2006. The Agreement
automatically renews for successive one-year periods unless terminated by Caraco
or Mr. Doshi upon ninety (90) days notice. In the event Caraco terminates Mr.
Doshi without cause, he will receive base salary payments and his premium
payments for health insurance benefits for six (6) months from the date of
termination. In addition, any stock options that would become available for
exercise at the end of the year during which such termination occurred shall
immediately vest
Robert Kurkiewicz, the Senior Vice President - Technical, entered into
a five-year employment agreement on November 22, 1993 which was amended on
January 1, 1999 to extend the term until January 1, 2003 and which was further
amended on August 30, 2002 to extend the term until December 31, 2007. The
agreement, as amended, provides Mr. Kurkiewicz' with a salary of $129,800 per
year and provides for a car allowance of $380.00 per month. The agreement
provides that at the end of the term, it is renewable for successive one-year
terms. In the event that Caraco terminates the agreement without cause, Mr.
Kurkiewicz is entitled to receive monthly base salary payments and his premium
payments for health insurance benefits for six (6) months from the date of
termination. In addition, any stock options that would become available for
exercise at the end of the year during which such termination occurred shall
immediately vest.
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CHANGE IN CONTROL ARRANGEMENTS
Under our 1999 Equity Participation Plan, options granted under that
plan will become fully exercisable following certain changes in control of our
company, such as:
- A person, other than Sun Pharmaceutical, becomes the owner of a
majority of the outstanding shares of our company;
- A public announcement is made of a tender or exchange offer by any
person, other than Sun Pharmaceutical, for 50% or more of the
outstanding shares of our company;
- The shareholders of our company approve a merger or consolidation with
any other corporation or entity, unless, following the merger, the
shares outstanding immediately before the merger continue to represent
a majority of the outstanding shares of the surviving entity
immediately following the merger;
- Where shareholders approve a plan of complete liquidation of our
company or an agreement for the sale of disposition by the company of
all or substantially all of the assets of our company; or
- Certain changes in the composition of our Board of Directors.
STOCK OPTION PLANS
In April 1993, our Board of Directors adopted the 1993 Stock Option
Plan (the "1993 Plan"), which was approved by our shareholders in October 1993.
The 1993 Plan reserved an aggregate of 550,000 shares of common stock for awards
under the Plan. The Plan terminated on December 31, 2002. As of December 31,
2002, incentive stock options to purchase an aggregate of 266,375 shares of
common stock were outstanding under the option plan, of which 213,100 were fully
vested. As of December 31, 2002, the outstanding options under the 1993 Plan
were held by an aggregate of 11 individuals and were exercisable at prices
ranging from $0.66 to $1.00 per share of common stock. None of the executive
officers, except for Messrs. Borkar and Kurkiewicz have been granted options
under the 1993 Plan. Mr. Borkar has been granted 150,000 incentive stock options
under the 1993 Plan at an exercise price of $0.66 per share. Mr. Kurkiewicz has
been granted 65,000 incentive stock options under the 1993 Plan, at an exercise
price of $0.94 per share.
1999 EQUITY PARTICIPATION PLAN
The 1999 Equity Participation Plan (the "1999 Plan") was approved by
our Board of Directors on April 9, 1999, and approved by our shareholders on
June 2, 1999. The 1999 Plan provides for the grant of options and/or restricted
stock to employees, consultants and non-employee directors. The options may be
either incentive stock options or non-qualified stock options. The 1999 Plan is
administered by the Compensation Committee of our Board of Directors which
determines the persons who are to receive awards, as well as the type, term and
number of shares subject to each award.
An aggregate of 3,000,000 shares of common stock have been reserved for
issuance under the 1999 Plan. As of December 31, 2002, 525,000 incentive options
and 18,000 non-qualified options to purchase an aggregate of 543,000 shares of
common stock were outstanding under the 1999 Plan . As of December 31, 2002,
4,000 shares of restricted stock have been awarded under the 1999 Plan. As of
December 31, 2002, 2,453,000 shares remain available for grant. As of December
31, 2002, the outstanding options under the plan were held by an aggregate of 35
individuals and were exercisable at prices ranging from $0.68 to $1.25 per share
of common stock. No person shall receive a grant under the 1999 Plan in excess
of 200,000 shares during any calendar year. Executive officers have been granted
incentive stock options and or restricted stock under the 1999 Plan as follows:
46
Mr. Borkar: An incentive stock option dated June 1999 to purchase
200,000 shares at an exercise price of $1.15 per share and 100 shares of common
stock in December 1999;
Mr. Doshi: An incentive stock option dated December 2001 to purchase
125,000 shares at an exercise price of $1.25 per share; and
Mr. Kurkiewicz: An incentive stock option dated June 2001 to purchase
10,000 shares at an exercise price of $0.80 per share and 100 shares of
restricted stock in December 1999.
These options are exercisable annually, as to 20% of the shares issuable
thereunder, commencing one year after the date of grant.
The option exercise price for each share covered by an option may be
less than the fair market value of a share of common stock on the date of grant,
however, in the case of incentive stock options or in the case of a grant to the
Chief Executive Officer and the four other highest compensated executive
officers, the price shall be no less than 100% of the fair market value of a
share of common stock at the time such option is granted. As noted, the term of
an option shall be determined by the Compensation Committee, provided however,
that in the case of incentive stock options, the terms shall not be more than 10
years from the date the incentive stock option is granted.
The Compensation Committee determines the purchase price and the other
terms and conditions applicable to any restricted stock awarded to a participant
in the 1999 Plan.
See discussion above under "Change in Control Arrangements" with
respect to disclosure of the 1999 Plan's provisions causing options and
restricted stock granted under the plan to become fully exercisable in the event
of a change in control.
OTHER OPTIONS
We have granted additional non-qualified stock options to Hexal at
$3.50 per share. See "Business - Hexal-Pharma GmbH & Co., KG."
We have also granted additional non-qualified stock options to Jay F.
Joliat, a director of Caraco, to purchase 1,032,666 common shares at a weighted
average exercise price of $2.10 per share, and to certain of his family members,
to purchase 300,000 common shares at a weighted average exercise price of $2.43
per share, and to David A. Hagelstein, a director of Caraco, to purchase 580,158
common shares at a weighted average exercise price of $1.39 per share.
Generally, such options provide for anti-dilution adjustments in the event of
certain mergers, consolidations, reorganizations, recapitalizations, stock
dividends or stock splits. Options were generally granted with approximately 10
year terms.
47
TRANSACTIONS OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN BENEFICIAL HOLDERS OF
CARACO
The following discloses transactions during 2002 and 2001 and proposed
transactions between Caraco and several of the incumbent directors, executive
officers and security holders who beneficially hold in excess of five percent of
our outstanding shares:
During 2002 we issued to Sun Global 1,632,000 shares of our common
stock in exchange for three ANDAs.
During 2002 and 2001, we purchased approximately $2,422,000 and
$1,138,000, respectively, of our raw materials from Sun Pharmaceutical.
Management believes that the terms and conditions of its agreements to purchase
such raw materials are fair and comparable to those, which could have been
obtained from independent parties. We intend to continue to purchase raw
materials from Sun Pharmaceutical in 2003.
During 2002 and 2001, Caraco purchased approximately $310,000 and
$260,000, respectively, of equipment from Sun Pharmaceutical. Management
believes that the terms and conditions of its agreements to purchase such
equipment are fair and comparable to those which could have been obtained from
independent parties. We intend to continue to purchase equipment from Sun
Pharmaceutical in 2003.
During the first quarter of 2002, Sun Pharmaceutical loaned us
$1,400,000 at an annual interest rate of 8%. During 2001, Sun Pharmaceutical
lent us $2,450,000. Sun Pharmaceutical reduced the rate of interest on such loan
from 10% to 8% per annum with an effective date of April 1, 2001. The loans are
due and payable in October 2006.
On November 21, 2002, we entered into a products agreement with Sun
Global. In exchange for each new generic drug transferred to us by Sun Global
which passes a bioequivalency test, we shall issue Sun Global 544,000 shares of
newly created preferred stock. See "Business-Sun Pharmaceutical Industries
Limited."
In December 2001, the Board extended the exercise date to December 31,
2005 with respect to options for 224,158 and 65,000 shares of Caraco common
stock previously granted to Messrs. Hagelstein and Joliat. The exercise prices
of such options are $1.50 and $3.50, respectively. Mr. Joliat, however has
declined such extension.
On December 20, 2001, the Board of Directors granted to Jitendra N.
Doshi a qualified stock option for 125,000 shares of Caraco's common stock at an
exercise price of $1.25 per share. The options are exercisable at the rate of
20% per year commencing one year from the date of grant and may be exercised
until December 20, 2007.
