through August 2003. We exchanged 544,000 shares of our common stock for each technology transfer of an ANDA product (when bio-equivalency studies were successfully completed) and 181,333 shares for each technology transfer of a DESI product. The products provided to us from Sun Pharma were selected by mutual agreement. Under such agreement, we conducted, at our expense, all tests including bio-equivalency studies. Pursuant to such agreement, Sun Pharma delivered to us the technology for 13 products. This agreement expired and, as noted below, we have entered into a new agreement,with Sun Global.
On November 21, 2002, we entered into a products agreement with Sun Global. Under the agreement, which was approved by our Independent Committee (comprised of 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. The products are selected by mutual agreement. Under such agreement, we conduct, at our expense, all tests including bio-equivalency 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 receives 544,000 shares of a newly created Series B Preferred Stock for each generic drug transferred when such drug has passed its bio-equivalency studies. 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 preferred shares have a liquidation preference equal to the value attributed to them on the dates on which they were earned. While such preferred shares are outstanding, we cannot, without the consent of the holders of a majority of the outstanding shares of the preferred stock, amend or repeal our articles of incorporation or bylaws if such action would adversely affect the rights of the preferred stock. In addition, without such consent, we cannot authorize the issuance of any capital stock having any preference or priority superior to the preferred stock.
The products agreement was amended by the Independent Committee in the quarter ended March 31, 2004 to eliminate the provision requiring that the Independent Committee concur in the selection of each product, and to provide instead, that each product satisfy certain objective criteria developed by management and approved by the Independent Committee. Pursuant to the products agreement, we have selected all the 25 products, seventeen of which passed bio-equivalency studies as of December 31, 2005, and one product since then. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Future Outlook.”
Sun Pharma has established Research and Development Centers in Mumbai and Vadodara in India, where the development work for products is performed.
Sun Pharma and its subsidiaries supply us with certain raw materials and formulations. In addition, Sun Pharma assists us in acquiring machinery and equipment to enhance our production capacities. We acquire machinery and equipment from Sun Pharma which is sold to us at its cost.
Sun Pharma also assists us by sending qualified technical professionals who work as Caraco employees.
Sun Pharma and its affiliates are using Caraco as a contract manufacturer and/or distributor for two of its products pursuant to agreements entered into in December 2004 and January 2005.
During the Transition Period, SPARC Bioresearch Private Limited (“SPARC”), an affiliate of Sun Pharma, performed certain analytical studies required as part of the bio-equivalency process for two products. The Corporation incurred approximately $172,000 of costs during this period for the studies performed by SPARC. No similar studies were performed by SPARC during the three and nine months ended December 31, 2005 or the corresponding periods of 2004.
As of December 31, 2005, Sun and its affiliates beneficially own 63.9% of the outstanding shares of Caraco (73.3% including the convertible Series B Preferred Stock).
7. ACCOUNTING FOR STOCK BASED COMPENSATION
The Corporation follows only the disclosure aspects of Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock-Based Compensation”. Management believes that the fair value and pro-forma disclosures, required by SFAS No. 123, are not material to the financial statements. The Corporation continues to apply Accounting Principles Board (APB) Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has generally been recognized in the financial statements for its outstanding stock options. Options to purchase 40,000 shares of common stock were granted on May 2, 2005 to the CEO of the Corporation, which will vest in the amount of 1/3rd every anniversary thereafter. The Company also granted 45,000 shares of common stock on May 2, 2005 to the CEO of the Corporation, which will vest in the amount of 1/3rd every anniversary date thereafter. In addition, the Company granted options to purchase 3,000 shares of common stock to each of the new independent directors upon the date of their appointment. No other options or stock grants were granted during the nine months ended December 31, 2005 or 2004.
8. COMMON STOCK ISSUANCES
We issued 36,100 and 77,800 shares of common stock to our employees upon exercise of their stock options during the nine months ended December 31, 2005 and 2004, respectively. During the nine months ended December 31, 2004, we issued 1,679,066 shares of common stock to Sun Pharma against exercise of stock options, which, Sun Pharma had acquired from two former directors during the first quarter of 2004.
9. PREFERRED STOCK ISSUANCES
We issued 3,264,000 shares and 2,720,000 shares of preferred stock to Sun Global during the nine month periods ended December 31, 2005 and 2004, respectively.
