<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, 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 November 9, 1999 - 18,552,295 shares
-1-
<PAGE> 2
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PARTICULARS THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 604,945 $ 480,959 $ 2,289,203 $ 1,509,964
Cost of goods sold 594,758 370,960 2,239,325 1,388,492
----------------------------------------------------------------------------
GROSS PROFIT (DIFFERENTIAL) 10,187 109,999 49,878 121,472
----------------------------------------------------------------------------
Selling, general & administrative expenses 667,053 446,173 1,597,560 1,556,032
Research & development costs 1,156,361 892,975 3,357,482 2,096,717
----------------------------------------------------------------------------
OPERATING LOSS (1,813,227) (1,229,149) (4,905,164) (3,531,277)
----------------------------------------------------------------------------
Other income (expense)
Interest expense (422,705) (203,410) (864,730) (610,230)
Interest income 5,427 10,498 13,950 20,775
----------------------------------------------------------------------------
OTHER EXPENSE - NET (417,278) (192,912) (850,780) (589,455)
----------------------------------------------------------------------------
NET LOSS $(2,230,505) $(1,422,061) $(5,755,944) $ (4,120,732)
============================================================================
NET LOSS PER BASIC AND DILUTED COMMON SHARE $ (0.12) $ (0.11) $ (0.31) $ (0.31)
===========================================================================
</TABLE>
SEE ACCOMPANYING NOTES
-2-
<PAGE> 3
CARACO PHARMACEUTICAL LABORATORIES LTD.
BALANCE SHEET (Unaudited)
<TABLE>
<CAPTION>
PARTICULARS Sept 30,
1999
- ------------------------------------------------------------------------------------------------------
ASSETS Amount (USD)
- ------------------------------------------------------------------------------------------------------
<S> <C>
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 566,321
Accounts receivables, net of allowances of $107,000 397,888
Inventories 1,578,836
Prepaid expenses and deposits 70,650
------------
TOTAL CURRENT ASSETS 2,613,695
------------
PROPERTY, PLANT AND EQUIPMENT - AT COST
- ---------------------------------------
Land 197,305
Building and improvements 6,682,725
Equipment 4,126,530
Furniture and fixtures 165,319
Total 11,171,879
Less: accumulated depreciation 3,714,071
------------
NET PROPERTY, PLANT & EQUIPMENT 7,457,808
------------
TOTAL ASSETS $ 10,071,503
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------------------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 846,418
Accrued expenses 233,574
Accrued interest 794,528
Current portion of long-term debt 1,974,285
------------
TOTAL CURRENT LIABILITIES 3,848,805
------------
LONG-TERM LIABILITIES
- ---------------------
Note payable - net of current portion 6,905,715
Notes payable to stockholders 6,415,000
Accrued interest 1,717,232
Preferred stock dividends payable 165,000
------------
TOTAL LONG-TERM LIABILITIES 15,202,947
------------
TOTAL LIABILITIES 19,051,752
------------
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; 29,421,840
issued and outstanding, 18,552,295 shares
Preferred stock dividends (165,000)
Accumulated deficit (39,237,089)
------------
TOTAL STOCKHOLDERS' DEFICIT (8,980,249)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 10,071,503
============
</TABLE>
SEE ACCOMPANYING NOTES
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<PAGE> 4
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
PARTICULARS NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,755,944) $ (4,120,732)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 425,700 428,812
Non cash interest expense 745,688
Changes in operating assets and liabilities
which provided (used) cash:
Accounts receivable 75,301 (360,456)
Inventories (309,293) (459,927)
Prepaid expenses and deposits 118,125 237,951
Accounts payable (1,899) (55,806)
Accrued expenses 188,624 388,498
----------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,513,698) (3,941,660)
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (214,557) (338,024)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 396,000 4,220,000
Proceeds from long-term debt 4,075,000
---------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 4,471,000 4,220,000
----------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (257,255) (59,684)
Cash and cash equivalents, beginning of period 823,576 422,856
----------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 566,321 $ 363,172
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
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<PAGE> 5
CARACO PHARMACEUTICAL LABORATORIES, LTD.
