-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DBwUjnqDQQdBSp0xWQFOWVMBRwwm9yUCQ98WeJBP65yoiUkvJGw24+Puls4r8wU/ a2SjikC/wJVxGslQBrPvCg== 0000950124-02-002901.txt : 20020904 0000950124-02-002901.hdr.sgml : 20020904 20020904172104 ACCESSION NUMBER: 0000950124-02-002901 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20020904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARACO PHARMACEUTICAL LABORATORIES LTD CENTRAL INDEX KEY: 0000887708 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 382505723 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-91968 FILM NUMBER: 02756814 BUSINESS ADDRESS: STREET 1: 1150 ELIJAH MCCOY DR CITY: DETROIT STATE: MI ZIP: 48202 BUSINESS PHONE: 3138718400 MAIL ADDRESS: STREET 1: 1150 ELIJAH MCCOY DRIVE CITY: DETROIT STATE: MI ZIP: 48202 SB-2/A 1 k71679sbv2za.txt AMENDMENT NO. 1 TO FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 2002 REGISTRATION NO. 333-91968 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------- PRE-EFFECTIVE AMENDMENT NO. 1 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. Subject to Completion, dated September 4, 2002. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities in any state where the offer or sale is not permitted. 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 July 1, 2002, the last reported sale price of our common stock on the OTC Bulletin Board was $3.03. 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....... $ $ - --------------------------- -------------------------- ---------------------------------- Total Minimum... $ $ - --------------------------- -------------------------- ---------------------------------- Total Maximum... $ $ - --------------------------- -------------------------- ----------------------------------
(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 $61,394. 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 90 days from the date of commencement of the offering (which may be extended by us for an additional 90 days), all purchase payments for such shares will be returned in full to subscribers, without interest or deduction. If the Minimum Offering is sold within the foregoing period, our offering may continue until the remaining shares are sold or ___________, 2003, whichever occurs first. However, we may terminate our offering at any earlier time if we choose to do so. PROSPECTUS DATED ___________, 2002 iii TABLE OF CONTENTS PROSPECTUS SUMMARY.................................................................................................................1 The Company.....................................................................................................................1 Recent Developments.............................................................................................................2 The Offering....................................................................................................................2 Offices and Websites............................................................................................................3 RISK FACTORS.......................................................................................................................4 Risks Relating to Our Company...................................................................................................4 Risks Relating to Our Industry..................................................................................................8 Risks Relating to this Offering and Our Common Stock............................................................................8 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS........................................................................12 PLAN OF DISTRIBUTION..............................................................................................................13 Sales by Caraco................................................................................................................13 Sales by Selling Shareholders..................................................................................................14 SELLING SHAREHOLDERS..............................................................................................................16 USE OF PROCEEDS...................................................................................................................16 DIVIDEND POLICY...................................................................................................................17 PRICE RANGE OF COMMON STOCK.......................................................................................................17 SELECTED FINANCIAL DATA...........................................................................................................18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................19 Overview.......................................................................................................................19 FDA compliance and product approvals...........................................................................................19 Liquidity and Capital Resources................................................................................................23 Future Outlook.................................................................................................................24 BUSINESS..........................................................................................................................25 Overview of the Generic Drug Industry..........................................................................................26 Caraco's Products and Product Strategy.........................................................................................26 Hexal-Pharma GmbH & Co., KG....................................................................................................26 Clonmel Chemicals Co., Ltd. (Ireland)..........................................................................................27 Sun Pharmaceutical Industries Limited..........................................................................................27 Marketing......................................................................................................................28 Sales and Customers............................................................................................................29 Research and Development.......................................................................................................29 Regulation.....................................................................................................................30 Suppliers and Materials........................................................................................................32 Competition....................................................................................................................33 Employees......................................................................................................................33 Product Liability and Insurance................................................................................................33 Property and EDC Financing.....................................................................................................34 The Facility...................................................................................................................35 Executive Officers and Directors...............................................................................................35 Board Committees...............................................................................................................36 Director Compensation..........................................................................................................37 Executive Compensation.........................................................................................................37
iv Option Grants in Last Fiscal Year..............................................................................................38 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values..............................................38 Employment Agreements..........................................................................................................39 Change in Control Arrangements.................................................................................................40 Stock Option Plans.............................................................................................................40 1999 Equity Participation Plan.................................................................................................41 Other Options..................................................................................................................42 Transactions of Directors, Executive Officers and Certain Beneficial Holders of Caraco.........................................42 Security Ownership of Certain Beneficial Owners................................................................................43 Security Ownership of Management and Directors.................................................................................43 DESCRIPTION OF CAPITAL STOCK......................................................................................................45 Authorized Shares..............................................................................................................45 Common Stock...................................................................................................................45 Preferred Stock................................................................................................................46 Options........................................................................................................................46 Registration Rights............................................................................................................46 Anti-Takeover Provisions of Michigan Law and our Articles of Incorporation.....................................................47 Limitation on Liability of Directors and Indemnification.......................................................................48 Transfer Agent and Registrar...................................................................................................49 LEGAL MATTERS.....................................................................................................................49 EXPERTS...........................................................................................................................49 WHERE YOU CAN FIND MORE INFORMATION...............................................................................................49 UNAUDITED FINANCIAL STATEMENTS...................................................................................................F-1 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT............................................................................F-7
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 44 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 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 46.3% 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. 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. 1 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 the first six months of 2002, the FDA approved 3 additional ANDAs. During the first six months of 2002, we filed a total of 2 ANDAs with the FDA. We have 6 currently pending ANDAs with the FDA (some of which, we believe, will be approved by 2002 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 have completed a private placement of 635,000 shares of common stock resulting in aggregate net proceeds to us of $1,692,000. For the six months ended June 30, 2002, we recorded net sales of $8,929,408 as compared to $1,867,330 during the same period of 2001, an increase of almost 478%. For the quarter ended June 30, 2002, we recorded net sales of $5,627,449 as compared to $924,552 for the same period of 2001, an increase of 608%. During the six months ended June 30, 2002, the net loss, after a non-cash expenditure of $1,251,200 for technology transfer cost, was $587,400 as compared to a net loss of $3,606,783 during the same period of 2001, which did not have any non-cash technology transfer cost. For the quarter ended June 30, 2002, the net loss was $68,157 as compared to a net loss of $1,953,291 for the same quarter 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 90 days (which may be extended by us for an additional 90 days) from the commencement of the offering, all purchase payments for such shares will be returned in full to subscribers, without interest or deduction. If the Minimum Offering is sold within the foregoing period, our offering may continue until the remaining shares are sold or ________, 2003, 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
2 Common Stock to be Outstanding after the 26,188,818 Shares (based upon shares outstanding as of June 30, 2002 and excludes Offering................................. 3,276,627 shares issuable upon the exercise of outstanding options and the conversion of preferred stock) and the issuance to Sun Pharmaceutical of additional shares for product technology transfers. 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 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. 3 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. For the year ended December 31, 2001, our net sales were $5,922,431 and our net losses were $5,757,463 compared to $2,377,546 and $7,622,708 respectively, for 2000. As of December 31, 2001, we had a shareholders' deficit of $22,945,249. In addition, we are highly leveraged. At December 31, 2001, we had total liabilities of $34,455,205. Further, net sales for the six months ended June 30, 2002 and 2001 were $8,929,408 and $1,867,330, respectively. The net losses for the six months ended June 30, 2002 and 2001 were $587,400 and $3,606,783, respectively. At June 30, 2002, we had total liabilities of $37,647,438. At June 30, 2002, we had negative working capital of $3,484,736 compared with a negative working capital of $8,897,985 at the corresponding period of 2001. The negative working capital positions as of June 30, 2002 and 2001, respectively were mainly due to the classification of the entire balance of the EDC debt and related accrued interest as current until the anticipated renegotiation of the repayment terms is completed, of which there is no assurance. The notes to the financial statement provide as follows about us (the "Corporation"): "Realization of a major portion of its assets is dependent upon the Corporation's ability to meet its future financing requirements and the success of future operations, the outcome of which cannot be assured. These factors raise concern about the Corporation's ability to continue as a going concern in the absence of sufficient additional funds, the achievement of profitable operations, and the sustained financial and operating support from Sun Pharmaceutical." 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 achieve profitability in 2003, there is no assurance when, if ever, we will generate significant revenues or achieve profitability. Actual results may differ materially from those expected by us. WE ARE CURRENTLY IN DEFAULT OF OUR LOAN OF APPROXIMATELY $8.0 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 June 30, 2002, our note payable to the EDC (classified as a current obligation) is approximately $7.8 million. We are and have been negotiating with the EDC to restructure our loan and extend the repayment schedule. While recent informal 4 contacts with the EDC lead us to believe that the EDC will extend the repayment schedule, the final decision rests with Detroit's City Council. There is no assurance that the EDC will accept our current proposal to restructure the loan and/or that if the EDC accepts our proposal that Detroit's City Council will approve the EDC's recommendation. Since February 1999, we have been making monthly payments to the EDC of $100,000 (currently aggregating through June 2002, $4.1 million), but such payments 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 revenues 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. The EDC loan is a first priority mortgage lien against our facility. In addition, the EDC has a continuing recurring interest in all of our assets, accounts and equipment, ANDAs and in the formula for the products provided to us by Sun Pharmaceutical. If 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 capital contributions ($7.5 million), loans ($9.7 million currently outstanding) and guarantees of loans ($17.5 million, of which $15.9 million is currently outstanding). As of June 30, 2002, Sun Pharmaceutical beneficially owns approximately 46.3% 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 us in developing our business and while Sun Pharmaceutical has expressed an attempt to continue to support our operations in 2002, 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 will have a material adverse effect on our operations, including the suspension of Sun Pharmaceutical's obligations to deliver products to us under its agreement with us. 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. 5 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 April 2001, we completed an FDA inspection 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 MAY HAVE CONFLICTS OF INTEREST WITH RESPECT TO ITS TRANSACTIONS WITH CARACO. Sun Pharmaceutical beneficially owns approximately 46.3% 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 Operating Officer of Caraco was formerly employed by Sun Pharmaceutical. As a result, Sun Pharmaceutical is subject to a number of conflicts of interests. Sun Pharmaceutical is engaged in the same business as Caraco and there may be conflicts in determining which products to transfer to Caraco 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 (e.g. a merger or sale of significant assets) Sun Pharmaceutical would not agree and would block it. Caraco believes, that with 6 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 COMMON STOCK TO SUN PHARMACEUTICAL IN EXCHANGE FOR THE PRODUCTS IT TRANSFERS TO CARACO MAY SIGNIFICANTLY INCREASE RESEARCH AND DEVELOPMENT EXPENSES AND THEREBY REDUCE EARNINGS. Pursuant to its products agreement with Caraco, which expires in August 2002 (see below), Sun Pharmaceutical transfers technology to Caraco. Sun Pharmaceutical receives 544,000 shares for each ANDA product transferred and 181,333 shares for each DESI (Drug Efficacy Study Implementation) product transferred. The value of the shares issued to Sun Pharmaceutical for the transfer of the products are included in research and development expenses. Depending on the number of products transferred and the price attributable thereto, the issuance of common stock to Sun Pharmaceutical could cause Caraco's research and development expenses to increase to an amount which would significantly decrease profit or create a loss. Sun Pharmaceutical is entitled to have the shares transferred at such time as it transfers a DESI or at such time as the product passes the applicable bioequivalency study or studies or, if no such studies are required for submission of an ANDA with respect to the product, then the shares will be due upon the FDA's granting approval of an ANDA with respect to such product. Accordingly, shares can be earned by Sun Pharmaceutical even if the product is not successfully produced and marketed. THE PRODUCTS AGREEMENT BETWEEN US AND SUN PHARMACEUTICAL EXPIRES IN AUGUST 2002 AND THERE IS NO ASSURANCE IT WILL BE EXTENDED. The products agreement between us and Sun Pharmaceutical (see "Business - - Sun Pharmaceutical Industries Limited") expires in August 2002. We are currently attempting to renegotiate and extend the term of the products agreement. The terms of any renegotiated products agreement are not known at this time. There is also no assurance that the products agreement will be successfully renegotiated and/or extended. 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. 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 (up to $5 million per incident and in the aggregate), there can 7 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. 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. We are not the stated beneficiary of 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. 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. 8 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: - 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; 9 - 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. During the last two years, July 1, 2000 through June 30, 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 62.5% of our outstanding voting power. This percentage excludes the effect of shares issuable upon the exercise of outstanding options and the conversion of preferred stock and the issuance of any additional shares to Sun Pharmaceutical for product technology transfers. Accordingly, these shareholders, individually and as a group, may be able to influence the 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. 10 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 $3.00 per share, contribute approximately 27.4% of the total amount to fund us to date, but will only own approximately 16.7% 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 Pharmaceutical for product technology transfers. EXERCISE OF OUTSTANDING OPTIONS AND CONVERSION OF CONVERTIBLE PREFERRED STOCK WILL DILUTE EXISTING SHAREHOLDERS AND COULD DECREASE THE MARKET PRICE OF OUR COMMON STOCK. As of June 30, 2002, we had issued and outstanding 21,823,818 shares of common stock and outstanding options and convertible preferred stock to purchase 3,276,627 additional shares of common stock at an average exercise price of approximately $1.87 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 and possibly to raise capital. These additional issuances will dilute your share ownership. WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS 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. We do not intend to pay cash dividends 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 and the terms of the outstanding Series A preferred stock restrict the payment of dividends on the common stock until all dividends payable on the Series A preferred stock have been paid in full. At this time, we owe the Series A preferred stock cumulative dividends of $330,000 as of June 30, 2002. 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. 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. As noted, we could also decide to pay off all or part of 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. 11 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 operations; - restructuring of the EDC loan; and - renegotiation of our products agreement with Sun Pharmaceutical. 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) lack of success in amending the EDC Agreement; (v) governmental restrictions on the sale of certain products; (vi) obtaining 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 new technology for the production of products or the entry into the market of new competitors; (x) integrity and reliability of our data; (xi) lack of success in attaining full compliance with regard to regulatory and cGMP compliance; (xii) lack of success in renegotiating our products agreement with Sun Pharmaceutical; and (xiii) other risks 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 12 protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 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 90 days from the date of commencement of the offering (which may be extended by us for an additional 90 days), 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. 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 _________, 2003, 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 will pay to the escrow agent fees in the amount of $1,500. 13 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 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 BY THE ESCROW AGENT, 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 14 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. 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. 15 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 forth information known to us with respect to the beneficial ownership of Caraco common stock as of June 30, 2002, by the Selling Shareholders. The percentage of beneficial ownership for the following table is based on 21,823,818 shares of common stock outstanding as of June 30, 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 0.14% 30,000 0 0 - ---------------------------------------- --------------- ---------------- ----------------------- ----------------- ---------------- Berlin Capital Growth, LP 250,000 1.14% 250,000 0 0 - ---------------------------------------- --------------- ---------------- ----------------------- ----------------- ---------------- LeRoy Carter 30,000 0.14% 30,000 0 0 - ---------------------------------------- --------------- ---------------- ----------------------- ----------------- ---------------- Verle Carter 25,000 0.11% 25,000 0 0 - ---------------------------------------- --------------- ---------------- ----------------------- ----------------- ---------------- J. George Investments, LLC 300,000 1.37% 300,000 0 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 $____ million. The gross proceeds will be reduced by legal, accounting and other miscellaneous expenses of approximately $61,394. 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 forth below is an estimate of how we intend to use the net proceeds of the offering, assuming the gross proceeds of __________, $2 million towards capital improvements, $5 million towards research and development, $3 million towards working capital requirements and the balance for debt elimination. If the net proceeds are less 16 than fully subscribed, we shall determine the proper allocation among the foregoing proposed uses. If we are unable to restructure the EDC loan, we may determine to pay off the EDC loan. This may reduce the amounts available for the other proposed uses. If only the Minimum Offering of 100,000 shares ($_____ ) 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 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 and the terms of the outstanding Series A preferred stock restrict the payment of dividends on the common stock until all dividends payable to a Series A preferred stock have been paid in full. At this time, we owe the Series A preferred stock cumulative dividends of $330,000 as of June 30, 2002. 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 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 June 27, 2002 there were approximately 158 holders of our common stock. 17 SELECTED FINANCIAL DATA The selected statements of operations data shown below for the years ended December 31, 2001, 2000 and 1999 and the balance sheet data as of December 31, 2001 and 2000 are derived from our audited financial statements included elsewhere in this prospectus. The selected statement of operations data shown below for the six months ended June 30, 2002 and 2001 and the balance sheet dated as of June 30, 2002 have been derived from the unaudited financial statements included elsewhere in this prospectus. In the opinion of Management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for the full year. 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 SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31 ----------------------- ------------------------ ---------------------- (UNAUDITED) ----------- 2002 2001 2001 2000 1999 ---- ---- ---- ---- ---- Net sales $ 8,929,408 $ 1,867,330 $ 5,922,431 $ 2,377,546 $ 2,895,022 Cost of goods sold 4,413,468 1,839,358 4,186,059 2,678,900 3,091,245 ------------ ------------ ------------ ------------ ------------ Gross profit / (loss) 4,515,940 27,972 1,736,372 (301,354) (196,223) Selling, general and administrative expenses 1,309,300 1,149,072 2,680,494 2,508,737 2,159,116 Research and development costs (non-cash) 1,251,200 -- -- 220,102 1,804,667 ------------ Research development costs 1,571,502 1,237,201 3,079,804 3,075,333 4,527,723 ------------ ------------ ------------ ------------ ------------ Depreciation 227,776 254,341 508,682 574,442 576,182 Operating income (loss) 156,152 (2,612,643) (4,023,926) (6,105,526) (8,687,729) Interest cost - net of interest income (743,562) (994,140) (1,733,537) (1,517,182) (1,052,255) ------------ ------------ ------------ ------------ ------------ Net loss $ (587,400) $ (3,606,783) $ (5,757,463) $ (7,622,708) $ (9,739,984) ============ ============ ============ ============ ============ Net loss per basic and diluted common share $ (0.03) $ (0.17) $ (0.29) $ (0.39) $ (0.58) Weighted average common shares outstanding 21,242,874 21,172,618 21,173,522 19,755,021 16,725,721
18
BALANCE SHEETS JUNE 30 DECEMBER 31 -------------- ------- ----------- (UNAUDITED) ----------- 2002 2001 2000 ---- ---- ---- Cash and cash equivalents $ 132,604 $ 241,110 $ 186,768 Other current assets 8,100,098 4,574,764 1,941,751 Property, plant & equipment (net) 7,568,857 6,694,082 7,094,233 Current liabilities 11,717,438 10,855,205 11,310,988 Long term liabilities 25,930,000 23,600,000 15,040,000 Accumulated deficit (57,188,700) (56,601,300) (50,843,837) Stockholders deficit (21,845,879) (22,945,249) (17,128,236)
