<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 March 31, 1998
Commission File No. 0-24676
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S><C>
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
</TABLE>
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 11, 1998 - 13,507,083 shares
The total number of pages is 16
<PAGE> 2
CARACO PHARMACEUTICAL LABORATORIES LTD.
BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 724,181
Accounts receivables net of allowance of $157,000 240,827
Inventories 606,445
Prepaid expenses and deposits 498,555
-----------
TOTAL CURRENT ASSETS 2,070,008
-----------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305
Building and improvements 6,682,725
Equipment 3,738,071
Furniture and fixtures 165,319
-----------
10,783,420
Less: Accumulated Depreciation 2,864,953
-----------
PROPERTY, PLANT AND EQUIPMENT, NET 7,918,467
-----------
TOTAL ASSETS 9,988,475
===========
</TABLE>
See accompanying notes
<PAGE> 3
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payables $ 954,272
Accrued expenses 121,622
------------
TOTAL CURRENT LIABILITIES 1,075,894
Notes payable to shareholders (Note 3) 2,040,000
Mortgage (Note 4) 8,880,000
Accrued Interest 1,319,159
------------
TOTAL LONG-TERM LIABILITIES 12,239,159
------------
TOTAL LIABILITIES 13,315,053
------------
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;
13,507,083 shares issued and outstanding 27,830,340
Stock subscription receivable (2,500,000)
Preferred stock dividends (75,000)
Accumulated deficit (29,581,918)
------------
TOTAL STOCKHOLDERS' DEFICIT (3,326,578)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 9,988,475
============
</TABLE>
See accompanying notes.
<PAGE> 4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
----------------------
<S> <C> <C>
Net Sales $ 538,120 $ 256,588
Cost of goods sold 544,624 419,791
GROSS MARGIN (DIFFERENTIAL) (6,504) (163,203)
Selling, general and
administrative expenses 418,560 412,960
Research & development costs 431,258 371,962
--------- ---------
OPERATING LOSS (856,322) (948,125)
--------- ---------
OTHER INCOME(EXPENSE)
Interest income 5,379 -
Interest expense (221,403) (207,477)
--------- ---------
OTHER EXPENSE - NET (216,025) (207,477)
--------- ---------
NET LOSS (1,072,347) (1,155,602)
========= =========
Net loss per basic and diluted common share $ (0.08) $ (0.15)
Weighted average number of
common shares outstanding 13,507,083 7,842,106
</TABLE>
See accompanying notes
<PAGE> 5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENT OF STOCKHOLDERS'DEFICIT (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON PREFERRED ACCUMULATED UNREALIZED
------------------ ------------------- STOCK STOCK DEFICIT LOSS ON
SHARES AMOUNT SHARES AMOUNT SUBSCRIPTION DIVIDENDS MARKETABLE
RECEIVABLE SECURITIES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 285,714 1,000,000 7,842,106 19,646,974 (14,087) -- (23,731,296) -- (3,098,409)
Preferred dividend -- -- -- -- (15,000) (1,155,602) -- (1,170,602)
Net Loss
------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 285,714 $1,000,000 7,842,106 $19,646,974 $(14,087) $(15,000) $(24,886,898) $ -- $(4,269,011)
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON PREFERRED ACCUMULATED UNREALIZED
------------------ ------------------- STOCK STOCK DEFICIT LOSS ON
SHARES AMOUNT SHARES AMOUNT SUBSCRIPTION DIVIDENDS MARKETABLE
RECEIVABLE SECURITIES TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 285,714 1,000,000 13,507,083 27,830,340 (4,220,000) (60,000) (28,509,571) -- (3,959,231)
Preferred dividend -- -- -- -- 1,720,000 (15,000) (1,072,347) -- 632,653
Net Loss
-------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 285,714 $1,000,000 13,507,083 $ 27,830,340 $(2,500,000) $(75,000) $(29,581,918) $ -- $(3,326,578)
=======================================================================================================
</TABLE>
See accompanying notes
<PAGE> 6
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------------
1998 1997
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,072,347) (1,155,602)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 128,550 121,950
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (91,180) 2,980
Inventories (65,462) 11,198
Prepaid expenses and deposits (53,905) (9,988)
Accounts payable (204,873) (192,936)
Accrued expenses 99,277 181,750
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,259,940) (1,040,648)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (158,735) (2,395)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (158,735) (2,395)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,720,000 0
Repayments of long-term debt 0 0
Net short-term borrowings 0 1,085,000
----------- -----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 1,720,000 1,085,000
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 301,325 41,957
Cash and cash equivalents, beginning of period 422,856 15,421
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 724,181 57,378
=========== ===========
Supplemental cash disclosures of cash flows information
----------- -----------
Cash paid for interest - -
=========== ===========
</TABLE>
See accompanying notes
<PAGE> 7
CARACO PHARMACEUTICAL LABORATORIES LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of March 31, 1998 and the related statements of operations,
stockholders' deficit and cash flows for the three months ended March 31, 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 March 31, 1998 and for the three months ended
March 31, 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 Form10-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 March 31, 1998, a stockholders' deficit
of $3,326,578 and working capital of $994,114. 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
<PAGE> 8
days of receipt of $4,000,000 of the Sun proceeds. As of March 31, 1998,
Sun had delivered $5,000,000 of the $7,500,000 investment. An additional
$1,000,000 of these proceeds had been received through April, 1998.
