<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, 1999
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 6, 1999 B 16,179,695 shares
The total number of pages is 14
<PAGE> 2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
BALANCE SHEET (Unaudited)
<TABLE>
<CAPTION>
ASSETS March 31,
1999
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 509,340
Accounts receivables, net of allowances of $160,000 475,575
Inventories 1,402,301
Prepaid expenses and deposits 132,860
------------
TOTAL CURRENT ASSETS 2,520,076
------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 197,305
Building and improvements 6,682,725
Equipment 4,009,498
Furniture and fixtures 165,319
------------
Total 11,054,847
Less: accumulated depreciation 3,438,371
------------
NET PROPERTY, PLANT & EQUIPMENT 7,616,476
------------
TOTAL ASSETS $ 10,136,552
============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 1,409,840
Accrued expenses 46,717
Accrued interest 665,603
Current portion of long-term debt 1,373,569
------------
TOTAL CURRENT LIABILITIES 3,495,729
------------
LONG-TERM LIABILITIES
Note payable - net of current portion 7,506,431
Notes payable to stockholders 2,790,000
Accrued interest 1,256,074
Preferred stock dividends payable 135,000
------------
TOTAL LONG-TERM LIABILITIES 11,687,505
------------
TOTAL LIABILITIES 15,183,234
------------
Stockholders' deficit
Preferred stock, no par value, authorized 5,000,000 shares; 1,000,000
issued and outstanding, 285,714 Series A shares
Common stock, no par value, authorized 20,000,000 shares; 29,390,840
issued and outstanding, 16,178,695 shares
Preferred stock dividends (135,000)
Accumulated deficit (35,302,522)
------------
TOTAL STOCKHOLDERS' DEFICIT (5,046,682)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 10,136,552
============
</TABLE>
SEE ACCOMPANYING NOTES
-2-
<PAGE> 3
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 879,446 $ 538,120
Cost of goods sold 858,857 544,624
-----------------------------------
GROSS PROFIT (DIFFERENTIAL) 20,589 (6,504)
-----------------------------------
Selling, general & administrative expenses 471,179 418,560
Research & development costs 1,169,649 431,258
-----------------------------------
OPERATING LOSS (1,620,239) (856,322)
-----------------------------------
Other income (expense)
Interest expense (206,621) (221,404)
Interest income 5,483 5,379
-----------------------------------
OTHER EXPENSE - NET (201,138) (216,025)
-----------------------------------
NET LOSS $ (1,821,377) $ (1,072,347)
===================================
NET LOSS PER BASIC AND DILUTED COMMON SHARE $ (0.11) $ (0.08)
===================================
</TABLE>
SEE ACCOMPANYING NOTES
-3-
<PAGE> 4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
January 1, 1998 285,714 $ 1,000,000 13,507,083 $ 27,830,340
Preferred dividend
Issuances of common stock
Net loss
Balance at March 31, 1998 285,714 $ 1,000,000 13,507,083 $ 27,830,340
=========================================================
Balance at
January 1, 1999 285,714 $ 1,000,000 14,528,000 $ 29,025,840
Preferred dividend
Issuances of common stock 1,650,695 365,000
Net loss
Balance at March 31, 1999 285,714 $ 1,000,000 16,178,695 $ 29,390,840
=========================================================
</TABLE>
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)
<TABLE>
<CAPTION>
COMMON
STOCK PREFERRED
SUBSCRIPTION STOCK ACCUMULATED
RECEIVABLE DIVIDENDS DEFICIT TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
January 1, 1998 $ (4,220,000) $ (60,000) $ (28,509,571) $ (3,959,231)
Preferred dividend (15,000) (15,000)
Issuances of common stock 1,720,000 1,720,000
Net loss (1,072,347) (1,072,347)
Balance at March 31, 1998 $ (2,500,000) $ (75,000) $ (29,581,918) $ (3,326,578)
===================================================================
Balance at
January 1, 1999 $ - $(120,000) $ (33,481,145) $ (3,575,305)
Preferred dividend (15,000) - (15,000)
Issuances of common stock 365,000
Net loss (1,821,377) (1,821,377)
Balance at March 31, 1999 $ - $(135,000) $ (35,302,522) $ (5,046,682)
===================================================================
</TABLE>
SEE ACCOMPANYING NOTES
-4-
<PAGE> 5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,821,377) $(1,072,347)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 150,000 128,550
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable (2,385) (91,180)
Inventories (132,758) (65,462)
Prepaid expenses and deposits 55,915 (53,905)