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 We have historically experienced limited sales, operating losses and cash-flow difficulties. During 2000, 2001 and 2002 (to the date of this prospectus), Sun Pharmaceutical assisted us 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 the $10.9 million from The Bank of Nova Scotia during 2000, 2001 and 2002. Also, Sun Pharmaceutical provided a loan of an additional $2.45 million to us during 2001. During the first quarter of 2002, Sun Pharmaceutical loaned us an additional $1.4 million. The loans were primarily utilized by us to fund the operations, research and development of new products and finance our increased working capital needs resulting from the increase in the product portfolio following FDA approvals of 3 products during 2001 and 3 products during the first six months of 2002. We also filed 2 more ANDA applications to the FDA during the first six months of 2002, bringing the total pending approvals up to 6. We continued our attempt to negotiate with the EDC to restructure our loan which has been in default and continued to pay the EDC $100,000 a month during 2001 and the first six months of 2002 (with aggregate payments to the EDC through June 2002, totaling $4.1 million). FDA COMPLIANCE AND PRODUCT APPROVALS Towards the end of the first and beginning of the second quarters of 2001, the FDA conducted an inspection of our facility. During this inspection, we were found to be substantially in compliance with the 19 cGMP regulations. While the FDA did issue us an FDA 483 list of observations, we do not believe they are material. In May 2001, the FDA provided us with a letter waiving preliminary approval inspections for the then pending ANDA submissions. Soon after the inspection, the FDA approved 2 of the then pending 9 ANDAs, and subsequently 1 more ANDA was also approved during 2001. During the first six months of 2002, the FDA approved 3 more ANDAs; 6 ANDAs are currently pending approval. The impetus provided by the FDA by finding our facility cGMP compliant, waiver of preliminary approval inspections for the then pending ANDAs and granting of the 6 ANDA approvals, has been substantially helpful in increasing sales to a level never reached before by us. SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001 NET SALES. Net sales for the six months ended June 30, 2002 and 2001 were $8,929,408 and $1,867,330, respectively, reflecting an increase of almost 378%. 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. While this increase is substantial over the previous period it is still at a low level, which we hope to increase in the last two quarters of 2002 through new product introductions, increases in sales of existing and newly approved products and new drug development. Currently, we manufacture and market all of the six ANDAs, which were approved by the FDA during 2001 and the first six months of 2002. The sales of the newly approved ANDAs have contributed appreciably to the gross sales (almost 38%) during the first six months of 2002. Net sales have also improved during the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 for the following reasons: - Gross sales of Metoprolol Tartrate have increased significantly during the first six months of 2002 to $4.5 million as compared to $725,000 in the same period of 2001. - We have been successful in obtaining larger sales contracts in 2002 with Veterans Administration and with ------ one large mail order company. - With our larger basket 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 $4,515,939 during the six months ended June 30, 2002 as compared to a nominal gross profit of $27,972 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 those during the corresponding period of 2001 and ability to absorb operational overheads due to higher sales. As a result of increased sales, the gross margin has also improved. The increase as noted above was the result of: - Change in sales mix to higher profit margin products such as Metroprolol Tartrate, Metformin, Hydrochloride and Oxaprozin. - Reduction in manufacturing costs for various products as customers have increased orders allowing us to increase batch sizes (for example Metoprolol Tartrate batch sizes have increased by approximately four times). 20 - Improved efficiency in the overall manufacturing process as we progress to full capacity SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the six months ended June 30, 2002 and June 30, 2001 were $1,309,300 and $1,149,072, respectively, representing an increase of 14%. The increase is primarily due to additional expenses incurred resulting from increased sales and production levels. While selling, general and administrative expenses have increased, slightly on a dollar basis, they have decreased significantly as a percentage of net sales (15% in 2002 compared to 61% in 2001). The dollar increase results primarily from additional sales staff, marketing expenditures and support staff to maintain compliance with FDA standards. RESEARCH AND DEVELOPMENT EXPENSES . Cash research and development expenses of $1,571,502 for the six months ended June 30, 2002 were higher by 27%, when compared with $1,237,201 incurred during the corresponding period of 2001. We have incurred non-cash research and development expenses (technology transfer cost) of $1,251,200 for the 1,088,000 shares of common stock issuable to Sun Pharmaceutical for 2 product transfers made to us during the first six months of 2002. There was no similar expense for the corresponding period of 2001. DEPRECIATION EXPENSE. We have has incurred depreciation expense of $227,776 for the first six months of June 30, 2002 as compared to $254,341 incurred in the corresponding period of 2001. 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 $745,982 and $1,006,343, for the six months ended June 30, 2002 and 2001, respectively. The decrease is due to lower LIBOR rate despite increase in the higher borrowing levels. Effective April 1, 2001, Sun Pharmaceutical and its affiliates reduce the rate of interest payable to them from 10% to 8%. Interest income for the corresponding periods of June 30 of 2002 and 2001 was $2,420 and $12,203, respectively. RESULTS OF OPERATIONS. The net loss for the six months ended June 30, 2002 and 2001 was $587,400 and $3,606,783, respectively reflecting a reduction of almost 84%. The net losses are directly related to (1) net sales, which were inadequate to absorb our interest costs and (2) the impact of higher non-cash technology transfer cost of $1,251,200. The significantly lower losses in the current six-month and three-month periods as compared to the previous respective periods are primarily due to significantly higher sales volumes and better-cost absorption due to increased sales. A number of uncertainties exit that may influence our future operation results, including general economic conditions, changes in conditions affecting the pharmaceutical industry primarily related to generic drug competition, obtaining additional financing, the EDC loan not being restructured, 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. 21 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 an insignificant part of the gross sales during the last six months of 2001. 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 the years ended December 31, 2001 and December 31, 2000 were $2,680,494 and $2,508,737, respectively, representing a nominal increase of 7%. The increase was primarily due to additional expenses incurred, resulting from increased sales and production levels. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of $3,079,804 for the year ended December 31, 2001 were lower by 6.5%, when compared with $3,295,435 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 technology transfer by Sun Pharmaceutical. During 2000, such non-cash expenses totaled $221,000. 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. RESULTS OF OPERATIONS. Net losses for the years ended December 31, 2001 and 2000 were $5,757,463 and $7,622,708, respectively. This represents a reduction of 24.4% 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. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 NET SALES. Net sales for the year's 2000 and 1999 were $2,377,546 and $2,895,022, respectively. This decrease can be mainly attributed to absence of contract manufacturing activity, the discontinuance of one of our products (see "Cost of Sales" below), the temporary suspension of production of four other products, and the increased resources shifting from production to FDA compliance. 22 COST OF SALES. While net sales reduced by 17% in 2000 compared to 1999, the cost of sales levels for 2000 and 1999 were $2,678,900 and $3,091,245 respectively or 112.6% and 107% of sales for the two years. This percentage increase can be mainly attributed to absence of contract manufacturing activity and the increased resources shifting from production to FDA compliance. Also, due to lower production during the year 2000 the plant continued to be underutilized, which increased the cost of sales. In addition, the FDA announced the voluntary discontinuance of manufacturing and marketing of products containing Phenyl Propanalomine (PPA) in November 2000. One of our products had this ingredient. We announced immediate discontinuance of the manufacture and marketing of the product. The raw materials and finished goods relating to this product were written off during the year 2000. GROSS PROFIT (DIFFERENTIAL). We posted a gross profit differential of $301,354 during 2000 as compared to $196,223 in 1999. This increase can be mainly attributed to absence of contract manufacturing activity, the increased resources shifting from production to FDA compliance and the discontinuance and/or temporary suspension by us of certain production. RESULTS OF OPERATIONS. Net losses for the years 2000 and 1999 were $7,622,708 and $9,739,984, respectively. The net losses were principally related to inadequacy of sales volume to absorb fixed operating costs, research and development costs, and costs incurred by us relating to compliance matters and lower production. Also, recruitment of senior level personnel during the year in key positions of Directors of Quality Control and Quality Assurance, which were a part of the compliance measures, had an impact on the losses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the years 2000 and 1999 were $2,508,737 and $2,159,116, respectively, representing an increase of almost 17% over the previous year. The increase was mainly due to the expenses incurred for FDA compliance, including the retention of an FDA consulting firm as well as recruitment of senior level personnel in key positions by us as described above. RESEARCH AND DEVELOPMENT EXPENSES. Research and Development expenses were $3,295,435 for 2000 as compared to $6,332,390 in 1999. The expenses incurred directly by us during the years 2000 and 1999 were $3.074 million and $4.528 million, respectively. As a result of lower product transfers in 2000 (2 ANDA product transfers) as compared to 8 in 1999 (6 ANDA products and 2 DESI products), the costs for the transfer were significantly lower, and hence the research and development costs were lower. The other reason for the lower expenses was also due to shift of our focus towards compliance. INTEREST INCOME. Interest income for 2000 and 1999 was $38,010 and $ 32,764 respectively. This income was generated from short-term interest earning deposits. INTEREST EXPENSE. Interest expense was $1,555,192 and $1,085,019 for 2000 and 1999, respectively. This was incurred primarily in connection with our mortgage obligation to the EDC, interest on notes payable to Sun Pharmaceutical and Sun Pharma Global as well as a new lines of credit granted to us through the assistance of Sun Pharmaceutical by ICICI Bank and the Bank of Nova Scotia. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, we had negative working capital of $3,484,736 compared with a negative working capital of $6,039,331 at the end of 2001. The negative working capital positions as of June 30, 2002 and December 31, 2001, respectively were mainly due to the classification of the entire balance of the EDC debt and 23 related accrued interest as current until the anticipated renegotiation of the repayment terms is completed, of which there is no assurance. 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 May 20, 2002 we have received $5,000,000 from ICICI Bank of India and $10,900,000 from Bank of Nova Scotia through these credit facilities. Further, we have received an additional loan of $2,450,000 during the fourth quarter of 2001 and $1,400,000 during the first quarter of 2002 from Sun Pharmaceutical to help us finance our research and development activities, debt reduction and working capital requirements. In addition, during the first quarter of 2002, 250,000 shares of common stock were issued by us for cash of $650,000 pursuant to a private placement to accredited investors, and during the second quarter of 2002, we have been able to place further 385,000 shares of common stock for cash of $1,042,000 pursuant to the private placement to accredited investors. FUTURE OUTLOOK We have experienced difficult times in the past. With having been found to be in substantial compliance by the FDA with respect to cGMPs during the second quarter of 2001, and also with the approvals of 6 ANDAs during 2001 and 2002, we feel reasonably optimistic about our future outlook. Our plans for improving profitability, cash flow positions and operations include increased sales (see below) and infusion of additional funding through the issuance of equity. Sun Pharmaceutical also continues to remain committed to support us, as it has in the past. During 2002, we have seen substantial improvements in revenues as compared to our historical performance. Capacity utilizations are improving and costs are being controlled. We expect sales and revenues to improve during 2002. Our plans for the remainder of 2002 include: - Continued focus on FDA compliance. - Continued research and development activities. We intend to file 3-4 ANDAs with the FDA prior to year-end. - Increased market share for certain existing products and recently introduced new products. - Increasing the speed of introduction of new approved products to the market, such as Metformin Hydrochloride. - Achieving operational efficiencies by attaining economies of scale, cost reduction per unit, and cheaper costs for active substances acquired from competitors and/or Sun Pharmaceutical. - Increasing the number of products, which, in turn, will improve manufacturing capacity utilization. We believe some of our pending ANDA products will be approved by the FDA by year-end. - Renegotiate and extend the term of our products agreement with Sun Pharmaceutical. (See "Business - Sun Pharmaceutical Industries Limited.") 24 - Restructure our EDC loan. (See "Business - Property.") 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 (prescription) and over-the-counter (non-prescription or "OTC") markets. A generic drug is a pharmaceutical product, which is the chemical and therapeutic equivalent of a brand-name drug as to which the patent and/or market exclusivity has expired. Generics are well accepted for substitution of brand products as they sell at a discount to the branded product's price and for their equivalence in quality and bioavailability. A significant source of our funding has been from private placement offerings and loans. Sun Pharmaceutical a specialty pharmaceutical corporation organized under the laws of India which currency beneficially owns 46.3% 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. In 2001 we continued to sustain substantial operating losses. At December 31, 2001, we had a stockholders' deficit of $22,945,249. At June 30, 2002, we had a stockholders' deficit of $21,845,879. Realization of a major portion of the assets is dependent upon our ability to meet our future financing requirements and the success of future operations, the outcome of which cannot be determined at the present time. We have continued to be dependent on the support of Sun Pharmaceutical. See "Sun Pharmaceutical Industries Limited" and Management's Discussion and Analysis of Financial Condition and Results of Operations." Net sales for the years ended December 31, 2001 and 2000 were $5,922,431 and $2,377,546, respectively, representing a 150% increase over the previous year. Net sales for the six months ended June 30, 2002 and 2001 were $8,929,408 and 1,867,330, respectively, reflecting an increase of almost 378%. We earned a gross profit of $1,736,372 for 2001 compared to a gross loss of $301,354 during 2000. We earned a gross profit of $4,515,940 during the first six months of 2002 as compared to a nominal gross profit of $27,972 during the corresponding period in 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" We also received 3 ANDA approvals during 2001, and 3 more ANDA approvals during the first six months of 2002. See "Caraco's Products and Product Strategy" and "Regulation" below. 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 (classified as a current obligation) stands at approximately $7,800,000 as at June 30, 2002. We have reconciled the principal balance outstanding with the EDC as of June 30, 2002 and we have reclassified the loan and accrued interest thereon. We have been paying $100,000 per month since February 1999 and in aggregate $4.1 million through June, 2002 to the EDC. Based on certain assumptions, we have allocated the payment of $600,000 during the first six months of 2002 made to the EDC between principal and interest. While such payments have brought us current in our interest obligation to the EDC, they have not brought us current in our obligations to the EDC as per the renegotiated terms of our 1997 restructured loan. Accordingly, the EDC may exercise all remedies available to it for our failure to make the scheduled payments. We intend to continue to make monthly payments of $100,000 to the EDC, again without prejudice to the rights of the EDC. We have recently submitted a proposal to the EDC to restructure the loan. 25 OVERVIEW OF THE GENERIC DRUG INDUSTRY Sales of generic drugs have increased in recent years because of a number of factors including (i) modification of state laws to permit or require substitution of generic drugs by pharmacists; (ii) enactment of Abbreviated New Drug Applications (ANDAs) procedures for obtaining Food and Drug Administration ("FDA") approval to manufacture generic prescription drugs; (iii) changes in governmental and third-party payor health care reimbursement policies to encourage cost containment; (iv) increased acceptance of generic drugs by physicians, pharmacists and consumers; and (v) the increasing number of formerly patented drugs which have become available to generic competition. Moreover, every year branded drugs with significant sales volumes come off-patent. CARACO'S PRODUCTS AND PRODUCT STRATEGY Our present product portfolio includes 13 prescription products in 22 strengths in 44 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 We have submitted 12 ANDAs to the FDA for approval since August 1997, including 2 filed during the first six months of 2002. Of these 12 ANDAs, the FDA approved 3 during 2001 and 3 during the first six months of 2002. Accordingly, we have 6 pending ANDAs, (some of which, we believe, will be approved by 2002 year-end). Of the 12 ANDAs, Sun Pharmaceutical has transferred the technology for 10 of them to us pursuant to our products agreement. (See "Sun Pharmaceutical Industries Limited") 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. 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 26 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 (See below). 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 13 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 $296,715 at December 31, 2001. CLONMEL CHEMICALS CO., LTD. (IRELAND) On October 22, 1993, we entered into an agreement with Clonmel Chemicals Co., Ltd. ("Clonmel"), pursuant to which Clonmel provided to us, with respect to each of two generic pharmaceutical products, formulations that have been previously tested, the formulation and manufacturing methods, in process controls, finished product specifications, analytical methods and stability data required for us to manufacture our own bio-batches (sample batches of the product in amounts necessary for testing on humans) for use in the preparation and filing with the FDA of ANDAs with respect to these products. Pursuant to the agreement, we must bear all costs of developing the products and filing the ANDAs and must pay Clonmel $10,000 on delivery of complete files containing the foregoing data, another $20,000 on completion of a successful bioequivalency study (which study will be at our expense), and a final $20,000 upon receipt of FDA approval of the related ANDA. Clonmel has granted us the exclusive right to manufacture and market these products in the United States, including its territories and Puerto Rico, and in Canada; and we have agreed to pay royalties to Clonmel on net sales (as defined) of these products for five years from the date on which the marketing of the respective product commences. The formulations were delivered to us in 1994 and a bioequivalency study of one of the products was conducted and an ANDA was filed in January 1997. The ANDA was approved in June 2001. (It is one of our current 13 products.) The second product is not currently being pursued. 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% (which 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 loans mature and are due and payable on August 31, 2006. Prior to this, an affiliate of Sun Pharmaceutical 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 27 been reduced by the affiliate from 10% to 8% effective April 1, 2001. The loan is payable in full in October 2003. During 2000, 2001 and 2002, Sun Pharmaceutical 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, during 2000, $5 million from ICICI Bank Limited and $10 million from The Bank of Nova Scotia during 2000 and 2001. Further, we have utilized $0.9 million of the enhanced facility during April 2002. The amounts borrowed under the ICICI Bank Limited credit facility must be repaid in eight equal quarterly installments beginning 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 is required to transfer to us the technology formula for 25 generic pharmaceutical products over a period of five years through August 2002. We exchange 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 are selected by mutual agreement. As of December 31, 2001, Sun Pharmaceutical has delivered to us the formula for 13 products. Sun Pharmaceutical currently beneficially owns approximately 46.3% of our outstanding common stock. We are currently attempting to renegotiate and extend the term of the Products Agreement . There is no assurance that the Products Agreement will be successfully renegotiated and/or extended. In connection with the technology transfer, 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. In the year ended December 31, 2001, we purchased approximately $1,138,000 in raw materials 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. 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 28 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 35% and 17% of sales in 2001 and 2000, respectively. Balances due from this customer represented approximately 40% and 9% of accounts receivable at December 31, 2001 and 2000, respectively. Shipments to another wholesale customer accounted for approximately 11% and 8% of sales in 2001 and 2000, respectively. Balances due from this customer represented approximately 18% and 4% of accounts receivable at December 31, 2001 and 2000, respectively. RESEARCH AND DEVELOPMENT The development of new prescription ANDA products, including formulation, stability testing and the FDA approval process, averages from two to five years. A drug is "bioequivalent" to a brand-name drug if the rate and extent of absorption of the drug are not significantly different from those of the brand-name drug. Although we perform our own stability testing, bio-equivalence is done through independent testing laboratories. An outline of research and development expenses incurred directly by us for 2001 and 2000 follows (000's):
2001 2000 ---- ---- Employee Costs $530 $576
29 Raw Materials/Supplies 131 138 Bioequivalency Studies 132 644 Laboratory Expenses 264 120 Other 2,022 1,596 ------ ------ TOTAL $3,079 $3,074 ====== ======
During 2001, Sun Pharmaceutical did not receive any shares of our common stock since bioequivalency studies for the 3 ANDAs transferred were not completed. Accordingly, the research and development expenses shown above for 2001 do not include the non-cash cost of the products transferred by Sun Pharmaceutical to us as compared to non-cash expenses of $221,000 during 2000. We have three research and development projects in 2002, two of which have been submitted to the FDA for approval. It is anticipated that the third product will be submitted to the FDA in September or October 2002. FDA approval normally takes 12 to 18 months. The biostudy costs of the three products aggregate approximately $785,000, of which approximately $415,000 has been paid through June 30, 2002. Raw material costs for the three products aggregated $74,500. All of the above expenditures were made in 2001 and 2002. $150,000 has also been expended in 2002 with respect to the manufacture, quality control, quality assurances and preparation of batches of the three products. Another $25,000 is expected to be expended on the foregoing. In addition, there is a non-cash technology transfer cost relating to the products. Sun Pharmaceutical is to receive 544,000 shares of our common stock for each ANDA. No shares have yet been issued to Sun with respect to these three products. Net cash in-flows are expected to commence with respect to the three products in the beginning of 2004, mid-2004 and at the end of 2004, respectively. There are risks and uncertainties associated with successfully completing the bioequivalency test of the third product and of receiving timely FDA approvals and of manufacturing and marketing all three products. If the projects are not successfully completed, our future business growth would be adversely affected. 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 30 provide substantial evidence of safety and efficacy of the drug product. Compliance with cGMP's is required at all times during the manufacture and processing of drugs. Such compliance requires 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. 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 31 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 an FDA inspection during 1999, at which time we received an FDA 483 (List of Observations). We responded to those observations and met with the Detroit District Director of the FDA. During the first quarter of 2000, the FDA conducted another inspection. We received another FDA 483, to which we responded in June 2000. In July 2000, we received a warning letter from the FDA relating to deviations and/or deficiencies in the cGMPs. The areas of concern related to record-keeping systems, testing standards, staff training and proficiency and quality systems. In response to the FDA 483s and warning letter, we retained the services of an FDA compliance-consulting firm in 1999 to help us address the cGMP compliance issues and develop the implementation plan to respond to the noted deficiencies and/or deviations. We responded to the FDA indicating the corrective measures and plan to rectify the deviations and deficiencies referred to above. During that time, the FDA would not approve any of our pending ANDAs. We actively undertook corrective measures to return us to compliance with cGMPs. We underwent FDA inspections during March and April of 2001 and we were found to be in substantial compliance with cGMPs. Although we did receive an FDA 483, we do not believe the observations are material. Subsequent to the inspection of the facility, the FDA granted its approval of 3 of our ANDA products during 2001. In May 2001, the FDA provided us with a letter waiving pre-approval inspections for the then pending ANDA submissions. During the first six months 2002, the FDA approved 3 more of our ANDAs. 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 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. 32 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 June 30, 2002, we have 138 employees engaged in research and development, quality assurance, quality control, administration, sales and marketing, materials management, facility management and manufacturing and packing. We have approximately doubled the number of our employees when compared to June 30, 2001. As of December 31, 2001, we had 76 employees who are engaged in research and development, quality assurance, quality control, administration, sales and marketing, materials management, facility management and manufacturing and packing. We have approximately doubled the number of our employees when compared to December 31, 2000. Most of our scientific and engineering employees have had prior experience with pharmaceutical or medical products companies, including Sun Pharmaceutical (See "Sun Pharmaceutical Industries Limited") 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 $5 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. There can be no assurance that the coverage limits of such policies will be adequate to cover our liabilities, should they occur. 33 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.") 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. During the month of December 1998 we approached the EDC regarding reconsideration of the repayment terms. We have defaulted on the Modification Agreement and have not made any of the schedule payments. We are currently renegotiating the repayment schedule with the EDC. During 2000, 2001 and 2002 to date, while we have been renegotiating with the EDC, we have paid $4.1 million to the EDC. 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. We intend to continue to make payments to the EDC again without prejudice to the rights of the EDC. The mortgage is a first priority mortgage lien against the property and may not be subordinated to the lien on any other mortgage or encumbrance except as otherwise provided in the Modification Agreement. In addition, Caraco has granted EDC a continuing security interest in all of our assets, accounts, equipment, proceeds thereof, ANDAs and in the products to be provided by Sun Pharmaceutical to us under its agreement with us. In addition to other covenants, we have agreed that our capital expenditures will 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 shares or merge or consolidate with any other corporation or other entity without the prior written consent of the EDC. 34 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. EXECUTIVE OFFICERS AND DIRECTORS Set forth below is information concerning our executive officers and directors as of June 3, 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 51 Chief Operating 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. 35 Jitendra N. Doshi has been 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. 36 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 recommends to the Board of Directors a 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, and makes such reports and recommendations to the Board of Directors as it deems appropriate. 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 one most highly compensated executive officer 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 2001 120,000 0 0 0 0 0 9,960(1) Chief Executive Officer 2000 120,000 0 0 0 0 0 9,960(1) 1999 120,000 0 0 75(2) 200,000(3) 0 4,560(4) Robert Kurkiewicz 2001 122,400 0 0 0 10,000(5) 0 4,560(4) Sr. Vice President 2000 120,000 0 0 0 0 0 4,560(4) Technical 1999 120,000 0 0 75(2) 0 0 4,560(4)
37 (1) $5,400 was contributed to Mr. Borkar for his retirement account and $380 per month was given for car allowance. (2) 100 shares of restricted stock were awarded by the Board of Directors to all employees during the month of December, 1999 (with a fair market value of $0.75 per share on such date). (3) A stock option of 200,000 shares was awarded to Mr. Borkar in June, 1999. See "Certain Transactions of Directors, Executive Officers and Certain Beneficial Holders of Caraco." (4) $380 per month was given for car allowance. (5) See "Option Grants in the Last Fiscal Year." OPTION GRANTS IN LAST FISCAL YEAR Stock options granted in 2001 to the named executive officers.
