U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED March 31, 2003
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 May 13, 2003-- 23,807,820
CARACO PHARMACEUTICAL LABORATORIES LTD.
UNAUDITED BALANCE SHEETS
PARTICULARS March 31, 2003
--------------
ASSETS
Current assets
Cash and cash equivalents $ 337,415
Accounts receivable, net 10,593,803
Inventories 5,582,540
Prepaid expenses and deposits 591,362
-------------
Total current assets 17,105,121
Property, plant and equipment - at cost
Land 197,305
Building and improvements 7,439,897
Equipment 5,569,738
Furniture and fixtures 275,504
-------------
Total 13,482,444
Less: accumulated depreciation 5,628,755
-------------
Net property, plant & equipment 7,853,688
-------------
-------------
Total assets $ 24,958,810
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 5,115,255
Accrued expenses 1,583,892
Current portion of notes payable to stockholders 6,000,000
Current portion of loan payable to financial institutions 4,375,000
Short term borrowings --
EDC debt classified as current 1,215,835
Preferred stock dividends payable 350,380
Accrued interest 676,415
-------------
Total current liabilities 19,316,777
-------------
Long-term liabilities
Notes payable to principal stockholders 3,850,000
Preferred stock dividends payable --
EDC debt classified as long term 6,085,575
Loans payable 13,125,000
-------------
Total long-term liabilities 23,060,575
-------------
-------------
Total liabilities 42,377,352
-------------
Stockholders' deficit
Preferred stock, no par value, authorized 5,000,000 shares; --
issued and outstanding 0 & 285,714 Series A shares
Common stock, no par value, authorized 30,000,000 shares; 40,457,028
issued and 23,762,532 outstanding shares
Additional Paid in Capital 282,858
Preferred stock dividends (350,380)
Accumulated deficit (57,808,047)
-------------
Total stockholders' deficit (17,418,541)
-------------
-------------
Total liabilities and stockholders' deficit $ 24,958,810
=============
See accompanying notes
CARACO PHARMACEUTICAL LABORATORIES LIMITED
UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
31-MARCH
PARTICULARS 2003 2002
-------------------------------------------------------------------------------------------------
$ $
Net Sales 8,721,600 3,301,959
Cost of goods sold 4,225,949 1,847,547
---------------------------------
Gross profit 4,495,651 1,454,412
Selling, general & administrative expenses 949,784 754,655
R&D cost 899,931 850,873
---------------------------------
Operating income / (loss) 2,645,936 (151,116)
---------------------------------
Interest
Interest expense (442,252) (369,067)
Interest income 1,065 940
---------------------------------
Net interest expense (441,187) (368,127)
---------------------------------
---------------------------------
Net income / (loss) 2,204,749 (519,243)
---------------------------------
---------------------------------
Net income / (loss) per basic and diluted common share 0.09 (0.03)
---------------------------------
See accompanying notes
3
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENTS OF CASH FLOWS
PARTICULARS Three Months ended March 31,
2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income / (loss) $ 2,204,749 $ (519,242)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 141,737 108,649
Common Shares issued in lieu of cash for compensation - 17,250
Changes in operating assets and liabilities which provided (used) cash:
Accounts receivable (5,109,668) (981,797)
Inventories 33,422 (276,162)
Prepaid expenses and deposits (120,049) 6,789
Accounts payable 1,132,418 (25,661)
Accrued expenses and Interest 267,000 (70,983)
-----------------------------------------------
Net cash used in operating activities (1,450,391) (1,741,157)
-----------------------------------------------
Cash flows from investing activities:
-----------------------------------------------
Purchases of property, plant and equipment (248,000) (310,987)
-----------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 1,600,000 -
Proceeds from Sale of Shares in Private Placement - 650,000
Payments of EDC debt (248,421) (184,736)
Net Loans received from Shareholders 150,000 1,400,000
-----------------------------------------------
Net cash provided from financing activities 1,501,579 1,865,264
-----------------------------------------------
Net (decrease) in cash and cash equivalents (196,812) (186,880)
Cash and cash equivalents, beginning of period 534,228 241,110
-----------------------------------------------
Cash and cash equivalents, end of period $ 337,415 $ 54,230
===============================================
See accompanying notes
4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
UNAUDITED STATEMENT OF SHAREHOLDERS' DEFICIT FOR THE
THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 - - 23,762,532 40,457,028
Net loss
------------------------------------------------------------
Balance at March 31, 2003 - $ - 23,762,532 $ 40,457,028
============================================================
------------------------------------------------------------------------------------------------------------
ADDITIONAL PREFERRED
PAID IN STOCK ACCUMULATED
CAPITAL DIVIDENDS DEFICIT TOTAL
------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 282,858 (350,380) (60,012,796) $ (19,623,290)
Net loss 2,204,749 2,204,749
-------------------------------------------------------------
Balance at March 31, 2003 $ 282,858 $ (350,380) $ (57,808,047) $ (17,418,541)
=============================================================
See accompanying notes
5
CARACO PHARMACEUTICAL LABORATORIES LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of March 31, 2003 and the related statements of operations,
stockholders' deficit and cash flows for the three months ended March 31, 2003
and 2002 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, 2003 and for the three months ended
March 31, 2003 and 2002 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, 2002.
