<PAGE> 1
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 SEPTEMBER 30, 1998
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 November 10, 1998 - 13,208,683 shares
The total number of pages is
------
<PAGE> 2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 480,959 158,394 1,509,964 586,812
Cost of goods sold 370,960 371,780 1,388,492 1,020,903
------------ ---------- ---------- ----------
GROSS MARGIN (DIFFERENTIAL) 109,999 (213,386) 121,472 (434,091)
------------ ---------- ---------- ----------
Selling, general and
administrative expenses 446,173 309,176 1,556,032 1,159,113
Research & development costs 892,975 307,142 2,096,717 1,028,756
------------ ---------- ---------- ----------
OPERATING LOSS (1,229,148) (829,704) (3,531,276) (2,621,960)
------------ ---------- ---------- ----------
OTHER INCOME(EXPENSE)
Interest income 10,498 3,863 20,775 3,263
Interest expense (203,410) (202,173) (610,230) (628,570)
Other 6,905 (13,462)
------------ ---------- ---------- ----------
OTHER EXPENSE - NET (192,912) (191,405) (589,455) (638,769)
------------ ---------- ---------- ----------
NET LOSS (1,422,061) (1,021,109) (4,120,732) (3,260,729)
------------ ---------- ---------- ----------
Net loss per basic and diluted common share (0.11) (0.10) (0.31) (0.38)
Weighted average number of
common shares outstanding 13,158,683 10,119,732 13,390,950 8,604,106
============ ========== ========== ==========
</TABLE>
See accompanying notes
<PAGE> 3
CARACO PHARMACEUTICAL LABORATORIES LTD.
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 363,172
Accounts receivables net of allowance of $200,000 510,103
Inventories 1,000,910
Prepaid expenses and deposits 206,699
-----------
TOTAL CURRENT ASSETS 2,080,884
-----------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305
Building and improvements 6,682,725
Equipment 3,917,360
Furniture and fixtures 165,319
-----------
10,962,709
Less: Accumulated Depreciation 3,165,215
PROPERTY, PLANT AND EQUIPMENT, NET 7,797,494
-----------
TOTAL ASSETS 9,878,378
===========
</TABLE>
See accompanying notes
<PAGE> 4
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payables $ 1,103,339
Accrued expenses 136,036
------------
TOTAL CURRENT LIABILITIES 1,239,375
------------
Notes payable to shareholders 2,040,000
Mortgage 8,880,000
Accrued Interest 1,623,966
------------
TOTAL LONG-TERM LIABILITIES 12,543,966
------------
TOTAL LIABILITIES 13,783,341
============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock - no par value; authorized 5,000,000 shares;
issued and outstanding; 285,714 Series A shares 1,000,000
Common stock - no par value; authorized 20,000,000 shares;
13,158,683 shares issued and outstanding 27,830,340
Preferred stock dividends (105,000)
Accumulated deficit (32,630,303)
------------
TOTAL STOCKHOLDERS' DEFICIT (3,904,963)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 9,878,378
============
</TABLE>
See accompanying notes.
<PAGE> 5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED)
<TABLE>
<CAPTION>
COMMON
PREFERRED STOCK COMMON STOCK STOCK
------------------------ ------------------------- SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
------------------------ ------------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 285,714 1,000,000 7,842,106 19,646,974 (14,087)
Preferred dividend -- -- -- --
Receipt of common stock subscription
receivable -- -- -- -- 14,087
Issuance of common stock 5,309,400 7,650,000 (5,500,000)
Net Loss -- -- -- -- --
Balance at September 30, 1997 285,714 $ 1,000,000 13,151,506 $27,296,974 $(5,500,000)
======= =========== ========== =========== ===========
<CAPTION>
PREFERRED
STOCK ACCUMULATED
DIVIDENDS DEFICIT TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Balance at
December 31, 1996 -- (23,731,296) (3,098,409)
Preferred dividend (45,000) (45,000)
Receipt of common stock subscription
receivable 14,087
Issuance of common stock 2,150,000
Net Loss (3,360,129) (3,360,129)
Balance at September 30, 1997 $ (45,000) $(27,091,425) $ (4,339,451)
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------- ----------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1997 285,714 1,000,000 13,507,083 27,830,340
Receipt of common stock subscription
receivable -- -- -- --
Issuance of common stock 1,600
Receipt of common stock (350,000)
Preferred dividend -- -- --
Net Loss -- -- --
Balance at September 30, 1998 285,714 $1,000,000 13,158,683 $ 27,830,340
======= ========== ========== ============
<CAPTION>
COMMON
STOCK PREFERRED
SUBSCRIPTION STOCK ACCUMULATED
RECEIVABLE DIVIDENDS DEFICIT TOTAL
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at (4,220,000) (60,000) (28,509,571) (3,959,231)
December 31, 1997
Receipt of common stock subscription 4,220,000 -- -- 4,220,000
receivable
-- (45,000) -- (45,000)
Preferred dividend
-- -- (4,120,732) (4,120,732)
Net Loss
Balance at September 30, 1998 $ -- $ (105,000) $(32,630,303) $ (3,904,963)
============ ============ ============ ============
</TABLE>
See accompanying notes
<PAGE> 6
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER - 30
--------------------------------
1998 1997
--------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,120,732) (3,360,129)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 428,812 365,850
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (360,456) 23,925
Inventories (459,927) (198,629)
Prepaid expenses and deposits 237,951 (49,467)
Accounts payable (55,806) (304,706)
Accrued expenses 388,498 587,179
------------------------------
NET CASH USED IN OPERATING ACTIVITIES (3,941,660) (2,935,977)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (338,024) (7,976)
Proceeds from sale of marketable securities -- 82,000
------------------------------
NET CASH USED IN INVESTING ACTIVITIES: (338,024) 74,024
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,220,000 2,119,087
Net short-term borrowings -- 1,085,000
------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 4,220,000 3,204,087
------------------------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (59,684) 342,134
Cash and cash equivalents, beginning of period 422,856 15,421
CASH AND CASH EQUIVALENTS, END OF PERIOD 363,172 357,555
==============================
SUPPLEMENTAL CASH DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for interest -- 451
==============================
</TABLE>
See accompanying notes
<PAGE> 7
CARACO PHARMACEUTICAL LABORATORIES LTD.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The balance sheet as of September 30, 1998 and the related statements of
operations, stockholders' deficit and cash flows for the three and nine months
ended September, 1998 and 1997 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, 1998 and for the three and nine
months ended September 30, 1998 and 1997 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, 1997.