(a) (b) (c) (d) (e) Name Number of Individual Grants Percent Exercise Price Expiration Securities of Total Options Granted Per Share Date Underlying to All Employees in Options Granted Fiscal Year Narendra N. Borkar 0 -- -- -- Robert Kurkiewicz 10,000 3.1% $0.80 6-4-07
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information for the named executive officers with regard to the aggregate stock options exercised during the year ended December 31, 2001, and the stock options held as of December 31, 2001.
Name Shares Acquired Value Number of Securities Value of Unexercised In- on Exercise Realized Underlying Unexercised the-Money Options at FY- ($) Options at FY-End (#) End ($) (1) Exercisable/Unexercisable Exercisable/Unexercisable Narendra N. Borkar 0 0 170,000 /180,000 $44,100/$29,400 Robert Kurkiewicz 0 0 39,000/36,000 $8,190/$8,960
38 (1) The value is based on the difference between the exercise prices and the closing bid price of Caraco's common stock on December 31, 2001. 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 $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. 39 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. As of June 30, 2002, incentive stock options to purchase an aggregate of 268,375 shares of common stock were outstanding under the option plan, of which 214,700 were fully vested, and a total of 281,625 shares of common stock remain available for grant. As of June 30, 2002, the outstanding options under the 1993 Plan were held by an aggregate of 15 individuals and were exercisable at prices ranging from $0.66 to $0.94 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, and 120,000 of such options are currently exercisable. Mr. Kurkiewicz has been granted 65,000 incentive stock options under the 1993 Plan, at an exercise price of $0.94 per share, and 52,000 of such shares are currently exercisable. The 1993 Plan provides for the grant to employees of our company of options to purchase shares of common stock that qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, as well as non-statutory options that do not qualify as incentive stock options. This 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, terms and number of shares subject to each award. Incentive stock options granted under the plan may not have an exercise price less than the fair market value of the common stock on the date of grant (or, if granted to a person holding more than 10% of our voting stock, at less than 110% of fair market value). Non-statutory stock options granted under the 1993 Plan may not have an exercise price less than 85% of fair market value on the date of grant. Aside from the maximum number of shares of common stock reserved under the 1993 Plan, there is no minimum or maximum number of shares that may be subject to options under the 1993 Plan. Options generally expire when the optionees' employment or other service is terminated with us. Options generally may not be transferred, other than by will or the laws of descent and distribution, and during the lifetime of an optionee, may be exercised only by the optionee. The term of each option is fixed by the Compensation Committee at the time of grant, however incentive stock option may be exercisable only for 10 years and an incentive stock 40 option granted to a person holding more than 10% of our voting stock may be exercisable only for 5 years. Stock options may be exercisable with either cash or shares of our common stock or other form of payment authorized by the Compensation Committee. 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 under the 1999 Plan. As of June 30, 2002, options (incentive (525,000) and non-qualified (18,000)) to purchase an aggregate of 543,000 shares of common stock were outstanding under the 1999 Plan . As of June 30, 2002, 4,000 shares of restricted stock have been awarded under the 1999 Plan. As of June 30, 2002, 2,453,000 shares remain available for grant. As of June 30, 2002, the outstanding options under the plan were held by an aggregate of 36 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: 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. 41 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 (200,000) 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 (1,026,666 at a weighted average exercise price of $2.71 per share) and to certain of his family members (300,000 at a weighted average exercise price of $2.43 per share) and to David A. Hagelstein, a director of Caraco (574,158 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. TRANSACTIONS OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN BENEFICIAL HOLDERS OF CARACO The following discloses transactions during 2001 and 2000 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. On April 1, 2000 Messrs. Hagelstein and Joliat received 416,000 and 960,000 shares of common stock, respectively, in lieu of principal and interest on their outstanding respective promissory notes, based on a value of $1.00 per share. During 2000 we issued to Sun Pharmaceutical 1,088,000 shares of our common stock in exchange for two ANDAs. During 2001 and 2000, we purchased approximately $1,398,000 and $707,000, 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 2002. In December 1999 and part of 2000, Sun Pharmaceutical made a $2.0 million secured loan to us at an annual interest rate of 10% which was repaid in May, 2000. During 2001, Sun Pharmaceutical lent an additional $2,450,000. Sun Pharmaceutical reduced the rate of interest on its loans to us from 10% to 8% per annum with an effective date of April 1, 2001. During the first quarter of 2002, Sun Pharmaceutical loaned us an additional $1,400,000 at an annual interest rate of 8%. The loans are secured. In December 2001, the Board extended the exercise date to December 31, 2005 with respect to options for 224,158 shares of Caraco common stock previously granted to Mr. Hagelstein. The exercise price of such options is $1.50. 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 42 at the rate of 20% per year commencing one year from the date of grant and may be exercised until December 20, 2007. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table provides information, as of June 30, 2002, 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 JUNE 30, 2002
Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class Joliat Enterprises, LLC 1,943,454(1) 8.9% 36801 Woodward Avenue, Ste 300 Birmingham, MI 48009 Sun Pharmaceutical Industries Limited. 10,105,323(2) 46.3% SPARC, Akota Road, Akota Vadodara, 390 020 India C. Arnold Curry 1,195,447(3) 5.5% 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 7,657,333 shares of common stock of Caraco and beneficially owns 725,333 shares registered in the name of Sun Pharma Advanced Research Centre Pvt. Limited and 1,722,657 shares registered in the name of Sun Pharma Global Inc., affiliates of Sun Pharmaceutical. 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. SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS The following table contains information, as of June 30, 2002, 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 September 20, 2002, through the exercise of any stock option or other right. Unless indicated 43 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) 290,100(1)(2) 1.3% Sailesh T. Desai(9) 0(2) * Jitendra N. Doshi(8) 2,000(3) * David A. Hagelstein(10) 2,064,249(4) 9.2% Phyllis Harrison-Ross 11,200(5) * Jay F. Joliat(10) 3,332,034(6) 14.4% Robert Kurkiewicz(8) 56,013(7) * Dilip S. Shanghvi(9)(10) 0(2) * Sudhir Valia(9) 0(2) * All executive officers and directors as a group 5,755,596(2) 24.0% (9 persons)
* Less than 1.0% of the outstanding shares (1) Includes stock options that are currently exercisable to purchase 240,000 shares of common stock. (2) Excludes 10,105,323 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. (3) Mr. Jitendra Doshi was elected as a member of the Board of Directors on December 15, 2001. 44 (4) The shares are held in trust (the "Hagelstein Trust"). Includes stock options that are currently exercisable to purchase 580,158 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 6,000 shares of common stock. (6) Includes 1,943,454 shares owned by Joliat Enterprises, LLC, of which Mr. Joliat is managing partner. See "Security Ownership of Certain Beneficial Owners." Also, includes 285,714 Series A Preferred Stock convertible to common stock; and stock options that are currently exercisable to purchase 1,032,666 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 54,000 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 for a period of three years after August 2001 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 21,823,818 shares were issued and outstanding as of June 30, 2002. Each share of our common stock entitles its holder to one vote per share. Subject to the dividend rights of the 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 company upon a liquidation, 45 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, of which 285,714 shares are issued and outstanding. The outstanding shares of preferred stock have been designated as Series A preferred stock. The Series A preferred stock is entitled to receive dividends at the rate of $0.21 per share, payable in cash annually. Dividends on the Series A preferred stock are cumulative. No dividend of any kind shall be paid to the holders of the common stock until cumulative dividends have been paid in full to the Series A preferred stock. Each share of Series A preferred stock may be converted by the holder thereof prior to January 1, 2004 into one share of common stock. In the event of a liquidation, dissolution or winding-up of our company, the holder of the Series A preferred stock is entitled to distributions prior to distributions to the holders of common stock in the amount of $3.50 per share. We are not permitted to redeem the Series A preferred stock. So long as any series A preferred stock is outstanding, we cannot, without the consent of the holder of the Series A preferred stock, amend or repeal our articles of incorporation and bylaws if such action would change the rights or preferences of the Series A preferred stock; authorize the issuance of any capital stock having any preference or priority superior to the Series A preferred stock or reclassify any class or series of common stock or other capital stock into shares having any preference or priority over the Series A preferred stock. Except as otherwise required by law, the holder of Series A preferred stock has no voting rights. Mr. Joliat, a director of Caraco, is the holder of the Series A preferred stock. Subject to the rights of the Series A 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 June 30, 2002, we had outstanding options to purchase an aggregate of 2,930,199 shares of common stock at a weighted average exercise price of approximately $2.00 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. 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 46 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. Jay F. Joliat, the holder of Series A Preferred Stock is provided with certain registration rights. These include the requirement that we file a registration statement, at our expense, registering at least $2,000,000 value of such shares upon the request of 67% of the aggregate of the outstanding Series A Preferred Shares and shares of common stock. In addition, the Series A Preferred Shares are entitled, at our expense, to cause the registration of its shares of our common stock any time that we register our common stock under the Securities Act. The expenses of such registration shall be borne by us. At least 30% of the shares held by the holders of the Series A Preferred Shares must be included in such request. Mr. Joliat has not requested us to register his 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 47 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. 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. 48 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. 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, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, 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. 49 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. 50 CARACO PHARMACEUTICAL LABORATORIES LTD. UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001 F-1 CARACO PHARMACEUTICAL LABORATORIES LTD. UNAUDITED BALANCE SHEET -----------------------
JUNE 30, 2002 - ----------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 132,604 Accounts receivables, net of allowances of $1,347,000 4,067,466 Inventories 3,754,751 Prepaid expenses and deposits 277,881 ------------ Total current assets 8,232,702 ------------ Property, plant and equipment - at cost Land 197,305 Building and improvements 7,126,690 Equipment 5,198,816 Furniture and fixtures 221,495 ------------ Total 12,744,306 Less: accumulated depreciation 5,175,449 ------------ Net property, plant & equipment 7,568,857 ------------ ------------ Total assets $ 15,801,559 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable $ 1,105,189 Accrued expenses 868,347 Technology Transfer cost payable 1,251,200 Accrued interest 668,961 EDC debt classified as current 7,823,741 ------------ Total current liabilities 11,717,438 ------------ Long-term liabilities Notes payable to stockholders 9,700,000 Loans Payable 15,900,000 Preferred stock dividends payable 330,000 ------------ Total long-term liabilities 25,930,000 ------------
F-2
------------ Total liabilities 37,647,438 ------------ Stockholders' deficit Preferred stock, no par value, authorized 5,000,000 shares; 1,000,000 issued and outstanding, 285,714 Series A shares Common stock, no par value, authorized 30,000,000 shares; 34,665,301 issued and 21,823,818 outstanding shares Subscriptions in Advance 7,520 Preferred stock dividends (330,000) Accumulated deficit (57,188,700) ------------ Total stockholders' deficit (21,845,879) ------------ ------------ Total liabilities and stockholders' deficit $ 15,801,559 ============
F-3 CARACO PHARMACEUTICAL LABORATORIES LIMITED UNAUDITED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30 2002 2001 - -------------------------------------------------------------------------------- Net Sales $8,929,408 $ 1,867,330 Cost of goods sold 4,413,468 1,839,358 --------------------------- Gross profit 4,515,940 27,972 Selling, general & administrative expenses 1,309,300 1,149,072 R&D Cost Non-cash 1,251,200 - R&D Cost Other 1,571,502 1,237,201 Depreciation 227,776 254,341 --------------------------- Operating Profit / (Loss) 156,162 (2,612,643) --------------------------- Interest Interest expense (745,982) (1,006,343) Interest income 2,420 12,203 --------------------------- Net Interest Expense (743,562) (994,140) --------------------------- Net Loss $ (587,400) $(3,606,783) --------------------------- Net loss per basic and diluted common share $ (0.03) $ (0.17) ---------------------------
F-4 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 2002 2001 - --------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (587,400) $(3,606,783) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 227,776 254,341 Common Shares issued for compensation 34,500 - Common Shares to be issued for R&D Cost 1,251,200 - Changes in operating assets and liabilities which provided (used) cash: Accounts receivable (2,580,958) (200,851) Inventories (845,696) (497,820) Prepaid expenses and deposits (98,680) (107,758) Accounts payable 142,288 636,645 Accrued expenses and Interest (8,389) 377,124 -------------------------- Net cash used in operating activities (2,465,359) (3,145,102) -------------------------- Cash flows from investing activities: -------------------------- Purchases of property, plant and equipment (1,102,637) (13,073) -------------------------- Cash flows from financing activities: Proceeds from long-term debt 900,000 3,650,000 Proceeds from Sale of Shares in Private Placement 1,692,000 - Advance for Stock Option Exercise 7,520 - Net Short-term repayments (75,000) (50,000) Payments to EDC (465,028) (600,000) Net Loans received from Shareholders 1,400,000 - -------------------------- Net cash provided from financing activities 3,459,492 3,000,000 -------------------------- Net decrease in cash and cash (108,506) (158,176) Cash and cash equivalents, beginning of period 241,110 186,768 -------------------------- Cash and cash equivalents, end of period $ 132,604 $ 28,592 ==========================
F-5 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENT OF SHAREHOLDERS' DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
PREFERRED PREFERRED STOCK COMMON STOCK STOCK ACCUMULATED SHARES AMOUNT SHARES AMOUNT DIVIDENDS DEFICIT TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 285,714 $ 1,000,000 21,172,618 $ 32,955,600 $(240,000) $(50,843,838) $(17,128,238) Preferred dividend (30,000) (30,000) Net loss (3,606,783) (3,606,783) ----------------------------------------------------------------------------------------------- Balance at June 30, 2001 285,714 1,000,000 21,172,618 32,955,600 (270,000) (54,450,622) (20,765,021) =============================================================================================== Balance at January 1, 2002 285,714 1,000,000 21,173,818 32,956,051 (300,000) (56,601,300) $(22,945,249) Preferred dividend (30,000) - (30,000) Issuances of common stock 15,000 17,250 17,250 to Directors as compensation Issuances of common stock under private placement 635,000 1,692,000 1,692,000 Advance for subscription for stock option exercise 7,520 7,520 Net loss (587,400) (587,400) ----------------------------------------------------------------------------------------------- Balance at June 30, 2002 285,714 $ 1,000,000 21,823,818 $34,672,821 $(330,000) $(57,188,700) $(21,845,879) ===============================================================================================
F-6 CARACO PHARMACEUTICAL LABORATORIES LTD. FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 F-7 CARACO PHARMACEUTICAL LABORATORIES LTD. INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS Independent Auditors' Report Balance Sheets - December 31, 2001 and 2000 Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999 Statements of Stockholders' Deficit for the Years Ended December 31, 2001, 2000 and 1999 Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 Notes to Financial Statements F-8 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, 2001 and 2000, and the related statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. REHMANN ROBSON Troy, Michigan February 13, 2002 F-9 BALANCE SHEETS - --------------------------------------------------------------------------------
ASSETS DECEMBER 31 ------------------------- 2 0 0 1 2 0 0 0 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 241,110 $ 186,768 Accounts receivable, net of allowances of $400,000 ($157,000 in 2000) 1,486,508 466,446 Inventories 2,909,055 1,411,921 Prepaid expenses and deposits 179,201 63,384 ----------- ----------- TOTAL CURRENT ASSETS 4,815,874 2,128,519 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Land 197,305 197,305 Buildings and improvements 6,829,377 6,784,027 Equipment 4,407,323 4,356,478 Furniture and fixtures 207,750 195,410 ----------- ----------- Total 11,641,755 11,533,220 Less accumulated depreciation 4,947,673 4,438,987 ----------- ----------- NET PROPERTY, PLANT AND EQUIPMENT 6,694,082 7,094,233 ----------- ----------- TOTAL ASSETS $11,509,956 $ 9,222,752 =========== ===========
The accompanying notes are an integral part of these financial statements. F-10
LIABILITIES AND STOCKHOLDERS' DEFICIT DECEMBER 31 ---------------------------- 2 0 0 1 2 0 0 0 ------------ ------------ CURRENT LIABILITIES Accounts payable $ 689,233 $ 561,102 Accounts payable, Sun Pharma 273,668 355,897 Accrued expenses 296,715 247,978 Short-term borrowings 75,000 75,000 Notes payable to stockholders, current portion - 50,000 EDC loan payable 5,380,000 6,580,000 Accrued interest 4,140,589 3,441,011 ------------ ------------ TOTAL CURRENT LIABILITIES 10,855,205 11,310,988 ------------ ------------ LONG-TERM LIABILITIES Loans payable to financial institutions 15,000,000 8,850,000 Notes payable to stockholders 8,300,000 5,950,000 Preferred stock dividends payable 300,000 240,000 ------------ ------------ TOTAL LONG-TERM LIABILITIES 23,600,000 15,040,000 ------------ ------------ TOTAL LIABILITIES 34,455,205 26,350,988 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTES 5, 9 AND 12) STOCKHOLDERS' DEFICIT Preferred stock, no par value; authorized 5,000,000 shares, issued and outstanding 285,714 Series A shares (285,714 in 2000) 1,000,000 1,000,000 Common stock, no par value; authorized 30,000,000 shares, issued and outstanding 21,173,818 shares (21,172,618 in 2000) 32,956,051 32,955,601 Preferred stock dividends (300,000) (240,000) Accumulated deficit (56,601,300) (50,843,837) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIT (22,945,249) (17,128,236) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,509,956 $ 9,222,752 ============ ============
F-11 STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 ----------------------------------------- 2 0 0 1 2 0 0 0 1 9 9 9 ----------- ----------- ----------- Net sales $ 5,922,431 $ 2,377,546 $ 2,895,022 Cost of goods sold 4,186,059 2,678,900 3,091,245 ----------- ----------- ----------- GROSS PROFIT (DIFFERENTIAL) 1,736,372 (301,354) (196,223) Selling, general and administrative expenses 2,680,494 2,508,737 2,159,116 Research and development costs 3,079,804 3,295,435 6,332,390 ----------- ----------- ----------- OPERATING LOSS (4,023,926) (6,105,526) (8,687,729) ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (1,748,922) (1,555,192) (1,085,019) Interest income 15,385 38,010 32,764 ----------- ----------- ----------- OTHER EXPENSE - NET (1,733,537) (1,517,182) (1,052,255) ----------- ----------- ----------- NET LOSS $(5,757,463) $(7,622,708) $(9,739,984) =========== =========== =========== NET LOSS PER BASIC AND DILUTED COMMON SHARE $ (0.29) $ (0.39) $ (0.58) =========== =========== ===========
F-12 STATEMENTS OF STOCKHOLDERS' DEFICIT
PREFERRED STOCK COMMON STOCK PREFERRED ----------------------- --------------------------- STOCK ACCUMULATED SHARES AMOUNT SHARES AMOUNT DIVIDENDS DEFICIT TOTAL -------- ------------ ------------ ------------ ------------ ------------ -------------- Balances at January 1, 1999 285,714 $ 1,000,000 14,528,000 $ 29,025,840 $ (120,000) $(33,481,145) $ (3,575,305) Preferred stock dividends - - - - (60,000) - (60,000) Issuance of shares via private placement - - 412,362 396,000 - - 396,000 Shares issued to directors in lieu of compensation - - 2,600 2,959 - - 2,959 Shares issued to employees in lieu of compensation - - 4,000 3,000 - - 3,000 Issuance of shares to Sun Pharma - - 3,609,333 1,804,666 - - 1,804,666 Net loss - - - - - (9,739,984) (9,739,984) -------- ------------ ------------ ------------ ------------ ------------ ------------- Balances at December 31, 1999 285,714 1,000,000 18,556,295 31,232,465 (180,000) (43,221,129) (11,168,664) Preferred stock dividends - - - - (60,000) - (60,000) Shares issued in exchange for services - - 120,990 103,496 - - 103,496 Shares issued in exchange for retirement of debt - - 1,390,000 1,390,000 - - 1,390,000 Issuance of shares to Sun Pharma - - 1,105,333 229,640 - - 229,640 Net loss - - - - - (7,622,708) (7,622,708) -------- ------------ ------------ ------------ ------------ ------------ ------------- Balances at December 31, 2000 285,714 1,000,000 21,172,618 32,955,601 (240,000) (50,843,837) (17,128,236) Preferred stock dividends (60,000) (60,000) Shares issued in lieu of compensation - - 1,200 450 - - 450 Net loss - - - - - (5,757,463) (5,757,463) -------- ------------ ------------ ------------ ------------ ------------ ------------- Balances at December 31, 2001 285,714 $ 1,000,000 21,173,818 $ 32,956,051 $ (300,000) $(56,601,300) $ (22,945,249) ======== ============ ============ ============ ============ ============ =============