On June 4, 2001, the Board of Directors granted to Robert Kurkiewicz a
qualified stock option for 10,000 shares of Caraco's common stock at an exercise
price of $0.80 per share. The options are exercisable at the rate of 20% per
year commencing one year from the date of grant and may be exercised until June
4, 2007.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides information, as of March 31, 2003, about
the shareholders who are not officers or directors known to us to be the
beneficial owners of more than 5% of our common stock. We relied solely on
information furnished by our transfer agent, Schedule 13Ds and/or the beneficial
owners listed, to provide this information.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 2002
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
Joliat Enterprises, LLC 2,229,168(1) 9.4%
36801 Woodward Avenue, Ste 300
Birmingham, MI 48009
Sun Pharmaceutical Industries Limited. 11,737,323(2) 49.4%
SPARC, Akota Road, Akota
Vadodara, 390 020 India
Sun Pharma Global, Inc. 3,354,657(2) 14.1%
Akara Building, 24 DeCastro Street
Wickhams Clay 1 Road
Town Tartola, British Virgin Islands
C. Arnold Curry 1,195,447(3) 5.0%
TTEE C. Arnold Curry Living Trust
17815 Hamilton Road
Detroit, MI 48203
(1) See footnotes 6 and 10 under "Security Ownership of Management and
Directors."
(2) Sun Pharmaceutical directly owns 8,382,666 shares of common stock of
Caraco and beneficially owns 3,354,657 shares registered in the name of
Sun Global. See footnotes 2 and 10 under "Security Ownership of
Management and Directors."
(3) Excludes 430,000 shares of common stock owned by his wife, Cara J.
Curry, as to which Mr. Curry disclaims beneficial ownership. See
"Business Litigation" with respect to a claim by Mr. Curry that he owns
an additional 175,000 shares.
49
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table contains information, as of March 31, 2003, about
the number of shares of our common stock beneficially owned by incumbent
directors and the executive officers named in the Summary Compensation Table and
by all incumbent directors and executive officers as a group. The number of
shares of common stock beneficially owned by each individual includes shares of
common stock which the individual can acquire by June 30, 2003, through the
exercise of any stock option or other right. Unless indicated otherwise, each
individual has sole investment and voting power or shares those powers with his
or her spouse with respect to the shares of common stock listed in the table.
Amount and Nature of Percentage of
Name of Beneficial Owner Beneficial Ownership Class
Narendra N. Borkar(8) 330,100(1)(2) 1.4%
Sailesh T. Desai(9) 0(2) *
Jitendra N. Doshi(8) 27,000(3) *
David A. Hagelstein(10) 2,068,649(4) 8.5%
Phyllis Harrison-Ross 12,600(5) *
Jay F. Joliat(10) 3,341,434(6) 13.5%
Robert Kurkiewicz(8) 71,013(7) *
Dilip S. Shanghvi(9)(10) 0(2) *
Sudhir Valia(9) 0(2) *
All executive officers and directors as a group 5,845,796(2) 22.7%
(9 persons)
-----------------------
* Less than 1.0% of the outstanding shares
(1) Includes stock options that are currently exercisable to purchase
280,000 shares of common stock.
(2) Excludes 11,737,323 shares of common stock owned by Sun Pharmaceutical
and its affiliates. See footnote 1 under "Security Ownership of Certain
Beneficial Owners" and "Transactions of Directors, Executive Officers
and Certain Beneficial Holders of Caraco." Messrs. Borkar, Desai,
Shanghvi and Valia are directors of, and Mr. Shanghvi, together with
his associate companies, is also the majority shareholder of, Sun
Pharmaceutical and, therefore, may be deemed to share investment
control over the shares of common stock held by Sun Pharmaceutical and
its affiliates. Each of Messrs. Borkar, Desai, Shanghvi and Valia
disclaims beneficial ownership of the shares of common stock owned by
Sun Pharmaceutical and its affiliates.
50
(3) Includes stock options that are currently exercisable to purchase
25,000 shares of common stock. See "Transactions of Directors,
Executive Officers and Certain Beneficial Holders of Caraco."
(4) The shares are held in trust (the "Hagelstein Trust"). Includes stock
options that are currently exercisable to purchase 576,558 shares of
common stock. Mr. Hagelstein's mailing address is 36801 Woodward
Avenue, Suite 313, Birmingham, MI 48009. See "Transactions of
Directors, Executive Officers and Certain Beneficial Holders of
Caraco."
(5) Includes stock options that are currently exercisable to purchase 2,400
shares of common stock.
(6) Includes 2,229,168 shares owned by Joliat Enterprises, LLC, of which
Mr. Joliat is managing partner. See "Security Ownership of Certain
Beneficial Owners." Also, includes stock options that are currently
exercisable to purchase 1,029,066 shares of common stock. Mr. Joliat's
mailing address is 36801 Woodward Avenue, Suite 300, Birmingham, MI
48009. See "Transactions of Directors, Executive Officers and Certain
Beneficial Holders of Caraco."
(7) Includes stock options that are currently exercisable to purchase
69,000 shares of common stock.
(8) The mailing address of each of these holders is 1150 Elijah McCoy
Drive, Detroit, Michigan 48202.
(9) The mailing address of Sun Pharmaceutical, S. Desai, D. Shanghvi and S.
Valia is Sun Pharmaceutical, SPARC, Akota Road, Akota, Vadodara - 390
020, India.
(10) Pursuant to a Voting Agreement dated August 1997, Joliat and the
Hagelstein Trust have agreed not to dispose of their shares until
August 2004 without giving Sun Pharmaceutical a right of first refusal
on the sale of their respective shares, and until August 2004, not to
sell their shares to any competitor, distributor or buyer or business
associate of Caraco without the consent of Sun Pharmaceutical.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED SHARES
We are authorized to issue 30,000,000 shares of common stock, no par
value per share, and 5,000,000 shares of preferred stock, no par value per
share. The following is a summary of the material terms and provisions of our
capital stock. Because it is a summary, it does not include all of the
information that is included in our articles of incorporation.
COMMON STOCK
We are authorized to issue 30,000,000 shares of common stock, of which
23,762,532 shares were issued and outstanding as of December 31, 2002. Each
share of our common stock entitles its holder to one vote per share. Subject to
the dividend rights of any outstanding preferred stock and subject to the
restrictions on dividends included in our EDC loan, holders of our common stock
are entitled to receive dividends as and when declared by our Board of Directors
from time to time out of funds properly available for the payment of dividends.
See, however, "Dividend Policy." Subject to the liquidation rights of the
preferred stock, the holders of our common stock are entitled to share pro rata
in the distribution of the remaining assets of our
51
company upon a liquidation, dissolution or winding-up. The holders of our common
stock have no cumulative voting, preemptive, subscription, redemption or sinking
fund rights.
PREFERRED STOCK
We are authorized to issue 5,000,000 shares of preferred stock.
In October 2002, Mr. Joliat converted his 285,714 shares of Series A preferred
stock into 285,714 shares of our common stock.
As disclosed under "Business-Sun Pharmaceutical Industries Limited"
below, on November 21, 2002, we entered into a products agreement with Sun
Global. The products agreement was approved by our independent directors.
Pursuant to such agreement, in return for the technology transfer of a product,
Sun Global will receive 544,000 shares of Series B preferred stock. The products
agreement provides for the transfer by Sun Global to us of 25 products. The
preferred shares have a liquidation preference equal to the value attributed to
them on the dates on which they were earned. The preferred shares are
non-voting, do not receive dividends and are convertible into common shares
after three years (or immediately upon a change in control) on a one-to-one
basis. The number of common shares into which the Series B preferred stock is
convertible is to be adjusted upon the occurrence of certain events, such as
stock dividends. In connection with the issuances of Series B preferred stock
under the products agreement, we have agreed to amend the Articles of
Incorporation to increase the number of preferred shares to 15 million and the
number of common shares to 50 million subject to approval of our shareholders.
The Series B preferred stock is not subject to redemption. So long as the Series
B preferred stock is outstanding, we cannot, without the consent of a majority
of the holders of the Series B preferred stock, amend or repeal our Articles of
Incorporation or Bylaws if such action would adversely affect the rights of the
Series B preferred stock. In addition, without such consent, we cannot authorize
the issuance of any capital stock having any preference or priority superior to
the Series B preferred stock.
Subject to the rights of the Series B preferred stock, our Board of
Directors is authorized to issue, subject to the restrictions stated above, one
or more additional series of preferred stock with such rights, privileges,
restrictions and conditions as our Board may determine. The preferred stock, if
issued, may be entitled to rank senior to our common stock with respect to the
payment of dividends and the distribution of assets in the event of liquidation,
dissolution or winding-up of our company.
OPTIONS
As of December 31, 2002, we had outstanding options to purchase an
aggregate of 2,916,199 shares of common stock at a weighted average exercise
price of approximately $1.78 per share. Generally, all outstanding options
provide for anti-dilution adjustments in the event of certain mergers,
consolidations, reorganizations, recapitalizations, stock dividends, stock
splits or other similar changes in our corporate structure and shares of our
capital stock. Options are typically granted with approximately 6 or 10 year
terms.
REGISTRATION RIGHTS
The holders of the common stock purchased in our March through mid-May
private placement were informed by us that we intended to file a registration
statement to register under the Securities Act the resale of the shares of
common stock they purchased pursuant to such private placement. This prospectus
forms part of the registration statement which has been filed in connection
therewith.
