-----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, CPKlnj1kU18lyFWxwpY1z/tBu/uSKix+AjfYY5Vyr7G1LD6nmMI47PaPgYUugKn3 BU5ixWJDvYtzUQr0coGegA== 0000950124-04-001970.txt : 20040430 0000950124-04-001970.hdr.sgml : 20040430 20040430154325 ACCESSION NUMBER: 0000950124-04-001970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040430 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31773 FILM NUMBER: 04769741 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 10-Q 1 k84929e10vq.txt QUARTERLY REPORT FOR THE PERIOD ENDED 03/31/2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2004 { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to _________ Commission File No. 0-24676 CARACO PHARMACEUTICAL LABORATORIES, LTD. (Exact name of registrant as specified in its charter) MICHIGAN 38-2505723 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1150 ELIJAH MCCOY DRIVE, DETROIT, MICHIGAN 48202 (Address of principal executive offices) (Zip Code) TELEPHONE: (313) 871-8400 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes {X} No { } Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes {X} No { } As of April 26, 2004, registrant had 24,577,828 shares of common stock issued and outstanding. CARACO PHARMACEUTICAL LABORATORIES LTD. UNAUDITED BALANCE SHEETS
BALANCES AS AT MARCH 31, DECEMBER 31, 2004 2003 ----------- ------------ $ $ ASSETS Current assets Cash and cash equivalents 4,244,815 4,206,282 Accounts receivable, net 2,760,338 4,538,473 Inventories 12,646,575 9,610,810 Prepaid expenses and deposits 593,208 562,030 ----------- ----------- Total current assets 20,244,936 18,917,595 ----------- ----------- Property, plant and equipment - at cost Land 197,305 197,305 Building and improvements 8,428,092 7,917,986 Equipment 7,632,179 6,991,024 Furniture and fixtures 489,252 364,140 ----------- ----------- Total 16,746,828 15,470,455 Less: accumulated depreciation 6,152,854 5,963,780 ----------- ----------- Net property, plant & equipment 10,593,974 9,506,675 ----------- ----------- Total assets 30,838,910 28,424,270 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIT) Current liabilities Accounts payable 6,813,286 5,225,976 Accrued expenses 1,942,704 4,855,320 Current portion of bank loans payable 9,250,000 8,750,000 EDC debt classified as current 1,214,906 1,115,213 Accrued interest 31,005 61,896 ----------- ----------- Total current liabilities 19,251,901 20,008,405 ----------- ----------- Long term liabilities EDC debt 4,752,810 5,270,277 Bank loans payable 3,125,000 8,125,000 ----------- ----------- Total long term liabilities 7,877,810 13,395,277 ----------- ----------- Total liabilities 27,129,711 33,403,682 ----------- ----------- Stockholders' equity / (deficit) Common stock, no par value, authorized 50,000,000 shares; 41,442,311 41,442,311 issued and outstanding shares - 24,577,828 shares Convertible Series B Preferred Stock, no par value, authorized 10,931,530 0 5,000,000 shares; issued and outstanding - 1,632,000 and -0- shares Additional paid in capital 2,718,735 2,718,735 Accumulated deficit (51,383,377) (49,140,458) ----------- ----------- Total stockholders' equity / (deficit) 3,709,199 (4,979,412) ----------- ----------- Total liabilities and stockholders' equity / (deficit) 30,838,910 28,424,270 =========== ===========
See accompanying notes 2 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 2003 ---------- --------- $ $ Net sales 13,561,088 8,721,600 Cost of goods sold 5,390,702 4,225,949 ---------- --------- Gross profit 8,170,386 4,495,651 Selling, general and administrative expenses 1,282,355 949,784 R&D cost 1,133,331 899,931 R&D cost - Affiliate 7,828,160 0 ---------- --------- Operating (loss) / income (2,073,459) 2,645,936 ---------- --------- Other Expense Interest expense (181,542) (442,252) Interest income 2,015 1,065 Other income 10,067 0 ---------- --------- Net other expense (169,460) (441,187) ---------- --------- ---------- --------- Net (loss) / income (2,242,920) 2,204,749 ========== ========= Net (loss) / income per common share ---------- --------- Basic (0.09) 0.09 ---------- --------- Diluted (0.09) 0.09 ---------- ---------
See accompanying notes 3 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 2003 ---------- ---------- $ $ Cash flows from operating activities Net (loss) / income (2,242,920) 2,204,749 Adjustments to reconcile net income / (loss) to net cash provided by /(used in) operating activities Depreciation 189,074 141,737 Preferred shares issued for R&D Cost - affiliate 7,828,160 0 Changes in operating assets and liabilities which provided / (used) cash: Accounts receivable 1,778,135 (5,109,668) Inventories (3,035,765) 33,422 Prepaid expenses and deposits (31,178) (120,049) Accounts payable 1,587,310 1,132,418 Accrued expenses and interest 159,863 267,000 ---------- ---------- Net cash provided by / (used) in operating activities 6,232,679 (1,450,391) ---------- ---------- Cash flows from investing activities ---------- ---------- Purchases of property, plant and equipment (1,276,372) (248,000) ---------- ---------- Cash flows from financing activities Proceeds from long-term debt 0 1,600,000 Net bank loans paid (4,500,000) 0 Payments of EDC debt (417,774) (248,421) Net Loans (repaid to) / received from shareholders 0 150,000 ---------- ---------- Net cash (used in) / provided by financing activities (4,917,774) 1,501,579 ---------- ---------- Net increase / (decrease) in cash and cash equivalents 38,533 (196,812) Cash and cash equivalents, beginning of period 4,206,282 534,228 ---------- ---------- Cash and cash equivalents, end of period 4,244,815 337,416 ========== ==========
Supplemental disclosure of cash flows information: During the quarter ended March 31, 2004, 544,000 shares of preferred stock were issued to Sun Global in satisfaction of the related liability for one product transfer that had been accrued at December 31, 2003 in the amount of $3,103,370. See accompanying notes 4 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2004
ADDITIONAL PREFERRED STOCK COMMON STOCK PAID IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL --------- ---------- ---------- ---------- ---------- ----------- ---------- $ $ $ $ Balances at January 1, 2004 0 0 24,577,828 41,442,311 2,718,735 (49,140,458) (4,979,412) Issuances of preferred stock to affiliate in exchange for product technology transfers 1,632,000 10,931,530 10,931,530 Net loss (2,242,920) (2,242,920) --------- ---------- ---------- ---------- --------- ----------- ---------- Balances at March 31, 2004 1,632,000 10,931,530 24,577,828 41,442,311 2,718,735 (51,383,378) 3,709,198 ========= ========== ========== ========== ========= =========== ==========
See accompanying notes 5 CARACO PHARMACEUTICAL LABORATORIES, LTD. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The balance sheets as of March 31, 2004 and December 31, 2003 and the related statements of operations and cash flows for the three months March 31, 2004 and 2003 and shareholders' equity for the three months ended March 31, 2004 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for the full year. The financial statements as of March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003 should be read in conjunction with the financial statements and notes thereto included in the Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2003. The accounting policies followed by the Corporation with respect to the unaudited interim financial statements are consistent with those stated in the 2003 Caraco Pharmaceutical Laboratories, Ltd., Annual Report on Form 10-KSB. 2. ORGANIZATION AND NATURE OF BUSINESS Caraco Pharmaceutical Laboratories, Ltd. ("Caraco," the "Company" or the "Corporation" which is also referred to as we, us or our), is a Michigan corporation engaged in the business of developing, manufacturing and marketing generic drugs for the ethical (prescription) and over-the-counter (non-prescription or "OTC") markets. A generic drug is a pharmaceutical product, which is the chemical and therapeutic equivalent of a brand-name drug as to which the patent and/or market exclusivity has expired. Generics are well accepted for substitution of brand products as they sell at a discount to the branded product's price and at their equivalence in quality and bioavailability. Our present product portfolio includes 18 products in 35 strengths in 82 package sizes. We are currently marketing 16 of the products in 28 strengths and 62 package sizes. The products are intended to treat a variety of disorders including the following: hypertension, arthritis, epilepsy, diabetes, depression and pain management. A significant source of our funding has been from private placement offerings and loans. Since August 1997, Sun Pharmaceutical Industries Limited, a specialty pharmaceutical corporation organized under the laws of India ("Sun Pharma"), has contributed equity capital and has advanced us loans. In addition, among other things, Sun Pharma has acted as a guarantor on loans to Caraco, has supplied us with raw materials for certain of our products, helped us obtain machinery and equipment to enhance our production capacities at competitive prices and transferred certain generic products to us. (See "Current Status of the Corporation" and "Sun Pharmaceutical Industries, Limited" below.) 