The accounting policies followed by the Corporation with respect to the
unaudited interim financial statements are consistent with those stated in the
1997 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.
The Corporation has not currently achieved sales necessary to support
operations. The Corporation has, as of September 30, 1998, a stockholders'
deficit of $3,904,963 and working capital of $841,508. 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, the outcome
of which cannot be determined at this time.
In August 1997, the Corporation and an Indian specialty pharmaceutical company,
Sun Pharmaceutical Industries, Ltd. ("Sun Pharma") completed an agreement
whereby:
a) In exchange for 5,300,000 shares of Caraco common stock Sun Pharma agreed
to invest $7,500,000 into the Corporation over a period of approximately
two years in four installments;
b) The number of products to be sold to the Corporation by Sun Pharma is 25
over a period of five years in exchange for 544,000 shares of Caraco common
stock to be issued for each product (181,333 shares, for each DESI (Drug
Efficacy Study Implementation) product; and
c) Two Caraco shareholders have each agreed to contribute to the Corporation
the equivalent up to $500,000 in cash or in shares of Caraco common stock,
not to exceed 250,000 each. During 1997, one shareholder director
contributed $150,000 in accordance with this agreement, thereby reducing
his future obligation to either $350,000 in cash or 100,000 shares. The
contributions from the shareholder directors are required to be satisfied
within 90 days of receipt of $4,000,000 of the Sun proceeds. As of
September 30, 1998 Sun had delivered the entire $7,500,000 investment and
the shareholder directors have satisfied their related obligations to the
Corporation.
<PAGE> 8
Management's plans include reducing the stockholders' deficit with the infusion
of additional funds from alternative sources and generating operating profits
by:
- Introducing in the short-run, DESI products, which do not require
lengthy and elaborate FDA approval procedures, thereby
strengthening the existing product portfolio.
- Restructuring and strengthening the Corporation to focus on new
product development, reliable supplies to customers, better
customer focus, improving the product mix for better contribution,
and better utilization of manufacturing capacities.
- Preparing for mid to long term product releases by the rapid
development of products requiring ANDA approvals from FDA. In
conjunction therewith, significant investments have been made by
Sun Pharma in India to establish a state of the art development
center dedicated to Caraco's product development needs. This
center commenced operations in the third quarter of 1997.
- Establishing strategic alliances with leading pharmaceutical
companies in manufacturing, development of new products in
partnerships and co-marketing.
- Leveraging the strengths of Sun Pharma in the area of rapid
product development in psychiatry, neurology, cardiology and
eventually, oncology.
- Identifying additional funding opportunities to support research
and development.
2. COMPUTATION OF LOSS PER SHARE
Loss per share is computed using the weighted average number of common shares
outstanding during each period. The Corporation adopted Statement of Financial
Accounting Standards (FASB) No. 128, "Earnings Per Share", effective December
31, 1997. This statement requires a dual presentation and reconciliation of
"basic" and "diluted" per share amounts. Diluted reflects the potential dilution
of all common stock equivalents. Since the assumed exercise of common stock
options and warrants and the assumed conversion of preferred stock and
convertible stockholder notes into common stock would be antidilutive, such
exercise is not assumed for purposes of determining diluted loss per share.
Accordingly, diluted and basic per share amounts are equal in each period.
3. LOSS FROM DEFALCATION
During the year ended December 31, 1994, the Corporation determined that
approximately $514,000 of Corporation funds had been misappropriated by the
Corporation's former controller, a son of the Corporation's former Chairman
Emeritus. The misappropriations occurred during the period from January through
June of 1994. The Corporation's former Chairman Emeritus reimbursed the
Corporation $514,000. In connection with this matter, approximately $56,000 in
certain legal and other expenses incurred by the Corporation in conducting an
investigation into this matter were paid directly by the former Chairman
Emeritus from his personal funds.