52
Sun Pharmaceutical, in connection with its acquisition of 5.3 million
shares of our common stock in 1997, received certain registration rights under
the Securities Act. Generally, we are required to register Sun Pharmaceutical's
shares of our common stock upon written notice that Sun Pharmaceutical intends
to register shares having a fair market value of $500,000 or more. The expenses
of such registration for the first four registrations shall be borne by us. To
the extent that the expense of any subsequent registration, after the first
four, exceeds $50,000, the excess shall be borne by us. In addition, Sun
Pharmaceutical is entitled, at our expense, to cause the registration of its
shares of our common stock at any time that we register our common stock under
the Securities Act. Sun Pharmaceutical has not requested us to register its
shares in connection with this offering.
Hexal also has been provided registration rights to cause us, at our
expense, to register two registrations with respect to shares issued to it upon
exercise of its options and to cause us to register such shares at any time that
we cause the registration of our shares under the Securities Act. At this time,
however, Hexal has not exercised any of its options.
ANTI-TAKEOVER PROVISIONS OF MICHIGAN LAW AND OUR ARTICLES OF INCORPORATION
There are several provisions of our articles of incorporation that may
have the effect of deterring or discouraging hostile takeovers or delaying
changes in control of our company. These include, among others, (i) the
requirement of a staggered Board of Directors, (ii) allowing the Board of
Directors, when evaluating any offer of another party with respect to a tender
or exchange offer for any voting capital stock of the company or to effect a
"business combination" as defined, see below, in Chapter 7A of the Michigan
Business Corporation Act (the "Act"), to consider the interest of our
shareholders, and the social, legal and economic effects upon employees,
suppliers, customers and others having similar relationships with the company,
and the communities in which the company conducts its business, and (iii)
requiring a super majority vote, 66 2/3rds, to adopt any provision inconsistent
with Chapter 7A or Chapter 7B of the Act, see below or to amend the staggered
board requirements. In addition, shareholders are not entitled to cumulative
voting in the election of directors. Our articles of incorporation also have
authorized undesignated preferred stock which could make it possible for our
Board of Directors to issue preferred stock with voting or other rights with
preferences that could impede the success of any attempt to effect a change of
control of our company.
We are subject to the Act. Chapter 7A of the Act applies to certain
"business combinations," defined to include a range or significant transactions
such as mergers, substantial sales of assets, securities issuances, liquidation,
and recapitalizations. In general, Chapter 7A requires, for any business
combination with an "interested shareholder,"generally a beneficial owner of
10% or more of a class of the voting capital stock: (i) an advisory statement
from the Board of Directors, (ii) the approval vote of holders at least 90% of
the outstanding shares of each class of voting capital stock, and (iii) the
approval vote of 66 2/3% of the holders of outstanding shares of each such
class, excluding those held by the interested shareholder, its "affiliates" and
"associates" as defined in Chapter 7A. These requirements do not apply, however,
where the interested shareholder satisfies certain "equal or similar" form of
consideration and procedural requirements specified in Chapter 7A, including a
requirement that the business combination not occur within five years of
attainment of interested shareholder status, or where our Board of Directors has
approved the transaction specifically, generally or generally by type prior to
the interested shareholder becoming an interested shareholder. Chapter 7A would
cease to apply to us if our articles of incorporation were amended to elect not
to be covered by the Chapter, but such an amendment would require the same votes
for approval as the Chapter requires for approval for a business combination
with an interested shareholder.
53
Generally, Chapter 7B of the Act would divest any control shares in an
"issuing public corporation" acquired in a "control share acquisition" of voting
rights unless and until approved by the affirmative vote of the holders of at
least a majority of the shares entitled to vote thereon and by the affirmative
vote of the holders of a majority of such shares excluding all "interested
shares." In general, a "control share acquisition" is defined, subject to
certain exclusions, including an exclusion for a merger or consolidation to
which the company is a party, as any acquisition of issued and outstanding
"control shares." The term "interested shares" refers to shares owned or
controlled as to voting power by employee-directors of the company, certain of
its officers, the entity making or proposing to make the control share
acquisition or its affiliates. The phrase "control shares" means shares that,
when added to those already owned or controlled as to voting power by an entity,
would if not for Chapter 7B, give the entity voting power in the election of
directors of the company within any of three thresholds: one-fifth, one-third or
a majority. An "issuing public corporation" is defined to include a corporation
which has 100 or more shareholders of record, has its principal place of
business or substantial assets in Michigan and satisfies certain other
requirements. The company qualifies as an issuing public corporation. If a
control share acquisition is approved as required by Chapter 7B, special
dissenters' rights are accorded to company shareholders thereafter.
The foregoing discussion of certain provisions of the Act is qualified
in its entirety by reference to those provisions. The area of state
anti-takeover law has been rapidly changing in recent years. For example,
certain state statutes have been contested on the basis of federal pre-emption
and other theories. Moreover, the anti-takeover laws do not completely insulate
corporations from hostile takeovers and do not change existing law concerning
directors' fiduciary duties to shareholders. Shareholders are therefore urged to
consult their respective legal counsel regarding applicable anti-takeover laws
and their effect on the company and its shareholders.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
Our articles of incorporation limit our directors' liability for breach
of fiduciary duty as a director, except for liability:
- For any breach of the director's duty of loyalty to us or our
shareholders;
- For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- For paying dividends or making other distributions in violation of the
Act; or
- For any transaction from which the director derived an improper
personal benefit.
The articles of incorporation further provide that if the Act is
hereafter amended to further eliminate or limit the liability of a director,
then a director shall not be liable to the fullest extent then permitted by the
Act. These provisions generally do not limit liability under federal or state
securities laws.
Michigan law, and our articles of incorporation, provide that we will,
in some situations, indemnify any person made or threatened to be made a party
to a proceeding by reason of that person's former or present official capacity
with our company against judgments, penalties, fines, settlements and reasonable
expenses including reasonable attorney's fees. Any person is also entitled,
subject to some limitations, to payment or reimbursement of reasonable expenses
in advance of the final disposition of the proceeding.
54
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Caraco
pursuant to the provisions described above, or otherwise, Caraco has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company, located in New York.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for Caraco by Bodman, Longley & Dahling LLP, Detroit, Michigan.
EXPERTS
The financial statements as of December 31, 2002 and 2001 and for each
of the three years in the period ended December 31, 2002, included in this
prospectus, have been audited by Rehmann Robson, independent auditors, as stated
in their report appearing herein. This report has been included in reliance upon
the report of such firm given upon its authority as an expert in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. Copies of our reports, proxy statements and
other information may be inspected and copied at the Public reference Section of
the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of these materials also can be obtained by mail at prescribed rates from the
Public Reference Section of the SEC or by calling the SEC at 1-800-SEC-0330. The
SEC maintains a web site that contains reports, proxy statements and other
information regarding us. The address of the SEC web site is http://www.sec.gov.
The Securities Act file number for our SEC filings is 0-24676.
We have filed a registration statement on Form SB-2 with the SEC for
the common stock offered under this prospectus. This prospectus does not include
all of the information contained in the registration statement. You should refer
to the registration statement and its exhibits for additional information that
is not contained in this prospectus. Whenever we make reference in this
prospectus to any of our contracts, agreements or other documents, you should
refer to the exhibits attached to the registration statement for copies of the
actual contract, agreement or other document.
This prospectus does not constitute an offer to sell, or a solicitation
of an offer to purchase, the securities offered by this prospectus or the
solicitation of a proxy, in any jurisdiction to or from any person to whom or
from whom it is unlawful to make an offer, solicitation of an offer or proxy
solicitation in that jurisdiction.
55
CARACO PHARMACEUTICAL LABORATORIES LTD.
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
F-1
CARACO PHARMACEUTICAL LABORATORIES LTD.
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheets - December 31, 2002 and 2001
Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
Statements of Stockholders' Deficit for the Years Ended December 31, 2002, 2001
and 2000
Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
Notes to Financial Statements
F-2
CARACO PHARMACEUTICAL LABORATORIES LTD
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Caraco Pharmaceutical Laboratories Ltd.
Detroit, Michigan
We have audited the accompanying balance sheets of Caraco Pharmaceutical
Laboratories Ltd. (a Michigan corporation) as of December 31, 2002 and 2001, and
the related statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
REHMANN ROBSON
Troy, Michigan
February 7, 2003
F-3
CARACO PHARMACEUTICAL LABORATORIES LTD.
--------------------------------------------------------------------------------
BALANCE SHEETS
ASSETS DECEMBER 31
------------------------------------
2002 2001
----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 534,228 $ 241,110
Accounts receivable, net 5,484,135 1,486,508
Inventories 5,615,962 2,909,055
Prepaid expenses and deposits 471,314 179,201
----------------- -----------------
TOTAL CURRENT ASSETS 12,105,639 4,815,874
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT
Land 197,305 197,305
Buildings and improvements 7,346,797 6,829,377
Equipment 5,458,314 4,407,323
Furniture and fixtures 232,112 207,750
----------------- ------------------
Total 13,234,528 11,641,755
Less accumulated depreciation 5,487,018 4,947,673
----------------- -----------------
NET PROPERTY, PLANT AND EQUIPMENT 7,747,510 6,694,082
----------------- ------------------
TOTAL ASSETS $ 19,853,149 $ 11,509,956
================= ==================
The accompanying notes are an integral part of these financial statements.
F-4
CARACO PHARMACEUTICAL LABORATORIES LTD.