3. CURRENT STATUS OF THE CORPORATION Net sales for the period ended March 31, 2004 were $13.6 million as compared to $8.8 million for the corresponding period of 2003. We incurred an operating loss of $2.1 million during the period ended March 31, 2004 as compared to earning operating income of $2.6 million for the corresponding period of 2003. After interest costs, we incurred a net loss of $2.2 million during the period ended March 31, 2004 as compared to earning net income of $2.2 million for the corresponding period of 2003. Net cash generated from operating activities was $6.2 million for the period ended March 31, 2004 as compared to net cash used in operating activities of $1.5 million for the corresponding period in 2003. At March 31, 2004, for the first time since inception, we had a positive stockholders' equity of $3.7 million, as compared to a stockholders' deficit of $5 million at December 31, 2003. (See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.") Pursuant to our products agreement with Sun Pharma Global, Inc. ("Sun Global"), a wholly-owned subsidiary of Sun Pharma, we have selected, through the first quarter of 2004, seven products out of the 25 products to be transferred to us by Sun Global. Of these, one product passed its bio-equivalency studies in the fourth quarter of 2003 and two products passed bio-equivalency studies during the first quarter of 2004. Under the products agreement, Sun Global has earned 544,000 preferred shares for each such product. (See "Sun Pharmaceutical Industries Limited" and "Item 2. - Future Outlook.") During the first quarter of 2004, we filed ANDAs for two of the three above-mentioned products with the FDA. We expect to file the third product during the second quarter. During the first quarter of 2004, we received approval from the FDA for an additional strength for one product in our portfolio. In April 2004, we received approval of one product from the FDA. This brings the total number of ANDAs pending approval by the FDA to three. (See "Organization and Nature of Business" above). During the first quarter of 2004, we appointed three new independent directors to comply with the requirements of the Sarbanes-Oxley Act of 2002 and the regulations of the American Stock Exchange. The new independent directors replace the three independent directors who resigned in late 2003. The new independent directors are William C. Brooks, Timothy Manney and Georges Ugeux. During the first quarter of 2004, Sun Pharma acquired 3,452,291 additional shares of common stock and 1,329,066 stock options from two former directors and a significant shareholder; thereby increasing its beneficial ownership from approximately 48% to 63%. During the first quarter of 2004, the Company repaid the entire balance of a $4.4 million loan from ICICI Bank Limited. In April 2004, the Company repaid the entire balance of the $6.0 million loan from the Economic Development Corporation of the City of Detroit (the "EDC"). The payoffs were funded from internal cash flow and by utilizing part of a new $10.0 credit line arranged with Citibank, N.A. 4. RECENT ACCOUNTING PRONOUNCEMENTS In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6 (b) of SFAS No. 133, clarifies when a derivative contains a financing component, amends a definition to conform to language used in FASB interpretation No. 45, and amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The subject matter of SFAS No. 149 is not currently applicable to the Corporation; accordingly, it is not expected that the provisions of SFAS No. 149 will have a material impact on the financial position, results of operations or cash flows of the Corporation. In May 2003 the FASB issued SAFS No. 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by cumulative effect of a change in accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. The subject matter of SFAS No. 150 is not currently applicable to the Corporation; accordingly, it is not expected that provisions of statement No. 150 will have a material impact on the financial position, results of operations or cash flows of the Corporation. 5. COMPUTATION OF (LOSS) / EARNINGS PER SHARE (Loss) / Earnings per share is computed using the weighted average number of common shares outstanding during each period and considers a dual presentation and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the potential dilution of all common stock equivalents. The basic and diluted weighted average numbers of common shares outstanding for the three months ended March 31, 2004 were 24,577,828. The basic and diluted weighted average numbers of common shares outstanding for the three months ending March 31, 2003 were 23,762,532 and 25,061,469. 6. MORTGAGE NOTE WITH EDC Our manufacturing facility and executive offices were constructed in 1991 and financed by $9.1 million loan pursuant to a Development and Loan Agreement dated August 10, 1990 (the "Agreement") from the EDC. The loan was collateralized by a first mortgage, effectively, on all of the Corporation's property and equipment purchased pursuant to the Agreement. On 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. We became in default of the restructured loan; however, from February 1999 to April 2003 we made $100,000 monthly payments to the EDC while we were negotiating another restructuring of the loan. On April 23, 2003, the loan was again restructured, effective as of January 1, 2003. The loan was extended for six years, with interest rates starting at 2.75% and increasing to 5.16% p.a. (current year's effective rate of interest being 3.36% p.a.). Under the extension, the EDC retained a first mortgage on our property, and a first lien on our furniture, fixtures, equipment, ANDAs and intellectual property. The EDC removed its first lien on our accounts receivable and inventory. In addition to other covenants, we agreed that we would not redeem any of our outstanding shares, pay any dividends with respect to our outstanding common stock or preferred shares or merge or consolidate with any other corporation or other entity without the prior written consent of the EDC. However, the EDC eliminated the prior restriction on capital investment in excess of $2 million by permitting us, so long as we were not in default of any of our obligations, to purchase new capital and sell the existing capital equipment so long as a result of such transactions the book value of our assets were not reduced below the balance as of December 31, 2002 and the proceeds of any such sales were retained by us. As of March 31, 2004, the obligations of the Corporation to the EDC were classified on the accompanying balance sheet in accordance with the terms of the restructured loan. At March 31, 2004, the loan from the EDC had been reduced to $6.0 million. In April 2004, the Company repaid the entire balance of the $6.0 million loan from EDC (effective rate of interest of 3.36%). This was funded by utilizing part of a new $10.0 credit line arranged with Citibank, N.A. (effective rate of interest of 2.25%). Accordingly, the EDC liens on our intellectual property and capital assets, and other restrictions have been removed. 7. SUN PHARMACEUTICAL INDUSTRIES LIMITED Pursuant to a stock purchase agreement, Sun Pharma had, as of December 31, 1998, remitted a total of $7.5 million to us for the purchase of 5.3 million common shares. Sun Pharma and its affiliates had loaned us, since August 1997, approximately $10.0 million at interest rates ranging from of 8.0% to 10% per annum, payable quarterly. Prior to December 31, 2003, we repaid all of such loans. Sun Pharma had also assisted us, by acting as guarantor, in obtaining line of credit loans from ICICI Bank Limited and The Bank of Nova Scotia in the amounts of $5.0 million and $12.5 million, respectively. As of March 31, 2004, we have repaid all of such loan to ICICI Bank Limited and made a scheduled installment payment of $3.1 million to The Bank of Nova Scotia. In August 1997, we entered into an agreement with Sun Pharma for the transfer of technology for 25 generic pharmaceutical products over a period of five years through August 2002 in exchange for 544,000 shares of our common stock for each ANDA product (when bio-equivalency studies were successfully completed) and 181,333 shares for each DESI product. The products provided to us by Sun Pharma were selected by mutual agreement. Under such agreement, we conducted, at our expense, all tests including bio-equivalency studies. Pursuant to such agreement, Sun Pharma delivered to us the technology for 13 products. This agreement has expired and, as noted immediately below, we have entered into a new agreement with Sun Global. In November 2002, we entered into a new products agreement with Sun Global for the transfer of the technology for 25 generic products over a period of 5 years. Under such agreement, we conduct, at our expense, all tests including bio-equivalency studies. Sun Global receives 544,000 shares of a new class of preferred stock (convertible into common stock after three years) for each ANDA product transferred upon the ANDA successfully passing the bio-equivalency studies. The preferred shares are non-voting and do not receive dividends. The products agreement with Sun Global was amended by the Independent Committee in the first quarter of 2004 to eliminate the provision requiring that the Independent Committee concur in the selection of each product, and provide instead, that each product satisfy certain objective criteria developed by management and approved by the Independent Committee. Pursuant to such objective criteria, we selected seven products during the first quarter of 2004 that we had been working on during 2003, but had not been formally selected under the products agreement prior to its amendment. One of the seven products passed its bio-equivalency studies in December 2003 and two products passed their respective bio-equivalency studies in the first quarter of 2004. Sun Global has thereby earned 544,000 preferred shares for each product. Sun Pharma has established Research and Development Centers in Mumbai and Baroda, India where the development work for products is performed. Sun Pharma supplies us with certain raw materials and formulations. In addition, Sun Pharma assists us in acquiring machinery and equipment to enhance our production capacities. Sun has also provided us with qualified technical professionals, many of whom are currently working at the facility. During the first quarter of 2004, Sun Pharma acquired 3,452,291 additional shares of common stock and 1,329,066 stock options from two former directors and a significant shareholder, thereby increasing its beneficial ownership from approximately 48% to 63%. 8. TERM LOAN FROM ICICI BANK The Corporation had obtained a term loan of $5 million from ICICI Bank Limited with the guarantee of Sun Pharma. This term loan had been used to finance research and development activities, upgrade facilities, repay loans and meet working capital requirements. Interest payments, based on Libor + 140 basis points (effective rate at the time of repayment (see below) was 2.40%), were due quarterly, with quarterly principal payments scheduled to be made from December 2003 through September 2005. During the quarter, we have repaid the entire loan due to ICICI Bank Limited out of funds generated from operations. 9. TERM LOAN FROM THE BANK OF NOVA SCOTIA The Corporation had obtained term loans of $12.5 million from The Bank of Nova Scotia with the guarantee of Sun Pharma. This term loan had been used to finance research and development activities, upgrade facilities, repay other loans and meet working capital requirements. Interest payments, based on an average of Libor + 175 basis points (current effective rate is 2.75%), are due quarterly, with semi-annual principal payments scheduled to be made from February 2004 through September 2005. The first installment due during the quarter in the amount of $3.1 million was repaid to The Bank of Nova Scotia out of funds generated from operations. That portion of the loan, which is due within one year from March 31, 2004, approximately $6.3 million, has been classified as current on the accompanying balance sheet. 