10. SALES AND CUSTOMERS
Our Company effectively addressed its challenges during the first nine months of fiscal 2006. The organization continues to be strengthened to meet the demands of the US generic market, while supporting our expected growth.
As is typical in the US retail sector, many of our customers are serviced through their designated wholesalers such as Amerisource-Bergen Corporation, McKesson Corporation and/or Cardinal
11
Health, which provide a service to supplement our direct relationship with our customers or act as an intermediary to service the customers directly in lieu of direct shipments from our Company. Collectively, for the nine months ended December 30, 2005, these wholesale accounts equate to 76% of our gross sales, yet the actual sales are for various customers with underlying direct contracts with our Company. No other single customer represents more than 10% of our gross sales during the relevant periods.
In 2002 we entered into a sales contract with the Veterans Administration, an agency of the U.S. government. The Veterans Administration has designated McKesson Corporation as its wholesaler. Our agreement which commenced June 21, 2002 was for one year with four 1 year option periods and is for one product, Metformin Hydrochloride. The first three option periods were exercised. 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 certain penalties would be incurred if we are unable to meet our sales commitment.
11. LINE OF CREDIT
On November 17, 2005, the Company entered into a one-year, $10 million Credit Agreement with JP Morgan Chase Bank, N.A. Under the Credit Agreement, the lender may make loans and issue letters of credit to the Company for the Company’s working capital needs and general corporate purposes. Letters of credit, if issued, expire one year from their date of issuance, but no later than November 17, 2007. As of December 31, 2005, no amounts have been drawn down under the Credit Agreement. Borrowings are secured by the Company’s receivables, inventory and all proceeds therefrom. Borrowings may be prepaid at any time by the Company. Interest is payable based on LIBOR or an alternate base rate (determined by reference to the prime rate or the federal funds effective rate), as selected by the Company. The rate of interest is LIBOR plus 75 basis points or Prime rate minus 100 basis points.
12. LITIGATION
On June 9, 2005, Novo Nordisk A/S and Novo Nordisk, Inc. (“Novo Nordisk”) filed a complaint in the United States District Court for the Eastern District of Michigan alleging that the Company’s filling of an ANDA seeking approval to market its generic version of Novo Nordisk’s Prandin® drug product infringed Novo Nordisk’s patent, which expires June 12, 2018. Novo Nordisk seeks an order from the Court which, among other things, directs the FDA not to approve Caraco’s ANDA any earlier than the claimed expiration date. The ANDA filed by Caraco contains a Paragraph IV certification challenging the Novo Nordisk patent. We believe that the Novo Nordisk patent is invalid and / or will not be infringed by Caraco’s manufacture, use or sale of the product, and we intend to vigorously defend this action in order to capitalize on potential 180 days of marketing exclusivity available for this product.
On September 22, 2004, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a complaint in the United States District Court for the Eastern District of Michigan alleging that the Company’s filing of an ANDA seeking approval to market its generic version of Ortho-McNeil’s
12
Ultracet® drug product infringed Ortho-McNeil’s patent, which expires on September 6, 2011. Ortho-McNeil seeks an order from the Court which, among other things, directs the FDA not to approve Caraco’s ANDA any earlier than the claimed expiration date. The ANDA filed by Caraco contained a Paragraph IV Certification challenging the Ortho-McNeil patent. We believe that the Ortho-McNeil patent is invalid and/or will not be infringed by Caraco’s manufacture, use or sale of the product, and we intend to vigorously defend this action. Since this action, Ortho-McNeil has entered into a license agreement with another manufacturer and has launched its product generically while another manufacturer has launched its approved generic at risk. On October 8, 2005, arguments were heard in the US District Court in the Eastern District of Michigan, on our motion for summary judgment on the issue of non- infringement. On October 19, 2005 our motion for summary judgment was granted in our favor. On December 19, 2005, the FDA approved the manufacture, use and sale of the product. Ortho-McNeil has filed an appeal of the finding of non-infringement by the Eastern District of Michigan. Additionally, the United States Patent and Trademark Office has allowed Ortho-McNeil’s request for a reissue patent that, when issued, Ortho-McNeil contends will be infringed by Caraco’s now-marketed product. We believe that, like its original patent, Ortho-McNeil’s reissue patent will be invalid and unenforceable.