On November 1, 1996, the SEC notified the Corporation, through its legal
counsel, that its Enforcement Division has tentatively decided not to recommend
that the Commission authorize an enforcement action against the Corporation. The
SEC further advised that it nevertheless was possible that an action against the
Corporation may ultimately result from the investigation. The SEC's
investigation had revealed that the defalcation which was reported
<PAGE> 9
on October 18, 1994 had also occurred in 1993, as well as in the first half of
1994, and that the defalcation had totaled at least an additional $300,000. On
September 4, 1997, the SEC instituted a civil complaint proceeding against the
Corporation's former controller and his brother, neither of whom have been
associated with the Corporation since June of 1994.
4. STOCKHOLDER NOTES PAYABLE
During 1997 and 1996, respectively, the Corporation borrowed $600,000 from two,
and $890,000 from three, including the two previously mentioned, stockholder
directors of the Corporation. During 1997, the Corporation also borrowed
$550,000 from Sun Pharma Global Inc., ("Sun"), a wholly owned subsidiary of Sun
Pharma. These demand notes, which accrue interest at 10% and are unsecured, were
restructured on September 15, 1997. The restructuring agreement provides for the
principal to be due on or before August 1, 1999 in cash or an equivalent number
of common shares of the Corporation, at the discretion of the note holder, at a
per share price of $1.50. Interest at 10% was prepaid in exchange for equivalent
number of common shares of the Corporation at a per share price of $1.50.
The notes with Sun and two of the three stockholder directors in the amount of
$1,840,000, are subject to the provisions of an Inter-Creditor Agreement. Among
other things, the Inter-Creditor Agreement provides for an equal opportunity in
collateral and principal payments based on each creditor's respective share of
total debt.
On October 14, 1998, the Corporation borrowed $300,000 from Sun Pharma through
an unsecured loan. Interest at 10% will be paid on a yearly basis.
5. MORTGAGE NOTE
Debt at December 31, 1997 consists of a note payable to the Economic Development
Corporation (EDC) of the City of Detroit, 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 and repayment is personally guaranteed by
the Corporation's founder and former Chairman of the Board and his spouse.
Effective April 2, 1993, and again 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.
- On February 1, 1999, the Corporation shall resume
making the regularly scheduled monthly payments of
principal and interest due under the note. Additional deferred
principal and interest due under the terms of the original
agreement are also required in amounts sufficient to amortize the
total deferred amount through July 2002.
- A reduction in the stipulated interest rate from the inception of
the loan through 1993 from 10% to 8.5%. The interest rates from
1994 through July 2002 vary from 5% to % 6.3%, as described in the
amendments.
<PAGE> 10
- The Corporation will reimburse administrative costs to the EDC in
the amount of $50,000 related to the restructuring.
As a condition of the deferral, the EDC was provided with the additional
security on all of the Corporation's existing equipment and the Corporation is
required to comply with several additional financial and operating covenants
which include, limiting capital expenditures made without the consent of the EDC
to under $2,000,000 during the deferral period, and abstaining from share
redemption during the payment deferral period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SALES
Net sales for the nine month periods ended September 30, 1998 and 1997 were
$1,509,964 and $586,812 respectively, an increase of 157%. Net sales for the
three month periods ended September 30, 1998 and 1997 were $480,959 and $158,394
respectively, an increase of 204%. These increases are directly attributable to
improved cash flows leading to better product availability, focused marketing
efforts and improved market conditions.
During the last fifteen months, the Corporation has developed 4 DESI
products, 2 of which have been provided by Sun Pharma pursuant to its agreement
with Caraco. These are currently being validated. It is anticipated that these
products will be introduced in the market during the fourth quarter of 1998.
Management anticipates increased sales volumes on introduction of these
products.
The Corporation has identified promising candidates for ANDA submission. Work
on some of these products has commenced and the technology for four products has
been transferred to Caraco from Sun Pharma pursuant to its agreement with
Caraco. Three of the Corporation's ANDA applications are awaiting clearance
from the FDA. The approval procedure for ANDAs involves both bioequivalence
studies and submittance to FDA, which is a time-consuming process. The
Corporation cannot guarantee the success of the bioequivalence studies, or FDA
approval.
COST OF SALES
Cost of sales for the nine month periods ended September 30, 1998 and 1997 were
$1,388,492 or 92% and $1,020,903 or 174% of sales, respectively. Cost of sales
for the three month periods ended September 30, 1998 and 1997 were $370,960 or
77% and $371,780 or 235% of sales, respectively. The reduced percentage in cost
of sales was a direct result of higher sales, and increased capacity
utilization.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine month periods ended
September 30, 1998 and 1997 were $1,556,032 and $1,159,113 respectively,
reflecting an increase of 34%. Selling, general and administrative expenses for
the three month periods ended September 30, 1998 and 1997 were $446,173 and
$309,176 respectively, reflecting an increase of 44%. The increased percentage
in selling, general and administrative expenses is a direct result of increased
personnel costs and depreciation.
RESEARCH AND DEVELOPMENT
Product development expenses for the nine month periods ended September 30, 1998
and 1997 were $2,096,717 and $1,028,756, respectively, an increase of 104%.
Product development expenses for the three month periods ended September 30,
1998 and 1997 were $892,975 and $307,142, respectively, an increase of 191%.