STATEMENTS 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 September 30, 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 4,024,295 396,000
Net loss
Balance at September 30, 1999 285,714 $ 1,000,000 18,552,295 $29,421,840
=====================================================================================
<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 (45,000) (45,000)
Issuances of common stock 4,220,000 4,220,000
Net loss (4,120,732) (4,120,732)
Balance at September 30, 1998 $ -- $ (105,000) $ (32,630,303) $ (3,904,963)
=================================================================================================
Balance at
January 1, 1999 $ -- $ (120,000) $ (33,481,145) $ (3,575,305)
Preferred dividend (45,000) -- (45,000)
Issuances of common stock 396,000
Net loss (5,755,944) (5,755,944)
Balance at September 30, 1999 $ -- $ (165,000) $ (39,237,089) $ (8,980,249)
=================================================================================================
</TABLE>
See accompanying notes
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<PAGE> 6
CARACO PHARMACEUTICAL LABORATORIES LTD.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The balance sheet as of September 30, 1999 and the related statements of
operations, stockholders' deficit and cash flows for the nine months ended
September 30, 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 September 30, 1999 and for the nine months ended
September 30, 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
Sun Pharma agreed to invest $7,500,000 in cash in exchange for 5,300,000 shares
of Caraco common stock. )). Sun Pharma has delivered all of the $7.5 million
investment. Sun also agreed to sell 25 products over a period of 5 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). The
corporation has issued shares to Sun Pharma and its subsidiary Sun
Pharmaceutical Advanced Research Centre Private Limited (SPARC) in lieu of
technology transfer of 6 ANDA and 2 DESI products in favor of the Corporation.
The Corporation has never achieved sales necessary to support operations. The
Corporation has, as of September 30, 1999, a stockholders' deficit of
$8,980,249. 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:
- - Focusing on research and development with a staff of 14 scientists as
compared to 6 in the corresponding period 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.
-6-
<PAGE> 7
- - The research and development team has already established
bio-equivalence of seven ANDA products, of which five have been filed
with the FDA for approval along with one product for which
bio-equivalence is not required and which has been filed with the FDA,
bringing the total to 6 for ANDA applications made to FDA. Further,
four DESI products have been developed and are launched. 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 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, 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 periods ended September 30, 1999 and September 30, 1998 were 16,097,374 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.
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.
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<PAGE> 8
- - On February 1, 1999, the Corporation was to 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. In July 1999, the EDC sent to the
Corporation drafts of the third note and mortgage modification agreement for its
review. The Corporation reviewed the draft with its attorneys and has forwarded
the document to the EDC with certain modifications. Pending resolution of the
amended terms, the Corporation has not made the scheduled February through
October 1999 payments. 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
stockholder directors of the corporation and $890,000 from three stockholder
directors of the Corporation, including the two shareholder directors previously
mentioned. 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. The Corporation and the
note holders are reviewing their options and no decision has been made regarding
converting the notes to cash or stock at this time.
As of September 30, 1999 the Corporation has borrowed $4,375,000 from Sun
Pharma, evidenced by an unsecured demand note which accrues interest at 10%. Sun
Pharma currently has no intent of demanding payment within the upcoming year;
and therefore, the notes payable to Sun Pharma 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 nine months periods ended September 30, 1999 and 1998 were
$2,289,203 and $1,509,964 respectively. For the third quarter ended September
30, 1999 net sales were $604,945 compared to $480,959 for the corresponding
quarter of the previous year showing an increase of over 25%. The increase of
over 25% is directly attributable to improved cash flow position. This has lead
to better product availability and increased inventory holding capacity to the
Corporation to increase production and sales. In addition, the Corporation's
focused marketing efforts, mix of generic drugs, sales of new products, and
improved market conditions for generic drugs have contributed to the sales
increase.
Gross Profit
The Corporation posted a gross profit of $49,878 for the first nine months of
1999, compared to $121,472 during the same period of 1998. Gross profit for the
quarter ended September 30, 1999 was $10,187 compared to $109,999 recorded in
the corresponding quarter in 1998. The margin in 1999 takes into account
capitalized cost of production labor and overheads in the inventories of bulk
tablets, work in progress and finished goods amounting to $124,615.
Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses for the nine months periods ended
September 30, 1999 and September 30, 1998 were $1,597,560 and $1,556,032
respectively, representing an increase of 3%. For the quarter ended September
30, 1999 SG&A was $667,053 as against $446,173 for a similar period in 1998.
Research and Development expenses
Research and Development expenses of $3,357,482 for the nine months periods
ended September 30, 1999 were higher by 60%, when compared with $2,096,717
incurred during the corresponding period of 1998. R&D expenses for the quarter
ended September 30, 1999 were $1,156,361 as against $892,975 in the
corresponding period of the previous year. The substantial increase was mainly
due to increase in research personnel, which numbered 14 at the end of September
30, 1999 compared to nine during the same period in 1998. The increased spending
represents the commitment of the Corporation to increase its focus in Research
and Development activities for future success.
The Corporation is working on five promising candidates for ANDA submission
during 1999 and early 2000. As of September 30, 1999 the Corporation has
submitted six ANDA applications to the US FDA for approval. In addition the
corporation has 21 products in the pipeline at various stages of development.
Although the products are developed with utmost care, the Corporation cannot
guarantee the success of the bio-equivalence studies, or FDA approval.
Interest Expense
Interest expense, which is incurred primarily in connection with the
Corporation's mortgage obligation to the EDC was $864,730 and $610,230 for
periods ended September 30, 1999 and 1998, respectively. Interest expense for
the quarter ended September 30, 1999 was $422,705 compared with $203,410 during
the same period in 1998.
-9-
<PAGE> 10
Results of Operations
Operating losses for the period ended September 30, 1999 and 1998 were
$4,905,164 and $3,531,277 respectively. For the third quarter ended September
30, 1999 the operating loss was $1,813,227 as against $1,229,149 during the
corresponding period of 1998. 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.
Liquidity and Capital Resources
At September 30, 1999, the Corporation had negative working capital of
$1,235,110 compared with working capital of $841,508 of the corresponding period
of 1998. The negative working capital for the period ended September 30, 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 September
30, 1999 the Corporation has received $4,375,000 from Sun Pharma through this
credit facility.
OTHER MATTERS
Year 2000 Compliance
The Corporation uses computer hardware and financial and manufacturing software
that it purchased from third party suppliers. The corporation with the
assistance of these third party suppliers has installed new hardware and
software during the third quarter of 1999 at a cost of $20,000. The suppliers
have confirmed to the corporation that the newly installed products are 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
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
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<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
A. The following exhibit is filed as part of this report and is attached
hereto:
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
B. There were no Form 8-K's filed during the third quarter of 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
By:/s/ Narendra N. Borkar
------------------------
Narendra N. Borkar
Chief Executive Officer (a duly
Authorized Signatory of the
Corporation)
Dated: November 9, 1999
-11-
<PAGE> 12
EXHIBIT INDEX
EXHIBIT TABLE
NUMBER EXHIBIT PAGE
27 Financial Data Schedule 13
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 566,321
<SECURITIES> 0
<RECEIVABLES> 504,888
<ALLOWANCES> 107,000
<INVENTORY> 1,578,836
<CURRENT-ASSETS> 2,613,695
<PP&E> 11,171,879
<DEPRECIATION> 3,714,071
<TOTAL-ASSETS> 10,071,503
<CURRENT-LIABILITIES> 3,848,805
<BONDS> 0
0
1,000,000
<COMMON> 29,421,840
<OTHER-SE> 39,402,089
<TOTAL-LIABILITY-AND-EQUITY> 10,071,503
<SALES> 2,289,203
<TOTAL-REVENUES> 2,289,203
<CGS> 2,239,325
<TOTAL-COSTS> 2,239,325
<OTHER-EXPENSES> 4,955,042
<LOSS-PROVISION> 107,000
<INTEREST-EXPENSE> 864,730
<INCOME-PRETAX> (5,755,944)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,755,944)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
