-----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, AyuMNdPNtrS8YqVD0JCD2kRjqNwWSXr27Hn2kYbOAPseMfsFMSWDaPgJst1NOYA6 ZTKZX9u8+mG6SK3p32iWXQ== 0000950134-02-012779.txt : 20021022 0000950134-02-012779.hdr.sgml : 20021022 20021021213702 ACCESSION NUMBER: 0000950134-02-012779 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021022 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: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24676 FILM NUMBER: 02794427 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 10QSB/A 1 k72340ae10qsbza.txt AMENDMENT TO FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2002 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 MC COY DRIVE, DETROIT, MICHIGAN 48202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (313) 871-8400 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 [ ] Common Stock outstanding at October 21, 2002 -- 22,911,818 shares CARACO PHARMACEUTICAL LABORATORIES LTD. UNAUDITED BALANCE SHEET
PARTICULARS September 30, 2002 - ----------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 348,026 Accounts receivable, net of allowances 3,462,066 Inventories 4,781,706 Prepaid expenses and deposits 356,760 ------------ Total current assets 8,948,559 ------------ Property, plant and equipment - at cost Land 197,305 Building and improvements 7,215,990 Equipment 5,280,018 Furniture and fixtures 221,495 ------------ Total 12,914,808 Less: accumulated depreciation 5,296,244 ------------ Net property, plant & equipment 7,618,563 ------------ Total assets $ 16,567,122 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable $ 1,625,794 Accrued expenses 1,022,337 Technology transfer cost payable -- Accrued interest 399,443 EDC debt classified as current 7,777,741 ------------ Total current liabilities 10,825,315 ------------ Long-term liabilities Notes payable to principal stockholders 9,700,000 Loans payable 15,900,000 Preferred stock dividends payable 345,000 ------------ Total long-term liabilities 25,945,000 ------------ Total liabilities 36,770,315 ------------ Stockholders' deficit Preferred stock, no par value, authorized 5,000,000 shares; 1,000,000 issued and outstanding, 285,714 Series A shares Common stock, no par value, authorized 30,000,000 shares; 35,916,500 issued and 22,911,818 outstanding shares Subscriptions in advance 7,520 Preferred stock dividends (345,000) Accumulated deficit (56,782,213) ------------ Total stockholders' deficit (20,203,193) ------------ Total liabilities and stockholders' deficit $ 16,567,122 ============
See accompanying notes 2 CARACO PHARMACEUTICAL LABORATORIES LIMITED UNAUDITED STATEMENTS OF OPERATIONS
PARTICULARS NINE MONTHS ENDED THREE MONTHS ENDED 30-SEP 30-SEP 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------------------- $ $ $ $ Net Sales 14,828,849 3,372,686 5,899,441 1,505,356 Cost of goods sold 7,448,809 2,904,191 3,035,340 1,064,833 ----------- ----------- ----------- ----------- Gross profit 7,380,041 468,495 2,864,102 440,523 Selling, general & administrative expenses 2,299,631 1,772,452 990,331 623,381 R&D cost to affiliate 1,251,200 -- -- -- R&D cost other 2,541,449 1,934,456 969,947 697,256 Depreciation 348,571 382,599 120,795 128,258 ----------- ----------- ----------- ----------- Operating profit / (loss) 939,189 (3,621,013) 783,028 (1,008,371) ----------- ----------- ----------- ----------- Interest Interest expense (1,130,898) (1,524,843) (384,917) (518,500) Interest income 10,798 14,000 8,377 1,797 ----------- ----------- ----------- ----------- Net interest expense (1,120,102) (1,510,843) (376,539) (516,703) ----------- ----------- ----------- ----------- Net profit / (loss) (180,913) (5,131,857) 406,488 (1,525,074) ----------- ----------- ----------- ----------- Net (loss) / income per basic and diluted common share (0.01) (0.17) 0.02 (0.09) ----------- ----------- ----------- -----------
See accompanying notes 3 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENTS OF CASH FLOWS
PARTICULARS Nine Months ended September 30, 2002 2001 - --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (180,913) $(5,131,857) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 348,571 382,650 Common Shares issued in lieu of cash for compensation 17,250 -- Common Shares issued for R&D cost 1,251,200 -- Changes in operating assets and liabilities which provided (used) cash: Accounts receivable (1,975,558) (726,953) Inventories (1,872,650) (512,297) Prepaid expenses and deposits (177,559) (165,107) Accounts payable 662,893 725,474 Accrued expenses and Interest (63,783) 592,896 ----------- ----------- Net cash used in operating activities (1,990,549) (4,835,195) ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (1,273,055) (70,890) ----------- ----------- Cash flows from financing activities: Proceeds from long-term debt 900,000 5,450,000 Proceeds from Sale of Shares in Private Placement 1,692,000 -- Advance for Stock Option Exercise 7,520 -- Net Short-term repayments (75,000) (50,000) Payments of EDC debt (554,000) (900,000) Net Loans received from Shareholders 1,400,000 300,000 ----------- ----------- Net cash provided from financing activities 3,370,520 4,800,000 ----------- ----------- Net increase / (decrease) in cash and cash equivalents 106,916 (106,085) Cash and cash equivalents, beginning of period 241,110 186,768 ----------- ----------- Cash and cash equivalents, end of period $ 348,026 $ 80,684 =========== ===========