10. LINE OF CREDIT FROM CITIBANK N.A. The Corporation has obtained a new $10.0 million line of credit from Citibank, N.A. with a secured irrevocable and unconditional standby letter of credit provided by Sun Pharma. The line of credit shall be used to finance working capital requirements, higher cost debt redemption and for financing capital expenditures. Interest payments are due monthly. The line of credit is revolving and for 1 year. Outstanding balances on the line of credit may be repaid at any time. The rate of interest is Libor + 125 basis points (current effective rate being 2.25%). That portion of the loan, which is due within one year from March 31, 2004, has been classified as current on the accompanying balance sheet. 11. COMMON STOCK ISSUANCES No common stock was issued during the quarters ended March 31, 2004 and 2003, respectively. 12. PREFERRED STOCK ISSUANCES We issued 1,632,000 shares of preferred stock to Sun Global during the first quarter of 2004 in connection with 1 product transfer during the last quarter of 2003 and 2 product transfers during the first quarter of 2004. No shares of preferred stock were issued to Sun Global during the corresponding period in 2003. 13. SALES AND CUSTOMERS Certain of our customers purchase our products through designated wholesale customers, which act as intermediary distribution channels for our products. For example, the Veterans Administration, which has entered into the sales contract discussed below, selected Amerisource Bergen as its designated wholesaler. Shipments to one wholesale customer accounted for approximately 63% and 76% of net sales during the three months ended March 31, 2004 and March 31, 2003, respectively. Balances due from this wholesaler represented approximately 64% of accounts receivable at March 31, 2004 and 78% of accounts receivables at March 31, 2003. No other single customer represented more than 10% of our net sales during the past two years. 14. LITIGATION As previously disclosed, on February 12, 2003, C. Arnold Curry filed a complaint in the Wayne County Circuit Court alleging breach of a written employment agreement. Mr. Curry is seeking 175,000 shares of our common stock (35,000 shares for each of the first five ANDAs approved by the FDA). We, and plaintiff, have each filed a motion for summary judgment. No trial date has been scheduled. We intend to vigorously defend ourselves against these claims, which we believe have no merit. As previously disclosed, we were named as one of two defendants and as one of several defendants in two separate product liability suits, involving Miraphen, which contains phenylopropanolame (PPA), one in federal court in Pennsylvania and another in state court in New Jersey, respectively. These lawsuits sought damages generally for personal injury as well as punitive damages under a variety of liability theories including strict products liability, breach of warranty and negligence. The plaintiff in the federal lawsuit stipulated to a dismissal of the lawsuit and the case was formally dismissed by the federal court in December 2003. It is our understanding that a stipulation of dismissal as to Caraco was entered by the state court on April 8, 2004. At this time, we have not, however, received a copy of the formal order. We are involved in certain legal proceedings from time to time incidental to our normal business activities. While the outcome of any such proceedings cannot be accurately predicted, we do not believe the ultimate resolution of any existing matters should have a material adverse effect on our financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that management believes is relevant to an understanding of the Corporation's results of operations and financial condition. The discussion should be read in conjunction with the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 2003 annual report on Form 10-KSB and the unaudited interim financial statements included in Item 1 of this Quarterly Report on Form 10-Q. OVERVIEW We have generated cash from operations of $6.2 million during the first quarter of 2004 compared to using cash in operations of $1.5 million during the first quarter of 2003. This cash was available and used primarily to pay off Company debt. While we did incur a net loss of $2.2 million during the first quarter of 2004 compared to net income of $2.2 million during the first quarter of 2003, the loss was primarily due to non-cash research and development expenses of $7.8 million in the first quarter of 2004 relating to 2 products passing their bio-equivalency studies during such period compared to no non-cash research and development expenses during the first quarter of 2003, as no product passed bio-equivalency studies during this period. FDA COMPLIANCE AND PRODUCT APPROVALS During November 2002, the FDA conducted an inspection of our facility and found us to be substantially in compliance with cGMP regulations. While the FDA did issue us an FDA 483 list of observations, we do not believe they are material and we have taken appropriate remedial actions. We have submitted 17 ANDAs to the FDA for approval since August 1997, including 2 filed during the first quarter of 2004. Of these, 14 have been approved and three are pending approval. We expect to file the product, which passed bio-equivalency studies at the end of March 2004, during the the second quarter of 2004. QUARTER ENDED MARCH 31, 2004 COMPARED WITH QUARTER ENDED MARCH 31, 2003 NET SALES. Net sales for the three months ended March 31, 2004 and 2003 were $13.6 million and $8.7 million, respectively, and reflects an increase of 56%. The increase is due to the higher production and marketing of most of our products. In addition, with our larger base of products, we have been able to attract both new customers and larger orders. As of March 31, 2004, we manufacture and market all except one of the approved products. Sales of two products accounted for 70% of our net sales during the three months ended March 31, 2004 as compared to 84% during the three months ended March 31, 2003, respectively. GROSS PROFIT. We earned a gross profit of $8.2 million during the three months ended March 31, 2004 as compared to a gross profit of $4.5 million during the corresponding period in 2003, reflecting an increase of 82%. The improvement was primarily due to higher sales volumes and better-cost absorption of operational overheads. As a result of increased sales, the gross profit as a percentage of net sales has also improved for the three months ended March 31, 2004 as compared to the corresponding period of 2003. The percentage for the three months ended March 31, 2004 was 60% as compared to 52% for the corresponding period in 2003. The increase was the result of: - Reduction in the material costs. - Changes in product mix to higher profit margin products. - Better cost absorption of manufacturing costs. - Further improved efficiency in the overall manufacturing process associated with higher utilization of plant capacity. - Utilization of newly installed larger and faster equipment to achieve economies of scale. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended March 31, 2004 and 2003, respectively, were $1.3 million and $0.9 million. This represents an increase of 35%. Selling, general and administrative expenses, as a percentage of net sales, during the three months ended March 31, 2004 have marginally improved to 9.5% compared to 10.9% during the same period of 2003. The increase of $0.4 million for the three months ended March 31, 2004 was primarily due to additional professional costs ($0.05 million) in connection with the ongoing litigation against the Company, higher product liability and other insurance costs ($0.16 million) and other costs related to sales and marketing. RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development expenses during the period ended March 31, 2004 were $1.1 million as compared to $0.9 million during the corresponding period of 2003. The reason for the higher cash research and development expenses was higher expenditures for bio-study costs during the first quarter of 2004 compared to none during the corresponding period of 2003. Non-cash research and development expenses of $7.8 million (technology transfer costs) have been recorded during the period ended March 31, 2004 for 1,088,000 shares of preferred stock earned by Sun Global for 2 products transfers during the three months ended March 31, 2004. There were no non-cash research and development expenses during the corresponding period of 2003. INTEREST EXPENSE. Interest expense on loans was $0.2 million and $0.4 million for the three months ended March 31, 2004 and 2003, respectively. The reduction in interest expense is primarily due to our repaying the loan of $10 million to Sun Pharma and its affiliates, the loan of $4.4 million to ICICI Bank Limited and our first installment of $3.1 million to The Bank of Nova Scotia during 2003 and 2004. RESULTS OF OPERATIONS. We incurred a net loss of $2.2 million for the three months ended March 31, 2004 as compared to earning net income of $2.2 million for the same period of 2003. The significantly reduced results of operations in the current three-month period of 2004 is primarily due to non-cash research and development expenses of $7.9 million compared to no such expenses in the corresponding period of 2003. LIQUIDITY AND CAPITAL RESOURCES. During the period ended March 31, 2004, we generated cash of $6.2 million as compared to using cash in operations of $1.5 million during the same period of 2003. The higher cash generation was due to higher sales and improved cost absorptions in our operations. In addition to repaying the entire debt of $4.4 million to ICICI Bank Limited and making a scheduled payment of $3.1 million to The Bank of Nova Scotia, operations have generated sufficient cash to fund our capital expenditures of $1.3 million during the three months ended March 31, 2004. In contrast, we had to borrow $1.6 million from The Bank of Nova Scotia to fund our operations and also finance our capital expenditure of $0.25 million during the corresponding period in 2003. At March 31, 2004, the Corporation had positive working capital of $1.0 million compared to a negative working capital of $1.1 million at December 31, 2003. The positive working capital position is primarily due to reduction of debt and current liabilities during 2004. As of December 31, 2003, the negative working capital was mainly due to the classification of $2.5 million loan payable to the