As previously disclosed, on February 12, 2003, C. Arnold Curry filed a complaint in the Wayne County Circuit Court alleging breach of a written employment agreement. Dr. Curry is seeking 175,000 shares of our common stock (35,000 shares for each of the first five ANDAs approved by the FDA). We and the plaintiff each filed a motion for summary disposition. Both parties’ motions were denied, and the parties have submitted the matter to binding arbitration. We intend to vigorously defend ourselves against these claims, which we believe have no merit.
From time to time, we are also involved in other legal proceedings incidental to our normal business activities, and while the outcome of any such proceedings cannot be accurately predicted, we do not believe the ultimate resolution of any existing matters would have a material adverse effect on our financial position or results of operations.
13. INVENTORIES
Inventories consist of the following amounts at December 31:
| | | | | | | |
| | 2005 | | 2004 | |
| |
| |
| |
Raw materials | | $ | 7,225,576 | | | 5,030,430 | |
Goods in transit | | | 4,236,576 | | | 2,901,626 | |
Work in process | | | 2,250,595 | | | 2,993,587 | |
Finished goods | | | 7,625,783 | | | 6,208,168 | |
| |
|
| |
|
| |
|
Total | | $ | 21,338,531 | | | 17,133,811 | |
| |
|
| |
|
| |
13
REVIEW REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
January 18, 2006
Stockholders and Board of Directors
Caraco Pharmaceutical Laboratories, Ltd.
Detroit, Michigan
We have reviewed the balance sheet of Caraco Pharmaceutical Laboratories, Ltd. as of December 31, 2005 and the related statements of operations for the three and nine months ended December 31, 2005 and 2004, the statements of cash flows for the nine months ended December 31, 2005 and 2004, and the statements of stockholders’ equity for the nine months ended December 31, 2005. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Caraco Pharmaceutical Laboratories, Ltd. as of March 31, 2005, and the related statements of operations, stockholders’ equity, and cash flows for the three-month period then ended (not presented herein), and in our report dated June 7, 2005, we expressed an unqualified opinion on those financial statements.
5750 New King Street– Suite 200– Troy, MI 48098– 248.952.5000– Fax 248.952.5750« www.rehmann.com
14
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis provides information that management believes is relevant to an understanding of the Corporation’s results of operations and financial condition. The discussion should be read in conjunction with the financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s 2004 Annual Report on Form 10-K as of and for the year ended December 31, 2004 (the “Annual Report”), the Company’s Transition Report as of and for the three months ended March 31, 2005, and the unaudited interim financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
OVERVIEW
The first three quarters of fiscal 2006 ended December 31, 2005 represent 19 quarters of successive sales revenue growth. During the three and nine months ended December 31, 2005, of our new fiscal year (“fiscal 2006”), we recorded net sales of $20.7 million and $58.1 million, respectively, compared to $16.7 million and $46.8 million during the corresponding periods of 2004. We incurred $9.0 million and $26.6 million in R&D expense during the three and nine months ended December 31, 2005 compared to $8.2 million and $21.5 million during the corresponding periods of 2004. This included $7.1 million and $21.0 million in non-cash R&D expense compared to $6.2 million and $16.6 million during the relevant periods. We generated cash from operations of $4.6 million during the nine months ended December 31, 2005 compared to $15.8 million during the corresponding period. This cash was used primarily to augment working capital. We incurred net loss of $0.7 million and $3.9 million during the three and nine months ended December 31, 2005 compared to net loss of $0.5 million and net income of $2.0 million during the corresponding periods of 2004. At December 31, 2005, we had stockholders’ equity of $48.9 million as compared to stockholders’ equity of $25.8 million at December 31, 2004.
FDA COMPLIANCE
The FDA commenced an inspection of the Company’s facility during the Transition Period. The FDA completed its inspection in May 2005 and issued observations on Form 483. We believe that we responded appropriately and have since received product approval of Clozapine 50mg, a tentative approval of Zolpidem (a generic version of Ambien®), approval of Carbamazepine 100, 200, 300 and 400 mg tablets and approval of Tramadol Hydrochloride with Acetaminophen tablets (the generic version of Ultracet®). We also received a tentative approval of one strength of Carvedilol (a generic version of Coreg®).