See accompanying notes 4 CARACO PHARMACEUTICAL LABORATORIES, LTD. UNAUDITED STATEMENT OF SHAREHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
PREFERRED PREFERRED STOCK COMMON STOCK STOCK ACCUMULATED SHARES AMOUNT SHARES AMOUNT DIVIDENDS DEFICIT TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2001 285,714 $ 1,000,000 21,172,618 32,955,600 $ (240,000) $ (50,843,838) $ (17,128,238) Preferred dividend (45,000) (45,000) Net loss (5,131,857) (5,131,857) ------- ----------- ---------- ------------ ---------- ------------- ------------- Balance at September 30, 2001 285,714 $ 1,000,000 21,172,618 $ 32,955,600 $ (285,000) $ (55,975,695) $ (22,305,095) ======= =========== ========== ============ ========== ============= ============= Balance at January 1, 2002 285,714 1,000,000 21,173,818 32,956,050 (300,000) (56,601,300) $ (22,945,250) Preferred dividend (45,000) - (45,000) Issuances of common stock 15,000 17,250 17,250 to Directors as compensation in lieu of cash Issuances of common stock under private placement 635,000 1,692,000 1,692,000 Issuances of common stock for product technology transfers 1,088,000 1,251,200 1,251,200 to affiliate Advance for subscription for stock option exercise 7,520 7,520 Net loss (180,913) (180,913) ------- ----------- ---------- ------------ ---------- ------------- ------------- Balance at September 30, 2002 285,714 $ 1,000,000 22,911,818 $ 35,924,020 $ (345,000) $ (56,782,213) $ (20,203,193) ======= =========== ========== ============ ========== ============= =============
See accompanying notes 5 CARACO PHARMACEUTICAL LABORATORIES LTD. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The balance sheet as of September 30, 2002 and the related statements of operations, stockholders' deficit and cash flows for the nine months ended September 30, 2002 and 2001 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 September 30, 2002 and for the nine months ended September 30, 2002 and 2001 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, 2001. The accounting policies followed by the Corporation with respect to the unaudited interim financial statements are consistent with those stated in the 2001 Caraco Pharmaceutical Laboratories, Ltd., Annual Report on Form 10-KSB. The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Realization of a major portion of the assets is dependent upon the Corporation's ability to meet its future financing requirements and the success of future operations. 2. ORGANIZATION AND NATURE OF BUSINESS Caraco Pharmaceutical Laboratories Ltd. ("Caraco" or "the Corporation" which is also referred to as we, us or our), 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 for their equivalence in quality and bioavailability. Our present product portfolio includes 13 products in 22 strengths in 44 package sizes. We are currently marketing all 13 products. The products are intended to treat a variety of disorders including the following: hypertension, arthritis, seizures, epilepsy, diabetes and pain management. To date, we have submitted 14 ANDAs to the Food and Drug Administration ("FDA"). Of these, we have received approvals for 10 ANDAs, of which 2 product approvals were received near the end of the third quarter of 2002; we have 4 ANDAs pending approval. We also have 5 DESI products. A significant source of our funding has been from private placement offerings and loans. Sun Pharmaceutical Industries, Limited, a specialty pharmaceutical corporation organized under the laws of India ("Sun Pharma"), which owns 49% of our outstanding shares has contributed equity capital and has advanced us loans. Also, pursuant to a products agreement with us, Sun Pharma has transferred certain products to us. (See "Current Status of the Corporation" and "Sun Pharmaceutical Industries, Ltd." below.) Our manufacturing facility and 6 executive offices were constructed pursuant to a $9.1 million loan from the Economic Development Corporation of the City of Detroit (the "EDC"). (See "Current Status of the Corporation" and "Mortgage Note" below.) 