ICICI Bank Limited and $6.25 million loan payable to The Bank of Nova Scotia as current, since these loans were due to mature in within one year from March 31, 2003. As noted, the Corporation has repaid the entire loan of $4.4 million due to ICICI Bank Limited and made a scheduled principal repayment of $3.1 million to The Bank of Nova Scotia. As at March 31, 2004, $9.4 million of The Bank of Nova Scotia loan is outstanding. The Corporation has obtained a $10.0 million line of credit from Citibank, N.A., with a secured irrevocable and unconditional standing letter of credit provided by Sun Pharma. Subsequent to the end of the first quarter, $6.0 million of the line of credit was used to pay off the EDC. It is anticipated that the balance of the line of credit shall be used to finance working capital requirements, higher cost debt redemption and for financing capital expenditures. FUTURE OUTLOOK We have experienced difficult times in the past. However, because we have been substantially compliant with cGMPs since 2001, have received approvals of twelve ANDAs during the last three years, have expanded and upgraded our facilities and have expanded our customer base, management feels that our future outlook is brighter. Management expects an increase in sales and improvement in cash flow during 2004. The pricing pressures, which resulted in lower gross margins in the fourth quarter of 2003, are expected to continue in 2004 due to increased competition. However, we still expect to meet our previously stated guidance of 20-25% revenue growth during 2004. As disclosed, under the products agreement dated November 21, 2002, between Sun Global and the Company, Sun Global has agreed to transfer the technology for 25 products to the Company over a five year period in exchange for 544,000 preferred shares (which are convertible on a one-to-one basis into common shares) per product. Since the date of the products agreement, seven products have been selected for development by the Company and three of these products have passed their respective bio-equivalency studies (one in 2003 and two in the first quarter of 2004). If some or all of the remaining four products pass their bio-equivalency studies in 2004, the fair value of the preferred shares earned by Sun Global in exchange for such products could cause our non-cash research and development expenses to increase to an amount which would significantly decrease profit or create a loss, as it has during the first quarter of 2004, in which two products passed bio-equivalency studies. While the development of new products will increase our non-cash R&D expense and will impact EPS, the cash will be available, among other things, to repay loans and reduce interest burden, meet increased working capital requirements and finance capital investments. This in turn will strengthen our balance sheet and build value for our shareholders. The Company will continue to aggressively move forward on the development of the products ("Products") presented and to be presented for consideration by Sun Global pursuant to the products agreement. We believe that receiving products from Sun Global, provides us with a partner who has a proven track record; one that already has provided us with quality products. Moreover, Sun Pharma's increased beneficial ownership in us, to approximately 63% of our outstanding shares, should, we believe, provide it with the incentive to continue to help us succeed. Sun Pharma has already provided us with millions of dollars in capital, loans, and guarantees of loans, and with personnel, raw materials and equipment, which have significantly helped us to date. Management's plans for the remainder of 2004 include: - Continued focus on FDA compliance. - Continued research and development activities. - Continued expenditures for capital investment including equipment and expansion of capacity. - Increased market share for certain existing products and recently introduced new products and enhanced customer reach and satisfaction. - Prompt introduction of new approved products to the market. - Achieving further operational efficiencies by attaining economies of scale and cost reduction per unit. - Increasing the number of products, as well as anticipated volume increases for existing products, which, in turn, will improve manufacturing capacity utilization. - Considering alternative ways of increasing cash flow including developing, manufacturing and marketing ANDAs owned by Sun Pharma. - Locating and utilizing facilities of contract-manufacturers to enhance production and therefore sales. - Further reducing debt, if adequately supported by positive cash flows. FORWARD LOOKING STATEMENTS This report, other than the historical financial and business information, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act. Without limitation, the words "believes," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Those statements include statements regarding our intent, belief, and current expectation. These statements are not guarantees of future performance and are subject to risks and uncertainties that cannot be predicted or quantified. Consequently, actual results could differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties including, but not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment; (ii) not obtaining FDA approval for new products or delays in receiving FDA approvals; (iii) governmental restrictions on the sale of certain products; (iv) dependence on key personnel; (v) development by competitors of new or superior products or cheaper products or new technology for the production of products or the entry into the market of new competitors; (vi) market and customer acceptance and demand for new pharmaceutical products; (vii) availability of raw materials in a timely manner, at competitive prices, and in required quantities; (viii) timing and success of product development and launch; (ix) integrity and reliability of the Company's data; (x) lack of success in attaining full compliance with regard to regulatory and cGMP compliance; (xi) experiencing difficulty in managing our recent rapid growth and anticipated future growth; (xii) dependence on limited customer base; (xiii) occasional credits to certain customers reflecting price reductions on products previously sold to them and still available as shelf-stock; (xiv) possibility of an incorrect estimate of charge-backs and the impact of such an incorrect estimate on net sales, gross profit and net income; (xv) dependence on few products generating majority of sales; (xvi) product liability claims for which the Company may be inadequately insured; (xvii) subjectivity in judgment of management in applying certain significant accounting policies derived based on historical experience, terms of contracts, our observations of trends of industry, information received from our customers and other sources, to estimate revenues, accounts receivable allowances including chargebacks, rebates, income taxes, values of assets and inventories etc and (xviii) other risks identified in this report and identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission. These forward-looking statements represent our judgment as of the date of this report. We disclaim, however, any intent or obligation to update our forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use any derivative financial instruments. All of our direct sales are in the United States and denominated in U.S. dollars. Our exposure to market risk for a change in interest rates relates primarily to our debt instruments. Our debt instruments, at March 31, 2004, are subject to variable interest rates, which float based upon a spread over LIBOR. Management does not believe that any risk inherent in these instruments is likely to have a material effect on our financial statements. ITEM 4. CONTROLS AND PROCEDURES a. The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer, who is also our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"), and has concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in providing him with material information relating to the Corporation known to others within the Corporation which is required to be included in our periodic reports filed under the Exchange Act. b. There have been no changes in the Corporation's internal controls over financial reporting that occurred during registrant's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed, on February 12, 2003, C. Arnold Curry filed a complaint in the Wayne County Circuit Court alleging breach of a written employment agreement. Mr. Curry is seeking 175,000 shares of our common stock (35,000 shares for each of the first five ANDAs approved by the FDA). We, and plaintiff, have each filed a motion for summary judgment. No trial date has been scheduled. We intend to vigorously defend ourselves against these claims, which we believe have no merit. As previously disclosed, we were named as one of two defendants and as one of several defendants in two separate product liability suits, involving Miraphen, which contains phenylopropanolame (PPA), one in federal court in Pennsylvania and another in state court in New Jersey, respectively. These lawsuits sought damages generally for personal injury as well as punitive damages under a variety of liability theories including strict products liability, breach of warranty and negligence. The plaintiff in the federal lawsuit stipulated to a dismissal of the lawsuit and the case was formally dismissed by the federal court in December 2003. It is our understanding that a stipulation of dismissal as to Caraco was entered by the state court on April 8, 2004. At this time, we have not, however, received a copy of the formal order. We are involved in certain legal proceedings from time to time incidental to our normal business activities. While the outcome of any such proceedings cannot be accurately predicted, we do not believe the ultimate resolution of any existing matters should have a material adverse effect on our financial position or results of operations. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER AND AFFILIATE PURCHASES OF EQUITY SECURITIES During the quarter ended March 31, 2004, registrant issued 1,632,000 preferred shares to Sun Global in exchange for the transfer of 3 products pursuant to our products agreement with Sun Global. Such preferred shares were issued to Sun Global pursuant to exemptions from registration under Section 4(2), Section 4(6) and Regulation D under the Securities Act of 1933. Pursuant to various stock and option purchase agreements between Sun Pharma and three shareholders and their affiliates, Sun Pharma acquired in January and February, 2004, 3,452,291 shares of common stock and rights to acquire options for 1,679,066 shares of common stock. The shares were acquired for $9.00 per share and the rights to the options were acquired for $9.00 less the exercise price of each option. ITEM 5. OTHER INFORMATION Under SEC regulations, the Company ceased being a small business issuer in February 2004 when Sun Pharma became the beneficial owner of more than a majority of the Company's outstanding shares. At such time, the Company became a controlled company under Amex regulations. As a controlled company, the Company is not required to have independent directors comprise a majority of the board of directors and is not required to have (i) director nominations made or recommended by a nominating committee comprised solely of independent directors or by a majority of the independent directors; or (ii) compensation of the CEO and all other officers determined or recommended by a compensation committee comprised solely of independent directors or by a majority of the independent directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.09 Amendment to Amended and Restated Bylaws dated January 16, 2004. 10.28 Line of credit loan with Citibank, N.A. 10.29 Master Note - Citibank. 10.30 Negative Pledge Agreement - Citibank 31.1 Certification of Chief Executive Officer and Chief Financial Officer. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. On February 19, 2004, the Corporation filed a Form 8-K disclosing in Item 1 thereof, the acquisition by Sun Pharma of stock and options of Caraco in private purchases. On March 3, 2004, the Corporation filed a Form 8-K disclosing in Item 12 thereof its results of operations for the year ended December 31, 2003. SIGNATURE In accordance with the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARACO PHARMACEUTICAL LABORATORIES, LTD. By: /s/ Jitendra N. Doshi -------------------------------- Jitendra N. Doshi Chief Executive Officer and Chief Financial Officer Dated: April 30, 2004 EXHIBIT INDEX 3.09 Amendment to Amended and Restated Bylaws dated January 16, 2004. 10.28 Line of credit loan with Citibank, N.A. 10.29 Master Note - Citibank. 10.30 Negative Pledge Agreement - Citibank 31.1 Certification of Chief Executive Officer and Chief Financial Officer. 32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-3.09 2 k84929exv3w09.txt AMENDMENT TO AMENDED AND RESTATED BYLAWS EXHIBIT 3.09 AMENDMENT TO AMENDED AND RESTATED BYLAWS JANUARY 16, 2004 ARTICLE III, SECTION 1 (LAST PARAGRAPH): The last paragraph of Article III, Section 1, which reads as follows: For purposes of these Amended and Restated Bylaws, an Independent Director shall mean a director who meets all of the following requirements: (i) Is elected by the stockholders. (ii) Is designated as an Independent Director by resolution of the Board. (iii) Is not any of the following: (A) An officer or employee of the Corporation or any affiliate thereof. (B) An individual having a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. (iv) Satisfies the requirements of an independent director under Sarbanes-Oxley Act of 2002. is hereby deleted in its entirety. ARTICLE III, SECTION 10 IS AMENDED TO READ AS FOLLOWS: Section 10. Compensation. Directors shall be entitled to such compensation for their services as directors as from time to time may be fixed by the board, including, without limitation, for their services as members of committees of the board and in any event shall be entitled to reimbursement of all reasonable expenses incurred by them in attending directors' meetings. ARTICLE IV, SECTION 1 IS AMENDED TO READ AS FOLLOWS: Section 1.Formation of Committees. The Board may, by resolution passed by a majority of the directors present at any meeting at which a quorum is present, designate one or more committees, with each committee consisting of two (2) or more directors of the Corporation. The Board shall designate an Audit Committee, which satisfies applicable regulations of the exchange or Nasdaq on which the Corporation's securities are listed. Except as prohibited by law, any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board conferred upon such committee by the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have the name or names as may be determined from time to time by resolution adopted by the Board. EX-10.28 3 k84929exv10w28.txt LINE OF CREDIT LOAN WITH CITIBANK, N.A. EXHIBIT 10.28 March 16, 2004 Caraco Pharmaceutical Laboratories Ltd. 110 Elijah McCoy Drive Detroit, MI 48202 Re $10,000,000 line of credit Gentlemen or Ladies: Citibank, F.S.B. ("Citibank") is pleased to advise you it holds available for Caraco Pharmaceutical Laboratories Ltd. (the "Borrower"), a corporation organized and in good standing under the laws of the State of Michigan, a line of credit (the "Line") in the amount of $10,000,000, subject to the following terms an conditions: 1. Description of the Line: Loans provided under the Line shall be evidenced by Citibank's Master Note (the "Note") in the amount of the Line. Each advance thereunder shall bear interest at a rate to be elected by the Borrower at the time of each advance thereunder equal to either: Prime Rate Option: A rate equal to the prime rate of interest as published in the Money Rates column of the Wall Street Journal from time to time (the "Prime Rate"); any change in the Prime Rate shall take effect on the date of the change in the Prime Rate, or LIBOR Rate Option: A rate equal to the Reserve Adjusted LIBOR, as such term is defined in the Note, plus a margin of 100 basis points. Interest on the unpaid principal balance of the Note from time to time outstanding shall be payable monthly in arrears commencing on the first day of the month following the date of the first advance under the Note. Any advance under the Line made by Citibank in its discretion shall be in an amount not less than $100,000. In the case of a Prime Rate advance, such advance may be prepaid, in whole or in part, in increments of not less than $100,000, without premium or penalty. The Borrower agrees to indemnify Citibank and hold Citibank harmless from any loss or expense that Citibank may sustain or incur, as more particularly described in the Note should the Borrower make any prepayment of the principal of an advance hereunder bearing interest at the LIBOR Rate or in the event of a default by the Borrower in the payment or performance of any terms of the Note or this line letter. There shall be available under the Line a sublimit for commercial letters of credit (each, an "L/C" and collectively, the "L/Cs") and standby letters of credit (each, a "SBLC" and collectively, the "SBLCs") in an amount not exceeding $500,000 in the aggregate. Each L/C issued under the Line shall be governed by the terms and conditions set forth in Citibank's Master Letter of Credit Agreement. There shall be payable in respect of each L/C, a fee equal to -1/4% ($100.00 minimum) upon the opening and 1/4% ($100.00 minimum) upon the negotiation thereof together with Citibank's fees and charges therewith. The maximum tenor for each L/C shall be one year. The SBLC issued under the Line shall be evidenced by Citibank's Agreement for Standby Letters of Credit which shall provide for the payment by the Borrower of a fee equal to 1% per annum. The SB shall, by its terms, expire not more than one (1) year after its issuance, but shall be automatically renewable for successive one year periods, unless written notice of termination is given by Citibank. Availability under the Line shall be limited to the aggregate principal amount of the Collateral SBLC in favor of Citibank in form and substance satisfactory to Citibank. The Borrower acknowledges and agrees that the Line is uncommitted and requests for advances or extensions of credit thereunder shall be approved in the discretion of Citibank, which may refuse to make an extension of credit under the Line at any time without prior notice to the Borrower, and that the performance or compliance by the Borrower of the agreements contained in this letter, or in any other document or agreement evidencing or securing such advances or extensions of credit. shall not obligate Citibank to make an advance or provide an extension of credit thereunder. Subject to the terms and conditions hereof, the Line shall be available until March 15, 2005. 2. Purpose of the Line: The purpose of the Line shall be to support the Borrower's working capital needs, debt redemption and capital expenditures. 3. Security for the Line: The Line shall be secured by "irrevocable and unconditional" Standby Letter(s) of Credit (the "Collateral SBLC") in favor of Citibank in form and substance satisfactory to Citibank. 4. Conditions Precedent: Prior to the Borrower's initial request for an advance under the Line: (a) It shall have provided to Citibank: (a) A copy of the resolutions passed by the Borrower's Board of Directors certified by its Secretary as being in full force and effect authorizing the borrowing described herein and the execution of all documents and agreements required by Citibank to evidence and secure the Line; and (b) A certified copy of the certificate of incorporation of the Borrower. (b) Citibank shall have received the Collateral SBLC in favor of Citibank in the amount of $10,000,000 in form and substance satisfactory to Citibank. 5. Financial Reporting: The Borrower shall provide to Citibank: (a) As soon as available, but in any event within one hundred twenty (120) day after the last day of each fiscal year, a balance sheet of the Borrower, as of such last day of the fiscal year, and statements of income and retained earnings and cash flows for such fiscal year prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail, such statements to be audited by a firm of independent certified public accountants satisfactory to Citibank. (b) As soon as available, but in any event within sixty (60) days after the end of each fiscal quarter, a balance sheet of the Borrower and statements of income and retained earnings and cash flows of the Borrower for such quarter, and the portion of the fiscal year through such date all in reasonable detail, such statements to be prepared by the Borrower in accordance with generally accepted accounting principles consistently applied. Each of the financial statements specified in Sections (i) and (ii) above shall be accompanied by a certificate signed by the president or chief financial officer of the Borrower to the effect that such statements fairly present the financial condition of the Borrower as of the balance sheet date and results of the operations of the Borrower for the period(s) then ended in accordance with generally accepted accounting principles consistently applied. (c) Such other financial or additional information as Citibank may from time to time request. 