LIABILITIES AND STOCKHOLDERS' DEFICIT DECEMBER 31
-------------------------------------
2002 2001
-------------- ---------------
CURRENT LIABILITIES
Accounts payable $ 1,958,809 $ 689,233
Accounts payable, Sun Pharma 2,024,028 273,668
Accrued expenses 1,391,623 296,715
Current portion of subordinated notes payable to stockholder 5,850,000
Current portion of loans payable to financial institutions 625,000
Short-term borrowings
- 75,000
EDC loan payable, current portion 1,004,000 5,380,000
Preferred stock dividends payable, current
350,380 -
Accrued interest 549,052 4,140,589
-------------- -------------
TOTAL CURRENT LIABILITIES 13,752,892 10,855,205
-------------- -------------
LONG-TERM LIABILITIES
Loans payable to financial institutions 15,275,000 15,000,000
EDC loan payable, net of current portion
6,598,547 -
Notes payable to stockholders, net of current portion 3,850,000 8,300,000
Preferred stock dividends payable
- 300,000
-------------- -------------
TOTAL LONG-TERM LIABILITIES 25,723,547 23,600,000
-------------- -------------
TOTAL LIABILITIES 39,476,439 34,455,205
-------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 9 AND 12)
STOCKHOLDERS' DEFICIT
Preferred stock, no par value; authorized 5,000,000 shares,
issued and outstanding -0- Series A shares
(285,714 in 2001) - 1,000,000
Common stock, no par value; authorized 30,000,000 shares,
issued and outstanding 23,767,532 shares
(21,172,818 in 2001) 40,457,028 34,111,543
Additional paid-in capital 282,858
Preferred stock dividends (350,380) (300,000)
Accumulated deficit (60,012,796) (57,756,792)
-------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (19,623,290) (22,945,249)
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 19,853,149 $ 11,509,956
============== ==============
The accompanying notes are an integral part of these financial statements
F-5
CARACO PHARMACEUTICAL LABORATORIES LTD.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------------
2002 2001 2000
---------------- ----------------- ------------------
(AS RESTATED)
-------------
Net sales $ 22,380,964 $ 5,922,431 $ 2,377,546
Cost of goods sold 12,047,410 4,186,059 2,678,900
--------------- ---------------- ----------------
GROSS PROFIT (DIFFERENTIAL) 10,333,554 1,736,372 (301,354)
Selling, general and administrative expenses 3,827,707 2,680,494 2,508,737
Research and development costs -
affiliate (Note 7) 3,887,423 -- 401,472
Research and development costs 3,348,789 3,079,804 3,065,795
--------------- ---------------- ----------------
OPERATING LOSS (730,365) (4,023,926) (6,277,358)
--------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Interest expense (1,539,075) (1,748,922) (1,555,192)
Interest income 13,436 15,385 38,010
--------------- ---------------- ----------------
OTHER EXPENSE - NET (1,525,639) (1,733,537) (1,517,182)
--------------- ---------------- ----------------
NET LOSS $ (2,256,004) $ (5,757,463) $ (7,794,540)
=============== ================ ================
NET LOSS PER BASIC AND DILUTED
COMMON SHARE $ (0.10) $ (0.29) $ (0.41)
=============== ================ ================
The accompanying notes are an integral part of these financial statements
F-6
CARACO PHARMACEUTICAL LABORATORIES LTD
STATEMENTS OF STOCKHOLDERS' DEFICIT
--------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
----------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------------ -----------
Balances at
January 1, 2000
as restated (Note 13) 285,714 $ 1,000,000 $ 18,556,295 $32,216,125
Preferred stock
dividends -- -- -- --
Shares issued in exchange
for services -- -- 120,990 103,496
Shares issued in exchange
for retirement of debt -- -- 1,390,000 1,390,000
Issuance of shares
to Sun Pharma, -- -- 1,105,333 401,472
as restated (Note 13)
Net loss -- -- -- --
-------- ----------- ------------ -----------
Balances at
December 31, 2000 285,714 1,000,000 21,172,618 34,111,093
Preferred stock dividends
Shares issued in lieu
of compensation -- -- 1,200 450
Net loss -- -- -- --
-------- ----------- ------------ -----------
Balances at
December 31, 2001 285,714 1,000,000 21,173,818 34,111,543
Preferred stock
dividends -- -- -- --
Issuance of common stock to
directors in lieu of
cash compensation -- -- 36,000 41,400
Issuance of common stock under
private placement -- -- 635,000 1,692,000
Issuance of common stock to
affiliate in exchange for
product technology transfers -- -- 1,632,000 3,887,423
Common stock subscribed -- -- -- 7,520
Preferred stock converted to
common stock (285,714) (1,000,000) 285,714 717,142
Net loss -- -- -- --
-------- ----------- ------------ -----------
Balances at
December 31, 2002 -- $ -- 23,762,532 $40,457,028
======== =========== ============ ===========
ADDITIONAL PREFERRED
PAID-IN STOCK ACCUMULATED
CAPITAL DIVIDENDS DEFICIT TOTAL
-------- --------- ------------ ------------
Balances at
January 1, 2000
as restated (Note 13) $ -- $(180,000) $(44,204,789) $(11,168,664)
Preferred stock
dividends -- (60,000) -- (60,000)
Shares issued in exchange
for services -- -- -- 103,496
Shares issued in exchange
for retirement of debt -- -- -- 1,390,000
Issuance of shares
to Sun Pharma, -- -- -- 401,472
as restated (Note 13)
Net loss -- -- (7,794,540) (7,794,540)
-------- --------- ------------ ------------
Balances at
December 31, 2000 -- (240,000) (51,999,329) (17,128,136)
Preferred stock dividends
Shares issued in lieu
of compensation -- -- -- 450
Net loss -- -- (5,757,463) (5,757,463)
-------- --------- ------------ ------------
Balances at
December 31, 2001 -- (300,000) (57,756,792) (22,945,249)
Preferred stock
dividends -- (50,380) -- (50,380)
Issuance of common stock to
directors in lieu of
cash compensation -- -- -- 41,400
Issuance of common stock under
private placement -- -- -- 1,692,000
Issuance of common stock to
affiliate in exchange for
product technology transfers -- -- -- 3,887,423
Common stock subscribed -- -- -- 7,520
Preferred stock converted to
common stock 282,858 -- -- --
Net loss -- -- (2,256,004) (2,256,004)
-------- --------- ------------ ------------
Balances at
December 31, 2002 $282,858 $(350,380) $(60,012,796) $(19,623,290)
======== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
F-7
CARACO PHARMACEUTICAL LABORATORIES LTD
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- -----------------
(AS RESTATED)
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,256,004) $(5,757,463) $(7,794,540)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 539,374 508,682 574,442
Common shares issued for interest expense -- -- 86,000
Common shares issued in exchange for
product formula 3,887,423 -- 401,472
Common shares issued in lieu of compensation 41,400 450 17,496
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (3,997,627) (1,020,062) (102,258)
Inventories (2,706,907) (1,497,134) 293,171
Prepaid expenses and deposits (292,112) (115,817) 13,951
Accounts payable 3,019,936 45,902 (614,134)
Accrued expenses and interest 925,917 748,315 681,108
---------------- ---------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (838,600) (7,087,127) (6,443,292)
---------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,592,802) (108,531) (215,459)
---------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank term loans 900,000 6,150,000 8,850,000
Net short-term borrowings (75,000) -- 75,000
Net borrowings (repayments) on loans
from stockholders 1,400,000 2,300,000 (225,000)
Repayments of EDC loan (1,200,000) (1,200,000) (2,300,000)
Proceeds from issuance of common stock 1,699,520 -- --
---------------- ---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,724,520 7,250,000 6,400,000
---------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 293,118 54,342 (258,751)
Cash and cash equivalents, beginning of year 241,110 186,768 445,519
---------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 534,228 $ 241,110 $ 186,768
================ ================ =================
The accompanying notes are an integral part of these financial statements.
F-8
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 in Detroit, Michigan to develop,
manufacture and market generic and private label 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). The Corporation's present product portfolio consists of a
limited number of products in certain strengths and package sizes. The
Corporation's drugs relate to a variety of therapeutic segments
including the central nervous system, cardiology, pain management and
diabetes.
Over the years, significant sources of funding for the Corporation have
been received from private placement offerings, stockholder and
financial institution loans and debt financing 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 2002 and 2001, the Corporation also obtained term loans
providing total credit facilities of $17.5 million from two foreign
banks.
The Corporation and a Mumbai, India based specialty pharmaceutical
manufacturing company, Sun Pharmaceutical Industries, Ltd. ("Sun
Pharma") completed an agreement, in 1997, whereby Sun Pharma invested
$7,500,000 into the common stock of the Corporation, and was required
to transfer to the Corporation the technology formula for 25 generic
pharmaceutical products over a period of five years through August 2002
in exchange for 544,000 shares of Caraco common stock to be issued for
each ANDA product and 181,333 shares for each DESI (Drug Efficacy Study
Implementation) product. As of December 31, 2002, Sun Pharma has
delivered to Caraco the formula for 13 products and beneficially owns
approximately 49% of the outstanding common stock of the Corporation.