3. CURRENT STATUS OF THE CORPORATION Since inception through March 31, 2002, the Corporation never achieved sales necessary to support its operations. However, during the second and third quarters of 2002, the Corporation achieved sales necessary to support its operations. We have earned an operating profit of $939,189 for the nine months ended September 30, 2002 and for the third quarter of 2002 we have earned an operating profit of $783,028. We incurred operating losses of $3,621,013 and $1,008,371 during the same periods in 2001. After interest costs, we have incurred a nominal loss of $180,913 for the nine months ended September 30, 2002 and a small net profit of $406,488 for the three months ended September 30, 2002. During the same period in 2001, we incurred a loss of $5,131,857 for the nine months ended September 30, 2001 and a net loss of $1,525,074 for the three months ended September 30, 2002. At September 30, 2002, we had a stockholders' deficit of $20,203,193 as compared to a deficit of $22,305,095 at September 30, 2001. We have continued to be dependent on the support of Sun Pharma, but the financial support is reduced due to the increased revenues and higher cash flows from internal operations during the second and third quarters of 2002. See "Sun Pharmaceutical Industries, Ltd." and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." We received 5 ANDA approvals during the nine months ended September 30, 2002. See "Caraco's Products and Product Strategy" below. We also filed two more ANDA applications with the FDA during the first nine months of 2002, bringing the total pending approvals up to 4. 4. COMPUTATION OF LOSS PER SHARE Loss 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 number of common shares outstanding for the periods ended September 30, 2002 and September 30, 2001 were 21,593,243 and 21,172,618 respectively. 5. MORTGAGE NOTE EDC Loan Debt at September 30, 2002 includes a note payable to the Economic Development Corporation of the City of Detroit ("EDC") related to funds advanced to the Corporation pursuant to a Development and Loan Agreement (the "Agreement") dated August 10, 1990 as amended. The note is collateralized by a first mortgage, effectively, on all of the Corporation's property and equipment purchased pursuant to the Agreement. Effective April 2, 1993, and subsequently on August 5, 1997, the Corporation and the EDC of the City of Detroit restructured the Agreement discussed above. The amendments included the deferral of scheduled principal and interest payments until February 1, 1999, at which time additional deferred principal and interest due under the terms of the original agreement were required in amounts sufficient to amortize the total deferred amount through July 2002. Additionally, the amendment included a reduction in the stipulated interest rate from the inception of the loan through 1993 from 10% to 8.5%. The interest rates from 1994 through July 2002 varied from 5% to 6.3% as described in the amendments. As a condition of the deferral, the EDC was provided additional security on all the Corporation's assets, accounts, equipments, proceeds and ANDAs. In addition, the Corporation is required to comply with several 7 additional financial and operating covenants which include, limiting capital expenditures made to under $2 million during the deferral period, and abstaining from share redemption, payment of dividends, mergers and consolidations, without the consent of the EDC. The Corporation's note payable to the EDC (classified as a current obligation) stands at approximately $7.8 million as at September 30, 2002. We have been paying $100,000 per month since February 1999 and in aggregate $4.4 million through September 30, 2002 to the EDC. While such payments have brought us current in our interest obligation to the EDC, they have not brought us current in our obligations to the EDC as per the renegotiated terms of the Corporation's 1997 restructured loan. We intend to continue to make monthly payments of $100,000 to the EDC, without prejudice to the rights of the EDC to exercise all remedies available to it for failure to make the scheduled payments. The Corporation had submitted a proposal in April of 2002 to the EDC to restructure the loan. Based on a resolution passed at a meeting of the Board of Directors of the EDC on September 25, 2002, the EDC approved a six year extension of the loan of approximately $7.8 million, with interest rates starting at 2.75% and increasing to 5.16%. Under the approval, the EDC would retain a first mortgage on our property, and a first lien on our furniture, fixtures and equipment and intellectual property. The EDC resolution, which provides that the transaction must be completed by January 1, 2003, will not become effective until a definitive agreement incorporating the above terms has been agreed to by the parties. 6. 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. Further, Sun Pharma has made loans to us, the details of which as of September 30, 2002, are given below: 8% Promissory note payable to Sun Pharma, principal balance $5,300,000 payable in full in October 2003, with interest payable semi-annually. 8% Additional Loan payable to Sun Pharma, principal balance $3,850,000 payable in full in August 2006, with interest payable quarterly. 