Accounts payable 561,524 (204,873)
Accrued interest and other expenses 157,370 99,277
------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,031,711) (1,259,940)
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (97,525) (158,735)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 365,000 1,720,000
Proceeds from long-term debt 450,000 -
------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 815,000 1,720,000
------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (314,236) 301,325
Cash and cash equivalents, beginning of period 823,576 422,856
------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 509,340 $ 724,181
==============================
</TABLE>
SEE ACCOMPANYING NOTES
-5-
<PAGE> 6
CARACO PHARMACEUTICAL LABORATORIES LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of March 31, 1999 and the related statements of operations,
stockholders' deficit and cash flows for the three months ended March 31, 1999
and 1998 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, 1999 and for the three months ended
March 31, 1999 and 1998 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, 1998.
The accounting policies followed by the Corporation with respect to the
unaudited interim financial statements are consistent with those stated in the
1998 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.
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); and
c) Two Caraco stockholder directors have each agreed to contribute to the
Corporation the equivalent of $500,000 in cash and/or in shares of
Caraco common stock, up to a maximum contribution of 250,000 shares
each.
Sun Pharma delivered all the $7.5 million investment and the two stockholder
directors have made their required contributions during 1998. In March 1999, the
Corporation also issued to Sun Pharma 1,269,333 common shares for delivery of
two ANDA products and one DESI product, the right for which was earned during
1998.
The Corporation has never achieved sales necessary to support operations. The
Corporation has, as of March 31, 1999, a stockholders' deficit of $5,046,682.
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.
Management's plans include reducing the stockholders' deficit with the infusion
of additional funding and generating operating profits by:
-6-
<PAGE> 7
- - Focusing on research and development with a staff of 14 scientists as
compared to 3 in the corresponding quarter of previous year.
Additionally, continued support from Sun Pharma having 26 researchers
working in India supporting Caraco's research and development efforts.
These personnel have a proven background in the pharmaceutical
development.
- - The research and development team has already established
bio-equivalence of four ANDA products, of which three have been filed
with the FDA for approval. Further, three DESI products have been
developed and are ready for marketing. The team is presently working on
21 products which are in different stages of development. There is no
assurance, however, that any of these products will be marketed. The
Corporation expects to complete the development of four to six products
each year.
- - The Corporation intends to increase the width and depth of its product
portfolio to serve the customers effectively.
- - With the increase in the number of products, as well as anticipated
volume increases for existing products, it is expected that
manufacturing capacity utilization will improve substantially over
time, resulting in better cost absorption and improved margins.
- - The Corporation will strive to enhance customer reach and achieve
customer satisfaction through reliable product deliveries.
- - The Corporation is presently evaluating alliances with leading
companies for manufacturing and development of new pharmaceutical
products
2. 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. 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.
The weighted average number of common shares outstanding (basic and diluted) for
the period ended March 31, 1999 and March 31, 1998 were 15,857,929 and
13,507,083, respectively.
3. MORTGAGE NOTE
EDC Loan
Debt at December 31, 1998 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.
-7-
<PAGE> 8
Effective April 2, 1993, and subsequently on August 5, 1997, the Corporation and
the EDC of the City of Detroit restructured the Agreement discussed above. The
amendments included:
- - The deferral of scheduled principal and interest payments until
February 1, 1999.