The increases demonstrate Caraco's continued commitment to new product
development as a means to increase and diversify its product offering. The
Corporation plans to continue to expand product development activities, as it
believes such efforts are vital to expanding the Corporation's product line and
generating future products. The Corporation has as of date,
<PAGE> 11
successfully completed the clinical studies for bioequivalence for one ANDA
product and submitted the product for FDA approval. With the infusion of funds
and the restructuring of the organization, the focus on new product development
has intensified. A development center supported and paid for totally by Sun
Pharma and dedicated to provide products to Caraco pursuant to its agreement
with Caraco was started in Bombay, India in the last quarter of 1997. This
center employs seventeen well-qualified and experienced pharmaceutical
researchers. The emphasis, in the future, will be on internal development of
products.
RESULTS OF OPERATIONS
Net losses for the nine month periods ended September 30, 1998 and 1997 were
$4,120,732 and $3,360,129 respectively. Net losses for the three month periods
ended September 30, 1998 and 1997 were $1,422,061 and $1,021,109 respectively.
The operating loss is directly related to net sales, which were inadequate to
absorb the fixed costs of the Corporation's operational expenses.
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, the Corporation's success in developing and market acceptance of
new products, manufacturing performance, availability and price fluctuations of
raw materials, FDA regulations and other factors.
INTEREST EXPENSE ACCRUED BUT NOT PAID
Interest expense, which is incurred primarily in connection with the
Corporation's mortgage obligation to the Economic Development Corporation of
Detroit, was $610,230 and $628,570 for the nine month periods ended September
30, 1998 and 1997, respectively. The interest expense for the three month
periods ended September 30, 1998 and 1997 were $203,410 and $202,173,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Corporation maintained working capital of $841,508.
This amount is attributable to funding from Sun Pharma and increased sales.
Management estimates that, at its currently planned and anticipated level of
operations, the Corporation will experience a progressive reduction in the
present level of operating losses in 1998. However, increased investments in
research and development will continue to be reflected in the Statement of
Operations during 1998. The benefits of these costs will not be available in
1998 because of the long lead times for development, biostudies and the FDA
approvals.
The Corporation has no material commitments for capital expenditures. There is
no assurance that the Corporation will be able to successfully raise additional
equity financing or that any of the Corporation's ANDAs will be approved by the
FDA within time parameters anticipated by the management or at all, or that the
Corporation will be able to manufacture in commercial quantities and sell
profitably any product resulting from FDA approval of an ANDA filed by the
Corporation.
YEAR 2000 COMPLIANCE
The Corporation has evaluated the implications of the changeover of existing
information technology systems to the year 2000 and believes that all systems
will be compliant with 2000. However, there can be no assurance that the
Corporation will not enter unanticipated costs or systems interruptions which
could have a material adverse effect on the Corporation's business, financial
condition or results of operations.
<PAGE> 12
PART II - OTHER INFORMATION
Item 5. Other Information
On September 22, 1998 the Board of Directors approved an employment
agreement between the Corporation and Narendra N. Borkar, attached hereto as
EXHIBIT 10.71.
Item 6. Exhibits and Reports
A. Exhibits
10.71 Employment Agreement between the Corporation and Narendra N. Borkar
dated September 22, 1998.
B. Reports
There were no reports on Form 8-K filed third quarter 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
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 (A duly
authorized signatory of the company)
DATED: November 10, 1998
<PAGE> 13
EXHIBIT INDEX
EXHIBIT TABLE
NUMBER EXHIBIT PAGE
- ------------------------------------------------------------------
10.71 Employment Agreement between
the Corporation and Narendra N. Borkar,
dated September 22, 1998
27 Financial Data Schedule
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 22nd day of
September, 1998, by and between CARACO PHARMACEUTICAL LABORATORIES, LTD. (the
"Company") and NARENDRA N. BORKAR ("Employee").
W I T N E S S E T H
WHEREAS, the Company desires to employ the Employee as its Chief
Executive Officer;
WHEREAS, the Employee desires to be employed by the Company as its
Chief Executive Officer; and
WHEREAS, the parties hereto are desirous of entering into a formal
agreement of employment.
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the parties covenant and agree as follows:
1. Employment. The Company agrees to appoint the Employee
and the Employee agrees to his appointment as Chief
Executive Officer of the Company.
2. Duties. The Employee shall diligently and conscientiously
devote on a full-time basis, his best efforts to the discharge
of his duties as established from time to time by the Bylaws
of the Company, the Board of Directors of the Company
(?Board?) and/or otherwise, and shall be under the supervision
of the Chairman of the Board. Such duties shall include, but
not be limited to, those set forth in Exhibit "A," a copy of
which is attached hereto and is herein incorporated by
reference.
3.A. Compensation. The Company shall pay the Employee a salary at a
rate of Ten Thousand ($10,000) Dollars per month ($120,000
annually), subject to all applicable withholdings, for
services rendered as the Chief Executive Officer. The
Employee's base salary shall be reviewed annually, and may be
adjusted based upon performance and other relevant factors
deemed reasonable by the Company.