8% promissory note payable to Sun Pharma Global, Inc., a $550,000 wholly owned subsidiary of Sun Pharma, payable by October 2003 with interest payable semi-annually. ---------- Notes payable to principal stockholders $9,700,000 ========== Notes payable to Sun Pharma and Sun Pharma Global, Inc. are subordinated to the EDC loan. Furthermore, Sun Pharma and Sun Global currently have no intention of demanding payment within the upcoming year; therefore, such notes have been classified as long term. In August 1997, we entered into an agreement (the "Products Agreement"), whereby Sun Pharma was required to transfer to us the technology formula for 25 generic pharmaceutical products over a period of five years through August 2002. We exchange 544,000 shares of our common stock for each technology transfer of an ANDA product (generally when a bio-equivalency study is successfully completed) and 181,333 shares for each technology transfer of a DESI (Drug Efficacy Study Implementation) product. The products provided 8 to us from Sun Pharma are selected by mutual agreement. As of September 30, 2002, Sun Pharma has delivered to us the technology for 12 products (10 ANDA's and 2 DESIs). Sun Pharma owns approximately 49% of our outstanding common stock. The Products Agreement has expired, however, at the present time, management is in negotiations with Sun Pharma to enter into a new products agreement. In connection with the technology transfer, Sun Pharma has established a Research and Development Center in Mumbai with a staff of 30 persons, including PhDs, pharmacy graduates, analytical chemists and regulatory professionals. Sun Pharma primarily performs development work for us at this laboratory. Sun Pharma supplies us with certain raw materials and also the machinery and equipments to increase production. Sun has also provided us with qualified technical professionals. Twenty-one of our technical professional employees were former Sun Pharma employees. 7. TERM LOAN FROM ICICI BANK The Corporation had obtained a term loan of $5 million from ICICI Bank of India with the support of Sun Pharma. This term loan has been used to finance research and development activities, upgrade facilities, repay loans and meet working capital requirements. The Corporation, as of September 30, 2002, has received proceeds in the amount of $5 million with interest payments due quarterly. Quarterly principal payments are scheduled, to be made from December 2003 through September 2005. 8. TERM LOAN FROM BANK OF NOVA SCOTIA The Corporation had obtained term loans of $10.9 million from the Bank of Nova Scotia, out of a total commitment of $12.5 million with the support of Sun Pharma. This term loan has been used to finance research and development activities, upgrade facilities, repay other loans and meet working capital requirements. As of September 30, 2002 payments of interest are due quarterly. Semi-annual principal payments are scheduled to be made from February 2004 through September 2005. 9. COMMON STOCK ISSUANCES During the nine months ended September 30, 2002, the Corporation issued 15,000 shares of common stock to the directors as compensation for attendance at board and committee meetings held during 2001. Also, the Corporation has recorded the expense and liability for common stock issuances for 15,000 shares of common stock to be issued to the directors as compensation for attendance at Board and committee meetings held during the first nine months of 2002. In addition, during the first nine months of 2002, 635,000 shares of common stock have been issued by the Corporation for cash of $1,692,000 pursuant to a private placement to accredited investors. We have issued to Sun Global 1,088,000 shares of common stock for 2 product technology transfers during the first nine months of 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This report, other than the historical financial and business information, may contain forward looking statements. Those statements include statements regarding the intent, belief, and current expectation of the Corporation. The 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 include: (i) that 9 the information is of a preliminary nature and may be subject to further adjustment; (ii) inability to renegotiate and extend the Corporation loan with the Economic Development Corporation; (iii) not obtaining FDA approval for new products or delays in receiving FDA approvals; (iv) governmental restrictions on the sale of certain products; (v) dependence on key personnel; (vi) 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; (vii) market and customer acceptance and demand for new pharmaceutical products, (viii) availability of raw materials, (ix) timing and success of product development and launch (x) integrity and reliability of the Corporation's data; and (xi) other risks identified in this report and identified from time to time in the Corporation reports and registration statements filed with the Securities and Exchange Commission. 