The accounting policies followed by the Corporation with respect to the
unaudited interim financial statements are consistent with those stated in the
2002 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 46 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. We have recently started
shipments of 1 additional product in 2 strengths and 4 pack sizes. This brings
our formulary of products to 14 products in 24 strengths and 50 pack sizes.
To date, we have submitted 14 ANDAs to the Food and Drug Administration ("FDA").
Of these, we have received approvals for 11 ANDAs, one of which was received
during the first quarter; we have 3 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
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
For the first time since inception, during the last three quarters of 2002 and
the first quarter of 2003, we achieved sales necessary to support our
operations. Net sales for the three months ended March 31, 2003 were $8.7
million as compared to $3.3 million for the three months ended March 31, 2002.
We have earned an operating gross profit of $4,495,651 for the three months
ended March 31, 2003 as compared to $1,454,412 during the same period in 2002.
We earned an operating profit income of $2,645,936 during the period of March
31, 2003 as compared to incurring operating losses of $151,116 during the same
period in 2002. After interest costs, we have earned a net profit income of
$2,204,749 for the three months ended March 31, 2003 as compared to a net loss
of $519,243 for the three months ended March 31, 2002. At March 31, 2003, we had
a stockholders' deficit of $17,481,541 as compared to a deficit of $22,812,242
at March 31, 2002. We have continued to be dependent on the support of Sun
Pharma, however, but the financial support is reduced due to the increased
revenues and higher cash flows from internal operations since the second quarter
of 2002. See "Sun Pharmaceutical Industries, Ltd." and "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
received one ANDA approval during the first quarter of 2003. See "Caraco's
Products and Product Strategy" below. We have 3 products pending approval with
the FDA.
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 period ended March 31, 2003 were 23,762,532 and 25,061,469, respectively.
The basic and diluted weighted average number of common shares outstanding for
the period ending March 31, 2002 21,242,874 respectively.
5. MORTGAGE NOTE
EDC Loan
Debt at March 31, 2003 includes approximately $7.3 million 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 was collateralized by a
first mortgage, effectively, on all of the Corporation's property and equipment
purchased pursuant to the Agreement. The loan was restructured on April 23,
2003, but is effective as of January 1, 2003. The loan has been extended for six
years, with interest rates starting at 2.75% and increasing to 5.16%. Under the
extension, the EDC retains a first mortgage on our property, and a first lien on
our furniture, fixtures equipment and intellectual property. The EDC has removed
its first lien on our accounts receivable and inventory. Further, the EDC has
eliminated the prior restriction on capital investment in excess of $2 million
by permitting us, so long as we are 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 is not reduced below the
balance as of December 31, 2002 and the proceeds of any such sales are retained
by the Company. The obligations of the Corporation to the EDC have been
classified in accordance with the terms of the restructured loan.
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 March 31,
2003, are given below:
2
8% Promissory note payable to Sun Pharma, principal balance $5,300,000
payable in full in October 2003, with interest payable
semi-annually.
8% Promissory note 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 $ 200,000
wholly owned subsidiary of Sun Pharma ("Sun Global"),
payable by October 2003 with interest payable semi-annually.
8% short term loan to Sun Pharma, payable upon demand $ 500,000
----------
Notes payable to principal stockholders $9,850,000
==========
Notes payable to Sun Pharma and Sun Pharma Global, Inc. are subordinated to the
EDC loan. Furthermore, the Sun Pharma and Sun Global loans due to mature in
October of 2003 are classified as current.