B. Bonus. The Employee shall receive, during the term of his
employment by Company, the following bonuses:
(a) A cash bonus in the amount of up to twenty-five (25%)
percent of his annualized base salary contingent upon
the achievement of corporate objectives to be
separately documented and to be determined and paid
annually, following each year of service, by December
31st of such year.
(b) A stock bonus of 50,000 shares of Common Stock of the
Company to be issued to Employee as of the date of
execution of this Agreement and to be delivered to
Employee as soon thereafter as possible. In
connection therewith, the Company hereby agrees to
pay to Employee his tax liability
1
<PAGE> 2
arising as a result of this grant at the time such
tax is due upon receipt of a written request by the
Employee to the Company therefor and proper evidence
of the computation of such tax.
C. Other Benefits. The Employee shall be entitled to participate
in any plan or program of employee benefits maintained by the
Company as of the date hereof, and which may be hereafter
adopted or modified by the Company, which is or shall be
available to the Employee as a result of his employment by the
Company pursuant to this Agreement, subject to the
requirements of such plans or programs. A list of specific
benefits to which the Employee shall be entitled is set forth
in Exhibit "B", a copy of which is attached hereto and is
herein incorporated by reference.
D. Vacations. The Employee shall be entitled to three (3) weeks
paid vacation each year.
E. Stock Options. Subject to the terms and conditions of the
Stock Option Agreement of even date herewith: (i) Employee
has been granted the right and option (the "Option") to
purchase up to One Hundred Fifty Thousand (150,000) shares
of Common Stock of the Company (the "Option Shares") at an
option price equal to $______ per share of Common Stock (the
fair market value of shares of Common Stock of the Company
on the date of execution of this Agreement, which for
purposes of this Agreement is the closing price of the
Company's Common Stock on the OTC Bulletin Board as of the
date of this Agreement or if no sale has occurred on such
date, then on the date immediately preceding the date of
this Agreement on which a sale has occurred); (ii) Employee
may only exercise his Option to purchase Option Shares to
the extent that such Option Shares have vested and become
exercisable with respect to such Option Shares in accordance
with the terms and conditions of the Stock Option Agreement;
(iii) unless terminated earlier, the right to exercise any
Option shall terminate no later than September 22, 2004; and
(iv) the Option Shares shall vest and become exercisable in
accordance with the following schedule, if as of each such
date, Employee is still employed by the Company:
<TABLE>
<CAPTION>
CUMULATIVE PERCENTAGE OF
OPTION SHARES VESTED
DATE AND EXERCISABLE
---- -------------------------
<S> <C> <C>
September 22, 1999 20%
September 22, 2000 40%
September 22, 2001 60%
September 22, 2002 80%
September 22, 2003 100%
</TABLE>
4. Term. Unless terminated earlier in accordance with Section 6
hereof, or renewed pursuant to Section 5 hereof, the term of
this Agreement shall commence as of September 22, 1998, and
shall continue for a period of five (5) years thereafter.
5. Renewal. This Agreement shall automatically renew for
successive one-year periods at the end of the five (5) year
term, subject, however, to ninety (90) days written notice of
termination by either party hereto prior to the commencement
of any such
2
<PAGE> 3
renewal period. The terms and conditions of this
Agreement shall apply during any such renewal period.
6. Termination. Notwithstanding any provision herein to the
contrary, during the terms of this Agreement, or during any
period following an automatic renewal under Section 5 hereof,
the Company's employment of the Employee under this Agreement
shall be terminated:
(a) Upon the Employee's death.
(b) Upon the Disability (as that term is defined herein)
of the Employee. For purposes of this Agreement, the
Disability of an Employee shall mean an illness,
injury, or physical or mental condition of the
Employee occurring for a period of three consecutive
months from the commencement of such illness, injury
or condition which results in the Employee's
inability during such period to perform substantially
all of his regular duties to the Company. In the
event the Company and the Employee do not agree on
whether the Employee suffered a Disability within the
meaning of this Section 6, then the issue shall be
settled by binding arbitration under the rules and
regulations of the American Arbitration Association,
and the decision or award of the arbitrator or
arbitrators in such arbitration shall be final,
conclusive and binding upon the parties thereto and
judgment may be entered thereon in any court of
competent jurisdiction.
(c) By the Company for "just cause" (as that term is
defined herein) or without cause. For purposes of
this Agreement, "just cause" shall mean dishonesty,
or refusal or failure to faithfully or diligently
perform the Employee's duties contemplated by this
Agreement, including but not limited to the failure
by the Employee to adhere to the policies of the
Board.
(d) By the Employee for "cause" not attributable to the
Employee, or without cause. For purposes of this
Agreement for "cause" not attributable to Employee
shall mean the Company failing to make any payment of
base salary to the Employee within thirty (30) days
after such payment is due.