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. NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2001 NET SALES. Net sales for the nine months ended September 30, 2002 and 2001 were $14,828,849 and $3,372,686, respectively, reflecting an increase of almost 340%. Net sales for the three months ended September 30, 2002 and 2001 were $5,899,441 and $1,505,356, respectively, reflecting an increase of almost 292% over the previous similar period. The increase is due to the higher production and marketing of our existing and newly approved products following the achievement of substantial compliance with cGMPs. While this increase is substantial over the previous period, net sales are still at a low level, which we plan to increase in the last quarter of 2002 through new product introductions, increases in sales of existing and newly approved products and new drug development. Currently, we manufacture and market six of the eight ANDAs which were approved by the FDA during 2001 and the first nine months of 2002 (2 ANDAs were approved during the third quarter of 2002). Net sales of these newly approved products were almost 40% of total net sales for the nine months ended September 30, 2002 and almost 75% of total net sales for the three months ended September 30, 2002. The majority of the net sales increase from sales of new products were from net sales of Metformin Hydrochloride (33% of net sales for the nine months ended September 30, 2002 and 60% of net sales for the three months ended September 30, 2002), and Tramadol Hydrochloride (7% of net sales for the nine months ended September 30, 2002 and 12.7% of net sales for the three months ended September 30, 2002). Net sales have also improved for the following reasons: - Net sales of Metoprolol Tartrate have increased significantly to $4.72 million during the first nine months of 2002 as compared to $1.13 during the same period of 2001 and to $1.36 million for the three months ended September 30, 2002 as compared to $.55 million for the same period of 2001. - We have been successful in obtaining larger sales contracts in 2002 with an agency of the U.S. government and with one large mail order company, however, the sales of Metformin Hydrochloride to such agency have been made at lower sales prices. (See discussion on "Gross Profit" below) - With our larger base of products, we have been able to attract both new customers as noted above, and larger orders. GROSS PROFIT. We earned a gross profit of $7,448,809 and $2,864,102 during the nine months and three months ended September 30, 2002 as compared to a gross profit of $468,495 and $440,523 during the corresponding periods in 2001. The improvement was primarily due to higher sales volumes with improved margins due to product mix in the current periods as compared to those during the corresponding periods of 2001 and ability to absorb operational overheads due to higher sales. 10 As a result of increased sales, the gross profit margin has also improved when comparing the gross profit margins for the three and nine-month periods ending September 30, 2002 and 2001. The increases were the result of: - Change in sales mix to higher profit margin products such as Metroprolol Tartrate, Metformin Hydrochloride, Tramadol Hydrochloride and Oxaprozin. - Reduction in manufacturing costs due to increased batch sizes. For example, Metoprolol Tartrate batch sizes have increased by approximately four fold. - Improved efficiency in the overall manufacturing process associated with higher utilization of plant capacity. - Utilization during the third quarter of $1.25 million of equipment installed during the nine months ended September 30, 2002. Gross profit margin for the nine months ended September 30, 2002 was 49% as compared to almost 54% for the six months ended June 30, 2002. This reduction in gross profit margin is primarily attributable to the lower prices charged for bulk sales of, and an increase in raw material costs (by almost 25% as compared to the six months ended September 30, 2002) of, Metformin Hydrochoride. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the nine months ended September 30, 2002 and September 30, 2001 were $2,299,631 and $1,772,452 respectively, representing an increase of 30%. Selling, general and administrative expenses have effectively decreased down to 15.5% of net sales during the nine months ended September 30, 2002 from almost 53% of net sales during the same period in 2001. Selling, general and administrative expenses for the three months ended September 30, 2002 and September 30, 2001 were $990,331 and $623,381 respectively, representing an increase of 58%. The actual increase of approximately $337,000 was due to additional professional costs ($125,000) primarily in connection with the ongoing negotiations of a new product agreement with Sun Pharma, costs of introducing new products into the market ($50,000), additional sales personnel ($25,000), increases in the salaries of sales and administrative staff ($45,000), recording of variable compensation expense on stock options granted and extended to a director ($90,000) and costs associated with development of