In August 1997, we entered into an 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. The agreement has expired. We
exchanged 544,000 shares of our common stock for each technology transfer of an
ANDA product (when a bio-equivalency study was successfully completed) and
181,333 shares for each technology transfer of a DESI (Drug Efficacy Study
Implementation) product. The products provided to us from Sun Pharma were
selected by mutual agreement. As of March 31, 2003, Sun Pharma delivered to us
the technology for 13 products. A total of 5,802,666 shares were issued to Sun
Pharma and its affiliates in exchange for the technology transfer under the old
and now expired agreement.
We entered into a new product agreement with Sun Global for the transfer of the
technology formula for 25 generic products over a period of 5 years in November
2002 replacing the previous product agreement with Sun Pharma. Sun Global
receives 544,000 shares of preferred stock (convertible into common stock after
three years) for each ANDA product transferred. The value of the shares issued
to Sun Global for the transfer of the products shall be included in research and
development expenses. Depending on the number of products transferred and the
market value of the shares attributable thereto, the issuance of preferred stock
to Sun Global could cause our research and development expenses to increase to
an amount which would significantly decrease profit or create a loss. Preferred
shares can be earned by Sun Global even if the product is not successfully
produced and marketed.
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 formulation and analytical development for us at this
laboratory.
Sun Pharma supplies us with certain raw materials and also the machinery and
equipment to increase productivity and 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 March 31, 2003, 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. A portion of the loan which is due within one year from
March 31, 2003 has been classified as current.
3
8. TERM LOAN FROM BANK OF NOVA SCOTIA
The Corporation had obtained term loans of $12.5 million from the Bank of Nova
Scotia 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 March 31, 2003, payments of interest
are due quarterly. Semi-annual principal payments are scheduled to be made from
February 2004 through September 2005. A portion of the loan which is due within
one year from March 31, 2003 has been classified as current.
9. COMMON STOCK ISSUANCES
We have not issued any shares of common stock during the first quarter of 2003.
During the first quarter ended March 31, 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. In addition, during the first quarter
of 2002, 250,000 shares of common stock were issued by the Corporation for cash
of $650,000 pursuant to a private placement to accredited investors.
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 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, (viii) timing and success of product development and launch (ix)
integrity and reliability of the Corporation's data; and (x) 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.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
NET SALES. Net sales for the three months ended March 31, 2003 and 2002 were
$8,721,600 and $3,301,959, respectively, reflecting an increase of almost 164%.
The increase is due to the higher production and marketing of most of our
products following the achievement of substantial compliance with cGMPs. Sales
of Metformin Hydrochloride, Tramadol Hydrochloride and Metoprolo Tartrate
accounted for 85% of our net sales for the quarter. Sales of Metformin
Hydrochloride increased because of our contract with the Veterans
Administration, however, the sales of Metformin Hydrochloride to such agency
have been made at lower sales prices. (See "Gross Profit" below).
GROSS PROFIT. We earned a gross profit of $4,495,651 during the three months
ended March 31, 2003 as compared to a gross profit of $1,454,412 during the
corresponding period in 2002. The improvement was
4
primarily due to higher sales volumes with improved margins due to change in
sales mix to more profitable products such as Metroprolol Tartrate, Metformin
Hydrochloride; Tramadol Hydrochloride and Oxaprozin; acquiring raw materials at
more competitive prices; reduction in manufacturing costs due to increased batch
sizes. Improved efficiency in the overall manufacturing process associated with
higher utilization of plant capacity; utilization of equipment installed during
the twelve months ended December 31, 2002 of $1.6 million; and acquire raw
materials at highly competitive prices in the current period, and ability to
absorb operational overheads due to higher sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2003 and March 31,
2002 were $949,784 and $754,655 respectively, representing an increase of 25%.
Selling, general and administrative expenses have effectively decreased down to
10.8% of net sales during the three months ended March 31, 2003 from almost 22%
of net sales during the same period in 2002.
The actual increase of approximately $195,000 was due to additional professional
costs ($25,000) primarily in connection with the ongoing litigation against the
Company, costs of introducing new products into the market ($25,000), additional
sales personnel ($15,000), increases in the salaries of sales and administrative
staff ($25,000), recording of variable compensation expense on stock options
granted and extended to a director ($35,000) and costs associated with
development of improved services and quality measures to customers.