In November 2002, a subsidiary of Sun Pharma agreed to transfer to the
Corporation a technology formula for 25 generic pharmaceutical products
over a period of five years through November 2007 in exchange for
544,000 shares of a new convertible preferred stock for each formula
received (Note 7). In addition to Sun Pharma's equity holdings, the
product and technology transfers which include various research and
development activities conducted on an ongoing basis by Sun Pharma,
loans made directly to and loans guaranteed on behalf of Caraco (see
Note 5), Sun Pharma has also supplied Caraco with certain raw materials
and equipment (see Note 4) and transferred to Detroit a number of
qualified technical and management professionals having pharmaceutical
experience. Furthermore, five of the eight Caraco directors are or were
affiliated with Sun Pharma. Caraco is substantially dependent on the
active involvement and support of Sun Pharma.
F-9
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In addition to its substantial dependence on Sun Pharma, 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 ANDAs, develop new products and continue to
raise in the near term the necessary funds to keep the Corporation in
business.
Operations
For the first time since inception, during the second, third and fourth
quarters of 2002, the Corporation has achieved sales necessary to
support operations. During 2002, the Corporation's results did improve
such that its loss from operations decreased from approximately
$4,000,000 in 2001 to approximately $730,000 in 2002. The Corporation's
net loss also decreased from approximately $5,750,000 in 2001 to
approximately $2,250,000 in 2002. The net loss in 2002 includes
approximately $3.9 million of research and development costs related to
technology transfers from Sun Pharma Global in exchange for common
stock of Caraco. There were no such technology transfers in 2001. In
addition, cash used by operations decreased from approximately
$7,100,000 in 2001 to approximately $840,000 in 2002. While management
views these results as positive developments, the Corporation must
still overcome its stockholders' deficit, which is $19,623,290 as of
December 31, 2002. Realization of a major portion of its assets is thus
dependent upon the Corporation's ability to meet its future financing
requirements and the success of future operations. Management believes
that continued improvement in profitability and cash flow, along with
sustained financial and operating support from Sun Pharma, are key
factors in the Corporation's ability to continue to operate in the
normal course of business. While management has a basis to reasonably
believe that Sun Pharma's substantial investment in Caraco provides Sun
Pharma with sufficient economic incentive to continue to assist Caraco
in developing its business, and Sun Pharma has expressed its intent to
continue to support Caraco's operations in the near term, as it has
done in the past, there can be no assurance that such support will, in
fact, continue for a period of time sufficient to ensure Caraco's
ultimate business success. For example, Sun Pharma, which is subject to
the prevailing regulatory process in India, may be constrained from
fully pursuing its business interest outside of India. 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 operating in the normal course of business.
Management's plans with regard to improving profitability, cash flows
and operations include infusion of additional funding from new
investors pursuant to equity offerings planned to be carried out during
the first half of 2003. Management's plans also include for 2003:
- Continued focus on FDA compliance.
- Continued research and development activities.
F-10
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
- Increased market share for certain existing products and
recently introduced new products and enhance customer reach
and satisfaction.
- Prompt introduction of newly approved products to the market.
- Striving to capture larger market share for existing products.
- Achieving operational efficiencies by attaining economies of
scale, cost reduction per unit, and obtaining additional cost
reductions for active raw materials acquired from competitors
and/or Sun Pharma.
- Increase the width and depth of product portfolio to serve the
customers effectively.
- Increase 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.
- Prompt restructuring of the EDC loan.
- Locating and utilizing facilities of contract-manufacturers to
enhance production and therefore sales.
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. Significant estimates include, but are not
limited to, valuation allowances for accounts receivable and the
recoverability of the Corporation's property, plant and equipment.
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
The Corporation recognizes revenue at the time its products are shipped
to its customers as, at that time, the risk of loss or physical damage
to the product passes to the customer, and the obligations of customers
to pay for the products are not dependent on the resale of the product
or the Corporation's assistance in such resale. Customers are permitted
to return unused product in, certain instances, after
F-11
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
approval from the Corporation upon the expiration date of the product's
lot. Amounts billed by the Corporation, if any, in advance of
performance with contracts to render certain manufacturing or research
and development services are deferred and then recognized upon
performance of those services.
Provisions for estimated returns, discounts, rebates and other price
adjustments including chargebacks can be reasonably determined in the
normal course of business based on historical results. A significant
portion of the current allowance has been reserved for expected
chargebacks. Chargebacks are price adjustments given to wholesale
customers for product it resells to parties with whom the Corporation
has established contractual pricing. The chargeback represents the
difference between the sales price to the wholesaler and the contracted
price. Approximately 96% of the current allowance for trade receivables
has been reserved for estimated chargebacks.
Accounts Receivable
Accounts receivable are stated at the amount management expects to
collect from outstanding balances. The Corporation provides for
probable uncollectible amounts through a charge to earnings and a
credit to a valuation allowance based on management's assessment of the
current status of individual accounts. Balances that are still
outstanding after the Corporation has attempted reasonable collection
efforts are written off through a charge to the valuation allowance and
a credit to trade accounts receivable.
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, 2002, 2001 and 2000, options to purchase 310,000,
2,705,199 and 2,486,155 shares, respectively, were excluded from the
computation of loss per share because the options' exercise prices were
greater than the average market price of the common shares.
The following table sets forth the computation of basic and diluted
loss per common share.
2002 2001 2000
----------- ----------- -----------
Numerator:
Loss from continuing operations $ 2,256,004 $ 5,757,463 $ 7,794,540
Preferred stock dividends 50,380 300,000 240,000
----------- ----------- -----------
Loss available to common
stockholders 2,306,384 6,057,463 8,034,540
----------- ----------- -----------
Denominator:
Weighted average shares outstanding
basic and diluted 22,031,425 21,173,522 19,755,021
----------- ----------- -----------
Loss per basic and diluted
common share $ .10 $ .29 $ .41
=========== =========== ===========
F-12
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 3 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 in the normal course of
business.
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 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 does not believe that comparable
financing would currently be available on similar terms.
F-13
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 of such
shares on the date they were earned.
Common Stock Issued to Sun Pharma
Common stock is issued from time to time to Sun Pharma in exchange for
the formula for products delivered by Sun Pharma to the Corporation.
Research and development costs are recorded based on the fair value of
the shares on the date the respective product formula has passed its
bioequivalancy study.
Recent Accounting Pronouncements
In June 2001, the FASB also issued Statement No. 142 "Goodwill and
Other Intangible Assets" which is effective generally beginning January
1, 2002. Statement 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but, instead,
tested for impairment at least annually in accordance with the
provisions of Statement 142. The Company has no goodwill and,
accordingly, adoption of the new standard will not impact the Company's
financial statements.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation
for the amount recorded or incurs a gain or loss. Statement 143 is
effective for fiscal years beginning after June 15, 2002. Adoption of
this statement is not expected to impact the Company's results of
operations or financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively
for fiscal years beginning after December 15, 2001. Statement 144
supersedes Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of
business (as previously defined under Opinion 30). The FASB issued
Statement No. 144 to establish a single accounting model for long-lived
assets to be disposed of by sale. Statement 144 broadens the
presentation of discontinued operations in the income statement to
include a component of an entity (rather than a segment of a business).
A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting
purposes, from the rest of an entity. Statement 144 also requires that
discontinued operations be measured at the lower of the carrying amount
or fair value less cost to sell, rather than net realizable
F-14
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
value. The Company does not believe Statement No. 144 will have a
material impact on its financial position or results of operations.
In December 2002, the FASB issued Statement 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
Statement No. 123", which is effective for years beginning after
December 15, 2002. This statement amends Statement No. 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock based employee
compensation and the effect of the method used on reported results. The
Company does not currently plan to voluntarily adopt this statement and
accordingly, the provisions will not have a material impact on its
financial position or results of operations.
2. SUPPLEMENTAL CASH FLOWS INFORMATION
Non-cash Investing and Financing Activities (See also Note 7)
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.
Other Cash Flows Information
Cash paid for interest for the years ended December 31, 2002, 2001 and
2000 was approximately $1,820,000, $1,044,000 and $760,000,
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 are summarized as follows as of December 31:
2002 2001
--------------- --------------
Accounts receivable $ 14,774,382 $ 1,886,508
--------------- --------------
Allowances:
Chargebacks (Note 1) 8,972,247 283,000
Sales returns and allowances 223,000 42,000
Doubtful accounts 95,000 75,000
--------------- --------------
Total allowances 9,290,247 400,000
--------------- --------------
Accounts receivable, net of allowances $ 5,484,135 $ 1,486,508
=============== ==============
F-15
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. INVENTORIES
Inventories consist of the following amounts as of December 31:
2002 2001
Raw materials $ 3,117,293 $ 1,810,364
Goods in transit 801,043 144,716
Work in process 1,153,913 719,729
Finished goods 543,713 234,246
-------------- --------------
Total $ 5,615,962 $ 2,909,055
============== ==============
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 2002, 2001 and 2000, the Corporation purchased approximately
$2,422,000, $1,138,000 and $707,000, respectively, of its raw materials
from Sun Pharma.
The Corporation also purchased approximately $-0- and $148,785 of raw
materials from an entity owned by a shareholder during 2002 and 2001,
respectively.
5. DEBT (INCLUDING RELATED PARTIES)
EDC Loan
Debt at December 31, 2002 includes a note payable to the Economic
Development Corporation (EDC) of the City of Detroit, plus accrued
interest thereon, 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
F-16
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 6.4%, as described in the
amendments (effective rate of 6.31% at December 31, 2001).