- - 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 of 5.78% at March 31, 1999).
As a condition of the deferral, the EDC was provided additional security on all
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
million during the deferral period, and abstaining from share redemption during
the payment deferral period. During the month of December 1998, the Corporation
approached the EDC regarding reconsideration of the repayment terms, which were
scheduled to begin in February 1999. The Corporation is currently renegotiating
the repayment schedule with the EDC and, as such, has not made the scheduled
February through April 1999 payments of approximately $168,000 for each month.
The Corporation intends to commence payments upon final resolution of the
amended terms.
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 amended agreements provide 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.
As of March 31, 1999 the Corporation has borrowed $750,000 from Sun Pharma,
evidenced by an unsecured demand note which accrues interest at 10%. The
stockholders currently have no intent of demanding payment within the upcoming
year; and therefore, the notes payable to stockholders have been classified as
long-term.
The notes with Sun Pharma 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.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
Sales
Net sales for the periods ended March 31, 1999 and 1998 were $879,446 and
$538,120 respectively. The increase of 63% is directly attributable to improved
cash position leading to better product availability. In addition, the
Corporation's focused marketing efforts, mix of generic drugs, sales to new
customers, sales of new products, and improved market conditions for generic
drugs have contributed to the sales increase.
Over the period of the last three months the Corporation has developed two DESI
products which are expected to be validated during the second quarter of 1999.
The Corporation is working on five promising candidates for ANDA submission
during 1999. In addition the Corporation has plans to commence development of
six products comprising both ANDA and DESI products. Although the products are
developed with utmost care, the Corporation cannot guarantee the success of the
bio-equivalence studies, or FDA approval.
During the 3 month period ended March 31, 1999 the Corporation has submitted
four ANDA applications to the US FDA for approval.
Gross Profit (Differential)
The Corporation posted a gross profit of $20,589 for the first three months of
1999, compared to a gross loss of $6,504 during the same period of 1998. The
increased margin was a direct result of a moderate increase in capacity
utilization.
Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses for the periods ended March 31,
1999 and March 31, 1998 were $471,179 and $418,560 respectively, representing an
increase of 13%. The increase in SG&A relates to an increase in chargebacks and
rebates due to increased sales. However, as the percentage of sales of SG&A was
lower at 54% in the first quarter ended March 31, 1999 compared to 78% for the
first quarter ended March 31, 1998.
Research and Development expenses
Research and Development expenses of $1,169,649 for the first quarter ended
March 31, 1999 were higher by 171%, when compared with $431,258 incurred during
the corresponding quarter of 1998. The substantial increase was mainly due to
increase in research personnel which numbered 14 at the end of first quarter of
1999 compared to three in the first quarter of 1998. The increased spending
represents the commitment of the Corporation to increase its focus in Research
and Development activities for future success.
Interest Expense
Interest expense, which is incurred primarily in connection with the
Corporation's mortgage obligation to the EDC was $206,621 and $221,404 for
periods ended March 31, 1999 and 1998, respectively.
-9-
<PAGE> 10
Results of Operations
Operating losses for the period ended March 31, 1999 and 1998 were $1,821,377
and $1,072,347 respectively. The operating losses are directly related to (1)
net sales, which were inadequate to absorb the fixed costs of the Corporation's
operational expenses and (2) increased research and development spending.
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 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 and other risks identified from time to time in
the Corporation's reports and registration statements filed with the Securities
and Exchange Commission.
Liquidity and Capital Resources
At March 31, 1999, the Corporation had negative working capital of $938,084
compared with working capital of $994,114 of the corresponding quarter of 1998.
The negative working capital for the quarter ended March 31, 1999 was mainly due
to the maturity of a portion of EDC debt and related accrued interest which has
been classified as current. To enable the Corporation to fund its research and
development activities and the increased working capital needs Sun Pharma has
established a $5.3 million unsecured credit line facility to be disbursed on an
as needed basis over a period of one year. As of March 31, 1999 the Corporation
received $750,000 from Sun Pharma.