Management's plans include reducing the stockholders' deficit with the infusion
of additional remaining funding from Sun Pharma in the amount of $1,500,000 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 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 stock -holder 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 the $514,000. In connection with this matter, approximately
$56,000 in certain
<PAGE> 9
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.
The Corporation has made filings about this matter with the Securities and
Exchange Commission (SEC). 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 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 creditors' respective share of
total debt.
On December 19, 1996, the Corporation borrowed $65,000 from a family member of a
shareholder director of the Corporation. This amount was repaid in January, 1997
from the proceeds of the Sun debt.
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.
<PAGE> 10
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 ( effective rate
5.44% at December 31, 1997).
- 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 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 periods ended March 31, 1998 and 1997 were $538,120 and
$256,588 respectively. The increase of 110% is directly attributable to
availability of funds leading to better product availability, focused marketing
efforts and market conditions.
Over the period of the last six months the Corporation has developed four DESI
products, two of which have been provided by Sun 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 second half 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. Two 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. Although the products
are developed with utmost care, the Corporation cannot guarantee the success of
the bioequivalence studies, or FDA approval.
<PAGE> 11
COST OF SALES
Cost of sales for the periods ended March 31, 1998 and 1997 were $544,624 or
101.2% and $419,791 or 163.6% of sales, respectively. The reduced percentage in
cost of sales was a direct result of higher sales, lower personnel costs and
increased capacity utilization.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the periods ended March 31,
1998 and 1997 consist of costs which are generally fixed in nature and are
controlled at the minimum level needed to support the Corporations' low sales
volumes.
RESEARCH AND DEVELOPMENT
Product development expenses for the periods ended March 31, 1998 and 1997 were
$431,258 and $371,962, respectively, demonstrating 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.
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
Operating losses for the periods ended March 31, 1998 and 1997 were $856,322 and
$948,125 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.
<PAGE> 12
INTEREST EXPENSE
Interest expense, which is incurred primarily in connection with the
Corporation's mortgage obligation to the Economic Development Corporation of
Detroit, was $221,403 and $207,477 for the periods ended ended March 31, 1998
and 1997, respectively. The increase in interest expense relates to loans from
three (3) shareholder directors and Sun Global Inc used to finance the
Corporation's short-term cash requirements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Corporation maintained working capital of $994,114. 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 progressive reduction in the present
level of operating losses in 1998. However, increased investments in research
and development will be reflected in the Statement of Operations for 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.
OTHER MATTERS
On May 6, 1998, William R. Hurd filed a complaint in the Circuit Court for the
County of Wayne, State of Michigan against Caraco, Sun Pharma and Narendra
Borkar. Mr. Hurd, the former President of Caraco, has alleged among other
things, that Caraco, Sun Pharma (which owns approximately 39.9% of the
outstanding shares of Caraco) and Mr. Narendra Borkar ( the present Chief
Executive Officer of Caraco) made and breached promises of continued employment
when Caraco terminated his employment in December 1997. Mr. Hurd seeks actual,
special and exemplary damages, in excess of $25,000. While Caraco and the
other defendants believe that they have meritorious defenses to the allegations
made in the complaint and intend to vigorously defend themselves, the action
is in the preliminary stages and management is unable to predict the outcome.
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
On May 6, 1998, Mr. William R. Hurd filed a complaint in the Circuit
Court for the County of Wayne, State of Michigan against Caraco, Sun
Pharmaceutical Industries, Ltd. ("Sun") and Narendra Borkar, the Chief Executive
Officer of Caraco. Mr. Hurd, the former President of Caraco, has alleged, among
other things, wrongful termination of his employment in December 1997. Mr. Hurd
seeks damages in excess of $25,000. Caraco and the other defendants believe that
they have meritorious defenses to the allegations made in the complaint and
intend to vigorously defend themselves.
ITEM 6. EXHIBITS AND REPORTS
a. Financial Data Schedule
b. There was one report on Form 8-K filed first quarter 1998 on
February 17, 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
(Principal Executive and Financial Officer)
Chief Executive Officer (A duly
authorized signatory of the Company)
DATED: May 15, 1998
<PAGE> 14
EXHIBIT INDEX
EXHIBIT TABLE
NUMBER EXHIBIT PAGE
27 Financial Data Schedule 16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 724,181
<SECURITIES> 0
<RECEIVABLES> 397,827
<ALLOWANCES> 157,000
<INVENTORY> 606,445
<CURRENT-ASSETS> 2,070,008
<PP&E> 10,783,420
<DEPRECIATION> 2,864,954
<TOTAL-ASSETS> 9,988,475
<CURRENT-LIABILITIES> 1,075,894
<BONDS> 0
0
1,000,000
<COMMON> 27,830,340
<OTHER-SE> (32,156,918)
<TOTAL-LIABILITY-AND-EQUITY> 9,988,475
<SALES> 538,120
<TOTAL-REVENUES> 538,120
<CGS> 544,624
<TOTAL-COSTS> 544,624
<OTHER-EXPENSES> 692,818
<LOSS-PROVISION> 157,000
<INTEREST-EXPENSE> 221,403
<INCOME-PRETAX> (1,072,347)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,072,347)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