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 both 2002 and 2001, the Corporation made payments of $1,200,000.
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 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 the Corporation expects to then commence making the requisite
agreed upon payments, which management believes has been agreed upon in
principle.
The Corporation had submitted a proposal in April 2002 to the EDC to
restructure the loan. Based on resolutions passed at meetings of the
Board of Directors of the EDC on September 25, 2002 and March 19, 2003,
the EDC approved a six year extension of the loan of approximately $7.8
million, with interest rates starting at 2.75% and increasing to 5.16%
over the term of the extension. The extension would be effective
January 1, 2003. Pursuant to the resolution, the EDC would retain a
first mortgage on the property, and a first lien on furniture, fixtures
and equipment and intellectual property. The EDC resolution will not
become effective until a definitive agreement incorporating the above
terms has been agreed to by the parties. Subsequent to the close of the
year, the Corporation has received drafts of the agreement from the
EDC, which is pending final approval. Management believes that the
Corporation has the intent and the ability to finalize this agreement
and, accordingly, the EDC debt has been classified on the accompanying
December 31, 2002 balance sheet according to the payment terms approved
by the resolution.
Loans Payable
Loans payable to financial institutions consist of the following
obligations as of December 31:
F-17
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2002 2001
--------------- ----------------
Term loan payable to ICICI Bank of India, with quarterly $ 5,000,000 $ 5,000,000
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 2.8% at
December 31, 2002), and is due in quarterly
installments.
$12.5 million term loan payable to Bank of Nova Scotia,
with semi-annual principal payments of $3,125,000
commencing in February 2004 and ending in August 2005.
Interest is charged at the LIBOR rate plus 30 basis
points (effective rate of 1.7% at December 31, 2002),
and is due in quarterly installments. An additional
annual fee of $15,000 is charged. 10,900,000 10,000,000
--------------- ----------------
Total loans payable $ 15,900,000 $ 15,000,000
=============== ================
At December 31, 2002, $10,900,000 has been drawn on the Bank of Nova
Scotia term loan. Additional amounts available to be drawn must be
drawn prior to March 25, 2003, at which time no further draws are
permitted. Principal prepayments are not permitted until August of
2003.
The Corporation incurred approximately $62,500 in bank fees as
stipulated in the Bank of Nova Scotia term loan during both 2002 and
2001. The repayment of these term loans is guaranteed by Sun Pharma.
Stockholder Notes Payable
Stockholder notes payable consist of the following obligations as of
December 31:
2002 2001
-------------- ---------------
Promissory note payable to Sun Pharma with the entire
principal balance due in October 2003. Interest is charged
at 8% per annum and is payable in semi-annual installments. $ 5,300,000 $ 5,300,000
Promissory note payable to Sun Pharma with the entire
principal balance due in August 2006. Interest is charged at
8% per annum and is payable in semi-annual installments. 3,850,000 2,450,000
Promissory note payable to Sun Pharma Global, Inc., a
wholly-owned subsidiary of Sun Pharma, with the entire
principal balance due in October 2003. Interest is charged
at 8% per annum and is payable in semi-annual installments. 550,000 550,000
-------------- ---------------
Total shareholder notes payable $ 9,700,000 $ 8,300,000
============== ===============
F-18
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Notes payable to Sun Pharma and Sun Pharma Global, Inc. are
subordinated to the EDC loan.
Interest incurred on these stockholder notes amounted to $765,337,
$697,363 and $528,608 in 2002, 2001 and 2000, respectively. Accrued
expenses include approximately $393,545 and $630,000 of accrued
interest payable on stockholder notes at December 31, 2002 and 2001,
respectively.
Scheduled maturities of all long-term debt for each of the years
succeeding December 31, 2002 are summarized as follows:
Year ended
December
31 Amount
------------------ -----------------
2003 $ 7,479,000
2004 9,955,000
2005 7,740,000
2006 5,095,000
2007 1,292,000
Thereafter 1,641,547
-----------------
Total $ 33,202,547
=================
6. INCOME TAXES
At December 31, 2002 and 2001 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
$18,100,000 and $17,300,000, respectively, has been established.
Changes in the valuation allowance were approximately $770,000,
$1,930,000 and $1,900,000 in 2002, 2001 and 2000, respectively
At December 31, 2002, net operating loss carryforwards of approximately
$53,000,000 are available to offset future federal taxable income.
Certain of the net operating losses begin to expire in 2007. The
Corporation's ability to utilize the net operating loss carryforwards
may be limited due to ownership changes.
F-19
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. STOCKHOLDERS' DEFICIT
Other Common Stock Issuances (also see Note 2)
During 2002 and 2000, the Corporation issued 1,632,000 and 1,105,333
shares of common stock, respectively, to an affiliate of Sun Pharma in
exchange for the formula for three and two ANDA products delivered to
Caraco in 2002 and 2000, respectively. The issuance of such shares have
been recorded as research and development expense, based on the fair
value of the respective shares on the date earned, which totaled
$3,887,423 and $401,472 in 2002 and 2000, respectively. These shares
have also been included in the calculation of the weighted average
number of common shares outstanding in the year the respective formula
was delivered.
During 2002, 285,714 shares of preferred stock were converted into
285,714 shares of common stock. The Corporation recorded additional
paid-in capital of $287,888 for the differences between the fair value
of the common stock on the conversion date and the per share value of
the preferred stock.
During 2002, the Corporation issued 635,000 shares of common stock in
connection with a private placement offering resulting in net proceeds
of $1,692,000 or approximately $2.66 per share.
During 2002, 2001 and 2000, the Corporation issued 36,000, 1,200 and
86,000 shares, respectively, of common stock to non-employee directors
in exchange for services rendered. The Corporation recorded
compensation expense of $41,400 and $450 in 2002 and 2001,
respectively, and recorded interest expense of $86,000 in 2000 based on
the fair values of such shares on the dates they were earned.
Common Stock
During 2002, the Corporation's Board of Directors approved the
authorization of an additional 20,000,000 shares of common stock, which
would be formally authorized upon the approval by the shareholders of
the Corporation.
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.
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. During 2002, the Corporation's Board of
Directors authorized an additional 10,000,000 shares of preferred
stock, which would be formally authorized upon the approval of the
shareholders of the Corporation.
F-20
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Each share of Series A Preferred Stock is nonvoting and was
convertible, at the option of the holder, into one share of common
stock. The preferred shares required annual dividends of $0.21 per
share on a cumulative basis. Accrued dividends on preferred stock at
December 31, 2002 and 2001 were $350,380 and $300,000, respectively. It
is expected that such dividends will be paid in 2003 and, accordingly,
the related liability is classified as a current obligation on the
accompanying balance sheet.
In November 2002, in connection with the technology transfer agreement
with a subsidiary of Sun Pharma (Note 1), the Corporation created a new
series of preferred stock designated as the Series B Convertible
Preferred Stock, consisting of 13,600,000 shares of no par
nonredeemable preferred stock. The Series B Preferred Stock, which has
no voting or dividend rights or liquidation preference other than
priority liquidation based on their face value, can be converted after
3 years from the issuance date into one share of common stock, subject
to a conversion adjustment in the event common stock equivalents are
issued by the Corporation in certain circumstances. Formal
authorization of these shares is pending final shareholder approval.
8. COMMON STOCK OPTIONS
Stock Option Plans
The Corporation maintains the 1999 Equity Participation Plan and the
1993 Stock Option Plan in which the Corporation may grant options to
employees and non-employee-directors and consultants for the purchase
of up to 3,550,000 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:
2002 2001 2000
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding,
beginning of year 679,375 $ 1.03 428,331 $ 1.51 564,469 $ 1.88
Granted -- -- 343,000 0.96 -- --
Terminated (14,000) 1.74 (91,956) (3.31) (136,138) 3.38
-------- -------- ------- -------- -------- --------
Outstanding, end of year 665,375 $ 1.01 679,375 $ 1.03 428,331 $ 1.51
======= ======== ======= ======== ======= ========
Options exercisable,
end of year 288,075 $ 1.04 168,200 $ 1.13 128,681 $ 1.75
======= ======== ======= ======== ======= ========
F-21
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Options at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
--------------------------- ---------- ------------ ---------- ----------- --------
$0.68 to $1.00 334,375 3.4 years $ 0.84 137,075 $ 0.89
$1.01 to $2.00 331,000 3.4 years 1.19 151,000 1.17
---------- ------------ ---------- ----------- --------
Total 665,375 3.4 years $ 1.01 288,075 $ 1.04
========== ============ ========== =========== ========
* Weighted average
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:
2002 2001 2000
--------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------------ --------- ------------ --------- --------------
Outstanding,
beginning of year 2,250,824 $ 2.00 2,300,824 $ 2.01 2,675,824 $ 2.00
Granted - - - - - -
Terminated - - (50,000) 3.5 (375,000) 1.42
--------- ------------ --------- ------------ --------- --------------
Outstanding, end of
year 2,250,824 $ 2.00 2,250,824 $ 2.10 2,300,824 $ 2.11
========= ============ ========= ============ ========= ==============
Options exercisable,
end of year 2,250,824 $ 2.00 2,250,824 $ 2.00 2,300,824 $ 2.18
========= ============ ========= ============ ========= ==============
F-22
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Options at December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Shares Life * Price * Shares Price *
----------------------------- ------------ ------------ ---------- ------------ --------
$0.66 to $1.00 250,000 1.9 years $ 0.75 250,000 $ 0.75
$1.01 to $2.00 1,024,158 2.9 years 1.45 1,024,158 1.45
$2.01 to $3.00 666,666 3.3 years 2.63 666,666 2.63
$3.01 to $4.00 310,000 1.4 years 3.50 310,000 3.50
--------- --------- ------ --------- ------
Total 2,250,824 2.7 years $ 2.00 2,250,824 $ 2.00
========= ========= ====== ========= ======
*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, because the exercise price does not exceed the
fair value on the date of grant, 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
2001 would have been employed: expected volatility of 104%, risk free
interest rate of 1.7% and expected lives of 6 years. The proforma
effect on operations would have been an increase in the 2001 net loss
of approximately $265,000 or $0.01 per common share. The weighted
average fair value of the options granted in 2001 was $0.77 per share.