6. Special Requirements: The Borrower agrees that the Line shall be supported by a negative pledge agreement in form and substance satisfactory to Citibank. 7. Origination Fee: In order to compensate Citibank for any costs attributable to Citibank's due diligence review of the Borrower's financial condition and business operations, including, without limitation, any credit and financial analysis conducted by Citibank to determine whether the Line shall be made available to the Borrower, the Borrower agrees to pay Citibank an administration fee of $10,000. If the origination fee is no remitted herewith, the Borrower authorizes Citibank to charge any of the Borrower's accounts maintained with Citibank for the payment thereof. 8. Acceptance: If the foregoing is acceptable, please so indicate by signing and returning this letter together with the origination fee before March 29, 2004, the date this letter will otherwise expire, unless extended in writing by Citibank. Very truly yours, CITIBANK, F.S.B. By: CITIBANK, N.A., Servicing Agent By: /s/ Martin Efron -------------------------------- Martin Efron Vice President Agreed and Accepted this 19th day of March, 2004 CARACO PHARMACEUTICAL LABORATORIES LTD. By: /s/ Jitendra N. Doshi ------------------------------ Name: Jitendra N. Doshi Title: Chief Executive Officer State of Michigan County of Oakland, Acting in Wayne County On this 19th day of March 2004, Jitendra Doshi personally appeared before me, who is personally known to me to be the signer of the above instrument, and he acknowledged signing of his own free will. By: /s/ Susan Banks-Williams, Ph.D. ------------------------------------ Susan Banks-Williams, Ph.D Notary Public, State of Michigan My Commission Expires September 1, 2007 EX-10.29 4 k84929exv10w29.txt MASTER NOTE - CITBANK EXHIBIT 10.29 MASTER NOTE (EURODOLLAR/PRIME RATE)(1) $10,000,000 DATE: , 2004 FOR VALUE RECEIVED, the undersigned, a Michigan corporation, promises to pay to the order of CITIBANK, F.S.B. (the "Bank"), on or before March 15, 2005 (the "Maturity Date"), the sum of Ten Million Dollars ($10,000,000), or, if less, the aggregate unpaid principal amount of all advances made by the Bank pursuant to the line of credit (each an "Advance" and collectively, the "Advances"), not to exceed an aggregate amount at any one time outstanding of Ten Million Dollars ($10,000,000), available to the undersigned hereunder (the "Line") together with interest thereon as set forth herein. Each Advance hereunder which is a Eurodollar Advance (as defined below) shall bear interest on the unpaid principal amount thereof for the Interest Period applicable thereto at a rate per annum equal to the Reserve Adjusted Libor determined for each Interest Period therefor in accordance with the terms of this Note plus a margin of 100 basis points. Each Advance which is a Prime Rate Advance (as defined below) shall bear interest on the unpaid principal amount thereof from the date thereof until payment of such Prime Rate Advance in full at a fluctuating rate per annum equal to the Prime Rate plus a margin of 0% per annum. The undersigned shall notify the Bank not later than 12 noon three Business Days prior each Advance hereunder which the undersigned requests to maintain at a rate of interest based on Reserve Adjusted Libor (a "Eurodollar Advance"), and not later than 12 noon on the date of each Advance which the undersigned requests to maintain at a rate of interest based on the Prime Rate (a "Prime Rate Advance"). All requests for Advances shall be irrevocable and shall be in the minimum amount of $100,000. Each request by the undersigned for an Advance hereunder shall specify whether the requested Advance is a Eurodollar Advance or a Prime Rate Advance, the proposed date to fund the Advance, and if a Eurodollar Advance is requested, the Interest Period applicable thereto. Any Eurodollar Advance may be continued as a Eurodollar Advance upon expiration of an Interest Period with respect thereto by complying with the notice provisions contained in the definition of Interest Period; provided, however, that no Eurodollar Advance may be continued as such when any Event of Default or event which upon notice, passage of time or both would constitute an Event of Default has occurred and is continuing but shall be automatically converted to a Prime Rate Advance on the last date of the Interest Period in effect when the Bank is notified of such default or Event of Default. The undersigned may elect from time to time to convert outstanding Eurodollar Advances to Prime Rate Advances by giving the Bank at least three Business Days prior irrevocable notice of such election; provided that any conversion of a Eurodollar Advance may be made only on the last day of an Interest Period with respect thereto. The undersigned may elect from time to time to convert an outstanding Prime Rate Advance to Eurodollar Advance by giving the Bank irrevocable written notice of such election not later than 12 noon, three Business Days prior to the date of the proposed conversion and further provided that (i) the conversion shall be in the minimum principal amount of $100,000 and (ii) no Event of Default or event upon notice, passage of time or both would constitute an Event of Default shall have occurred and be continuing. Notwithstanding the foregoing, no Advance may be converted to or continued as a Eurodollar Advance if the Interest Period would extend beyond the Maturity Date. _______________________ (1) This note provides that interest be paid monthly in respect of Prime Rate Advances and on the last day of an Interest Period in respect of Eurodollar Advances. Interest in respect of Prime Rate Advances shall be payable on the first day of each month commencing on the first such date to occur after the date the Advance is made, and on the Maturity Date. Interest in respect of Eurodollar Advances shall be payable on the last day of the Interest Period in respect thereof. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. All payments hereunder shall be payable in immediately available funds in lawful money of the United States. The undersigned authorizes the Bank to charge any of the undersigned's accounts for payments of principal or interest. Any payment of principal of or interest payable hereunder which is not paid when due, whether at maturity, by acceleration, or otherwise, shall bear interest from the date due until paid in full at a rate per annum equal to three percent (3%) above the rate otherwise payable with respect thereto. All requests for advances shall be irrevocable and shall be for a minimum of $100,000 and must be received by the Bank no later than 12:00 noon on the date of the proposed advance. The Bank may act without liability upon the basis of telephonic notice believed by the Bank in good faith be from the undersigned. In each such case, the undersigned hereby waives the right to dispute the Bank's record of the terms of such telephonic notice. The undersigned shall immediately confirm to the Bank in writing each telephonic notice. All advances under the Line are at the Bank's sole and absolute discretion and the Bank, at its option and in its sole and absolute discretion and without notice to the undersigned may decline to make any advance requested by the undersigned. Subject to the terms and conditions hereof and the terms and conditions set forth in any agreement in writing between the Bank and the undersigned the undersigned may borrow, repay in whole or in part, and reborrow on a revolving basis, up to the maximum amount of the Line. Prime Rate Advances may be prepaid without premium or penalty together with accrued interest thereon to and including the date of prepayment. Eurodollar Advances may be prepaid without premium or penalty (except as provided in the next succeeding paragraph) together with accrued interest thereon to and including the date of prepayment, provided such prepayment date must be the last day of the then current Interest Period of such Advance. The Bank shall maintain its records to reflect the amount and date of each advance and of each payment of principal and interest thereon. A such records shall, absent manifest error, be conclusive as to the outstanding principal amount hereof; provided, however, that the failure to make any notation to the Bank's records shall not limit or otherwise affect the obligations of the undersigned to repay each advance made by the Bank, in accordance with the terms hereof. The undersigned agrees to indemnify the Bank and hold the Bank harmless from any loss or expense which the Bank may sustain or incur, including without limitation, interest or fees payable by the Bank to lenders of funds obtained by it in order to maintain a Eurodollar Advance hereunder, as a consequence of (a) default by the undersigned in payment of the principal amount of or interest on a Eurodollar Advance, (b) default by the undersigned in making any prepayment of a Eurodollar Advance after the undersigned gives notice in accordance with this Note and/or (c) the making of any payment of a Eurodollar Advance on a day which is not the last day of the then applicable Interest Period with respect thereto. When claiming indemnification under this paragraph, the Bank shall provide to the undersigned a statement explaining the amount of any such loss or expense which statement shall in the absence of manifest error be conclusive with respect to the undersigned. The indemnity obligations hereunder shall survive payment in full of the Note. As security for the payment of this Note and of all other obligations and liabilities of the undersigned to the Bank, whether now or hereafter existing, joint, several, direct, indirect, absolute, contingent, secured, matured or unmatured, the undersigned grants to the Bank a right of setoff against, a continuing security interest in, and an assignment and pledge of all moneys, deposits (general or special), securities and other property of the undersigned and the proceeds thereof, now or hereafter held by the Bank on deposit, in safekeeping, in transit or otherwise, at any time credited by or due from the Bank to the undersigned, or in which the undersigned shall have an interest. Upon the occurrence and continuance of any of the following (each an "Event of Default"): (a) default in the payment when due of any amount hereunder; (b) filing by or against the undersigned of a petition commencing any proceeding under any bankruptcy, reorganization, rearrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or