The accompanying notes are an integral part of these financial statements. F-13 STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ----------------------------------------- 2 0 0 1 2 0 0 0 1 9 9 9 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(5,757,463) $(7,622,708) $(9,739,984) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 508,682 574,442 576,182 Common shares issued to satisfy interest expense - 86,000 119,043 Common shares issued in exchange for product formula - 229,640 1,804,666 Common shares issued in lieu of compensation 450 17,496 5,959 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable (1,020,062) (102,258) 109,002 Inventories (1,497,134) 293,171 (435,549) Prepaid expenses and deposits (115,817) 13,951 (7,603) Accounts payable 45,902 (614,134) 682,817 Accrued expenses and interest 748,315 681,108 1,196,858 ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (7,087,127) (6,443,292) (5,688,609) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (108,531) (215,459) (360,448) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bank term loans 6,150,000 8,850,000 - Net short-term borrowings - 75,000 - Net borrowings (repayments) on loans from stockholders 2,300,000 (225,000) 5,275,000 Repayments of EDC loan (1,200,000) (2,300,000) - Proceeds from issuance of common stock - - 396,000 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,250,000 6,400,000 5,671,000 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54,342 (258,751) (378,057) Cash and cash equivalents, beginning of year 186,768 445,519 823,576 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 241,110 $ 186,768 $ 445,519 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-14 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. While other ANDA build-ups have proceeded, the Corporation has generated relatively limited sales revenue through December 31, 2001. 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 2001 and 2000, the Corporation also obtained term loans totaling $15 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 is 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, 2001, Sun Pharma has delivered to Caraco the formula for 13 products and owns approximately 48% of the outstanding common stock of the Corporation. 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), in recent years Sun Pharma has also supplied Caraco with certain raw materials (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. 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 F-15 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS 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. GOING CONCERN ASSUMPTION The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Corporation has never achieved sales necessary to support operations. The Corporation has, as of December 31, 2001, a stockholders' deficit of $22,945,249. Realization of a major portion of its assets is dependent upon the Corporation's ability to meet its future financing requirements and the success of future operations, the outcome of which cannot be assured. These factors raise concern about the Corporation's ability to continue as a going concern in the absence of sufficient additional funds, the achievement of profitable operations, and the sustained financial and operating support from Sun Pharma. 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 interests 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 as a going concern. 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 2002. Management's plans also include for 2002: - Continued focus on FDA compliance. - Continued research and development activities. - Increased market share for certain existing products and recently introduced new products and enhance customer reach and satisfaction. - Attempt to increase the speed of introduction of new approved products to the market, such as Metformin Hydrochloride and four other pending ANDA products. - Achieve operational efficiencies by attaining economies of scale, cost reduction per unit, and cheaper costs for active substances acquired from competitors and/or Sun Pharma. F-16 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS - 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. 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 Sales are recognized upon the shipment of product, which constitutes delivery to the customer and substantial performance of the Corporation's obligation to the customer. Allowances are provided for returns and price adjustments in the normal course of business based primarily upon actual historical results. Amounts billed by the Corporation, if any, in advance of performance in connection with contracts to render certain manufacturing or research and development services are deferred and then recognized upon performance of services. INVENTORIES Inventories are stated at the lower of cost determined by the first in, first-out method, or market. LOSS PER SHARE Loss per share is computed using the weighted average number of common shares outstanding during each year and considers a dual presentation and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the potential dilution of all common stock equivalents. F-17 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS At December 31, 2001, 2000 and 1999, options to purchase 2,705,199, 2,486,155 and 2,569,355 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.
2 0 0 1 2 0 0 0 1 9 9 9 ----------- ----------- ----------- Numerator: Loss from continuing operations $ 5,757,463 $ 7,622,708 $ 9,739,984 Cumulative preferred stock dividends 300,000 240,000 180,000 ----------- ----------- ----------- Loss available for common stockholders 6,057,463 7,862,708 9,919,984 ----------- ----------- ----------- Denominator: Weighted average shares outstanding basic and diluted 21,173,522 19,755,021 16,725,271 ----------- ----------- ----------- Loss per basic and diluted common share $ .29 $ .39 $ .58 =========== =========== =========== - ----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Depreciation is computed using the straight line method over the estimated useful lives of the related assets, which range from 5 to 40 years. Management annually reviews these assets for impairment and reasonably believes the carrying value of these assets will be recovered through cash flow from operations, assuming the Corporation is successful in continuing to operate as a going concern. 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. F-18 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS 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. COMMON STOCK ISSUED TO DIRECTORS Common stock is issued from time to time in lieu of cash for directors fees, and is recorded as compensation expense at the fair value on the date of issuance. COMMON STOCK ISSUED TO SUN PHARMA Common stock is issued 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 of issuance. Such costs amounted to $0, $229,640 and $1,804,666 during 2001, 2000 and 1999, respectively. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, "Business Combinations." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. During its operating history the Company has neither initiated nor completed any business combinations and, accordingly, expects that adoption of the new standard will not have an effect on the Company's financial position or results of operations. 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 F-19 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS 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 value. The Company is currently evaluating the effects of adopting Statement No. 144 and at this time cannot predict whether or not its provisions will 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, 2001 and 2000 was approximately $1,044,000 and $760,000, respectively. No interest payments were made during 1999. F-20 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS 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 at December 31:
2 0 0 1 2 0 0 0 ------------- ------------- Accounts receivable $ 1,886,508 $ 623,446 ------------- ------------- Allowances: Doubtful accounts 75,000 6,000 Sales returns and allowances 42,000 20,000 Price adjustments 283,000 131,000 ------------- ------------- Total allowances 400,000 157,000 ------------- ------------- Accounts receivable, net of allowances $ 1,486,508 $ 466,446 ============= =============
4. INVENTORIES Inventories consist of the following amounts at December 31:
2 0 0 1 2 0 0 0 ------------- ------------- Raw materials $ 1,955,080 $ 889,742 Work in process 719,729 417,391 Finished goods 234,246 104,788 ------------- ------------- Total $ 2,909,055 $ 1,411,921 ============= =============
The principal components used in the Corporation's business are active and inactive pharmaceutical ingredients and certain packaging materials. Many of these components are available only from sole source suppliers, most of whom must be FDA approved. Qualification of a new supplier could serve to delay the manufacture of the drug involved. During 2001, 2000 and 1999, the Corporation purchased approximately $1,138,000, $707,000, and $397,000, respectively, of its raw materials from Sun Pharma. The Corporation also purchased approximately $148,785 of raw materials from an entity owned by a shareholder during 2001. 5. DEBT (INCLUDING RELATED PARTIES) SHORT-TERM BORROWINGS Short-term borrowings consist of unsecured draws made in 2000 on a credit facility from Taurus Financial Service Limited. Principal and interest charged at 8% per annum are payable on demand. F-21 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS EDC LOAN Debt at December 31, 2001 includes a note payable to the Economic Development Corporation (EDC) of the City of Detroit (classified as a current obligation of $5,380,000 at December 31, 2001), plus accrued interest there on, 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. The Corporation is in default on this debt obligation. Effective April 2, 1993, and subsequently on August 5, 1997, the Corporation and the EDC of the City of Detroit restructured the Agreement discussed above. The amendment included the deferral of scheduled principal and interest payments until February 1, 1999, at which time additional deferred principal and interest due under the terms of the original agreement were required in amounts sufficient to amortize the total deferred amount through July 2002. Additionally the amendment included a reduction in the stipulated interest rate from the inception of the loan through 1993 from 10% to 8.5%. The interest rates from 1994 through July 2002 vary from 5% to 6.4%, 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 December of 1998, the Corporation approached the EDC regarding renegotiation of the repayment terms. The Corporation is currently renegotiating the repayment schedule with the EDC and, as such, has not made any of the scheduled payments. During 2001 and 2000, the Corporation made payments of $1,200,000 and $2,300,000, respectively, to the EDC. All payments on the EDC loan to date have been applied against the principal balance for financial reporting purposes. The Corporation continues to accrue interest. Upon the renegotiation of the debt, some amount may be required to be reclassified between accrued interest and principal. Such payments have not brought the Corporation current in its obligations to the EDC, and such payments were made without prejudice to the rights of the EDC to exercise all remedies available to the EDC for failure to make the scheduled payments. While the terms of the restructured loan are being negotiated, the Corporation intends to continue to make payments to the EDC, again without prejudice to the rights of the EDC. Upon a final agreement of the restructured terms of the loan, of which there can be no assurance, the Corporation expects to then commence making the requisite agreed upon payments. F-22 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS LOANS PAYABLE Loans payable to financial institutions consist of the following obligations as of December 31:
2 0 0 1 2 0 0 0 ----------------- ------------------ Term loan payable to ICICI Bank of India, with quarterly principal payments of $625,000 commencing on December 31, 2003 and ending on September 30, 2005. Interest is adjusted semi-annually and is charged at the LIBOR rate plus 140 basis points (effective rate of 3.3% at December 31, 2001), and is due in quarterly installments. $ 5,000,000 $ 5,000,000 $10 million term loan payable to Bank of Nova Scotia, with semi-annual principal payments of $2,500,000 commencing in February 2004 and ending in September 2005. Interest is charged at the LIBOR rate plus 30 basis points (effective rate of 2.2% at December 31, 2001), and is due in quarterly installments. An additional annual fee is charged, based on the average outstanding balance at the LIBOR rate plus 125 basis points. 10,000,000 3,850,000 ---------------- ---------------- Total loans payable $ 15,000,000 $ 8,850,000 ================ ================
The Corporation incurred approximately $62,500 in bank fees as stipulated in the Bank of Nova Scotia term loan during 2001 and 2000. The Corporation also incurred syndication fees during 2000 of approximately $21,000 in securing these term loans, repayment of which are guaranteed by Sun Pharma. F-23 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS STOCKHOLDER NOTES PAYABLE Stockholder notes payable consist of the following obligations as of December 31: 2 0 0 1 2 0 0 0 --------------- --------------- Promissory notes payable to Sun Pharma with principal balance due in October 2003 and August 2006. Interest was charged at 10% per annum through March 31, 2001, then reduced to 8% thereafter, and is payable in semi-annual installments. $ 7,750,000 $ 5,300,000 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 was charged at 10% per annum through March 31, 2001, then reduced to 8% thereafter. 550,000 650,000 Promissory note payable to stockholder director, with interest charged at 10%, principal payments are payable installments, maturing March 1, 2001. - 50,000 -------------- -------------- Total shareholder notes payable $ 8,300,000 $ 6,000,000 ============== ==============
Notes payable to Sun Pharma and Sun Pharma Global, Inc. are subordinated to the EDC loan. Interest incurred on these stockholder notes amounted to $528,608, $697,363 and $477,212 in 2001, 2000 and 1999, respectively. Accrued expenses include approximately $630,000 of accrued interest payable on stockholder notes at December 31, 2001. Scheduled maturities of all long-term debt for each of the years succeeding December 31, 2001 are summarized as follows:
Year ended December 31 Amount ------------------ ----------------- 2002 $ - 2003 6,475,000 2004 7,500,000 2005 6,875,000 2006 2,450,000 ----------------- $ 23,300,000 =================
6. INCOME TAXES At December 31, 2001 and 2000 a deferred income tax asset and related valuation allowance, attributable primarily to the net operating loss carryforwards (calculated using a 34% tax rate) of approximately $17,300,000 and $15,000,000, respectively, has been established. Changes in the F-24 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS valuation allowance were approximately $1,930,000, $1,900,000 and $3,300,000 in 2001, 2000 and 1999, respectively At December 31, 2001, net operating loss carryforwards of approximately $51,000,000 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. 7. STOCKHOLDERS' DEFICIT PRIVATE PLACEMENT In connection with private placement offerings in 1999, the Corporation sold 412,362 shares of common stock netting $396,000. The shares were sold at prices ranging from $0.88 to $1.00 per share. OTHER COMMON STOCK ISSUANCES (ALSO SEE NOTE 2) During 2001 and 1999, the Corporation issued 1,200 and 2,600, respectively, shares of common stock to non-employee directors in exchange for services rendered. The Corporation recorded compensation expense of $450 and $3,000 in 2001 and 1999, respectively, based on the fair values of such shares on their issuance dates. During 2000 and 1999, the Corporation issued 1,105,333 and 3,609,333 shares of common stock, respectively, to Sun Pharma in exchange for the formula for eight ANDA and two DESI products delivered to Caraco. Such shares have been recorded as research and development expense, and have been included in the calculation of the weighted average number of common shares outstanding in the year the respective formula was delivered. During 2000, the Corporation issued 34,990 shares to an investor relations firm in exchange for services rendered. The Corporation recorded compensation expense of $17,496 based on the fair value of such shares on their issuance dates. In connection with an employment agreement entered into in 1998 with its Chief Executive Officer, the Corporation awarded a common stock bonus of 50,000 shares. Compensation expense of $3,000 was recorded during 1999 based on their fair value per share on the date of issuance. 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. F-25 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS Each share of preferred stock is nonvoting and is convertible, at the option of the holder, into one share of common stock through January 1, 2004. The preferred shares require annual dividends of $0.21 per share on a cumulative basis. Accrued dividends on preferred stock at December 31, 2001 and 2000 were $300,000 and $246,000, respectively. It is not expected that such dividends will be paid in 2002 and, accordingly, the related liability is classified as a noncurrent obligation on the accompanying balance sheet. 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:
2 0 0 1 2 0 0 0 1 9 9 9 -------------------------- ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ----------- -------- --------- ------- -------- Outstanding, beginning of year 560,331 $ 1.51 696,469 $ 1.88 556,721 $ 2.15 Granted 343,000 0.96 - - 200,000 1.15 Terminated (91,956) (3.31) (136,138) 3.38 (60,252) 1.24 ------- ----------- -------- --------- ------- -------- Outstanding, end of year 811,375 $ 0.90 560,331 $ 1.51 696,469 $ 1.88 ======= =========== ======= ========= ======= ======== Options exercisable, end of year 214,400 $ 0.91 174,881 $ 2.06 187,700 $ 3.25 ======= =========== ======= ========= ======= ========
Options at December 31, 2001: Options Outstanding Options Exercisable ------------------------------------------ ---------------------- Remaining Range of Exercise Contractual Exercise Exercise Prices Shares Life * Price * Shares Price * ----------------- ------- --------- ------- ------- -------- $0.68 to $1.00 486,375 3.8 years $0.79 161,400 $0.94 $1.01 to $2.00 325,000 4.3 years 1.19 80,000 1.18 ------- --------- ----- ------- ----- Total 811,375 4.0 years $0.95 214,400 $1.13 ======= ========= ===== ======= =====
*Weighted average F-26 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS OTHER COMMON STOCK OPTION AGREEMENTS The Corporation has issued other stock options outside of the 1999 and 1993 Plans. These stock options have been issued with various vesting schedules and expire at various dates through October 2006. Activity with respect to these options is summarized as follows:
2 0 0 1 2 0 0 0 1 9 9 9 -------------------------- ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ----------- -------- --------- ------- -------- Outstanding, beginning of year 2,150,824 $ 2.11 2,525,824 $ 2.00 2,625,824 $ 3.38 Granted - - - - 600,000 1.40 Terminated (50,000) 3.5 (375,000) 1.42 (700,000) (6.50) --------- --------- --------- --------- --------- -------- Outstanding, end of year 2,100,824 $ 2.10 2,150,824 $ 2.11 2,525,824 $ 2.00 ========= ========= ========= ========= ========= ======== Options exercisable, end of year 2,100,824 $ 2.10 2,150,824 $ 2.18 2,525,824 $ 2.07 ========= ========= ========= ========= ========= ========
Options at December 31, 2001:
Options Outstanding Options Exercisable ------------------------------------ --------------------- Remaining Range of Exercise Contractual Exercise Exercise Prices Shares Life * Price * Shares Price * ----------------- --------- ----------- -------- --------- -------- $0.66 to $1.00 100,000 3.0 years $ 0.88 100,000 $ 0.88 $1.01 to $2.00 1,024,158 3.0 years 1.44 1,024,158 1.44 $2.01 to $3.00 666,666 4.3 years 2.63 666,666 2.63 $3.01 to $4.00 310,000 2.4 years 3.50 310,000 3.50 --------- --------- ------ --------- ------ Total 2,100,824 3.3 years $ 2.10 2,100,824 $ 2.10 ========= ========= ====== ========= ======
*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 and 1999 would have been employed: expected volatility of 104% and 95%, respectively, risk free interest rate of 1.7% and 5.5%, respectively, and expected lives of 6 years. The proforma effect on operations would F-27 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS have been an increase in the 2001 and 1999 net losses of approximately $265,000 and $302,000, respectively, or $0.01 per common share. STRATEGIC ALLIANCE STOCK OPTION ARRANGEMENT Pursuant to a strategic alliance formalized by an agreement for the acquisition of certain technology with a third-party pharmaceutical company ("Hexal"), the Corporation granted to Hexal, for each product (i) a "sign-up" option to purchase 100,000 shares of the Corporation's common stock at a price of $3.50 per share and (ii) a "product" option to purchase shares at an exercise price of $3.50 as of December 10, 1996, per share, as defined, upon the filing of an ANDA related to each of the two specified generic drugs. Such options may be exercised and payment for shares may be made only out of royalties payable by the Corporation to Hexal for sales, if any, of the related products. Hexal subsequently decided to proceed with the development of only one product. To date, there have been limited sales of the introduced product, but no options (which total approximately 85,000) have been exercised. At December 31, 2001 and 2000, royalties payable to Hexal, which are included in accrued expenses, amount to $296,715 and $157,000, respectively. 9. RELATED PARTY 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. Net rental expense on these operating leases was $33,960 and $21,225 for the years ended December 31, 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, 2001:
Year Amount ---- ------------- 2002 $ 33,960 2003 33,960 2004 33,960 2005 12,735 ------------- Total minimum payments due $ 114,615 =============