No options were granted during 2002 and 2000.
In December 2001, the Board of Directors extended the exercise date to
December 31, 2005 with respect to options for 224,158 shares of Caraco
common stock previously granted to an independent director. The
modification has resulted in the options being treated as variable
rather than fixed in accordance with Financial Accounting Standards
Board Interpretation 44 (FIN 44). Variable compensation expense of
$262,265 has been recorded during 2002 for the difference between the
fair value of the underlying common stock and the exercise price of the
respective options. No corresponding compensation expense was
appropriate in 2001.
Strategic Alliance Stock Option Arrangement
Pursuant to an agreement between the Corporation and Hexal-Pharma BmbH
& Co., KG, a German pharmaceutical company and its United States
affiliate (together, "Hexal") dated October 1, 1993, Hexal 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 "Product"). The Corporation
agreed to pay Hexal royalties on the yearly sales of each Product (see
below). The Corporation filed an ANDA in March 1995 with respect to
Metoprolol Tartrate, received approval from the FDA in December 1996
and introduced it in 1997. (Metoprolol Tartrate is one of our 13
current products. See "Caraco's
F-23
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Products and Product Strategy".) Hexal has decided not to proceed with
the development of the second Product.
Pursuant to the agreement, the Corporation has, for each Product (i) a
Sign-Up Option to purchase 100,000 shares of Common Stock at $3.50 per
share; and (ii) a Product Option to purchase shares at an exercise
price of $3.50 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. No options have yet been exercised.
Royalties payable to Hexal, which are included in accrued expenses,
amount to $801,144 and $296,715 at December 31, 2002 and 2001,
respectively. The Corporation has recently learned that the formula
provided to them by Hexal, with respect to Metoprolol Tartrate, may be
different than the formula currently used for manufacturing by the
Corporation. The Corporation is investigating further whether they
should continue to accrue the related royalties based on these formula
differences.
9. LEASES
The Corporation entered into two noncancelable 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.
The Corporation entered into a noncancelable operating lease with an
unrelated party during 2002 to lease an additional warehouse. The lease
requires monthly payments of $8,750 and expires in November 2005.
Net rental expense on these operating leases was $51,460, $33,960 and
$21,225 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The following is a schedule of annual future minimum lease payments
required under the operating leases with remaining noncancelable lease
terms in excess of one year as of December 31, 2002:
Year Amount
---- -------------
2003 $ 138,960
2004 138,960
2005 108,985
-------------
Total minimum payments due $ 386,905
=============
The Corporation additionally paid Sun Pharma approximately $310,000,
$260,000 and $33,500 during 2002, 2001 and 2000, respectively, for the
purchase of various parts needed to operate production machinery.
F-24
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. RETIREMENT PLAN
The Corporation established in 2001 a deferred compensation plan
qualified under Section 401(k) of the Internal Revenue Code. Under this
plan, eligible employees are permitted to contribute up to the maximum
allowable amount determined by the Internal Revenue Code. The
Corporation may make discretionary matching and profit sharing
contributions under the provisions of the Plan. No discretionary
contributions were made by the Corporation during 2002 or 2001.
11. SALES AND CUSTOMERS
Major Customer
Shipments to one wholesale customer accounted for approximately 65%,
35% and 17% of net sales in 2002, 2001 and 2000, respectively. Balances
due from this customer represented approximately 80%, 40% and 9% of
accounts receivable for each of the three periods ended December 31,
respectively.
The loss of this customer could have a negative effect on short-term
operating results.
Sales Commitment
The Corporation entered into an agreement with an unrelated party
effective August 5, 2002 to ship approximately $13,000,000 of product
to the customer per year over a one year base contract period. The
agreement provides for certain penalty provisions if the Corporation is
unable to meet its sales commitment and additionally provides for four
one year option periods.
Other
Net sales in 2002 and 2001 included approximately $850,000 and
$250,000, respectively, related to contracted manufacturing activities.
No contract manufacturing activities occurred during 2000.
12. OTHER MATTERS
Employment Contracts
The Corporation has employment agreements with three of its executive
officers which provide for fixed annual salaries and a six month
continuance including insurance benefits and immediate stock options
vesting upon termination without cause. The agreement with one of the
executives also provides for six-
F-25
CARACO PHARMACEUTICAL LABORATORIES LTD
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
month salary and benefits continuance in the event of a change in
ownership control of the Corporation and a significant change in
employment duties.
Litigation
The Corporation is involved in routine litigation incidental to its
business. The Corporation is defending for its interests and is
contesting the claims against it. Management believes the ultimate
disposition of these matters will not have a material adverse affect on
the financial statements.
Product Liability and Insurance
The Corporation currently has in force general and product liability
insurance, with coverage limits of $10 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.
13. RESTATEMENT
The Corporation recorded a prior period adjustment to restate common
stock and the accumulated deficit as of January 1, 2000 in connection
with the valuation of its common shares issued to Sun Pharma in
exchange for product technology transfers received through that date.
The restatement served to increase the accumulated deficit and capital
previously reported at that date by $983,660. The 2000 operating
results have been restated by increasing the net loss by $171,832 in
connection with the valuation of common shares issued to Sun Pharma in
exchange for the product technology transfer during 2000.
* * * * *
F-26
5,000,000 SHARES
CARACO PHARMACEUTICAL LABORATORIES LTD.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
________ __, 200_
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XV of Caraco's articles of incorporation limit the liability of
its directors. The article provides, generally, that a director shall not be
personally liable to Caraco or its shareholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to Caraco or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for a violation of Section 551(1) of the Michigan
Business Corporation Act (the "Act"), (iv) for any transaction from which the
director derived an improper personal benefit, or (v) for any act or omission
occurring prior to the effective date of Article XV. The articles of
incorporation further provide that if the Act hereafter is amended to further
eliminate or limit the liability of a director, then a director of Caraco, in
addition to the circumstances in which a director is not personally liable as
set forth in the immediately preceding sentence, shall not be liable to the
fullest extent permitted by the Act, so amended. Any repeal or modification of
the foregoing provisions of Article XV by the shareholders of Caraco shall not
adversely affect any right of protection of a director of Caraco existing at the
time of such repeal or modification.
Article XVII of Caraco's articles of incorporation and Article VII of
Caraco's bylaws provide that Caraco shall indemnify each of the directors and
officers of Caraco, and may indemnify any other individual, to the fullest
extent permitted by Sections 561 and 562 of the Act and as otherwise permitted
by law, and shall promptly make or cause to be made any determination required
by Section 564a of the Act. Article XVII of the articles of incorporation and
Article VII of the bylaws also provide that Caraco shall pay and reimburse each
of the directors and officers of Caraco, and may pay and reimburse any other
individual, to the fullest extent permitted by Section 564b of the Act and as
otherwise permitted by law, and that Caraco shall promptly make or cause to be
made any determination required by Section 564b.
Caraco maintains an insurance policy for its directors and executive
officers pursuant to which its directors and executive officers are insured
against liability for certain actions in their capacity as directors and
executive officers of Caraco.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Caraco's directors, officers or persons controlling
Caraco pursuant to the foregoing provisions, Caraco is aware that in the opinion
of the Securities and Exchange Commission that this indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by Caraco
in connection with the issuance and distribution of the shares of common stock
being registered. All such expenses are estimated except for the SEC
registration fee.
II-1
SEC registration fee $ 1,394
Printing expenses 10,000
Fees and expenses of counsel for Caraco 50,000
Fees and expenses of accountants for Caraco 30,000
Blue sky fees and expenses 10,000
Miscellaneous 10,000
--------
Total $111,394
--------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since July 1, 1999, Caraco has issued the following securities without
registration under the Securities Act.
1. In April and September 1999, we issued an aggregate of 3,609,333 shares
of common stock to Sun Pharmaceutical in exchange for the formula for 6
ANDAs and 2 DESIs products. In connection with such exchange, we issued
Sun Pharmaceutical an additional 17,333 shares of common stock in
April, 2000.
2. In December 1999, we awarded an aggregate of 4,000 shares of common
stock to certain of our employees under our 1999 Equity Participation
Plan. These shares had a market price of $0.75 on the date of the
award.