improved services and quality measures to customers. RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development expenses of $2,541,449 for the nine months ended September 30, 2002 were higher by 31% when compared with $1,934,456 incurred during the corresponding period of 2001. We incurred non-cash research and development expenses (technology transfer cost) of $1,251,200 for the 1,088,000 shares of common stock issuable to Sun Pharma Global for 2 product transfers made to us during the first nine months of 2002. There was no similar expense for the corresponding period of 2001. The major reason for the additional cash research and development expenses were the costs for three bio-study projects under way, which have total costs of approximately $300,000 each. We recorded expenditures towards these projects of approximately $430,000 during the nine months ended September 30, 2002 or 71% of total additional costs. Further, we recorded cost of raw material of $84,000 for R&D purposes for one of the projects currently undergoing bio-equivalency studies. Cash research and development expenses of $969,947 for the three months ended September 30, 2002 were higher by 39% when compared with $697,256 incurred during the corresponding period of 2001. There were no non-cash research and development expenses for these periods. The major reasons for the additional cash research and development expenses were biostudy costs of almost $190,000 and Raw Material costs of $84,000. DEPRECIATION EXPENSE. We incurred depreciation expense of $348,571 for the first nine months of September 30, 2002 as compared to $382,599 incurred in the corresponding period of 2001. We incurred 11 depreciation expense of $120,795 for the three months ended September 30, 2002 as compared to $128,258 in the corresponding period of 2001. INTEREST EXPENSE. Interest expense, which was incurred in connection with our mortgage obligation to the EDC, interest on notes payable to Sun Pharmaceutical and Sun Global as well as on term loans granted to us by ICICI Bank and the Bank of Nova Scotia, and guaranteed by Sun Pharmaceutical, was $1,130,898 and $1,524,843, for the nine months ended September 30, 2002 and 2001, respectively. The decrease in the amount of interest is due to a lower LIBOR rate, on the loans from ICICI Bank of India and Bank of Nova Scotia, despite increase in the higher borrowing levels. Effective April 1, 2001, Sun Pharmaceutical and its affiliates reduce the rate of interest payable to them from 10% to 8%. RESULTS OF OPERATIONS. The net losses for the nine months ended September 30, 2002 and 2001 were $180,913 and $5,131,857, respectively, reflecting a reduction of almost 97%. The net losses for the nine month periods are directly related to net sales, which were inadequate to absorb our interest costs and the impact of higher non-cash technology transfer cost of $1,251,200 recorded during the nine months ended June 30, 2002. We had a net profit of $406,488 for the quarter ended September 30, 2002 compared to a net loss of $1,525,074 for the corresponding period in 2001. The significantly lower losses in the current nine-month and three-month periods as compared to the previous respective periods are primarily due to significantly higher sales volumes and better-cost absorption due to increased sales and an improved product mix. Also, the utilization in the third quarter ended September 30, 2002 of $1.25 million of new equipment installed during the nine months ended September 30, 2002 helped to improve production. A number of uncertainties exist that may influence the Corporation's future operating results, including general economic conditions, changes in conditions affecting the pharmaceutical industry primarily related to generic drug competition, obtaining additional financing, government restrictions on sale of certain products, obtaining new FDA approvals, development by competitors of new or superior products or new technology for production of products or the entry into the market of new competitors. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, the Corporation had negative working capital of $1,876,757 compared with a negative working capital of $8,252,566 at the corresponding period of 2001. The negative working capital positions as of September 30, 2002 and 2001 respectively were mainly due to the classification of the entire balance of the EDC debt and related accrued interest as current until the anticipated renegotiation of the repayment terms is completed. In the first quarter of 2002, $3,208,769 of the EDC debt was reclassified from accrued interest to principal. As a result of the numerous complex modifications made to the EDC debt since its inception and the fact we were in default for many years, we accrued interest at the default rate of interest as outlined in the various modification agreements. In addition, during the default period, we commenced paying the EDC $100,000 per month. It was unclear as to what interest