(e) Employee shall receive the severance compensation
described below in full settlement of the termination
of his employment with the Company:
(i) In the event of the death or Disability of
Employee or if the Company terminates the
Employee for "just cause", the Employee
shall be entitled to the base salary and
benefits earned by him prior to the date of
death, Disability or termination but not the
bonus referenced in Paragraph 3.B.(a);
(ii) In the event that the Company terminates the
Employee without cause, the Employee would
receive a severance package as follows:
3
<PAGE> 4
a. The Employee shall receive monthly
base salary payments and, as
applicable, the bonus referenced in
Paragraph 3.B.(a) for six (6) months
from the date of termination;
b. The Company shall continue premium
coverage payments for health and
life insurance for six (6) months
from the date of death, Disability
or termination;
c. Any stock options that would become
available for exercise at the end of
the year during which such death,
Disability or termination occurred
shall vest;
(iii) In the event the Employee terminates this
Agreement for cause not attributable to the
Employee, the Employee would receive a
severance package as follows:
a. The Employee shall receive monthly
base salary payments and, as
applicable, the bonus referenced in
Paragraph 3.B.(a) for six (6) months
from the date of termination;
b. The Company shall continue premium
coverage payments for health and
life insurance for six (6) months
from the date of termination;
c. Any stock options that would become
available for exercise at the end of
the year during which such
termination occurred shall vest.
(iv) In the event that the Employee terminates
this Agreement without cause, the Employee
shall be entitled to the base salary and
benefits earned by him prior to the date of
termination.
7. Confidentiality/Non-Competition. Employee agrees that while
Employee is employed by the Company and, if Employee is
terminated by the Company for just cause or Employee
terminates without cause, for the eighteen (18) month period
following the date of such termination (the "Non-Compete
Period"), Employee shall not, either directly or indirectly
(and whether or not for compensation), work for, be employed
by, own, manage, operate, control, finance, participate or
engage in, or have any interest in, any person, firm,
entity, partnership, limited partnership, limited liability
company, corporation or business (whether as an employee,
owner, sole proprietor, partner, venturer, member,
shareholder, officer, director, agent, creditor, consultant
or in any capacity which calls for the rendering of personal
services, advice, acts of management, operation or control)
which engages in any business activity of the Company or any
business which is substantially the same as or competitive
with the Company's including, but not limited to, the
development, manufacture and marketing of generic and
private label drugs for the prescription and
over-the-counter markets (the "Business") and which is
located in the State of Michigan (the location of the
Company's headquarters), all counties in the State where
Employee works for the Company
4
<PAGE> 5
or one of its subsidiaries or anywhere in the United States
or Canada in which the Company does Business and wherein
Employee worked on behalf of the Company (the "Restricted
Territory").
Employee further agrees that Employee shall not, directly or
indirectly, at any time during the Non-Compete Period:
(a) divert or attempt to divert any Business from the
Company whether in the Restricted Territory or not;
(b) solicit, contact, call upon or attempt to solicit, or
provide services to, any of the Company's customers, suppliers or actively
sought potential customers or suppliers for the purpose of doing anything within
the definition of the Business or any work reasonably related to the Business
whether in the Restricted Territory or not; or
(c) induce or attempt to induce any person who is an employee
or consultant of the Company to leave the employ or consulting relationship with
the Company.
At all times, Employee shall keep secret and inviolate and
shall not divulge, communicate, use to the detriment of the Company or for the
benefit of any other person or persons or misuse in any way any knowledge or
information of a confidential nature, including, without limitation, all trade
secrets, tax records, personnel histories, sales information, computer programs,
technical data, customer lists and unpublished matters relating to the business,
assets, accounts, books, records, customers, operations, personnel and contracts
of the Company which Employee may or hereafter come to know as a result of
Employee's association with or which is unique to the Company ("Confidential
Information"). Employee may disclose Confidential Information if required by any
judicial or governmental request, requirement or order; provided that Employee
will take reasonable steps to give the Company sufficient prior notice to
contest such request, requirement or order.
Employee has knowledge of the affairs, trade secrets,
customers, potential customers and other proprietary information of the Company
and Employee acknowledges and agrees that compliance with the covenants set
forth in this Paragraph 7 is necessary for the protection of the Business,
goodwill and other proprietary interests of the Company and that any violation
of this Paragraph 7 will cause severe and irreparable injury to the Business,
goodwill and proprietary interests of the Company, which injury is not
adequately compensable by money damages. Accordingly, in the event of a breach
(or threatened or attempted breach) of this Paragraph 7, the Company shall, in
addition to any other rights and remedies, (i) be entitled to immediate
appropriate injunctive relief or a decree of specific performance of this
Agreement, without the necessity of showing any irreparable injury or special
damages, and (ii) not be obligated to issue any shares subject to the option
upon exercise of the option.
Employee acknowledges that, due to Employee's education and
job skill, Employee's adherence to the terms of this
confidentiality/non-competition provision will not deprive Employee of the
opportunity to obtain gainful employment with other companies serving
different product or geographic markets after the termination of Employee's
employment with the Company.
5
<PAGE> 6
Nothing herein shall be deemed to prevent Employee from holding less
than five (5%) percent of the outstanding publicly-traded securities of any
person, firm, or corporation.
If, in any judicial proceeding, a court shall refuse to enforce any
of the covenants included herein, then said unenforceable covenant(s) shall be
deemed modified so as to become enforceable to the maximum extent permitted, and
if such modification is not permitted, then such unenforceable covenants shall
be deemed eliminated from these provisions for the purpose of the proceeding to
the extent necessary to permit the remaining separate covenants to be enforced.
It is the intent and agreement of the Company and Employee that these covenants
be given the maximum force, effect and application permissible under law.