The Corporation additionally paid Sun Pharma approximately $33,500 during 2000 for the purchase of various parts needed to operate production machinery. F-28 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 2001. 11. SALES AND CUSTOMERS MAJOR CUSTOMERS Shipments to one wholesale customer accounted for approximately 35%, 17% and 15% of sales in 2001, 2000 and 1999, respectively. Balances due from this customer represented approximately 40%, 9% and 10% of accounts receivable for each of the three periods ended December 31. Shipments to another customer accounted for approximately 11%, 8% and 11% of sales in 2001, 2000 and 1999, respectively. Balances due from this customer represented approximately 18%, 8% and 3% of accounts receivable for each of the three periods ended December 31. The loss of either of these customers could have a negative effect on short-term operating results. OTHER Net sales in 2001 and 1999 included approximately $250,000 and $195,000, respectively, related to contracted manufacturing activities. No contract manufacturing activities occurred during 2000. 12. OTHER MATTERS EMPLOYMENT CONTRACTS The Corporation has employment agreements with two 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-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. Management believes the resolution of these matters will not materially affect the financial statements. F-29 5,000,000 SHARES CARACO PHARMACEUTICAL LABORATORIES LTD. COMMON STOCK --------------------- PROSPECTUS --------------------- , 2002 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 20,000 Fees and expenses of accounts for Caraco 10,000 Blue sky fees and expenses 10,000 Miscellaneous 10,000 ---------- Total $ 61,394 ----------
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, valued at $0.50 per share, 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, valued at $0.23 per share, 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. II-2 10. In June 2001, we granted options to acquire 190,000 shares of common stock to 34 employees (other than those executive officers and directors noted above) pursuant to our 1993 Stock Option Plan and 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. 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 3.1 Registrant's Amended and Restated Articles of Incorporation, as amended. (2) 3.2 Registrant's Amended and Restated Bylaws. (6) 3.3 Certificate of Amendment to the Articles of Incorporation filed February 13, 1997. (4) 3.4 Amendment to Amended and Restated Bylaws. (10) 3.5 Certificate of Determination of Rights, Privileges and Preferences Series A Preferred Stock. (+) 3.6 Certificate of Amendment to the Articles of Incorporation filed February 10, 2000. (+) 4.1 Form of Subscription Agreement (+) 5.1 Opinion of Bodman, Longley & Dahling LLP. (+) 10.1 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; II-3 Second Amendment thereto, dated April 2, 1993; and supplemental letter, dated October 26, 1993 and agreement. (1) 10.2 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) 10.3 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) 10.4 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) 10.5 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) 10.6 Agreement, dated as of October 1, 1993, among Registrant, Hexal-Pharma GmbH & Co., KG, and Hexal Pharmaceuticals, Inc. (1) 10.7 Agreement, dated October 20, 1993, between Registrant and Clonmel Chemicals Co., Ltd. (1) 10.8 Form of 1993 Stock Option Plan. (1) 10.9 Employment Agreement, dated October 22, 1993, with Robert Kurkiewicz. (1) 10.10 Series A Preferred Stock Purchase Agreement dated November 30, 1994, with Jay F. Joliat. (2) 10.11 Joint venture agreement dated on March 11, 1996, with Sun Pharmaceutical Industries, Inc. (3) 10.12 Secured Promissory Note dated December 23, 1996 with Sun Pharma Global, Inc. (4) 10.13 Security Agreement dated December 23, 1996 with Sun Pharma Global, Inc. (4) 10.14 Stock Purchase Agreement by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as of April 23, 1997. (5) 10.15 Products Agreement by and between Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries, Ltd. dated as of April 23, 1997. (5) 10.16 Registration Rights Agreement dated as of April 1997. (5) 10.17 Stock Pledge Agreement dated as of July 28, 1997. (5) 10.18 Second Note and Mortgage Modification Agreement. (6) II-4 10.19 Amendment to Employment Agreement of Robert Kurkiewicz dated as of April 1, 1997. (6) 10.20 Employment Agreement dated September 22, 1998 with Narendra N. Borkar. (7) 10.21 1999 Equity Participation Plan. (8) 10.22 Agreement between ICICI Bank and Caraco for the term loan of $5 million. (9) 10.23 Term Sheet between Bank of Nova Scotia and Caraco for the term loan of $12.5 million. (10) 10.24 Renewal to Employment Agreement of Robert Kurkiewicz dated as of January 1, 1999. (+) 10.25 Third Amendment to Employment Agreement of Robert Kurkiewicz. (+) 10.26 Employment Agreement of Jitendra N. Doshi. (+) 23.1 Consent of Rehmann Robson. (+) 23.2 Consent of Bodman, Longley & Dahling LLP (included in Exhibit 5.1) 24.1 Power of Attorney (on signature page to original Form SB-2 registration statement filed on July 3, 2002) 99.1 Escrow Agreement with Bank One Trust Company, N.A. (+) 99.2 Form of Sales Agent Agreement. (+) - -------------------------- + 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 March 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 March 31, 1997, Commission File No. 0-24676. (5) Incorporated by reference from Exhibits to Registrant's Form 10-QSB filed on November 14, 1997, Commission File No. 0-24676. (6) Incorporated by reference from Exhibits to Registrant's Form 10-KSB filed on March 31, 1998, Commission File No. 024676. II-5 (7) Incorporated by reference from Exhibits to Registrant's Form 10-QSB filed on November 13, 1998, Commission File No. 0-24676. (8) Incorporated by reference from Exhibit A to Registrant's Proxy Statement filed on April 28, 1999, Commission File No. 0-24676. (9) Incorporated by reference from Exhibits to Registrant's Form 10-QSB filed on August 14, 2000, Commission File No. 0-24676. (10) Filed with original Form SB-2 filed on July 3, 2002. 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 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. II-6 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. 1 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: September 4, 2002 CARACO PHARMACEUTICAL LABORATORIES LTD. By /s/ Narendra N. Borkar --------------------------------------- Narendra N. Borkar Chief Executive Officer II-7 In accordance with the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 1 to this registration statement on Form SB-2 was signed by the following persons in the capacities indicated, on September 4, 2002. Name and Signature Title * Chairman of the Board - ------------------------------------- Dilip Shanghvi /s/ Narendra N. Borkar President, Chief Executive Officer, - ------------------------------------- Treasurer and Director (Principal Narendra N. Borkar Executive Officer, Principal Financial and Principal Accounting Officer) /s/ Jitendra N. Doshi Chief Operating Officer and Director - ------------------------------------- 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 II-8 CARACO PHARMACEUTICAL LABORATORIES LTD. PRE-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM SB-2 EXHIBIT INDEX 3.5 Certificate of Determination of Rights, Privileges and Preferences Series A Preferred Stock. 3.6 Certificate of Amendment to the Articles of Incorporation filed February 10, 2000. 4.1 Form of Subscription Agreement 5.1 Opinion of Bodman, Longley & Dahling LLP. 10.24 Renewal to Employment Agreement of Robert Kurkiewicz dated as of January 1, 1999. 10.25 Third Amendment to Employment Agreement of Robert Kurkiewicz. 10.26 Employment Agreement of Jitendra N. Doshi. 23.1 Consent of Rehmann Robson. 23.2 Consent of Bodman, Longley & Dahling LLP (included in Exhibit 5.1). 99.1 Escrow Agreement with Bank One Trust Company, N.A. 99.2 Form of Sales Agent Agreement. II-9 EX-3.5 4 k71679exv3w5.txt CERTIFICATE OF DETERMINATION OF RIGHTS, PRIVELEGES EXHIBIT 3.5 CERTIFICATE OF DETERMINATION OF RIGHTS, PRIVILEGES AND PREFERENCES SERIES A PREFERRED STOCK OF CARACO PHARMACEUTICAL LABORATORIES LTD. The Chairman of the Board and Secretary hereby certify that: 1. They are the duly elected and acting Chairman of the Board and Secretary, respectively, of CARACO PHARMACEUTICAL LABORATORIES LTD., a Michigan corporation (the "Corporation"). 2. Pursuant to authority given by the Corporation's Articles of Incorporation, the Board of Directors of the Corporation at a meeting of the Board of Directors at which a quorum was present, held on November 30, 1994, has adopted the following resolution: Whereas, the Articles of Incorporation of the Corporation authorizes one class of shares designated preferred shares, comprising 5,000,000 shares issuable from time to time (the "Preferred Stock"), and one class of shares designated common shares, comprising 10,000,000 shares issuable from time to time (the "Common Stock"); and Whereas, the Board of Directors of the Corporation is authorized to issue shares of Preferred Stock in series and to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon each series of Preferred Stock; and Whereas, the Corporation has not heretofore issued any of such Preferred Stock and it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to Series A Preferred Stock and the number thereof; Now, Therefore, Resolved, that the Board of Directors hereby provides for the issue of a series of Preferred Stock of the Corporation consisting of 285,714 shares designated as "Series A Preferred Stock", and hereby fixes the rights, privileges, preferences, restrictions and other matters relating to the Series A Preferred Stock as follows: 1. Dividend Rights. The holders of the Series A Preferred Stock shall be entitled to receive dividends accruing from and after January 1, 1997, at the rate of Twenty-One Cents ($.21) per share per year, payable in cash annually. Dividends on the Series A Preferred Stock shall be payable out of any funds legally available therefor, prior and in preference to any dividend payment with respect to Common Stock. Dividends on the Series A Preferred Stock shall be cumulative, so that if dividends required to be paid on such stock for any year shall not have been paid, the amount of the deficiency shall be paid in full, without interest, together with any dividends due for the current year, before any distribution of any kind shall be paid to the holders of the Common Stock. 2. Voting Rights. Except as otherwise required by law or provided herein, holders of Series A Preferred Stock shall have no voting rights. 10 3. Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series A Preferred Stock will be entitled to receive out of the assets of the Corporation, prior and in preference to any distribution of the assets or surplus funds of the Corporation to the holders of any other series of Preferred Stock or of the Common Stock by reason of their ownership thereof, the amount of Three Dollars and Fifty Cents ($3.50) per share (as appropriately adjusted for stock splits, stock dividends, recapitalizations, and similar events) for each share of Series A Preferred Stock then held by them, plus all accrued and unpaid cumulative dividends with respect thereto, and will not be entitled to receive any portion of the remaining assets of the Corporation. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series A Preferred Stock are insufficient to permit the payment to such holders of the whole preferential amount, then the entire assets and funds of the Corporation legally available for distribution to the holders of the capital stock of the corporation will be distributed ratably among the holders of the Series A Preferred Stock and the holders of any other series of Preferred Stock whose liquidation rights are in parity with those of Series A Preferred Stock, and the holders of any other series of Preferred Stock (if any) and of Common Stock shall receive nothing. After payment has been made to the holders of the Series A Preferred Stock of the full amounts to which they are entitled as aforesaid, any remaining assets will be distributed ratably to the holders of other series of Preferred Stock (if any) and of Common Stock. The holders of the Series A Preferred Stock shall not be entitled to participate in dividends or distributions upon liquidation or dissolution of the Corporation, other than their priority dividends and priority liquidation distribution as provided herein. 4. Conversion. The holders of the Series A Preferred Stock shall be entitled to convert their shares to shares of Common Stock as follows: (a) Right to Convert. Each share of Series A Preferred Stock may at the option of the holder of record be converted prior to January 1, 2004, into one share of Common Stock, subject to adjustment as set forth below. To the extent not previously exercised, the right to convert shall then terminate. (b) Fractional Shares Upon Conversion. No fractional shares of Common Stock will be issued upon conversion of Series A Preferred Stock and any fractional shares which otherwise result from conversion by a holder of all his shares of Series A Preferred Stock then being converted (taken together as a group) will be redeemed by payment in cash of an amount equal to such fraction by the then effective market price per share of Common Stock as promptly as funds legally are available therefor. (c) Adjustment for Combination or Consolidations of Common Stock. In the event the Corporation at any time or from time to time After December 1, 1994, effects a subdivision or combination of its outstanding Common Stock into a greater or lesser number of shares without a proportionate and corresponding subdivision or combination of its outstanding Series A Preferred Stock, then the existing conversion ratio for the Series A Preferred Stock will be increased or decreased proportionately. (d) Adjustment for Dividends, Distributions and Common Stock Equivalents. In the event the Corporation at any time or from time to time after December 1, 1994, makes or issues a dividend payable in Common Stock to holders of record of its Common Stock, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of 11 Common Stock or other securities or rights ("Common Stock Equivalents"), convertible into or entitling the holder thereof to receive additional shares of Common Stock without payment of any consideration by such holder for Common Stock Equivalents or the additional shares of Common Stock, then and in such event, for the purpose of protecting the holders of Series A Preferred Stock from any dilution in connection therewith, the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable in payment of such dividends or distribution or upon conversion or exercise of such Common Stock Equivalents will be deemed to be issued and outstanding as of the time of such issuance or, in the event such a record date has been fixed, as of the close of business on such a record date. In each such event the then existing conversion ratio for the Series A Preferred Stock will be increased as of the time of such issuance or, in the event such a record date has been fixed, as of the close of business on such record date, by multiplying the conversion ratio for the Series A Preferred Stock by a fraction, the numerator of which will be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution or upon conversion or exercise of such Common Stock Equivalents, and the denominator of which will be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, however, if such record date has been fixed and such dividend is not fully paid or if such distribution is not made on the date fixed therefor, the conversion ratio for the Series A Preferred Stock will be recomputed accordingly as of the close of business on such record date and thereafter the conversion ratio for the Series A Preferred Stock will be adjusted pursuant to this paragraph 4(d) (iii) as of the date of actual payment of such dividends or distributions. (e) Mechanics of Conversion. Before any holder of Series A Preferred Stock will be entitled to convert the same into shares of Common Stock, he will surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred Stock, and will give written notice to the Corporation stating the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation, as soon as practicable thereafter, will issue and deliver at such office to such holder or to his nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which he will be entitled as aforesaid. Such conversion will be deemed to have been made immediately prior to the close of business on the date delivery of said notice to the Corporation of its transfer agent, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion will be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (f) No Impairment. The Corporation, whether by amendment of its Articles of Incorporation, or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, will not avoid or seek to avoid the observance or performance of any of the terms to be observed hereunder by the Corporation, but at all times in good faith will assist in the carrying out of all of such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. (g) Reservation of Stock Issuable Upon Conversion. The Corporation at all times will observe and keep available out of its authorized but unissued shares of Common Stock solely for the purposes of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of Common Stock as from time to time will be sufficient to effect the conversion of all the then outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock is not sufficient to effect the conversion of all the then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as may be available to the holders of Series A Preferred Stock for such failure, the 12 Corporation will take such actions as, in the opinion of its counsel, may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as will be sufficient for such purposes. 5. Redemption. The Series A Preferred Stock shall not be subject to redemption by the Corporation. 6. Covenants. In addition to any other rights by law, so long as any Series A Preferred Stock is outstanding, the Corporation, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of such outstanding shares of Series A Preferred Stock, will not: (a) Amend or repeal any provision of, or add any provision to, the Corporation's Articles of Incorporation or By-laws or this certificate of determination of rights, privileges and preferences if such action would alter or change the preferences, rights, privileges or power of, or the restrictions provided for the benefit of, any Series A Preferred Stock, or increase or decrease the number of shares of Series A Preferred Stock authorized hereby; (b) Authorize or issue shares of any class or series of stock (other than the Series A Preferred Stock expressly authorized herein) having any preference or priority as to dividends, assets, or other right superior to any such preference or priority of the Series A Preferred Stock, or authorize or issue shares of stock of any class, convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Corporation having any preference or priority as to dividends, assets, or other rights, superior to any such preference or priority of the Series A Preferred Stock; or (c) Reclassify any class or series of any Common Stock or any other shares of stock hereafter created junior to the Series A Preferred Stock into shares having any preference or priority as to dividends, liquidation or other right superior to any such preference or priority of the Series A Preferred Stock. Resolved Further, that the Chairman of the Board and the Secretary of the Corporation hereby are authorized and directed to prepare, execute, verify, file and record a certificate of determination of rights, privileges and preferences in accordance with the foregoing resolutions and the provisions of Michigan law. The authorized number of shares of Series A Preferred Stock is 285,714, none of which has been issued. Dated: November 30, 1994 /s/ C. Arnold Curry -------------------------------------- C. Arnold Curry, Chairman /s/ Allan J. Hammer -------------------------------------- Allan J. Hammer, Secretary 13 EX-3.6 5 k71679exv3w6.txt CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORP EXHIBIT 3.6 CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION FOR USE BY DOMESTIC PROFIT CORPORATIONS (Please read information and instructions on the last page) Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the following Certificate: 1. The present name of the corporation is: Caraco Pharmaceutical Laboratories Ltd. 2. The identification number assigned by the Bureau is: 345-364 3. The location of the registered office is: 1150 Elijah McCoy Drive Detroit, Michigan 48202 ---------------------------------------------------------------------- (Street Address) (City) (Zip Code) 4. Article III, Section 1 of the Articles of Incorporation is hereby amended to read as follows: 1. The total authorized capital stock is: Common Shares 30,000,000 Preferred Shares 5,000,000 5. COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE BOTH. a. [ ] The foregoing amendment to the Articles of Incorporation was duly adopted on the ________ day of _______________, 19______, in accordance with the provisions of the Act by the unanimous consent of the incorporator(s) before the first meeting of the Board of Directors or Trustees. Signed this ________ day of _____________________, 19____________. ---------------------------------- ---------------------------------- (Signature) (Signature) ---------------------------------- ---------------------------------- (Type or Print Name) (Type or Print Name) ---------------------------------- ---------------------------------- (Signature) (Signature) ---------------------------------- ---------------------------------- (Type or Print Name) (Type or Print Name) 14 b. [X] The foregoing amendment to the Articles of Incorporation was duly adopted on the 25th day of June, 1997. The amendment: (check one of the following) [X] was duly adopted in accordance with Section 611(2) of the Act by the vote of the shareholders if a profit corporation, or by the vote of the shareholders or members if a nonprofit corporation, or by the vote of the directors if a nonprofit corporation organized on a nonstock directorship basis. The necessary votes were cast in favor of the amendment. [ ] was duly adopted by the written consent of all directors pursuant to Section 525 of the Act and the corporation is a nonprofit corporation organized on a nonstock directorship basis. [ ] was duly adopted by the written consent of the shareholders or members having not less than the minimum number of votes required by statute in accordance with Section 407(1) and (2) of the Act if a nonprofit corporation, or Section 407(1) of the Act if a profit corporation. Written notice to shareholders who have not consented in writing has been given. (Note: Written consent by less than all of the shareholders or members is permitted only if such provision appears in the Articles of Incorporation.) [ ] was duly adopted by the written consent of all the shareholders or members entitled to vote in accordance