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to our financial statements included in our Annual Report and in Note 1 to our financial statements included in our Transition Report
15
filed with the Securities and Exchange Commission. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require management’s subjective judgments. As a result, these judgments are subject to an inherent degree of uncertainty. In applying these policies, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include, but are not limited to, provisions for estimated customer returns, discounts, rebates and other price adjustments, including customer chargebacks, valuation allowances for deferred tax assets, and valuation of overhead components in inventory. As stated previously, these are discussed in more detail in Note 1 to our Annual Report and in Note 1 to our Transition Report. We have reviewed and determined that these policies remain our critical accounting policies for the first three fiscal quarters of 2006. We did not make any changes in these policies during this period.
Three and Nine Months Ended December 31, 2005 Compared to Three and Nine Months Ended December 31, 2004
Net Sales. Net sales for the relevant periods were $20.7 and $58.1 million, respectively, compared to $16.7 million and $46.8 million, reflecting an increase of 24% for each of the relevant periods. The increase is due to the higher production and increased marketing of our products to new and existing customers and in part due to the recent launch of Tramadol Hydrochloride with Acetaminophen, which represented approximately $0.8 million in net sales in the last 10 days of the period. Currently, we manufacture and market all except two of the approved products. Sales of three products accounted for approximately 69% and 74% of net sales for the relevant nine-month periods of 2005 and 2004, respectively. Sales of these three products accounted for approximately 79% and 84% of net sales for the relevant three-month periods of 2005 and 2004, respectively.
Gross Profit. We earned gross profit of $10.3 million and $28.2 million during the relevant periods as compared to gross profit of $9.4 million and $27.7 million during the relevant corresponding periods, reflecting increases of 10% and 2% for the relevant periods. The increase in gross profit for the relevant periods is primarily due to higher sales, an improved balance in the mix of customers or the class of trade and product selection being sold offset in part by price erosion during the quarter.
The gross profit margins for the relevant periods declined to 50% and 49% as compared to 56% and 59%. The decrease was primarily the result of increased competition, both domestic and foreign, resulting in erosion of prices and profit margins. The 50% profit margin reflects a 1 percent improvement over the second quarter 2006 profit margin, primarily due to mix of products being sold during the quarter.
Selling, General and Administrative Expenses. Selling, general and administrative expenses during the relevant periods were $2.1 million and $5.7 million compared to $1.7 million and $4.0
16
million, representing increases of 24% and 43%. The selling, general and administrative expenses continue to remain at approximately 10% of net sales for the relevant periods.
The increase in SG&A for the nine months ended December 31, 2005 has been due to an increase in regulatory costs for compliance with SEC regulations, including Sarbanes-Oxley requirements ($0.3 million), primarily additions to management and associated compensation ($0.5 million), higher taxes on income and property ($0.2 million) and higher SG&A expenses associated with higher sales volumes as well as a one time charge ($0.3 million) in the current three and nine month periods associated with our decision to forego an acquisition of real property in favor of alternate expansion opportunities.
Research and Development Expenses. Total R&D expenses for the relevant periods were $9.0 and $26.6 million compared to $8.2 million and $21.5 million. Actual cash research and development expenses were $1.8 million and $5.5 million compared to $2.0 million and $4.9 million during the relevant periods. We incurred non-cash research and development expenses (technology transfer cost) of $7.1 million and $21.0 million for 2 and 6 product transfers during the relevant periods of 2005, as compared to $6.2 million and $16.6 million for 2 and 5 product transfers during the corresponding periods of 2004. Each product transfer earns 544,000 shares of preferred stock. The cash R&D expenses during the nine months ended December 2005 were slightly higher compared to those during the corresponding 2004 period due to increased R&D activity.
Interest Expense. We did not incur any interest cost during the relevant periods of 2005. Interest expense on loans from the Economic Development Corporation of the City of Detroit (the “EDC”), ICICI Bank, the Bank of Nova Scotia and Citibank amounted to $0.2 million during the nine month period ended December 31, 2004. The decrease in the amount of interest is due to paying off the entire loans due to the EDC, ICICI Bank, the Bank of Nova Scotia and CitiBank during 2004.
Results of Operations. We incurred a net loss of $0.7 million and $3.9 million during the relevant periods. We incurred a net loss of $0.5 million and earned net income of $2.0 million during the corresponding periods of 2004.