hereafter in effect; (c) making by the undersigned an assignment for the benefit of creditors; (d) petitioning or applying to any tribunal for the appointment of a custodian, receiver or trustee for the undersigned or for a substantial part of its assets; (e) death or incapacity of the undersigned (if an individual); (f) entry of any judgment or order of attachment, injunction or governmental tax lien or levy issued against the undersigned or against any property of the undersigned; (g) consent by the undersigned to assume, suffer or allow to exist, without the prior written consent of the Bank, any lien, mortgage, assignment or other encumbrance on any of its assets or personal property, now owned or hereafter acquired, except those liens, mortgages, assignments or other encumbrances in existence on the date hereof and consented to in writing by the Bank; (h) default in the punctual payment or performance of this or any other obligation to the Bank or to any other lender at any time; (i) the existence or occurrence at any time of one or more conditions or events which, in the sole opinion of the Bank, has resulted or is reasonably likely to result in a material adverse change in the business, properties or financial condition of the undersigned; (j) failure on request to furnish any financial information or to permit inspection of the books an records of the undersigned; (k) any warranty, representation or statement in any application, statement or agreement which proves false in any material respect, (l) default in the observance or performance of any covenant or agreement of the undersigned herein or in any other agreement between the Bank and the undersigned; or (m) any of the foregoing events (other than the event described in clause (a)) shall occur with respect any guarantor of the undersigned's obligations hereunder then this Note shall, at the sole option of the Bank, become due and payable without notice or demand; provided, however, if an event described in clause (b), clause (c) or clause (d) above occurs, this Note shall automatically become due and payable. Upon the occurrence and during the continuance of an Event of Default, the Bank shall be entitled to setoff against and apply to the payment hereof the balance of any account or accounts maintained with the Bank by the undersigned and to exercise any other right or remedy granted hereunder, or under any agreement between the undersigned and the Bank or available at law or in equity, including, but not limited to, the rights and remedies of a secured party under the Connecticut Uniform Commercial Code. The failure by the Bank at any time to exercise any such right shall not be deemed a waiver thereof; nor shall it bar the exercise of any such right at a later date. Each and every right and remedy granted to the Bank hereunder or under any agreement between the undersigned and the Bank or available at law or in equity shall be cumulative and not exclusive of any other rights, powers, privileges or remedies, and may be exercised by the Bank from time to time and as often as may be necessary in the sole and absolute discretion of the Bank. The undersigned agrees to pay, on demand, all of the Bank's costs and expenses, including reasonable counsel fees (whether in-house or outside counsel), in connection with the collection of any amounts due to the Bank hereunder or in connection with the enforcement of the Bank's rights this Note. This Note shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to principles of con choice of laws. THE UNDERSIGNED HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY FEDERAL OR STATE COURT IN THE STATE OF CONNECTICUT IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS NOTE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY AND CONSENT TO THE PLACING OF VENUE. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE UNDERSIGNED HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN MAY NOT BE LITIGATED IN OR BY SUCH COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE UNDERSIGNED AGREES NOT TO SEEK AND HEREBY WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT. THE UNDERSIGNED AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO ITS ADDRESS SET FORTH BELOW OR SUCH OTHER ADDRESS THAT THE UNDERSIGNED SHALL HAVE NOTIFIED THE BANK IN WRITING OR ANY METHOD AUTHORIZED BY THE LAWS OF THE STATE OF CONNECTICUT. EXCEPT AS PROHIBITED BY LAW, THE UNDERSIGNED HEREBY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE. The undersigned and the Bank hereby agree and acknowledge that any and all information relating to the undersigned which is furnished by the undersigned to the Bank (or to any affiliate of the Bank), and which is non-public, confidential or proprietary in nature, shall be kept confidential by the Bank or such affiliate in accordance with applicable law; provided, however, that such information and other credit information relating to the undersigned may be distributed by the Bank or such affiliate (a) to the Bank's or such affiliate's directors, officers, employees, attorneys, affiliates, attorneys, auditors and regulators, and (b) upon the order of a court or other governmental agency having jurisdiction over the Bank or such affiliate, to any other party. The undersigned and the Bank further agree that this provision shall survive the termination of this Note. The Bank shall not, by any act, delay, omission or otherwise, be deemed to have waived any of its rights and/or remedies hereunder. No change, amendment, modification, termination, waiver, or discharge, in whole or in part, of any provision of this Note shall be effective unless in writing and signed by the Bank, and if so given by the Bank, shall be effective only in the specific instance in which given. The undersigned acknowledges that this Note and the undersigned's obligations under this Note are, and shall at all times continue to be, absolute and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Note and the obligations of the undersigned under this Note. The undersigned absolutely, unconditionally and irrevocably waives any and all right to assert any set-off, counterclaim or crossclaim of any nature whatsoever with respect to this Note or the undersigned's obligations hereunder. In the event anyone or more of the provisions contained in this Note should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The undersigned hereby waives presentment, demand for payment, protest, notice of dishonor, and any and all other notices or demands in connection with the delivery, acceptance, performance, default, or enforcement of this Note. As used herein the following terms shall have the following meanings: "Bank" shall be deemed to include the Bank, its successors and assigns and any holder hereof. "Business Day" means (a) a day other than a Saturday, Sunday or other day on which commercial banks in Connecticut are authorized or required by law to close and (b) relative to the date of (i) continuing an Advance as, or converting an Advance to, a Eurodollar Advance, (ii) making any payment or prepayment of principal of or payment of interest on a Eurodollar Advance, or (iii) the undersigned giving any notice (or the number of Business Days to elapse prior to the effectiveness thereof) in connection with any matter referred to in (b)(i) or (b)(ii), any day on which dealings in U.S. dollars are carried on in the London interbank eurodollar market. "Eurocurrency Reserve Requirement" means for any day as applied to a Eurodollar Advance, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto), as from time to time hereafter in effect, dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such system. "Interest Period" with respect to any Eurodollar Advance means: (a) Initially, the period commencing on the date such Eurodollar Advance is made and ending one, two or three months thereafter; (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Advance an ending one, two or three months thereafter, as selected by the undersigned by irrevocable written notice to the Bank not less than three (3) Business Days prior to the last day of the then current Interest Period with respect to such Eurodollar Advance; provided, however, that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a Eurodollar Advance would otherwise end on a day which is not a Business Day, the Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) if the undersigned shall fail to give notice as provided in clause (b) above, the undersigned shall be deemed to have requested co version of the affected Eurodollar Advance to a Prime Rate Advance on the last day of the then current Interest Period with respect thereto; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically correspond. day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iv) no Interest Period may be selected which ends later than the Maturity Date. "Prime Rate" shall mean a fluctuating rate per annum equal to the prime rate of interest as published in the Money Rates column of the Wall Street Journal from time to time. Any change in the Prime Rate shall take effect on the date of the change in the Prime Rate. "Reserve Adjusted Libor" shall mean with respect to the Interest Period pertaining to a Eurodollar Advance, the rate per annum equal to the quotient (rounded upwards to the next higher 1/16 of one percent) of (a) the annual rate of interest at which dollar deposits of an amount comparable the amount of such Loan and for a period equal to the Interest Period applicable thereto are offered to the Bank in the London interbank market at approximately 11:00 a.m. (London time) on the second Business Day prior to the beginning of such Interest Period, divided by (b) a number equal to 1.00 minus the Eurocurrency Reserve Requirement. "Undersigned" shall mean, if this Note is signed by more than one party, unless otherwise stated herein, shall mean the "undersigned and each of them" and each undertaking herein contained shall be their joint and several undertaking. The Bank may proceed against one or more of the undersigned at one time or from time to time as it elects in its sole and absolute discretion. In the event that the Bank shall have determined (which determination shall be conclusive and binding upon the undersigned) that, by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the Reserve Adjusted Libor for any requested Interest Period or with respect to the continuation of a Eurodollar Advance beyond the expiration of the then current Interest Period with respect thereto, the Bank shall forthwith give notice of such determination, confirmed in writing, to the undersigned. If such notice is given, any outstanding Eurodollar