with section 407(3) of the Act if a nonprofit corporation, or Section 407(2) of the Act if a profit corporation. Signed this 15 day of Jan, 2000 By /s/ Narendra N. Borkar ------------------------------------------------------ (Only Signature of President, Vice-President, Chairperson or Vice-Chairperson) Narendra N. Borkar CEO, President --------------------------------------------------------- (Type or Print Name) (Type or Print Title) 15 EX-4.1 6 k71679exv4w1.txt FORM OF SUBSCRIPTION AGREEMENT EXHIBIT 4.1 CARACO PHARMACEUTICAL LABORATORIES LTD. SUBSCRIPTION AGREEMENT FOR OFFERING OF 4,365,000 SHARES OF COMMON STOCK $_____ PER SHARE To Be Completed By Prospective Investor If and when accepted by Caraco Pharmaceutical Laboratories Ltd., a Michigan corporation (the Corporation), this Subscription Agreement shall constitute the subscription of the undersigned subscriber for the number of shares of the Common Stock, no par value, of the Corporation identified below (the Shares). The Corporation and its sales agent, as applicable, are relying upon the accuracy and completeness of the information set forth herein in complying with their obligations under applicable securities laws. (1) Method of Subscription: The undersigned hereby subscribe for the Shares at a purchase price of $_____ per share. Before a subscription will be accepted, the following must be completed (all blanks filled in), executed, dated, acknowledged and returned to the Corporation at 1150 Elijah McCoy Drive, Detroit, Michigan 48202. a. One executed copy of this Subscription Agreement; b. Until the Minimum Offering is sold, (as defined in the Prospectus dated ________, 200___), checks, money orders or bank drafts upon a U.S. bank shall be payable to "Bank One Trust Company, N.A.," Escrow Agent, for the full amount of the purchase price; c. After the Minimum Offering is sold, checks, money orders or bank drafts upon a U.S. bank shall be payable to "Caraco Pharmaceutical Laboratories Ltd." for the full amount of the purchase price; and d. An executed copy of Form W-9. In no event will subscriptions be accepted later than _________, 200___, at which time the offering will terminate. (2) Acceptance By Corporation: The undersigned understands that the Corporation will notify him or it whether the subscription has been accepted or rejected, as promptly as possible. In the event this subscription is rejected, all funds and documents tendered by the undersigned shall be returned, without interest, in which case the Corporation shall have no further obligation to the undersigned. The Corporation in its sole discretion and for any or no reason shall determine whether this subscription shall be accepted or rejected in 16 whole or in part. This subscription is not binding upon the Corporation until accepted by the Corporation. The Corporation reserves the right to terminate the Offering and to return all subscription proceeds at any time prior to the receipt and use of the subscription proceeds by the Corporation. (3) Receipt of Prospectus. The undersigned acknowledges receipt and review of the Prospectus dated ____________, 200___ (the "Offering"). (4) Independent Advice: The undersigned acknowledges that he or it has been advised to consult with independent counsel regarding the consequences of participating in this investment. (5) Residency of the Subscriber: The undersigned represents and warrants to the Corporation and the Sales Agent, as applicable, that he is a bona fide resident of the State of __________. Specifically, if an individual, the undersigned represents and warrants that his principal residence at the time of the offer and sale of the Shares is in the State of _________. If a corporation, partnership, trust or other form of business organization, the undersigned represents and warrants that at the time of the offer and sale of the Shares, it has its principal office within the State of ___________. (6) Further Representations, Warrants and Covenants: The undersigned hereby represents, warrants, covenants and agrees as follows: a. Except as set forth in the Prospectus and the exhibits thereto, no representations or warranties, oral or otherwise, have been made to the undersigned by the Corporation or any other person, whether or not associated with the Corporation or this offering. In entering this transaction, the undersigned is not relying upon any information, other than that contained in the Prospectus and the exhibits thereto and the results of any independent investigation conducted by the undersigned at the undersigned's sole discretion and judgment. b. The subscription of the undersigned is irrevocable, however, the undersigned shall have no obligations under this Agreement if the subscription is for any reason not accepted by the Corporation or if the Offering by the Corporation is cancelled. (7) Indemnity: The undersigned hereby agrees to indemnify the Corporation and the Sales Agent, as applicable, and each of their officers, directors, representatives, agents and employees, and hold them harmless from and against any and all liability, damage, cost or expense incurred on account of or arising out of: a. Any breach of or inaccuracy in the declaration, representations and warranties set forth herein; b. Any action, suit or proceeding based upon the claim that said declarations, representations or warranties were inaccurate or misleading or otherwise cause for obtaining damages or redress from the Corporation or the Sales Agent, as applicable. (8) Miscellaneous: The undersigned further understand and acknowledge that: a. This subscription is not transferable or assignable by the undersigned. 17 b. If the undersigned consists of more than one person, the obligations of the undersigned shall be joint and several and the representations and warranties herein contained shall be deemed to be made by and be binding upon each such person and his or her heirs, executors, administrators, successors and assigns. c. This subscription, upon acceptance by the Corporation, shall be binding upon the heirs, executors, administrators, successors and assigns of the undersigned. d. This Subscription Agreement constitutes the entire agreement between the parties respecting the subject matter thereof. e. Captions in this Subscription Agreement are for the convenience of reference only and shall not limit or otherwise affect the interpretation or effect of any term or provision hereof. f. This Subscription Agreement shall be governed, enforced and construed in all respects in accordance with the laws of the State of Michigan without giving effect to any conflict of laws or choice of law rules. g. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Subscription Agreement may be brought against the Corporation or the undersigned only in the courts in the State of Michigan, County of Wayne or, if it has or can acquire jurisdiction, in the United States District Court for the Eastern District of Michigan, and the Corporation and the undersigned consent to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on the Corporation or the undersigned anywhere in the world. (9) Type of Ownership for Shares if Subscribers Are Individuals (check one): ( ) Individual Ownership (one signature required) ( ) Joint Tenants with Right of Survivorship (both parties must sign) ( ) Tenants in Common (both parties must sign) -------------------------------------------------------------- Please print here the exact name (registration) subscriber desires on account (10) Organizational Ownership (check one): ( ) Corporation (signature of authorized officer required) ( ) Partnership (signature of all partners required) 18 ( ) Limited Liability Company (signature of all members or managers required) ( ) Other Form of Organization (see Corporation or Sales Agent, as applicable, for signature instruction) -------------------------------------------------------------------- Please print here the exact organization name (registration) subscriber desires on account NOTE: Investors should seek the advice of their attorneys in deciding in which of the above forms they should take ownership of the Shares, since different forms of ownership can have varying gift tax, estate tax, income tax and other consequences. (11) Amount of Subscription: Number of Shares: ___________________ Total Purchase Price: _________________($_____ per share) IN WITNESS WHEREOF, the undersigned, intending to be legally bound, has completed this Subscription Agreement to evidence his or its subscription for the Shares of Caraco Pharmaceutical Laboratories Ltd. this _______ day of _____________, 200___. (This signature block is for use by individual subscribers only) --------------------------------------- Address: Telephone No: Facsimile No: E-mail: 19 (This signature block is for use by organizational subscribers only) --------------------------------------------- (Name of organization) By: Its: Address: Telephone No: Facsimile No: E-mail: The Corporation has accepted this Subscription Agreement this _______ day of __________, 200____. CARACO PHARMACEUTICAL LABORATORIES LTD. By: ____________________________________ - Its: ____________________________________ 20 EX-5.1 7 k71679exv5w1.txt OPINION/CONSENT OF BODMAN, LONGLEY & DAHLING LLP EXHIBIT 5.1 [BODMAN, LONGLEY & DAHLING LETTERHEAD] [FORM OF OPINION] ________________, 2002 Caraco Pharmaceutical Laboratories Ltd. 1150 Elijah McCoy Drive Detroit, MI 48202 Re: Caraco Pharmaceutical Laboratories Ltd. Registration Statement on Form SB-2 Ladies and Gentlemen: We have acted as counsel to Caraco Pharmaceutical Laboratories Ltd., a Michigan corporation (the "Company"), in connection with the proposed registration of up to 5,000,000 shares of the Company's Common Stock, no par value (the "Shares") pursuant to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act") (such Registration Statement, as amended or supplemented and together with any other registration statement referred to in this paragraph, is hereinafter referred to as the "Registration Statement"). This opinion also relates to any registration statement in connection with this offering that is to be effective upon filing pursuant to Rule 462(b) under the Act and the term "Shares" as used herein also includes any additional shares of the Company's common stock registered pursuant to such subsequently filed registration statement. In that connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary for the purposes of this opinion, including (i) the Amended and Restated Articles of Incorporation and Bylaws of the Company, (ii) minutes and records of the corporate proceedings of the Company with respect to the Shares, (iii) the Registration Statement and the exhibits thereto, and (iv) such other documents and instruments as we have deemed necessary for purposes of the opinions contained herein. For purposes of this opinion, we have assumed the authenticity of the documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies and the authenticity of the originals of all documents submitted to us as copies. We have also assumed the genuineness of the signatures of the persons signing all documents in connection with which this opinion is rendered, the authority of such persons signing on behalf of the parties thereto and the due authorization, execution and delivery of all documents by the parties thereto other than the Company. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Our opinion expressed below is subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of any laws except the Michigan Business Corporation Act (the "MBCA") and the federal laws of the United States of America. 21 Based upon and subject to the foregoing qualifications, assumptions and limitations and the further limitations set forth below, we are of the opinion that the Shares have been duly authorized for issuance and, upon (i) effectiveness under the Act of the Registration Statement and (ii) payment for the Shares and issuance in accordance therewith, the Shares will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Commission as Exhibit 5.1 to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the current MBCA or the current federal law of the United States be changed by legislative action, judicial decision or otherwise. This opinion is furnished to you solely for your benefit to be used by you in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise relied upon by any other person or by you for any other purpose. Very truly yours, BODMAN, LONGLEY & DAHLING LLP By: -------------------------- Fred B. Green, Partner 22 EX-10.24 8 k71679exv10w24.txt RENEWAL TO EMPLOYMENT AGREEMENT -ROBERT KURKIEWICZ EXHIBIT 10.24 RENEWAL TO EMPLOYMENT AGREEMENT This renewal to Employment Agreement (the "Renewal") is made this 1st day of January, 1999, by and between Caraco Pharmaceutical Laboratories Ltd. (the "Company") and Robert Kurkiewicz ("Employee"). WITNESSETH: WHEREAS, the Company and Employee entered into an Employment Agreement dated October 22, 1993 (the "Employment Agreement"); WHEREAS, the Company and Employee entered into an Amendment to that Employment Agreement dated April 1, 1997 (the "Amended Employment Agreement"); NOW, THEREFORE, in consideration of the premises and covenants herein contained, the parties covenant and agree that the following shall become effective on January 1, 1999. 1. Existing Employment Agreement. Except as modified hereby, the terms and conditions of the Employment Agreement shall continue in full force and effect. 2. Salary. Paragraph 3(a) of the Amended Employment Agreement is hereby amended by increasing the annual salary payable to Employee from $92,250 to $120,000. Except for the change in the amount of the annual salary, the provisions of Paragraph 3(a) of the Employment Agreement continue in full force and effect. 3. This Amended Employment Contract shall be for a term of four years (4) renewable for successive one-year terms. 4. Exhibit. Exhibit B shall be amended to add a car allowance of $380.00 per month. IN WITNESS WHEREOF, the Employee and the Company have executed this Agreement on the date first above written. CARACO PHARMACEUTICAL LABORATORIES LTD. a Michigan corporation By: /s/ Narendra N. Borkar EMPLOYEE: --------------------------- Narendra N. Borkar Its: Chief Executive Officer /s/Robert Kurkiewicz ---------------------- Robert Kurkiewicz 23 EX-10.25 9 k71679exv10w25.txt 3RD AMENDMENT TO EMPLOYMENT AGREEMENT-R KURKIEWICZ EXHIBIT 10.25 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement (the "Third Amendment") is made this _____ day of August, 2002, by and between Caraco Pharmaceutical Laboratories Ltd. (the "Company") and Robert Kurkiewicz (the "Employee"). RECITALS The Company and Employee entered into that certain Employment Agreement dated October 22, 1993, which was amended by that certain Amendment to Employment Agreement dated April 1, 1997 and by that certain Renewal to Employment Agreement dated January 1, 1999 (together the "Employment Agreement"). Both parties are desirous of extending the term of the Employment Agreement and of modifying certain of its terms. NOW, THEREFORE, in consideration of the premises and covenants herein contained, the parties covenant and agree as follows: 1. Term. Unless terminated earlier in accordance with Section 7 of the Employment Agreement, or renewed as provided for herein, the term of the Employment Agreement, which currently continues through December 31, 2002, shall be extended for a period of five (5) years commencing January 1, 2003 and ending on December 31, 2007. The Employment Agreement, as amended, shall automatically renew for successive one-year periods at the end of the five (5) year term provided herein, subject, however, to ninety (90) days written notice of termination by either party hereto prior to the commencement of any such renewal period. The terms and conditions of the Employment Agreement, as amended, shall apply during any such renewal period. 2. Compensation. The Company shall pay the Employee an annual salary of $129,800 subject to all applicable withholdings for services rendered as the Company's Senior Vice President - Technical. The Employee's base salary shall be reviewed annually and may be adjusted based on performance and other relevant factors deemed reasonable by the Company. 3. Termination by Employee for "Cause". Sub-paragraphs 7(d)(i)(a) and (b) of the Employment Agreement are hereby amended by changing the applicable period over which the severance package is to be paid from twelve (12) months to six (6) months. Except for this change, the provisions of sub-paragraph 7(d) of the Employment Agreement continue in full force and effect. 4. Disability. The second sentence of Section 7(b) is hereby deleted and replaced by the following: "For purposes of this Agreement, the Disability of Employee shall mean an illness, injury, or physical or mental condition of the Employee occurring for a period of any ninety (90) or more days out of a one hundred and eighty (180) day period which results in the Employee's inability during such period to perform substantially all of his regular duties to the Company. 5. Existing Employment Agreement. Except as modified hereby by this Third Amendment, the terms and conditions of the Employment Agreement shall continue in full force and effect. 24 IN WITNESS WHEREOF, the Employee and the Company have executed this Third Amendment on the date first above written. CARACO PHARMACEUTICAL LABORATORIES LTD a Michigan corporation By: /s/ Narendra N. Borkar ----------------------------------- Narendra N. Borkar, Chief Executive Officer /s/ Robert Kurkiewicz ------------------------------------------- Robert Kurkiewicz 25 EX-10.26 10 k71679exv10w26.txt EMPLOYMENT AGREEMENT OF JITENDRA N. DOSHI EXHIBIT 10.26 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 30th day of August, 2002, by and between CARACO PHARMACEUTICAL LABORATORIES LTD. (the "Company") and JITENDRA N. DOSHI ("Employee"). W I T N E S S E T H WHEREAS, the Company employs the Employee as its Chief Operating Officer; WHEREAS, the parties hereto are desirous of entering into a formal agreement of employment. NOW, THEREFORE, in consideration of the premises and covenants herein contained, the parties covenant and agree as follows: 1. Employment. The Employee is the Chief Operating Officer of the Company. 2. Duties. The Employee shall diligently and conscientiously devote on a full-time basis, his best efforts to the discharge of his duties as established from time to time by the Bylaws of the Company, the Board of Directors of the Company, the Compensation Committee, and the Chief Executive Officer of the Company, and shall be under the direct supervision of the Chief Executive Officer. Such duties shall include, but not be limited to, those set forth in Exhibit "A," a copy of which is attached hereto and is herein incorporated by reference. 3. (a) Compensation. The Company shall pay the Employee a salary at a rate of $130,000 annually, subject to all applicable withholdings, for services rendered as the Chief Operating Officer. The Employee's base salary shall be reviewed annually, and may be adjusted based upon performance and other relevant factors deemed reasonable by the Company. (b) Other Benefits. The Employee shall be entitled to participate in any plan or program of employee benefits maintained by the Company for all employees as of the date hereof, and which may be hereafter adopted or modified by the Company, and which is or shall be available to the Employee as a result of his employment by the Company pursuant to this Agreement, subject to the requirements of such plans or programs. A list of specific benefits to which the Employee shall be entitled is set forth in Exhibit "B," a copy of which is attached hereto and is herein incorporated by reference. (c) Vacations. The Employee shall be entitled to three (3) weeks paid vacation each year. 4. Term. Unless terminated earlier in accordance with Section 6 hereof, or renewed pursuant to Section 5 hereof, the term of this Agreement shall be deemed to have commenced as of January 1, 2002, and shall continue for a period of five (5) years thereafter, that is through December 31, 2006. 5. Renewal. This Agreement shall automatically renew for successive one-year periods at the end of the five (5) year term, subject, however, to ninety (90) days written notice of termination by either party 26 hereto prior to the commencement of any such renewal period. The terms and conditions of this Agreement shall apply during any such renewal period. 6. Termination. Notwithstanding any provision herein to the contrary, during the term of this Agreement, or during any period following an automatic renewal under Section 5 hereof, the Company's employment of the Employee under this Agreement shall be terminated: (a) Upon the Employee's death. (b) Upon the Disability (as that term is defined herein) of the Employee. For purposes of this Agreement, the Disability of Employee shall mean an illness, injury, or physical or mental condition of the Employee occurring for a period of any ninety (90) or more days out of a one hundred and eighty (180) day period which results in the Employee's inability during such period to perform substantially all of his regular duties to the Company. In the event the Company and the Employee do not agree on whether the Employee suffered a Disability within the meaning of this Section 6, then the issue shall be settled by binding arbitration under the rules and regulations of the American Arbitration Association, and the decision or award of the arbitrator or arbitrators in such arbitration shall be final, conclusive and binding upon the parties thereto and judgment may be entered thereon in any court of competent jurisdiction. (c) By the Company for "just cause" (as that term is defined herein) or without cause. For purposes of this Agreement, "just cause" shall mean dishonesty, or refusal or failure to faithfully or diligently perform the Employee's duties contemplated by this Agreement, including but not limited to the failure by the Employee to adhere to the policies of the Board. (d) By the Employee for "cause" not attributable to the Employee, or without cause. For purposes of this Agreement for "cause" not attributable to Employee shall mean the Company failing to make any payment of base salary to the Employee within thirty (30) days after such payment is due. (e) Employee shall receive the compensation described below in full settlement of the termination of his employment with the Company: (i) In the event of the death or Disability of Employee or if the Company terminates the Employee for "just cause," the Employee shall be entitled to the base salary and benefits earned by him prior to the date of death, Disability or termination. (ii) In the event that the Company terminates the Employee without cause, the Employee shall receive a severance package as follows: (1) The Employee shall receive monthly base salary payments for six (6) months from the date of termination; (2) The Company shall continue premium coverage payments for health insurance for six (6) months from the date of death, Disability or termination; 27 (3) Any stock options that would become available for exercise at the end of the year during which such death, Disability or termination occurred shall vest; (iii) In the event the Employee terminates this Agreement for cause not attributable to the Employee, the Employee shall receive a severance package as follows: (1) The Employee shall receive monthly base salary payments for six (6) months from the date of termination; (2) The Company shall continue premium coverage payments for health insurance for six (6) months from the date of termination; (3) Any stock options that would become available for exercise at the end of the year during which such termination occurred shall vest. (iv) In the event that the Employee terminates this Agreement without cause, the Employee shall be entitled to the base salary and benefits earned by him prior to the date of termination. 