RESEARCH AND DEVELOPMENT EXPENSES. Cash research and development expenses of
$899,931 for the three months ended March 31, 2003 were higher by 5% when
compared with $850,873 incurred during the corresponding period of 2002. The
major reason for the additional cash research and development expenses was the
costs for raw material of approximately $80,000 for one of the projects
currently undergoing efficacy studies and other filing costs.
DEPRECIATION EXPENSE. We incurred depreciation expense of $138,770 for the first
three months of March 2003 as compared to $108,208 incurred in the corresponding
period of 2002. Depreciation has increased due to additional investment into
capital assets during 2002 of $1.6 million.
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 $441,187 and $368,127,
for the three months ended March 31, 2003 and 2002, respectively. The increase
in the amount of interest is due to the increase in borrowing levels. We have
utilized the $1.6 million of the remaining draws from Bank of Nova Scotia as
well as having borrowed $500,000 from Sun Pharma (a demand loan) to finance
increased working capital.
RESULTS OF OPERATIONS. We earned net income of $2,204,749 for the three months
ended March 31, 2003 as compared to a net loss of $519,243 for the same period
of 2002, respectively, reflecting an improvement of almost 525%. The
significantly improved results of operations in the current three-month period
as compared to the previous respective period are primarily due to significantly
higher sales volumes, improved cost absorption due to increased sales, improved
product mix and obtaining more competitive prices for raw materials.
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.
5
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Corporation had negative working capital of $2,211,655
compared with a negative working capital of $4,693,663 at the corresponding
period of 2002. The negative working capital positions as of March 31, 2003 and
2002, respectively, were mainly due to the classification of certain portions of
the loans payable to Bank of Nova Scotia and ICICI Bank coming due within the
next twelve months and $5.5 million of the loans payable to Sun Pharma and Sun
Global coming due in October 2003. In the first quarter of 2002, $3,208,769 of
the EDC debt was reclassified from accrued interest to principal.
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 March 31, 2003, the Corporation
has received $5,000,000 from ICICI Bank of India and $12,500,000 from Bank of
Nova Scotia through these credit facilities. Further, the Corporation has
received an additional short-term loan of $500,000 during the first quarter of
2003 from Sun Pharma to help the Corporation finance its increased working
capital requirements. The cash generated out of the operations has generally
been sufficient to run the operations of the Corporation as well as repay a
portion of the EDC debt.
FDA
We underwent FDA inspections in November 2002 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 and we have taken appropriate remedial
actions. During the first quarter of 2003, we received approval for one of the
then pending ANDAs. We now have 3 ANDAs pending approval.
FUTURE OUTLOOK
We have experienced difficult times in the past. With our having been found to
be in substantial compliance by the FDA with respect to cGMPs during the second
quarter of 2001 and the fourth quarter of 2002, and also with the approvals of
11 ANDAs during 2001, 2002 and 2003, management feels that our future outlook is
brighter. Revenues have been improving and consequently, so have operational
profits, net income and cash flows. Also, management is focused on cost controls
and consumption controls. Management's future plans for improving profitability,
cash flow positions and operations include increased sales (see below) and
infusion of additional funding through the issuance of equity. We also expect
Sun Pharma to continue to support us, as it has in the past.
The FDA has directed the manufacturers and distributors of Guaifenesin LA which,
including us, consists of 66 companies, to cease manufacturing Guaifenesin LA by
May 23, 2003 and to cease all sales after November 2003. The FDA has determined
that Guaifenesin LA is a new drug which requires a new drug application and
approval before it may be manufactured and sold. We intend to comply with the
FDA's directive. We do not intend to file a new drug application with the FDA
with respect to Guaifenesin LA. Net sales of Guaifenesin LA during the year
ended December 31, 2002 and during the quarter ended March 31, 2003 were $1.65
million and $0.36 million, respectively.
Management believes that the new products agreement ("Products Agreement") with
Sun Global, pursuant to which products are paid for in a newly created preferred
stock and not in cash should benefit Caraco. As we have disclosed, under the
Products Agreement, we conduct, at our expense, all tests, including
bioequivalency studies. We believe that the new Products Agreement benefits us
by, among other things, preserving our cash resources. By acquiring products for
stock instead of cash or instead of for cash and for royalties, we should
thereby have such cash available to support our operations. While the payment
for products in stock would have the effect of reducing earnings or causing a
loss because the stock will be valued on the respective dates on which it is
earned and constitute a non-cash research and development expense, we believe
that the advantages to us of preserving our cash for operations outweighs the
non-cash effect on earnings.