OTHER MATTERS
Year 2000 Compliance
The Corporation uses computer hardware and financial and manufacturing software
that it purchased from third party suppliers. Such suppliers have confirmed to
the Corporation that such products are Year 2000 compliant. The corporation
plans to complete the installation of hardware and software during the second
quarter of 1999. Consequently, the Corporation does not expect to incur any
significant costs to become Year 2000 compliant. The Corporation has no
information concerning the Year 2000 compliance status of its suppliers or
customers. If any of the Corporation's significant suppliers or customers do not
successfully and timely become Year 2000 compliant, the Corporation's business
or operations could be adversely affected. The Corporation has not yet generated
any disaster contingency plans related to the Year 2000 compliance issue.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
-10-
<PAGE> 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS
a. The following exhibit is filed as part of this report and is attached
hereto:
EXHIBIT 10.72 - Renewal to Employment Agreement Robert
Kurkiewicz dated January 1, 1999
EXHIBIT 27 - Financial Data Schedule
b. There were no Form 8-K's filed during the first quarter of 1999.
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: May 12, 1999
-11-
<PAGE> 12
EXHIBIT INDEX
EXHIBIT TABLE
NUMBER EXHIBIT PAGE
- --------------------------------------------------------------------
10.72 Renewal to Employment Agreement 13
Robert Kurkiewicz dated January 1, 1999
27 Financial Data Schedule 14
-12-
<PAGE> 1
EXHIBIT 10.72
RENEWAL TO EMPLOYMENT AGREEMENT
This renewal to Employment Agreement (the "Renewal") is made this 1st
day of January, 1999, by and between Caraco Pharmaceutical Laboratories, Ltd.
(The "Company") and Robert Kurkiewicz ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee entered into an Employment
Agreement dated October 22, 1993 (the "Employment Agreement");
WHEREAS, the Company and Employee entered into an Amendment to that
Employment Agreement dated April 1, 1997 (the "Amended Employment Agreement");
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the parties covenant and agree that the following shall become
effective on January 1, 1999.
1. Existing Employment Agreement. Except as modified hereby, the
terms and conditions of the Employment Agreement shall continue in full force
and effect.
2. Salary. Paragraph 3(a) of the Amended Employment Agreement is
hereby amended by increasing the annual salary payable to Employee from $92,250
to $120,000. Except for the change in the amount of the annual salary, the
provisions of Paragraph 3(a) of the Employment Agreement continue in full force
and effect.
3. This Amended Employment Contract shall be for a term of four years
(4) renewable for successive one-year terms.
4. Exhibit B shall be amended to add a car allowance of $380.00 per
month.
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/Narendra N. Borkar EMPLOYEE:
Narendra N. Borkar
Its: Chief Executive Officer /s/Robert Kurkiewicz
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 509,340
<SECURITIES> 0
<RECEIVABLES> 635,575
<ALLOWANCES> 160,000
<INVENTORY> 1,402,301
<CURRENT-ASSETS> 2,520,076
<PP&E> 11,054,847
<DEPRECIATION> 3,438,371
<TOTAL-ASSETS> 10,136,552
<CURRENT-LIABILITIES> 3,495,729
<BONDS> 0
0
1,000,000
<COMMON> 29,390,840
<OTHER-SE> 35,437,522
<TOTAL-LIABILITY-AND-EQUITY> 10,136,552
<SALES> 879,446
<TOTAL-REVENUES> 879,446
<CGS> 858,857
<TOTAL-COSTS> 858,857
<OTHER-EXPENSES> 1,460,239
<LOSS-PROVISION> 160,000
<INTEREST-EXPENSE> 206,621
<INCOME-PRETAX> 1,821,377
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,821,377
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