Advance shall be converted, on the last day of the then current Interest Period with respect thereto, to a Prime Rate Advance. Such notice shall be withdrawn by the Bank when the Bank shall determine that adequate and reasonable means exist for ascertaining Reserve Adjusted Libor. Notwithstanding anything to the contrary contained elsewhere in this Note, if any change after the date hereof in law, rule, regulation, guideline or order or in the interpretation thereof by any governmental authority charged with the administration thereof, shall make it unlawful for the Bank to make or maintain any Advance as a Eurodollar Advance, then, by written notice to the undersigned, the Bank may require that the Eurodollar Advance be converted to a Prime Rate Advance, whereupon the Eurodollar Advance shall be automatically converted to a Prime Rate Advance as of the date of such notice to the undersigned. In the event that any change in applicable law or regulation, or in the interpretation thereof by any governmental authority charged with the administration thereof, shall impose on or deem applicable to the Bank any reserve requirements against this Note or the Line or impose upon the Bank other costs or assessments, the undersigned shall pay to the Bank on demand an amount sufficient to compensate the Bank for the additional cost resulting from the maintenance or imposition of such reserves, costs or assessments. Any consents, agreements, instructions or requests pertaining to any matter in connection with this Note, signed by anyone of the undersigned shall be binding upon all of the undersigned. This Note shall bind the respective successors, heirs or representatives of the undersigned This Note and the Line shall not be assigned by the undersigned without the Bank's prior written consent. IN WITNESS WHEREOF, the undersigned has duly executed this Note the day and year first above written. Witness: Amit Shah CARACO PHARMACEUTICAL LABORATORIES LTD. By: /s/ Jitendra N. Doshi ----------------------------------- Name: Jitendra N. Doshi Title: Chief Executive Officer Borrower's Address: 1150 Elijah McCoy Drive Detroit, MI 48202 State of Michigan County of Oakland, Acting in Wayne County On this 19th day of March 2004, Jitendra Doshi personally appeared before me, who is personally known to me to be the signer of the above instrument, and he acknowledged signing of his own free will. By: /s/ Susan Banks-Williams, Ph.D. ----------------------------------- Susan Banks-Williams, Ph.D Notary Public, State of Michigan My Commission Expires September 1, 2007 EX-10.30 5 k84929exv10w30.txt NEGATIVE PLEDGE AGREEMENT - CITIBANK EXHIBIT 10.30 _________, 2004 NEGATIVE PLEDGE AGREEMENT In consideration of one or more loans, advances, or other financial accommodations or transactions, at any time before, at or after the date hereof made or extended by Citibank, F.S.B. (the "Bank"), to Caraco Pharmaceutical Laboratories Ltd. (the "Borrower"), the Borrower hereby agrees as follows: 1. As used herein, the following terms shall have the following meanings: "Loan" shall mean the revolving line of credit in the amount of $10,000,000 made available by the Bank to the Borrower, and such other loans, advances or financial accommodations that the Bank may provide in the future to the Borrower. "Loan Documents" shall mean the master note and all other documents evidencing or securing the Loan or executed in connection therewith. "Obligations" shall mean the obligations of the Borrower to the Bank pursuant to the Loan Documents. "Assets" shall mean all of Debtor's now existing and hereafter acquired inventory, of every kind and nature, wherever located, including, without limitation, all raw materials, finished goods, work-in-process, packing and advertising materials and all documents, whether negotiable or nonnegotiable representing any of the foregoing, all embedded software, and all supporting obligations an all products and proceeds thereof; all now existing and hereafter acquired or created accounts (including without limitation health-care insurance receivables, credit card receivables, licensing fees an royalties and rights to payment for realty sold or leased), together with the Debtor's interest in all inventory described in invoices with respect to such accounts; all returned and repossessed inventory; and all now existing and hereafter acquired or created instruments (including promissory notes), chattel paper (whether tangible or electronic) wherever located, including, without limitation, all of the foregoing which arise in connection with the sale of inventory and/or the rendition of services, and all supporting obligations and all products and proceeds of the foregoing and all of Debtor's books and records. "Transfer" shall mean any bulk sale, transfer, assignment, gift, hypothecation, pledge, mortgage or creation of any lien, encumbrance or security interest in the Assets. Transfer shall include involuntary transfers, liens and encumbrances arising by operation of law, judicial proceedings, contract or otherwise, as well as transfers arising by voluntary act, but shall not include replacement of equipment for obsolescence or upgrade, nor in the case of inventory, use or consumption in the ordinary course of business. "Proceeds" shall mean the consideration of the Transfer of the Assets. 2. As long as the Obligations shall remain unpaid or unsatisfied, the undersigned shall not, without the written consent of the Bank in each instance first had and obtained, make any Transfer of the Asset or suffer or permit any Transfer to be made by anyone in respect to the Asset. 3. For notice purposes and not for the purpose of perfecting any security interest, the Borrower authorizes the Bank to (i) file any Uniform Commercial Code financing statements or amendments thereto without the signature of the Borrower or by signing of the Borrower's name to any such financing statements as its attorney-in-fact, in jurisdictions in which the Bank is unable to file financing statements or amendments without the Borrower's signature or (ii) file a photographic or other reproduction of this Negative Pledge Agreement (the "Agreement") as a financing statement. 4. a. Unless otherwise provided in any written consent given by the Bank in accordance with Paragraph 2, or if the Borrower shall hereafter make any Transfer of the Assets in violation of Paragraph 2, the Proceeds derived, received by or inuring to the benefit of the Borrower in connection therewith are hereby transferred, set over and assigned to the Bank, and shall be received and held by the Borrower as the trustee of an express trust solely for the benefit of the Bank (and the Bank is hereby granted a security interest therein), and shall be delivered to the Bank forthwith upon receipt in these forms as received, except for the endorsement or assignment necessary to transfer title thereto to the Bank, and such Proceeds shall be applied by the Bank in payment or reduction of the Obligations in such order or manner and at such time or times as the Bank, in its sole discretion, shall determine. b. Further, in the event that the Borrower shall hereafter make any Transfer of the Assets in violation of Paragraph 2, or should there occur any violation of any of the terms hereof, same shall be considered to be an Event of Default under the provisions of the Loan Documents, and the Bank shall have each of its remedies under the Loan Documents. 5. The Borrower hereby irrevocably designates and appoints the Bank, its agents and designees, as attorney-in-fact for, and in the name of, the Borrower with full power and authority (but under no duty), to enforce and protect all of the rights herein granted to the Bank. Said power of attorney is coupled with an interest. The Borrower hereby authorizes the making and delivery by such attorney-in-fact, for and in the name of the Borrower, of any and all additional documents, instruments, assignments or endorsements deemed necessary or desirable to assure the fulfillment of the purposes hereof, hereby ratifying and confirming, in all respects, the action by such attorney-in-fact. 6. Nothing herein contained shall, in any manner, be deemed to amend, supersede or modify any term or provision of any note, guarantee, security agreement, collateral loan agreement or other instrument evidencing any loan or obligation of the Borrower to the Bank, it being understood that the terms of this Agreement shall be deemed merely supplemental thereto. 7. The provision hereof shall be binding upon the Borrower and upon the Borrower's successors, and assigns, as the case may be, and shall inure to the benefit of the Bank, its successors, transferees and assigns. This Agreement shall be governed by, and construed in accordance with, the law of the State of Connecticut, and cannot be changed or terminated orally. CARACO PHARMACEUTICAL LABORATORIES LTD. By: /s/ Jitendra N. Doshi ----------------------------------- Name: Jitendra N. Doshi Title: Chief Executive Officer State of Michigan County of Oakland, Acting in Wayne County On this 19th day of March 2004, Jitendra Doshi personally appeared before me, who is personally known to me to be the signer of the above instrument, and he acknowledged signing of his own free will. By: /s/ Susan Banks-Williams, Ph.D. ----------------------------------- Susan Banks-Williams, Ph.D Notary Public, State of Michigan My Commission Expires September 1, 2007 EX-31.1 6 k84929exv31w1.txt CERTIFICATION OF C.E.O AND C.F.O. EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE AND FINANCIAL OFFICER I, Jitendra N. Doshi, the Chief Executive Officer and Chief Financial Officer of Caraco Pharmaceutical Laboratories, Ltd. (the "registrant") certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and I have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant is made known to me by others, particularly during the period in which this quarterly report is being prepared; (b) {Intentionally omitted}; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, registrant's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. April 30, 2004 /s/ Jitendra N. Doshi ----------------------------- Jitendra N. Doshi Chief Executive Officer and Chief Financial Officer EX-32.1 7 k84929exv32w1.txt SECTION 906 CERTIFICATION OF CEO AND CFO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q of Caraco Pharmaceutical Laboratories, Ltd. ("Caraco") for the quarter ended March 31, 2004 (the "Report"), the undersigned, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Caraco. April 30, 2004 /s/ Jitendra N. Doshi --------------------------- Jitendra N. Doshi Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----