rate the EDC was accruing interest or how it was applying the $100,000 payments. On numerous occasions, we sent written correspondence and confirmations to the EDC requesting verification of the outstanding principal and interest balances. The EDC never responded to the written requests until the first quarter of 2002 when, once again, discussions were being held to restructure the obligation. As disclosed in the financial statement footnotes, we considered the total of EDC principal and accrued interest thereon to fairly present the outstanding obligations and that when verification of the principal and accrued interest was received from the EDC, we would reclassify the amount necessary between principal and accrued interest. This reclassification was recorded as of March 31, 2002 in the first quarter. There was no effect on total current liabilities, working capital or on the statement of cash flows. 12 To enable the Corporation to fund its research and development activities, repay certain term loans and fund working capital needs, Sun Pharma has become a security guarantor for a credit line of $5 million from ICICI Bank of India and $12.5 million from Bank of Nova Scotia. As of September 30, 2002 the Corporation has received $5,000,000 from ICICI Bank of India and $10,900,000 from Bank of Nova Scotia through these credit facilities. Further, the Corporation has received an additional loan of $2,450,000 during the fourth quarter of 2001 and $1,400,000 during the first quarter of 2002 from Sun to help the Corporation finance its R&D activities, debt reduction and working capital requirements. The Corporation has not borrowed any funds during the three months ended September 30, 2002 as compared to $1,800,000 during the same period of 2001. The cash generated out of the operations have been sufficient to run the operations of the Corporation as well as repay the EDC debt. In addition, during the first six months of 2002, 635,000 shares of common stock have been issued by the Corporation for cash of $1,692,000 pursuant to a private placement to accredited investors. FDA We underwent FDA inspections during March and April of 2001 and we were found to be in substantial compliance with cGMPs. Although we did receive an FDA 483, we do not believe the observations are material. We had filed 9 ANDA applications at that time with the FDA for approvals. Subsequent to the inspection of the facility, the FDA granted its approval of 3 of our ANDA products during 2001. In May 2001, the FDA provided us with a letter waiving pre-approval inspections for the then pending ANDA submissions. Through September 30, 2002, the FDA has approved 5 more of our ANDAs. We also filed 1 ANDA application in 2001 and 2 more ANDA applications during the first nine months of 2002 with the FDA. The total numbers of FDA approvals accorded to us to date are 10 ANDAs and the number of pending ANDA submissions now stands at 4. FUTURE OUTLOOK The Corporation has experienced difficult times in the past. With the Corporation having been found to be in substantial compliance by the FDA with respect to cGMPs during the second quarter of 2001, and also with the approvals of 8 ANDAs during 2001 and 2002, management feels that the Corporation's future outlook is brighter. Management's plan for improving profitability, cash flow positions and operations include increased sales (see below) and infusion of additional funding through the issuance of equity. Sun Pharma also continues to remain committed to support the Corporation, as it has in the past. During 2002, the Corporation has generated substantial improvements in revenues as compared to the past. Capacity utilizations are improving and costs are being controlled. The Corporation expects revenues to improve during 2002 and continue to improve into 2003. 13 Management's plans for the remainder of 2002 include: - Continued focus on FDA compliance. - Continued research and development activities. - Increased market share for certain existing products and recently introduced new products and enhanced customer reach and satisfaction. - Speedy introduction of new approved products to the market, such as Meperidine Hydrochloride and Ticlopidine Hydrochloride. - Striving to capture larger market share for existing products like Metformin Hydrocloride and Metoprolol Tartrate. - Achieving operational efficiencies by attaining economies of scale, cost reduction per unit, and cheaper costs for active substances acquired from competitors and/or Sun Pharma. - Increasing the width and depth of product portfolio to serve customers effectively. - Increasing the number of products, as well as anticipated volume increases for existing products, which, in turn, will improve manufacturing capacity utilization. - Considering alternative ways of increasing cash flow including developing, manufacturing and marketing ANDAs owned by Sun Pharma. - Speedy restructuring of the EDC Loan. - Locating and utilizing facilities of contract-manufacturers