3. In December 2000, we issued an aggregate of 1,088,000 shares of common
stock to Sun Pharmaceutical in exchange for the formula for 2 ANDAs.
4. In April 2000, we issued an aggregate of 34,990 shares of our common
stock to an accredited investor, our investor relations firm, in
exchange for services rendered.
5. In April 2000, we issued an aggregate of 416,000 shares of common stock
to Mr. David A. Hagelstein, one of our directors, in satisfaction of an
outstanding promissory note, based on a value of $1.00 per share.
6. In April 2000, we issued an aggregate of 960,000 shares of common stock
to Mr. Jay F. Joliat, one of our directors, in satisfaction of an
outstanding promissory note, based on a value of $1.00 per share.
7. In April 2000, we issued an aggregate of 100,000 shares of common stock
to a former director in satisfaction of an outstanding promissory note,
based on a value of $1.00 per share.
8. In March 2001, we issued an aggregate of 1,200 shares of common stock
to certain of our non-employee directors as compensation for attendance
at board and committee meetings.
9. In June 2001, we granted an option for 10,000 shares of our common
stock, pursuant to the 1999 Equity Participation Plan, to Robert
Kurkiewicz, one of our executive officers, at an exercise price of
$0.80 per share. The options are exercisable at the rate of 20% per
year commencing one year from the date of grant and may be exercised
until six years from the date of grant.
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10. In June 2001, we granted options to acquire 187,000 shares of common
stock to 29 employees (other than the executive officer noted above)
pursuant to our 1999 Equity Participation Plan. All options were
granted at the market price of the shares as of the date of grant of
$0.80. The options are exercisable at the rate of 20% per year
commencing one year from the date of grant and may be exercised until
six years from the date of grant.
11. In September 2001, we granted options relating to an aggregate of
15,000 shares of common stock to certain of our non-employee directors
(Messrs. Hagelstein and Joliat and Dr. Harrison-Ross), as compensation
for attendance at board and committee meetings. The exercise price of
the options is $0.68 per share The options are exercisable at a rate of
20% per year commencing one year from the date of grant and may be
exercised until six years from the date of grant.
12. In December 2001, we granted an option for 125,000 shares of our common
stock, pursuant to the 1999 Equity Participation Plan, to Jitendra N.
Doshi, one of our executive officers, at an exercise price of $1.25 per
share. The options are exercisable at the rate of 20% per year
commencing one year from the date of grant and may be exercised until
six years from the date of grant.
13. In March 2002, we issued an aggregate of 15,000 shares of common stock
to certain of our non-employee directors as compensation for attendance
at board and committee meetings.
14. In March, April and part of May of 2002 we issued an aggregate of
635,000 shares of our common stock for an aggregate purchase price of
$1.69 million to five accredited investors.
15. In September 2002, we issued an aggregate of 1,088,000 shares of common
stock to Sun Global in exchange for the formula for two ANDAs.
16. In November 2002, we issued an aggregate of 544,000 shares of common
stock to Sun Global in exchange for the formula for one ANDA.
17. In December 2002, we issued an aggregate of 21,000 shares of common
stock to certain of our non-employee directors as compensation for
attendance at board and committee meetings.
No underwriting commissions or discounts were paid with respect to the
sales of the unregistered securities described above. In addition, all the above
sales were made on Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering and Regulation D of the Securities Act.
ITEM 27. EXHIBITS
3.01 Registrant's Amended and Restated Articles of Incorporation, as
amended. (2)
3.02 Certificate of Amendment to the Articles of Incorporation filed
February 13, 1997. (4)
3.03 Certificate of Amendment to the Articles of Incorporation filed
February 10, 2000. (11)
3.04 Certificate of Determination of Rights, Privileges and Preferences
Series B Preferred Stock (12)
3.05 Registrant's Amended and Restated Bylaws. (6)
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3.06 Amendment to Amended and Restated Bylaws dated May 2002. (10)
3.07 Amendment to Amended and Restated Bylaws dated November 2002. (12)
4.01 Form of Subscription Agreement (+)
5.01 Opinion of Bodman, Longley & Dahling LLP. (+)
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 $157,000, 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 Form of 1993 Stock Option Plan. (1)
10.08 Employment Agreement, dated October 22, 1993, with Robert Kurkiewicz.
(1)
10.09 Secured Promissory Note dated December 23, 1996 with Sun Pharma Global,
Inc. (4)
10.10 Security Agreement dated December 23, 1996 with Sun Pharma Global, Inc.
(4)
10.11 Stock Purchase Agreement by and between Caraco Pharmaceutical
Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as of
April 23, 1997. (5)
10.12 Products Agreement by and between Caraco Pharmaceutical Laboratories,
Ltd. and Sun Pharmaceutical Industries, Ltd. dated as of April 23,
1997. (5)
10.13 Registration Rights Agreement dated as of April 1997. (5)
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10.14 Second Note and Mortgage Modification Agreement. (6)
10.15 Amendment to Employment Agreement of Robert Kurkiewicz dated as of
April 1, 1997. (6)
10.16 Employment Agreement dated September 22, 1998 with Narendra N. Borkar.
(7)
10.17 1999 Equity Participation Plan. (8)
10.18 Agreement between ICICI Bank and Caraco for the term loan of $5
million. (9)
10.19 Term Sheet between Bank of Nova Scotia and Caraco for the term loan of
$12.5 million. (10)
10.20 Renewal to Employment Agreement of Robert Kurkiewicz dated as of
January 1, 1999. (11)
10.21 Third Amendment to Employment Agreement of Robert Kurkiewicz. (11)
10.22 Employment Agreement of Jitendra N. Doshi. (11)
10.23 Agreement between Caraco and Sun Pharma Global, Inc. dated November
21,2002 (13)
10.24 Sales contract with government vendor. (12)
23.01 Consent of Rehmann Robson. (+)
23.02 Consent of Bodman, Longley & Dahling LLP (included in Exhibit 5.01)
24.01 Power of Attorney (on signature page to original Form SB-2 registration
statement filed on July 3, 2002)
99.01 Escrow Agreement with Bank One Trust Company, N.A. (11)
99.02 Form of Sales Agent Agreement. (11)
--------------------------
+ Filed herewith
(1) Incorporated by reference from Exhibits to Registrant's
Registration Statement on Form SB-2, as amended, filed on
November 5, 1993, Commission File No. 33-71398C.
(2) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 30, 1995, Commission File No.
0-24676.
(3) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on March 30, 1996, Commission File No. 0-24676.
(4) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 31, 1997, Commission File No.
0-24676.
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(5) Incorporated by reference from Exhibits to Registrant's Form
10-QSB filed on or about November 14, 1997, Commission File
No. 0-24676.
(6) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 31, 1998, Commission File No.
024676.
(7) Incorporated by reference from Exhibits to Registrant's Form
10-QSB filed on or about November 13, 1998, Commission File
No. 0-24676.
(8) Incorporated by reference from Exhibit A to Registrant's Proxy
Statement filed on or about April 28, 1999, Commission File
No. 0-24676.
(9) Incorporated by reference from Exhibits to Registrant's Form
10-QSB filed on or about August 14, 2000, Commission File No.
0-24676.
(10) Filed as Exhibit with original Form SB-2 filed on or about
July 3, 2002.
(11) Filed as Exhibit with Pre-Effective Amendment No. 1 to Form
SB-2 filed on or about September 4, 2002.
(12) Incorporated by reference from Exhibits to Registrant's Form
10-KSB filed on or about March 31, 2003, Commission File No.
0-24676.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
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therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Pre-Effective
Amendment No. 3 to registration statement on Form SB-2 to be signed on its
behalf by the undersigned, in the City of Detroit, State of Michigan.
Dated: April 14, 2003
CARACO PHARMACEUTICAL LABORATORIES LTD.
By: /s/ Narendra N. Borkar
______________________________________
Narendra N. Borkar
Chief Executive Officer
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In accordance with the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 to this registration statement on Form SB-2 was
signed by the following persons in the capacities indicated, on April 14, 2003.
Name and Signature Title
------------------ -----
* Chairman of the Board
-------------------------------------
Dilip Shanghvi
/s/ Narendra N. Borkar President, Chief Executive Officer, Treasurer and Director
------------------------------------- (Principal Executive Officer)
Narendra N. Borkar
/s/ Jitendra N. Doshi Chief Operating Officer, Chief Financial Officer and
Director, (Principal Accounting Officer)
-------------------------------------
Jitendra N. Doshi
* Director
-------------------------------------
Sailesh T. Desai
* Director
-------------------------------------
David A. Hagelstein
* Director
-------------------------------------
Phyllis Harrison-Ross
* Director
-------------------------------------
Jay F. Joliat
* Director
-------------------------------------
Sudhir Valia
/s/ Narendra N. Borkar Attorney-In-Fact*
-------------------------------------
Narendra N. Borkar
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CARACO PHARMACEUTICAL LABORATORIES LTD.
PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM SB-2
EXHIBIT INDEX
4.01 Form of Subscription Agreement
5.01 Opinion of Bodman, Longley & Dahling LLP.
23.01 Consent of Rehmann Robson.
23.02 Consent of Bodman, Longley & Dahling LLP (included in Exhibit 5.01).
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