Liquidity and Capital Resources
We generated cash from operations of $4.6 million for the nine months ended December 31, 2005 as compared to generating cash of $4.8 million from operations during the Transition Period ended March 31, 2005 (January 1 to March 31, 2005). Accounts receivable increased by $12.8 million during the relevant period of Fiscal 2006 as compared to $6.7 million in accounts receivable at the end of March 31, 2005. The increase in accounts receivable is relative to the increase in sales and associated terms offered to our customers and has a direct correlation to the timing of chargebacks received. This current period’s positive cash flow is more consistent with historical trends.
We generated cash from operations of $4.6 million as compared to $15.8 million from operations during the relevant nine-month periods. In addition to augmenting working capital, the balance at the beginning of the relevant periods and cash generated from operations were used to finance our capital expenditures of $2.4 million and $2.7 million.
17
During the nine months ended December 31, 2004, we repaid the entire balance of $6.0 million due to the EDC, $9.4 million to The Bank of Nova Scotia and $10 million to Citibank, FSB. These payoffs were funded from internal cash flow and by utilizing a $10.0 million credit line arranged with Citibank, FSB.
At December 31, 2005 we had working capital of $34.7 million compared to working capital of $13.2 million at December 31, 2004. We had working capital of $18.8 million at March 31, 2005. The increased working capital in fiscal 2006 is primarily due to increased accounts receivable balances resulting from higher sales volumes. Additionally we have available the $10 million line of credit recently obtained through JPMorgan Chase Bank, N.A. which would allow us flexibility in expansion efforts to increase our capacity over the next few years.
Future Outlook
We continue to be optimistic about our future outlook. We believe we are substantially compliant with cGMPs. We have received two ANDA approvals and one tentative approval during the most recent quarter both in the last month of the quarter. Currently, we have 13 products pending approval at the FDA. We continue to expand and upgrade our facilities and improve our customer base. Our efforts combined with Sun Global in developing new products have also picked up momentum and this should permit us to grow at a reasonable level. We now have four products, Metformin, Metoprolol, Tramadol and Salsalate whose market share is ranked third or higher against the same products of our generic competitors. Based on current trends we believe it necessary to increase our previous guidance from 15-20% growth to 25-30% growth for fiscal 2006 compared to calendar 2004.
We are confident that, although we continue to have lower gross profits due to price erosion, our sales growth, product portfolio improvements and execution of our plans will offset any long-term impact. However, should the pricing pressures become more severe than anticipated, the result may be lower growth rates and gross margins. Management has and will continue to work diligently to counter the pricing pressures through increased sales volumes, expansion of our customer base, improved productivity, better-cost absorption of operational overheads, cost reductions and increased development plans.
As disclosed, under the products agreement dated November 21, 2002 between Sun Global and the Company, Sun Global has agreed to transfer the technology for 25 products to the Company over a five year period in exchange for 544,000 preferred shares (which are convertible on a one-to-one basis into common shares) per product. Since the date of the products agreement, the Company has selected all 25 products for development and eighteen of these products have passed their respective bio-equivalency studies (one in December 2003, seven in 2004, three during the Transition Period, one during the first quarter of fiscal 2006, three during the second quarter of fiscal 2006, two during the third quarter of fiscal 2006 and one since then). If some or all of the remaining products pass their bio-equivalency studies in fiscal 2006, the fair value of the preferred shares earned by Sun Global in exchange for such products could cause our non-cash research and development expenses to increase to an amount which would significantly decrease profit or create a loss.
18
While the development of new products will increase both our cash and non-cash R&D expense and will impact EPS, we expect that cash will be available, among other things, to meet increased working capital requirements, fund potential Paragraph IV Certification litigation and finance further capital investments.
The Company will continue to aggressively move forward with the development of new products. We believe that receiving products from Sun provides us with a partner with a proven track record; one that already has provided us with quality products. Moreover, Sun Pharma’s increased beneficial ownership in us to approximately 63.9% (approximately 73.3% including the convertible Series B Preferred Stock), should, we believe, provide it with the incentive to continue to help us succeed. Sun Pharma has previously provided us with capital, loans, guarantees of loans, personnel, raw materials and equipment, which have significantly helped us to date.