to enhance production and therefore sales. - Finalizing a new product agreement between Sun Pharma Global, a wholly-owned subsidiary of Sun Pharma, and the Corporation for technology transfer of new products. ITEM 3. CONTROLS AND PROCEDURES a. The term "disclosure controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) 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 principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this quarterly report (the "Evaluation Date"), and has concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective 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 significant changes in the Corporation's internal controls or in other factors which could significantly affect internal controls subsequent to the Evaluation Date. 14 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES During the first nine months of 2002, the Corporation issued, pursuant to a private placement, an aggregate of 635,000 shares of common stock for an aggregate purchase price of $1.69 million to five accredited investors. No underwriting commission or discounts were paid with respect to the sales of these unregistered securities. The above sales were made in reliance of Section 4(2) of the Securities Act of 1933, as amended ("the Securities Act") as transactions by an issuer not involving a public offering and Regulation D of the Securities Act. In addition, in connection with 2 ANDA product transfers, during the first six months of 2002, from Sun Global to the Corporation pursuant to that certain products agreement dated August 1997 between Sun Pharma and the Corporation, Sun Global earned 1,088,000 shares of common stock. Such shares were issued during the three months ended September 30, 2002. No underwriting commission or discounts were paid with respect to the issuance of these shares. Such unregistered shares were issued in reliance on Section 4(2) and Regulation D of the Securities Act. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Corporation has not made the required scheduled payments to the EDC since February 1999. While the Corporation has made payments of $4,400,000 to date to the EDC ($900,000 during the first, second and third quarters of 2002), such payments have not brought the Corporation current in its obligation to the EDC loan, and all such payments have been made without prejudice to the rights of the EDC to exercise all remedies available to the EDC for failure to make the scheduled payments. The Corporation had submitted a proposal in April of 2002 to the EDC to restructure the loan. Based on a resolution passed at a meeting of the Board of Directors of the EDC on September 25, 2002, the EDC approved a six year extension of the loan of approximately $7.8 million, with interest rates starting at 2.75% and increasing to 5.16%. Under the approval, the EDC would retain a first mortgage on our property, and a first lien on our furniture, fixtures and equipment and intellectual property. The EDC resolution, which provides that the transaction must be completed by January 1, 2003, will not become effective until a definitive agreement incorporating the above terms has been agreed to by the parties. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N.A. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB/A (a) Exhibits 99.1 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. (b) Reports on Form 8-K. There were no Form 8-Ks filed during the third quarter of 2002. SIGNATURES Pursuant to 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/ Narendra N. Borkar --------------------------- Narendra N. Borkar Chief Executive Officer and principal financial officer Dated: October 21, 2002 CERTIFICATION I, Narendra N. Borkar, the Chief Executive Officer and principal financial officer of Caraco Pharmaceutical Laboratories Ltd. (the "registrant") certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A 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; 16 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: (a) designed such disclosure controls and procedures 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) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. October 21, 2002 /s/ Narendra N. Borkar --------------------------- Narendra N. Borkar Chief Executive Officer and principal financial officer EXHIBIT INDEX 99.1 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. 17 EX-99.1 3 k72340aexv99w1.txt CERTIFICATION PURSUANT TO SECTIONS 1350 AND 906 EXHIBIT 99.1 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-QSB/A of Caraco Pharmaceutical Laboratories Ltd. ("Caraco") for the quarter ended September 30, 2002 (the "Report"), I Narendra N. Borkar, the Chief Executive Officer and principal financial officer of Caraco, hereby certify, 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. October 21, 2002 /s/ Narendra N. Borkar --------------------------- Narendra N. Borkar Chief Executive Officer and principal financial officer -----END PRIVACY-ENHANCED MESSAGE-----