7. Confidentiality. At all times, Employee shall keep secret and inviolate and shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons or misuse in any way any knowledge or secrets, tax records, personnel histories, sales information, computer programs, assets, accounts, books, records, customers, operations, personnel and contracts of the Company which Employee may or hereafter come to know as a result of Employee's association with or which is unique to the Company ("Confidential Information"). Employee may disclose Confidential Information if required by any judicial or governmental request, requirement or order; provided that Employee will take reasonable steps to give the Company sufficient prior notice to contest such request, requirement or order. The provisions of this Paragraph 7 shall survive the termination of this Agreement and Employee's employment with the Company. 8. Waiver. Failure by either party to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver by that party of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 9. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 10. Nontransferability. Neither the Employee, nor his heirs, assigns or estate shall have the right to assign, encumber or dispose of any payment or right hereunder, which payment and right is expressly declared nonassignable and nontransferable except as otherwise specifically provided herein. 11. Successors and Assigns. The Company and the Employee bind themselves, and their respective partners, successors, permitted assigns, heirs and legal representatives to all of the terms and conditions of this Agreement. 28 12. Assignment. This Agreement, and any or all rights hereunder, may not be assigned, in whole or in part, by the Employee. The Company may assign this Agreement, in whole or in part, and any or all of its rights hereunder. 13. Notices. (a) Every notice or other communication required or permitted to be given under this Agreement ("Notice") shall be in writing and shall be given by registered or certified mail, postage prepaid, return receipt requested, or by delivery of such Notice personally or by causing such Notice to be delivered next day delivery by reputable air courier. All such Notices shall be mailed or delivered to the Parties at the following addresses: If to Company: CARACO PHARMACEUTICAL LABORATORIES LTD Board of Directors 1150 Elijah McCoy Drive Detroit, Michigan 48202 If to Employee: Jitendra N. Doshi 524 Fox Hills Dr. S. Bloomfield Hills, MI 48304 or other such addresses as the Parties may from time to time designate by written notice. Delivery under this Paragraph 13, when by mail, shall be effective as of the date upon which the return receipt is accepted or refused. A Notice personally delivered under this Section 13 shall be effective upon such delivery or, if delivery is refused, upon such refusal. A Notice delivered next day delivery by reputable air courier shall be effective upon the next business day after having been sent. 14. Entire Agreement. The foregoing provisions contain the entire agreement of the parties hereto, and no modification hereof shall be binding upon the parties unless the same is in writing and signed by the respective parties hereto. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Michigan. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but such counterparts together shall constitute one instrument. 29 IN WITNESS WHEREOF, the Employee and the Company have executed this Agreement on the date first above written. CARACO PHARMACEUTICAL LABORATORIES LTD. a Michigan corporation By: /s/ Narendra N. Borkar ------------------------------------------ Narendra N. Borkar Chief Executive Officer EMPLOYEE By: /s/Jitendra N. Doshi ------------------------------------------ Jitendra N. Doshi 30 EXHIBIT "A" 1. Job Title: Chief Operating Officer 2. Major Goals and Responsibilities - - Assists in developing the basic objectives, policies and operating plans of the Company's business under the direction of the Chief Executive Officer. - - Under the direction of the Chief Executive Officer, prepares adequate plans for the future development and growth of the Company's business. - - Under the direction of the Chief Executive Officer, analyzes operating results of the Company and its principal components relative to established objectives and makes recommendations of appropriate steps to correct unsatisfactory conditions. - - Under the direction of the Chief Executive Officer, assists in developing working capital requirements, and determining financing needs of the Company. 3. Reports to: Chief Executive Officer 4. People Managed: See the attached organizational chart 5. Position within the Organizational Structure: Member of management under the Chief Executive Officer 6. Primary Contact: Chief Executive Officer 31 EXHIBIT "B" 1. Health Insurance Health insurance with family coverage consistent with the health insurance provided other executives of the Company. 2. Car Allowance A Company car will be provided to the Employee, the value of which shall not exceed $380.00 per month. 32 EX-23.1 11 k71679exv23w1.txt CONSENT OF REHMANN ROBSON EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS' -------------------------------- Caraco Pharmaceutical Laboratories Ltd. Detroit, Michigan We hereby consent to the use in this Pre-Effective Amendment No. 1 to the Registration Statement on Form SB-2 of our report dated February 13, 2002 relating to the financial statements of Caraco Pharmaceutical Laboratories Ltd. for the years ended December 31, 2001, 2000 and 1999, and to the reference to our Firm under the caption "Experts" in the Prospectus. Rehmann Robson Troy, Michigan September 3, 2002 33 EX-99.1 12 k71679exv99w1.txt ESCROW AGREEMENT WITH BANK ONE TRUST COMPANY, N.A. EXHIBIT 99.1 ESCROW AGREEMENT Agreement entered into this 15th day of July, 2002, (this "Agreement") between Caraco Pharmaceutical Laboratories Ltd. (herein called "Company"), and Bank One Trust Company, N.A. whose address is 611 Woodward, Mail Suite MI 1-8110, Detroit, Michigan 48226 (herein called "Agent"): A. The Company shall be offering investors ("Investors") up to 4,365,000 of its shares of common stock pursuant to a registration statement ("Registration Statement") filed with the Securities and Exchange Commission (the "SEC") and the securities divisions ("Securities Divisions") of certain States. The prospectus provides a minimum of 100,000 shares (the "Minimum Offering") must be sold within 90 days from the date of commencement of the offering (which commencement date shall be communicated in writing by the Company to the Agent). The 90-day offering period may be extended by the Company for an additional 90 days) (the "Termination Date"). If the Minimum Offering is not obtained on or before the Termination Date, the offering by the Company will terminate. B. The purchase price for the shares of common stock will be paid by Investors at the time of subscription. The Company has represented to the Investors that the Minimum Offering will be deposited into an escrow account. C. The Company and Agent desire that the subscription proceeds with respect to the Minimum Offering be held in escrow by the Agent pursuant to the terms and conditions set forth below. WITNESSETH: 1. The Company agrees to deliver, or cause to be delivered to Agent, the checks representing payment from Investors for their shares of common stock of the Company. The Company agrees to retain the original copies of all of the Investors' subscription agreements and to deliver to Agent duplicate copies of such subscription agreements fully executed by both the Company and the Investors. Agent shall have no duty or obligation to examine the subscription agreements for any purpose whatsoever (including, but not limited to, genuineness of signatures or authority to sign). The checks representing payment for the shares of common stock with respect to the Minimum Offering shall be made payable to "Bank One Trust Company, N.A., escrow agent." Agent agrees to hold the subscription proceeds in a non-interest bearing account (the "Escrow Account"). 2. If subscriptions for 100,000 shares, in the aggregate, have not been deposited with Agent into the Escrow Account by the Termination Date, Agent will return to the Investors all of the Investors' subscription proceeds held in the Escrow Account. If, however, subscription proceeds for 100,000 or more shares have been deposited with Agent into the Escrow Account on or before the Termination Date, upon written notification and demand by the Company, Agent will release all of such subscription proceeds to the Company by depositing the proceeds into an account specified to the Agent in writing by the Company's Chief Executive Officer. In no event will such subscription proceeds be released to the Company until the Agent has received collected funds. For purposes of this Agreement, the term 34 "collected funds" shall mean all funds received by the Agent which have cleared normal banking channels and are in the form of cash. 3. If, during the term of this Escrow Agreement, an Investor and the Company deliver to Agent written instructions that an Investor has rescinded his purchase of shares of common stock, then Agent shall return to that Investor his or her subscription proceeds that Agent is holding for such Investor. 4. The duties and obligations of Agent hereunder shall be determined solely by the express provisions of this Agreement. Agent shall not be liable or responsible for any act done or step taken or omitted by it or any mistake of fact or law or for anything which it may do or refrain from doing, except for its gross negligence, willful misconduct or willful default or failure in the performance of any obligation imposed upon it hereunder. 5. Agent is authorized to act in reliance upon the sufficiency, correctness, genuineness or validity of any instrument or document or other writing submitted to it hereunder and shall have no liability with respect to said matters. 6. Agent's fee in the amount of $1,500.00 shall be paid in advance by the Company at the time the Company's registration statement is declared effective by the SEC and the Securities Division of at least one State. Subject to Paragraph 4, the Company agrees, to indemnify and hold harmless the Agent from any costs, damages, expenses or claims, including attorney's fees, which Agent may incur or sustain as a result of or arising out of this Escrow Agreement or Agent's duties relating thereto. The above indemnification shall survive the resignation or removal of Agent or the termination of this Agreement. IN NO EVENT SHALL THE ESCROW AGENT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY (i) DAMAGES OR EXPENSES ARISING OUT OF THE SERVICES PROVIDED HEREUNDER, OTHER THAN DAMAGES WHICH RESULT FROM THE ESCROW AGENT'S FAILURE TO ACT IN ACCORDANCE WITH THE STANDARDS SET FORTH IN THIS AGREEMENT, OR (ii) SPECIAL OR CONSEQUENTIAL DAMAGES, EVEN IF THE ESCROW AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7. The Agent shall have the right, but not the obligation, to consult with counsel of choice of a reputable law firm which has more than 50 lawyers and shall not be liable for action taken or omitted to be taken by Escrow Agent in good faith in accordance with the advice of such counsel. 8. In the event of any disagreement or the presentation of adverse claims or demands in connection with the Escrow Account, Agent shall, at its option, be entitled to refuse to comply with any such claims or demands during the continuance of such disagreement and may refrain from delivering any item affected thereby, and in so doing, Agent shall not become liable to the Company or any Investor, or to any other person, due to its failure to comply with any such adverse claim or demand. Agent shall be entitled to continue, without liability, to refrain and refuse to act: a. Until all the rights of the adverse claimants have been finally adjudicated by a court having jurisdiction of the parties and the items affected thereby, after which time the Agent shall be entitled to act in conformity with such adjudication; or 35 b. Until all differences shall have been adjusted by agreement and Agent shall have been notified thereof and shall have been directed in writing signed jointly or in counterpart by the Company and by all persons making adverse claims or demands, at which time Agent shall be protected in acting in compliance therewith. The parties agree that they may seek adjudication of any adverse claim or demands only in either the Circuit Court for the County of Wayne, Michigan, or the United States Federal District Court for the Eastern District of Michigan, Southern Division. The parties agree to the jurisdiction of either of said Courts over their persons as well as the subscription proceeds, waive personal service of any process, and agree that service of process by certified or registered mail, return receipt requested, to the address set forth below each party's signature to this Agreement shall constitute adequate service. 9. Agent may resign as such following the giving of thirty days prior written notice to the Company hereto. Similarly, Agent may be removed and replaced following the giving of thirty days prior written notice to Agent by the Company. In either event, the duties of Agent shall terminate thirty days after the date of such notice (or as of such earlier date as may be mutually agreeable); and Agent shall then deliver the balance of the escrow deposit then in its possession to a successor escrow agent as shall be appointed by the Company as evidenced by a written notice filed with Agent. 10. Any notice, consent or request to be given in connection with any of the terms or provisions of this Agreement shall be in writing and be given in person, by facsimile transmission, courier delivery service or by mail, and shall become effective (a) on delivery if given in person, (b) on the date of delivery if sent by facsimile or by courier delivery service, or (c) four business days after being deposited in the mail, with proper postage for first-class registered or certified mail, prepaid. Notices shall be addressed as follows: (i) if to the Company: Caraco Pharmaceutical Laboratories Ltd. 1150 Elijah McCoy Drive Detroit, Michigan 48202 Attention: Narendra N. Borkar Fax Number: (313) 871-8314 (ii) if to the Agent: Bank One Trust Company, N.A. 611 Woodward Mail Suite MI 1-8100 Detroit, Michigan 48226 Attention: Christopher Perelekos Fax Number: (313) 225-3420 36 11. The entire agreement of the parties is contained herein; any change in terms or conditions herein may only be made in writing signed by all parties hereto. Agent shall not be charged with knowledge of any fact, unless it has actually received written notice thereof from one of the parties by certified or registered mail, return receipt requested, addressed to Agent's address shown at the top of this Agreement, such notice clearly referring to this Agreement. 12. This Escrow Agreement shall be deemed to have been made under and shall be governed by the laws of the State of Michigan in all respects, including matters of construction, validity and performance. CARACO PHARMACEUTICAL LABORATORIES LTD By /s/ Narendra N. Borkar ------------------------------- Narendra N. Borkar Its Chief Executive Officer BANK ONE TRUST COMPANY, N.A. By /s/ Christopher Perelekos ------------------------------- Its Authorized Officer 37 EX-99.2 13 k71679exv99w2.txt FORM OF SALES AGENT AGREEMENT EXHIBIT 99.2 SELLING AGENT AGREEMENT _____________, 200___ Selling Agent Name Street City, State Ladies and Gentlemen: Caraco Pharmaceutical Laboratories Ltd. (the "Issuer" or "Company") hereby appoints _______________________________ as selling agent (the "Sales Agent" or "you") on a non-exclusive, best efforts basis, to sell up to _____________ shares of the Company as described below and hereby confirms its agreement (this "Agreement") with the Sales Agent as follows: 1. DESCRIPTION OF THE SHARES AND THE OFFERING. The Company proposes to issue and sell a minimum of 100,000 shares and a maximum of 4,365,000 shares (the "Shares") of its common stock, no par value ("Common Stock"), for a purchase price of $________ per share. The Shares and the terms of the offering are more fully described in the Company's Form SB-2 Registration Statement (Reg. No. 333-91968) (the "Registration Statement") filed with the United States Securities and Exchange Commission (the "Commission"). (a) The Shares will be sold by the Company on a best efforts basis, subject to availability. The Company reserves the right to withdraw, cancel or modify the offering hereby and to reject subscriptions, in whole or in part, for any reason. All subscription payments will be delivered into escrow for deposit in a non interest-bearing escrow account with Bank One Trust Company, N.A. as escrow agent until such time as 100,000 Shares have been offered and sold (the "Minimum Offering"). After the Minimum Offering has been sold, all subscription payments will be deposited directly with the Company. (b) The offering will begin on the date that the Registration Statement is declared effective by the Commission and by the applicable state securities division of the state in which the Sales Agent was licensed and registered to sell securities. Unless collected funds sufficient to purchase at least the Minimum Offering of the Company's shares are received by the escrow agent from accepted subscribers within 90 days from the date of commencement of the offering (which may be extended by the Company for an additional 90 days), all purchase payments for such shares will be returned in full to subscribers, without interest or deduction. If the Minimum Offering is sold within the foregoing period, the Company's offering may continue until the remaining shares are sold or ___________, 2003, whichever occurs first. However, the Company may terminate the offering at any earlier time if it chooses to do so. 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company represents and warrants to, and agrees with, the Sales Agent that: (a) The Company has prepared the Registration Statement in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Rules and Regulations (the "Rules and Regulations") of the Commission thereunder and has filed the Registration Statement with the Commission. Copies of the Registration Statement, including any amendments thereto, the preliminary prospectuses (meeting 38 the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements, and schedules, as finally amended and revised, have heretofore been made available by the Company to the Sales Agent. The Registration Statement has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. (b) The Company is offering the Shares to be sold, subject to availability, through the best efforts of employees and directors of the Company and selling agents pursuant to the requirements of the Securities Act and the Rules and Regulations of the Commission thereunder. (c) No action, suit, or proceeding for the purpose of preventing or suspending the use of the Prospectus has been initiated or, to the knowledge of the management of the Company, threatened by any governmental agency or body nor has any such agency or body notified the Company of any objections to the use of the Prospectus. (d) As of the date hereof and at all times thereafter during the offering, neither the Prospectus nor any amendment or supplement thereto will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations and warranties shall not apply to information, if any, contained in or omitted from the Prospectus or any such amendment or supplement in reliance upon, and in conformity with, written information furnished to the Company by the Sales Agent specifically for use in the preparation thereof. (e) The Company is duly organized and validly existing and in good standing under the laws of the State of Michigan and has full power and authority (corporate and other) to conduct its business as described in the Prospectus. The Company has all such power, authority, authorizations, approvals, orders, licenses, certificates, and permits necessary to enter into this Agreement, to carry out the provisions and conditions hereof, and to commence the offering. This Agreement has been duly and validly authorized, executed and delivered by the Company and is a valid and binding agreement and obligation of the Company. (f) Except as contemplated in the Prospectus, after the respective dates as of which information is given in the Prospectus, the Company has not incurred any liabilities or obligations, direct or contingent, or entered into any transactions that are material to the Company, and there has not been any material change in the capital stock, short-term debt, or long-term debt of the Company, or any material adverse change, or, to the knowledge of the management of the Company, any development involving a prospective material adverse change in the condition (financial or other), net worth or results of operations of the Company. (g) The Company has conducted its business so as to comply in all material respects with applicable statutes, rules, regulations, decisions, directives, and orders, and there is not pending or, to the knowledge of the management of the Company, threatened, any action, suit, or proceeding to which the Company is or may be a party, before or by any court or governmental agency or body, which might result in any material adverse change in the condition (financial or other), business, net worth, or results of operations of the Company or might materially and adversely affect the properties or assets thereof. (h) The Registration Statement contains a list of agreements, instruments, or understandings to which the Company or its subsidiaries is a party or by which they or their properties may be bound and which may be material to the Company ("Material Agreements"). Except as set forth in the Registration Statement, 39 the Company is not in default in the performance or observance of any obligation, agreement, covenant, or condition contained in any Material Agreement, nor is the Company in violation of any term or provision of its Amended and Restated Articles of Incorporation or Bylaws. The execution and delivery of this Agreement and the incurrence of the obligations herein set forth will not conflict with, or constitute a breach of or default under, the Amended and Restated Articles of Incorporation or the Bylaws of the Company or any Material Agreement or any statute regulating the business of the Company, or any rule, regulation, decision, directive, or order of any court or governmental agency or body having jurisdiction over the Company or any of its activities or properties; and, except as expressly set forth herein and in the Prospectus, no consent, approval, authorization, or order of any court or governmental agency or body is required for the consummation of the transactions contemplated hereby. (i) The Company's authorized and issued capital stock is stated in the Prospectus. The Shares being sold by the Company pursuant to this Agreement, when issued and delivered in accordance with this Agreement, will be duly and validly issued and outstanding and fully paid, and the Company's Common Stock conforms to all statements in relation thereto contained in the Prospectus. 