6
During the first quarter of 2003, the Corporation has generated substantial
revenues as compared to the past. Capacity utilizations are improving and costs
are being controlled. The Corporation expects revenues to improve during the
rest of 2003.
Management's plans for the remainder of 2003 include:
o Continued focus on FDA compliance.
o Continued research and development activities.
o Increased market share for certain existing products and
recently introduced new products and enhanced customer reach
and satisfaction.
o Prompt introduction of new approved products to the market.
o Striving to capture larger market share for existing products.
o Achieving operational efficiencies by attaining economies of
scale, cost reduction per unit, and obtaining additional cost
reductions for active substances acquired from competitors
and/or Sun Pharma.
o Increase the width and depth of product portfolio to serve
customers effectively.
o Increase the number of products, as well as anticipated volume
increases for existing products, which, in turn, will improve
manufacturing capacity utilization.
o Considering alternative ways of increasing cash flow including
developing, manufacturing and marketing ANDAs owned by Sun
Pharma.
o Locating and utilizing facilities of contract-manufacturers to
enhance production and therefore sales.
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 and our Chief
Financial Officer have 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 have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective in
providing them 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.
7
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as previously disclosed in past reports, and for the
following, we are not a party to any litigation, which,
individually or in the aggregate, is believed to be material
to our business:
As previously disclosed, we have been named as one of two
defendants and as one of several defendants in two separate
product liability suits, involving Miraphen which contains
phenylpropanolame (PPA), one in federal court in Pennsylvania
and another in state court in New Jersey, respectively. These
lawsuits seek damages generally for personal injury as well as
punitive damages under a variety of liability theories
including strict products liability, breach of warranty and
negligence. The federal lawsuit does not set forth a specific
dollar a mount of damages requested; the state lawsuit seeks
damages of $20 million. Our product liability insurer has
recently informed us that we are not covered by insurance
because the policy does not apply to any claim relating to any
product containing PPA. Although the ultimate outcome of
these cases and the potential effect on us cannot be
determined, we have retained counsel and we believe we have
substantial defenses to the claims and intend to vigorously
defend the lawsuits.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We were in default on our loan from the EDC, however, we are
not currently in default. The loan was restructured on April
23, 2003, but is effective as of January 1, 2003. The loan has
been extended for six years, with interest rates starting at
2.75% and increasing to 5.16%. Under the extension, the EDC
retains a first mortgage on our property, and a first lien on
our furniture, fixtures equipment and intellectual property.
The EDC has removed its first lien on our accounts receivable
and inventory. Further, the EDC has eliminated the prior
restriction on capital investment in excess of $2 million by
permitting us, so long as we are 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 is not reduced below the balance
as of December 31, 2002 and the proceeds of any such sales are
retained by the Company.
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) Exhibits
10.24 Third Note Modification Agreement
10.25 Third Mortgage Modification Agreement
8
99.1 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.
There were no Form 8-Ks filed during the first quarter of 2003.
9
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
By: /s/ Jitendra N. Doshi
---------------------
Jitendra N. Doshi
Chief Financial Officer
Dated: May 15, 2003
CERTIFICATION
I, Narendra N. Borkar, the Chief Executive Officer of Caraco Pharmaceutical
Laboratories Ltd. (the "registrant") certify that:
1. I have reviewed this quarterly report on Form 10-QSB 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. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant is made known to us 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 our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our 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) (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. The registrant's other certifying officer and 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.
May 15, 2003 /s/ Narendra N. Borkar
-----------------------
Narendra N. Borkar
Chief Executive Officer
11
CERTIFICATION
I, Jitendra N. Doshi, the Chief Financial Officer of Caraco Pharmaceutical
Laboratories Ltd. (the "registrant") certify that:
1. I have reviewed this quarterly report on Form 10-QSB 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. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant is made known to us 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 our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our 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. The registrant's other certifying officer and 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.
May 15, 2003 /s/ Jitendra N. Doshi
-------------------------
Jitendra N. Doshi
Chief Financial Officer
12
EXHIBIT INDEX
10.24 Third Note Modification Agreement
10.25 Third Mortgage Modification Agreement
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.
13