The provisions of this Paragraph 7 shall survive the termination of
this Agreement and Employee's employment with the Company.
8. Change in Control.
(a) In the event (i) the Company merges into or
consolidates with another entity, or is subject in
any way to a transfer of a substantial amount of its
assets, resulting in the assets, business or
operations of the Company being controlled by an
entity or individual other than the Company (a
"Change in Ownership"), or there occurs any "Change
in Control" (as defined below) of the Company and
(ii) there is a significant change in the nature and
scope of the duties and powers of the Employee, or
the Employee reasonably determines that, as a result
of the occurrence of one or more of the events
described in subparagraph 8(a)(i), he is unable to
exercise or perform the powers, functions or duties
as set forth in this Agreement or the Employee has
"good reason" to terminate as that term is defined
in subparagraph 8(c), then the Employee shall be
entitled, upon giving thirty (30) days advance
written notice to the Company, to terminate this
Agreement and shall within 90 days after the
effective date of such termination, receive a lump
sum amount equal to his base salary for six (6)
months at the rate in effect on the date such notice
is given to the Company. The Employee shall also be
entitled to the immediate vesting in any stock
option which would have been exercisable at the
close of the year during which the Change in Control
occurred.
(b) A "Change in Control" shall be deemed to have
taken place if (i) a third person, (other than Sun
Pharmaceutical Industries, Ltd., and/or its
affiliates), including a group of affiliated
individuals and/or entities, becomes the beneficial
owner of shares of the Company having thirty (30%)
percent or more of the total number of votes that
may be cast for the election of Directors of the
Company, or (ii) as a result of, or in connection
with any cash tender or exchange offer, merger,
consolidation or other business combination, or sale
of assets, or any combination, or sale of assets, or
any combination of the foregoing events, the persons
who are directors of the Company before the
occurrence of such event or events cease to
constitute more than fifty (50%) percent of the
Board of Directors of the Company. Notwithstanding
the above, a "Change in Control" shall not include a
public secondary offering or a private placement of
securities to a group of unaffiliated individuals
and/or entities which following such offering own
6
<PAGE> 7
thirty (30%) percent or more of the total number of
votes that may be cast for the election of directors
of the Company.
(c) For purposes of paragraph 8(a)(ii), the Employee
shall be deemed to have "good reason" to terminate
his employment with the Company pursuant to
paragraph 8(a)(ii) if any of the following events
occurs without the Employee's express written
consent:
(i) The assignment to the Employee of any duties
materially inconsistent with the Employee's
position, duties, responsibilities, and
status with the Company immediately prior to
the Change in Control or Change in
Ownership;
(ii) A material change in the Employee's
reporting responsibilities, titles or
offices as in effect immediately prior the
Change in Control or Change of Ownership, or
any removal of the Employee from or any
failure to re-elect the Employee to such
office, unless such removal or failure to
elect is for cause;
(iii) A reduction in base salary under the
Employee's wage and salary program in effect
immediately prior to the Change in Control
or Change of Ownership;
(iv) The Employee is requested to relocate his
office to a location more than one hundred
(100) miles from its location immediately
prior to the Change in Control or Change in
Ownership;
(v) In the event the Employee consents to any
relocation of his office and such relocation
necessitates the Employee moving from his
then current residence ("Prior Residence"),
the failure by the Company to pay or
reimburse the Employee for all reasonable
moving expenses incurred with respect to a
new residence and to indemnify the Employee
against any loss incurred by the Employee in
the sale of his prior residence which loss
shall be the amount, if any, by which the
actual sales price of the Prior Residence is
exceeded by the higher of the Employee's
aggregate investment in residence or the
fair market value of the Prior Residence as
established by an independent appraiser
designated by the Employee and acceptable to
the Company;
(vi) Failure of the Company to continue in effect
any benefit or compensation plan or
arrangement in which the Employee was
participating immediately preceding the
Change in Control or Change in Ownership, or
the taking of any action by the Company not
required by law which would adversely affect
the Employee's participation in or
materially reduce Employee's benefits from
such plan.
9. Waiver. Failure by either party to insist upon strict
compliance with any of the terms, covenants, or conditions
hereof shall not be deemed a waiver by that party of any such
7
<PAGE> 8
term, covenant or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or
more times be deemed a waiver or relinquishment of any such
right or power at any other time or times.
10. Severability. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or
enforceability of any other provision.
11. Nontransferability. Neither the Employee, nor his heirs,
assigns or estate shall have the right to assign, encumber or
dispose of any payment or right hereunder, which payment and
right is expressly declared nonassignable and nontransferable,
except as otherwise specifically provided herein.
12. Successors and Assigns. The Company and the Employee bind
themselves, and their respective partners, successors,
assigns, heirs and legal representatives to all of the terms
and conditions of this Agreement.
13. Assignment. This Agreement, and any or all rights hereunder,
may not be assigned, in whole or in part, by the Employee. The
Company may assign this Agreement, in whole or in part, and
any or all of its rights hereunder.