3. ENGAGEMENT OF SALES AGENT; SALES AND DELIVERY OF THE SHARES. On the basis of the representations and warranties herein contained, and subject to the terms and conditions and convenants and agreements set forth herein, the parties hereto agree as follows: (a) The Sales Agent will act as selling agent for the Company on a non-exclusive, best efforts basis to sell Shares for the account of the Company, subject to availability, at a price of _______ per Share, and the Sales Agent agrees to use its best efforts to effect such sales. However, the Sales Agent makes no commitment to purchase any of the Shares. The Sales Agent's engagement hereunder will terminate on the earlier of (a) ___________, or such later date not beyond ____________, 200___ (90 days), to which the Company may extend the offering; (b) the sale of all 4,365,000 of the Shares; (c) termination of the offering by the Company for any reason before the sale of all of the Shares; or (d) termination of the Sales Agent's engagement by the Company in accordance with the provisions of Section 10 hereof. The period from the Effective Date (as defined in Section 10(a)) to such termination of the Sales Agent's engagement shall be referred to as the "Offering Period." (b) The Sales Agent will deliver a copy of the Prospectus and a subscription agreement in the form filed with the Registration Statement (the "Subscription Agreement") to each prospectus investor in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (together, the "Exchange Act"), including Rule 15c2-8 thereunder. (c) All subscribers will be instructed to execute a Subscription Agreement and to make their remittances payable to "Bank One Trust Company, N.A., Escrow Agent" during the Minimum Offering period and to "Caraco Pharmaceutical Laboratories Ltd." after the Minimum Offering has been reached and the escrow proceeds released to the Company, in accordance with the instructions contained in the Prospectus, the Subscription Agreement, and this Agreement. Upon receipt of a Subscription Agreement and subscription proceeds, the Sales Agent shall review the Subscription Agreement for completeness and then shall promptly transmit a copy of the completed Subscription Agreement to the Escrow Agent (original to the Company) and subscription proceeds to the Escrow Agent or the Company, as applicable, no later than noon, Eastern Time, of the next business day after receipt. 40 (d) The Company reserves the right to accept or reject, in whole or in part, any subscription forwarded by the Sales Agent at any time in its sole discretion and for any reason. If the Company rejects all or a portion of any such subscription, the Company shall deliver to the Escrow Agent written notice stating the amount of the rejected portion of the subscription together with a copy of the Subscription Agreement for the rejected subscription. Upon such delivery, the Escrow Agent shall promptly return the Subscription Agreement and the proceeds for the rejected portion of such subscription to the Sales Agent, who shall promptly return them to the Subscriber. (e) Upon the sale of Shares by the Company, the Company shall authorize the issuance and delivery of stock certificates for the Shares sold to the Subscriber. (f) If the offering of the Shares is terminated for any reason at any time when the Company has accepted subscriptions for fewer than 100,000 shares, then, in accordance with the Company's escrow agreement, the Escrow Agent shall promptly deliver to the Sales Agent checks in the amount of the subscription proceeds received from such Sales Agent on behalf of each Subscriber, without interest, for delivery to the appropriate Subscribers. (g) As compensation for its efforts, the Sales Agent shall be paid by the Company a commission of _____ percent (___%) of the proceeds of the Shares sold through the efforts of the Sales Agent. The commission shall be paid to the Sales Agent promptly upon the Company's authorization of the issuance of stock certificates for Shares sold through the Sales Agent's efforts. 4. ADDITIONAL COVENANTS OF THE COMPANY. The Company covenants and agrees with the Sales Agent that: (a) The Company will notify the Sales Agent promptly of any request by the Commission or any other governmental body or agency that the Prospectus be amended or supplemented. (b) The Company will advise the Sales Agent, promptly after it shall receive notice or obtain knowledge thereof, of the initiation or threatening of any action, suit or proceeding for the purpose of preventing or suspending the use of the Prospectus and that it will use its best efforts to prevent the issuance of any order or ruling preventing or suspending the offering or to obtain its withdrawal if such an order or ruling should be issued. (c) The Company will furnish to the Sales Agent, as soon as available, copies of the Prospectus and all amendments and supplements thereto in such quantities as the Sales Agent may from time to time reasonably request. (d) The Company will apply the net proceeds from the offering received by it substantially in the manner set forth under "Use of Proceeds" in the Prospectus. (e) During the two-year period after the date of the last sale of Shares by the Company, the Company or its successors or assigns will comply with all registration, filing, and reporting requirements of the Securities Act and the Exchange Act. 41 5. COVENANTS, REPRESENTATIONS, AND WARRANTIES OF THE SALES AGENT. The Sales Agent covenants and agrees with the Company that: (a) The Sales Agent will maintain an accurate record of all orders to purchase Shares and funds received, including the name, address, and social security or taxpayer identification number of each prospectus purchaser and the manner in which the stock certificate is to be issued. (b) The Sales Agent will instruct all subscribers to execute a Subscription Agreement containing the following information: (i) the name, address, and social security (or taxpayer ID) number of the Subscriber; (ii) the number of Shares subscribed for by the Subscriber; (iii) the current aggregate dollar amount of such subscription (which shall be $_____ multiplied by the number of Shares subscribed for by the Subscriber; and (iv) the Subscriber's signature. The Sales Agent will instruct each subscriber to make its remittance, in the exact dollar amount of the total purchase price for the number of Shares subscribed for, payable (a) during the Minimum Offering, to the Escrow Agent, and if remittance is represented by a check, the check must be payable to "Bank One Trust Company, N.A., Escrow Agent and (b) after the Minimum Offering and release of proceeds from the escrow account to the Company, payable to "Caraco Pharmaceutical Laboratories Ltd." The Sales Agent will promptly transmit a copy of the Subscription Agreements (originals to the Company) and subscription proceeds received by the Sales Agent to the Escrow Agent at the following address: Bank One Trust Company, N.A. Escrow Agent for Caraco Pharmaceutical Laboratories Ltd. 611 Woodward Mail Suite MI 1-8110 Detroit, Michigan 48226 and if to the Company, as applicable, at the address provided in Section 11. (c) The Sales Agent agrees, that if the Company determines any subscription forwarded to the Escrow Agent by the Sales Agent is not complete, or if the Company rejects all or a portion of any subscription, and therefore the Company returns all or a portion of the subscription proceeds to the Sales Agent, the Sales Agent will promptly notify the Subscriber in writing and promptly return to the Subscriber the amount of subscription proceeds received from the Company. (d) The Sales Agent agrees that if the offering of the Shares is terminated for any reason at any time when the Company has accepted subscriptions for fewer than 100,000 shares, and as a result the Escrow Agent delivers to the Sales Agent checks in the amount of the subscription proceeds received from such Sales Agent on behalf of each Subscriber, without interest, the Sales Agent shall promptly deliver such checks to the appropriate Subscribers. (e) The Sales Agent is registered with the Commission as a broker-dealer and is a member in good standing with the National Association of Securities Dealers, Inc. (the "NASD"), and the Sales Agent and all its agents and representatives have or will have all required licenses and registrations to perform its obligations under this Agreement; and such registrations, membership, and licenses will remain in effect during the terms of this Agreement. The Sales Agent agrees that, in performing its obligations under this Agreement, the Sales Agent will comply with all applicable statutes and the rules and regulations of the NASD and any other federal 42 or state governmental agency that are applicable to it. This Agreement has been duly and validly authorized, executed and delivered by the Sales Agent and is its valid and binding agreement and obligation. (f) The Sales Agent agrees that, upon receipt of any notice from the Company of the happening of any event of the kind which, in the opinion of the Company, requires the amendment or supplementation of the Prospectus, the Sales Agent will forthwith discontinue offering Shares until the Sales Agent receives copies of the supplemented or amended Prospectus, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and, if so directed by the Company, the Sales Agent will deliver to the Company all copies, other than permanent file copies, then in the Sales Agent's possession, of the Prospectus before such supplementation or amendment. (g) The Sales Agent represents and warrants to the Company that (i) neither the Sales Agent nor any of its associated or affiliated persons have acquired unregistered securities of the Company, and (ii) except for this Agreement, no contractual or other relationship exists between the Sales Agent and the Company. (h) The Sales Agent will represent and warrant to the NASD, by submitting a letter in the form attached as Appendix A to this Agreement that (i) neither the Sales Agent nor any of its associated or affiliated persons have acquired unregistered securities of the Company, and (ii) except for this Agreement, no contractual or other relationship exists between the Sales Agent and the Company. 6. RESPONSIBILITY FOR PAYMENT OF EXPENSES. The Company covenants and agrees to pay the costs and expenses typically borne by issuers of securities in a public offering, including, without limitation (i) the costs and charges of any transfer agent or registrar and the cost of preparing stock certificates; (ii) the qualification of the Shares under state securities laws (if necessary), including filing fees and the reasonable fees and disbursements of counsel in connection therewith; (iii) the filing fee of the NASD; and (iv) the printing and delivery to the Sales Agent of copies of the Prospectus and any amendments or supplements thereto. 7. CONDITIONS TO OBLIGATIONS. The obligations of each of the parties as provided herein shall be subject to the continuing accuracy, as of the date hereof and as of the date of the Company's acceptance of any subscription for Shares obtained through the efforts of the Sales Agent, of the representations and warranties of the other party herein. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless the Sales Agent, each of its agents, attorneys, officers, directors, and employees, and any person who controls the Sales Agent within the meaning of the Securities Act against any and all losses, claims, lawsuits, damages, or liabilities to which the Sales Agent or its agents, attorneys, officers, directors, or control persons may become subject insofar as such losses, claims, lawsuits, damages, or liabilities (including awards and/or judgments) arise out of or are in connection with the Prospectus or any amendment or supplement thereto, or any representations, statements, or other acts by the Company, its officers, directors, employees, agents, or control persons, and will reimburse the Sales Agent, its officers, directors, employees, agents, attorneys and any person who controls the Sales Agent for any and all costs and expenses, including reasonable counsel fees incurred by them in connection with the investigation or defense of any such loss, claim, lawsuit, damage, or liability; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, lawsuit, or liability arises out of or is based upon an untrue statement or omission made in the Prospectus or any amendment or supplement thereto or in reliance 43 upon and in conformity with written information furnished to the Company, if any, by or on behalf of the Sales Agent specifically for use with reference to the Sales Agent in preparation thereof. (b) The Sales Agent will indemnify and hold harmless the Company, each of its agents, attorneys, officers, directors, and employees, and any person who controls the Company within the meaning of the Securities Act against any and all losses, claims, lawsuits, damages, or liabilities to which the Company or any such person may become subject insofar as such losses, claims, lawsuits, damages or liabilities (including awards and/or judgments) arising out of or in connection with or resulting from any statements furnished to the Company in writing by the Sales Agent that are included in the Prospectus or any amendment or supplement thereto and which are furnished specifically for use with reference to the Sales Agent in preparation thereof, and will reimburse any and all costs and expenses, including reasonable counsel fees incurred by the Company or other indemnified person in connection with investigating or defending any such loss, claim, lawsuit, damage, or liability. (c) If the indemnification of a person specified above is for any reason held unenforceable, the indemnifying party agrees to contribute to the losses, claims, damages and liabilities for which such indemnification is held unenforceable, (i) in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and the Sales Agent, on the other hand, of the transaction as contemplated (whether or not the transaction is consummated) or (ii) if (but only if) the allocation provided for in clause (i) is for any reason held unenforceable, in such proportion as it appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company, on the one hand, and the Sales Agent, on the other hand, as well as any other relevant equitable considerations. The Company agrees that, for the purposes of this paragraph, the relative benefits to the Company and the Sales Agent of the transaction as contemplated hereby shall be deemed to be in the same proportion that the total value paid or contemplated to be paid to or by the Company, any affiliate of the Company, or any of its shareholders, as the case may be, as a result or in connection with the transaction bears to the fees paid or to be paid to the Sales Agent under this Agreement; provided, however, that, to the extent permitted by applicable law, in no event shall the Sales Agent be required to contribute an aggregate amount in excess of the aggregate fees actually paid to it under this Agreement. (d) If an indemnified party is requested or required to appear as a witness in any action brought by or on behalf of or against the indemnifying party or any affiliate of the indemnifying party in a transaction contemplated by this Agreement in which such indemnified party is not named as a defendant, the indemnifying party shall reimburse the indemnified party for all expenses incurred by it in connection with such indemnified party's appearing and preparing to appear as such a witness, including, without limitation, reasonable fees and disbursements of its legal counsel. (e) Neither party shall, without the other party's prior written consent, which consent shall not be unreasonably withheld, settle, compromise, or consent to the entry of any judgment in any pending or threatened claim, action, or proceeding in respect of which indemnification could be sought against it under the indemnification provisions of this Agreement, whether or not any indemnified party is an actual or potential party to a claim, action, or proceeding, unless such settlement, compromise, or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, or proceeding. (f) The foregoing reimbursement, indemnity, and contribution obligations shall be in addition to any liabilities which the indemnifying party may otherwise have. The reimbursement and indemnity obligations of 44 the indemnifying party under such subparagraphs shall extend upon the same terms and conditions to any affiliate of the indemnified party, and the shareholders, directors, officers, employees, attorneys, and control persons (if any), as the case may be, of the indemnified party and any of its affiliates. (g) Prior to any proposed sale, distribution, or liquidation of all or a significant portion of a party's assets or any significant recapitalization of its outstanding securities in a transaction pursuant to which such party's ability to honor its obligations hereunder might be adversely affected, such party will notify the other party in writing thereof and, if requested by the other party, shall arrange alternative means for providing for the obligations of the parties set forth in this Section 8, including the assumption of such obligations by a third party or the issuance or creation of an escrow, in each case in an amount and upon terms and conditions satisfactory to the indemnified part. The provisions of Section 8 shall survive any termination of the authorization provided by this Agreement. 9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, and agreements of the Company and the Sales Agent herein, and the indemnity agreements contained in Section 8 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Sales Agent or any controlling persons or the Company or any of its officers, directors, or any controlling persons, and shall survive the issuance of the Shares. 10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective (the "Effective Date") upon the later to occur of (i) the time the Registration Statement shall be declared effective by the Commission and the effective date of the Registration Statement in the state(s) in which the Sales Agent will be offering the Shares; and (ii) the execution and delivery of this Agreement by the Company and the Sales Agent. (b) Either the Company or the Sales Agent may terminate this Agreement by giving notice to the other as provided in Section 11 at any time. Any such termination shall not terminate the obligations of the parties pursuant to Sections 3, 6 and 8 of this Agreement. 11. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be hand delivered or sent by U.S. certified mail, return receipt requested, or other form of delivery requiring signature by the person receiving the delivery, or telecopied and confirmed to the following addresses: To the Sales Agent: At the address set forth on the first page of this agreement. To the Company: Caraco Pharmaceutical Laboratories Ltd. 1150 Elijah McCoy Drive Detroit, Michigan 48226 With a copy to: Fred B. Green, Esq. Bodman, Longley & Dahling LLP 34th Floor, 100 Renaissance Center Detroit, Michigan 48243 45 All notices shall be deemed delivered upon the earlier of the date the receiving party signs the return receipt or five days after the notice is postmarked. Any party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose. 12. PARTIES. This Agreement shall inure to the benefit of and be binding upon the Sales Agent, the Company, and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their successors and assigns and the per sons referred to in Section 8, any legal or equitable right, remedy, or claim under or in respect of this Agreement or any provision herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective successors and assigns and such indemnified persons and for the benefit of no other person or corporation. No purchaser of any of the Shares from the Sales Agent shall be construed a successor or assign merely by reason of such purchase. 13. APPLICABLE LAW. This Agreement shall be governed by, enforced and construed in accordance with, the laws of the State of Michigan. 14. JURISDICTION. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Sales Agent Agreement may be brought against the Company or the Sales Agent only in the courts in the State of Michigan, County of Wayne or, if it has or can acquire jurisdiction, in the United States District Court for the Eastern District of Michigan, and the Company and the Sales Agent consent to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on the Company or the Sales Agent anywhere in the world. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. The validity of this Agreement shall not be impaired if each party does not execute the same counterpart so long as the execution of each party appears on the counterparts taken as a whole. If the foregoing correctly sets forth the understanding between the Company and the Sales Agent, please so indicate by signing in the space provided below for that purpose, whereupon this Agreement shall constitute a binding agreement between the Company and the Sales Agent. 46 CARACO PHARMACEUTICAL LABORATORIES LTD. By: ----------------------------- Name: Narendra N. Borkar Title: Chief Executive Officer ACCEPTED as of the date below. By: ----------------------------- Name: Title: Date: 47 APPENDIX A ____________________, 200___ National Association of Securities Dealers, Inc. Corporate Financing 9509 Key West Avenue Rockville, MD 20850 Attn: Re: Caraco Pharmaceutical Laboratories Ltd. OFFERING OF UP TO 4,365,000 SHARES OF COMMON STOCK In connection with its participation as a Selling Agent of Caraco Pharmaceutical Laboratories Ltd. in the above-referenced offering of shares of common stock of Caraco Pharmaceutical Laboratories Ltd. _____________________________ ("Member"), an NASD member, represents and warrants as follows: 1. Member is serving as a Selling Agent for a maximum of __________ shares in the offering. 2. Neither Member nor any of its associated or affiliated persons have acquired unregistered securities of Caraco Pharmaceutical Laboratories Ltd. 3. Except for this Agreement, no contractual or other relationship exists between Member and Caraco Pharmaceutical Laboratories Ltd. By: ------------------------- Name: Title: 48 -----END PRIVACY-ENHANCED MESSAGE-----