Management’s plans for the remainder of fiscal 2006 include:
| | |
| (a) | Continued focus and improvement on FDA compliance. |
| | |
| (b) | Increased pace of research and development activities, with a view to maximize ANDA filings. |
| | |
| (c) | Continue to invest in equipment and facilities to expand capacity to meet requirements of projected growth in near term. |
| | |
| (d) | Increased market share for certain existing products and recently introduced new products and enhanced customer reach and satisfaction. |
| | |
| (e) | Prompt introduction of new approved products to the market. |
| | |
| (f) | Achieving further operational efficiencies by attaining economies of scale and cost reduction per unit. |
| | |
| (g) | Increase the number of products, as well as anticipated volume increases for existing products, which, in turn, will improve manufacturing capacity utilization. |
| | |
| (h) | Considering alternative ways of increasing cash, including developing, manufacturing and marketing ANDAs owned by Sun Pharma, and borrowings. |
| | |
| (i) | Locating and acquiring facilities to enhance production and therefore sales. |
| | |
| (j) | Research alternate product development sources and product licenses such as in licensing authorized generics from brand innovator companies and acquisitions of ANDAs from competitor manufacturers both domestically and abroad. |
Forward Looking Statements
This report, other than the historical financial and business information, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Without limitation, the words “believes,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. Those statements include statements regarding our intent, belief, and current expectation. These statements are not guarantees of future performance and are subject to risks and uncertainties that
19
cannot be predicted or quantified. Consequently, actual results could differ materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment; (ii) not obtaining FDA approval for new products or delays in receiving FDA approvals; (iii) governmental restrictions on the sale of certain products; (iv) dependence on key personnel; (v) development by competitors of new or superior products or cheaper products or new technology for the production of products or the entry into the market of new competitors; (vi) market and customer acceptance and demand for new pharmaceutical products; (vii) availability of raw materials in a timely manner, at competitive prices, and in required quantities; (viii) timing and success of product development and launch; (ix) integrity and reliability of the Company’s data; (x) lack of success in attaining full compliance with regard to regulatory and cGMP compliance; (xi) experiencing difficulty in managing our recent rapid growth and anticipated future growth; (xii) dependence on limited customer base; (xiii) occasional credits to certain customers reflecting price reductions on products previously sold to them and still available as shelf-stock; (xiv) possibility of an incorrect estimate of charge-backs and the impact of such an incorrect estimate on net sales, gross profit and net income; (xv) dependence on few products generating majority of sales; (xvi) product liability claims for which the Company may be inadequately insured; (xvii) subjectivity in judgment of management in applying certain significant accounting policies derived based on historical experience, terms of contracts, our observations of trends of industry, information received from our customers and other sources, to estimate revenues, accounts receivable allowances including chargebacks, rebates, income taxes, values of assets and inventories; (xviii) litigation involving claims of patent infringement; (xix) litigation involving claims for royalties relating to a prior contract for one product and (xx) other risks identified in this report and identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission. These forward-looking statements represent our judgment as of the date of this report. We disclaim, however, any intent or obligation to update our forward-looking statements.
| |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company has no debt or other market risk securities or transactions in foreign exchange.
| |
ITEM 4. | CONTROLS AND PROCEDURES |
a. The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in
20
providing them with material information relating to the Company known to others within the Company which is required to be included in our periodic reports filed under the Exchange Act.
b. There has been no change in the Company’s internal control over financial reporting that occurred during the third quarter of fiscal 2006 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
The information presented in Note 12 of Part I, Notes to Financial Statements, is incorporated herein by reference.
| |
10.26 | Credit Agreement dated as of November 17, 2005 between Caraco and JP Morgan Chase Bank, N.A. |
| |
10.27 | Security Agreement dated as of November 17, 2005 between Caraco and JP Morgan Chase Bank, N.A. |
| |
31.1 | Certification of Chief Executive Officer |
| |
31.2 | Certification of Chief Financial Officer. |
| |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| CARACO PHARMACEUTICAL |
| LABORATORIES,LTD. |
| |
Date: January 20, 2006 | By: /s/ Daniel H. Movens |
| |
| |
| Daniel H. Movens |
| Chief Executive Officer |
| |
Date: January 20, 2006 | By: /s/ Jitendra N. Doshi |
| |
| |
| Jitendra N. Doshi |
| Chief Financial Officer |
22
EXHIBIT INDEX
23