14. Notices.
(a) Every notice or other communication required or
permitted to be given under this Agreement ("Notice")
shall be in writing and shall be given by registered
or certified mail, postage prepaid, return receipt
requested, or by delivery such Notice personally or
causing such Notice to be delivered by reputable air
courier or otherwise. All such Notices shall be
mailed or delivered to the Parties at the following
addresses:
If to Company: CARACO PHARMACEUTICAL LABORATORIES,
LTD.
Board of Directors
1150 Elijah McCoy Drive
Detroit, Michigan 48202
If to Employee: NARENDRA N. BORKAR
27727 Gateway Blvd, Apt. G 204
Farmington Hills, Michigan 48334
or other such addresses as the Parties may from time
to time designate by written notice. Delivery under
this Paragraph 14, when by mail, shall be effective
as of the date upon which the return receipt is
accepted or refused. A Notice personally delivered
under this Section 14 shall be effective upon such
delivery or, if delivery is refused, upon such
refusal. A Notice delivered by reputable air courier
shall be effective upon the next business day after
having been sent.
15. Entire Agreement. The foregoing provisions contain the entire
agreement of the parties hereto, and no modification hereof
shall be binding upon the parties unless the same is in
writing and signed by the respective parties hereto.
8
<PAGE> 9
16. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of
Michigan.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered
shall be an original, but such counterparts together shall
constitute one instrument.
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement on the date first above written.
CARACO PHARMACEUTICAL LABORATORIES,
LTD., a Michigan corporation
By:/s/Dilip Shanghvi
-------------------------------
Dilip Shanghvi
Its: Chairman of the Board
EMPLOYEE:
By:/s/Narendra N. Borkar
-------------------------------
Narendra N. Borkar
9
<PAGE> 10
EXHIBIT "A"
1. Job Title: Chief Executive Officer (Principal Executive
Officer and Principal Financial and
Accounting Officer)
2. Major Goals and Responsibilities
- Develops the basic objectives, policies and operating plans of
the Corporation's business with the advice of the members of
management; submits these to the Board of Directors for its
approval.
- Insures that adequate plans for the future development and
growth of the Corporation's business are prepared, and
participates in their preparation; periodically presents such
plans for general review and approval by the Board of
Directors.
- Plans and directs all investigations and negotiations
pertaining to mergers and acquisitions, joint ventures, or the
sale of major assets with the advance knowledge and approval
of the Board of Directors.
- Analyzes operating results of the Corporation and its
principal components relative to established objectives and
insures that appropriate steps are taken to correct
unsatisfactory conditions.
- Insures the adequacy and soundness of the Corporation's
financial structure, reviews projections of the Corporation's
working capital requirements, negotiates and otherwise
arranges for any outside financing that may be indicated, with
the advice of members of the management and the advance
knowledge and approval of the Board of Directors.
- Takes such steps as may be necessary to protect and
enhance the Corporation's investments in subsidiaries and
affiliates.
- Represents the Corporation as appropriate in its relationships
with major customers, suppliers, competitors, commercial and
investment bankers, government agencies, professional
societies and similar groups.
- Insures adequate flow of information between members of
management and the Board of Directors.
4. Reports To: Board of Directors
5. People Managed: All Employees at Caraco
6. Position within the Organizational Structure: Top management
7. Primary Contact: Board of Directors
Governmental Agencies
Industry Representatives
Banks/Financial Institutions
<PAGE> 11
EXHIBIT "B"
1. Health and Life Insurance
Health insurance with family coverage consistent with the health
insurance provided other executives of the Company and life insurance
in an amount of two (2) times the Employee's annualized salary.
2. Moving Expenses
The Company will pay Employee $45,000 in full payment for moving
expenses as well as closing costs, real estate fees and temporary
housing costs incurred by the Employee in connection with his
relocation to the Detroit metropolitan area pursuant to this Agreement.
3. Car Allowance
A Company car will be provided to the Employee, the value of which
shall not exceed $380.00 per month.
4. Liability Insurance
The Company shall provide the Employee coverage under the Company's
directors and officer liability policy, a copy of which will be
provided to the Employee, upon request.
5. Disability Insurance
The Company shall pay 25% of the premium of a disability insurance
policy providing for payment of no more than 66-2/3% of the Employee's
salary in the event of the Employee's disability, as defined in such
insurance policy, for a disability period of no more than five years
from the date of disability. The Employee shall be responsible for the
remaining 75% of the premium for such disability insurance policy, and
for any additional premium due to an increase in the coverage, if
desired by the Employee.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 363,172
<SECURITIES> 0
<RECEIVABLES> 710,103
<ALLOWANCES> 200,000
<INVENTORY> 1,000,910
<CURRENT-ASSETS> 2,080,884
<PP&E> 10,962,709
<DEPRECIATION> 3,165,215
<TOTAL-ASSETS> 9,878,378
<CURRENT-LIABILITIES> 1,239,375
<BONDS> 0
0
1,000,000
<COMMON> 27,830,340
<OTHER-SE> (32,735,303)
<TOTAL-LIABILITY-AND-EQUITY> 9,878,378
<SALES> 1,509,964
<TOTAL-REVENUES> 1,509,964
<CGS> 1,388,492
<TOTAL-COSTS> 1,388,492
<OTHER-EXPENSES> 3,652,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (610,230)
<INCOME-PRETAX> (4,120,732)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,120,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,120,732)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0
</TABLE>
