version of Forest’s Lexapro® (escitalopram oxalate) drug product infringed Forest’s Patent No. Re. 34,712, which is set to expire on September 13, 2011. Forest seeks an order from the court which, among other things, directs the FDA not to approve Caraco’s ANDA any earlier than the claimed expiration date. The ANDA filed by Caraco contained a Paragraph IV Certification challenging the Forest patent. The Corporation believes that the Forest patent is invalid and/or will not be infringed by Caraco’s manufacture, use or sale of the product, and the Corporation intends to vigorously defend this action. Prior to this action, Forest has filed two lawsuits with other manufacturers who sought to market a generic version of Lexapro®. Forest settled the lawsuit with Alphapharm Pty. Ltd. in October 2005, granting Alphapharm the exclusive right to distribute generic versions of Lexapro® for five years. Alphapharm’s launch date is dependent on a number of factors but is set to be no later than two weeks before the claimed expiration of the Forest patent on September 13, 2011. On July 13, 2006, Forest obtained an order from the United States District Court for the District of Delaware, holding that IVAX Pharmaceuticals, Inc. and CIPLA Ltd.’s proposed generic version of Lexapro® infringed the Forest patent and that the asserted claims of the Forest patent are valid and enforceable.

As previously disclosed, on June 9, 2005, Novo Nordisk A/S and Novo Nordisk, Inc. (“Novo Nordisk”) filed a complaint in the United States District Court for the Eastern District of Michigan alleging that the Corporation’s filing of an ANDA seeking approval to market its generic version of Novo Nordisk’s Prandin® drug product infringed Novo Nordisk’s patent, which expires June 12, 2018. Novo Nordisk seeks an order from the Court which, among other things, directs the FDA not to approve Caraco’s ANDA any earlier than the claimed expiration date. The ANDA filed by Caraco contains a Paragraph IV certification challenging the Novo Nordisk patent. The Corporation believes that the Novo Nordisk patent is invalid and/or will not be infringed by Caraco’s manufacture, use or sale of the product, and the Corporation intends to vigorously defend this action in order to capitalize on the potential 180 days of marketing exclusivity available for this product.

As previously disclosed, on September 22, 2004, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a complaint in the United States District Court for the Eastern District of Michigan alleging that the Corporation’s filing of an ANDA seeking approval to market its generic version of Ortho-McNeil’s Ultracet® brand tramadol/acetaminophen drug product infringed Ortho-McNeil’s patent, which expires on September 6, 2011. Ortho-McNeil seeks an order from the Court which, among other things, directs the FDA not to approve Caraco’s ANDA any earlier than the claimed expiration date. The ANDA filed by Caraco contained a Paragraph IV Certification challenging the Ortho-McNeil patent. The corporation believes that the Ortho-McNeil patent is invalid and/or will not be infringed by Caraco’s manufacture, use or sale of the product, and the corporation intends to vigorously defend this action. Since this action, Ortho-McNeil has entered into a license agreement with another manufacturer who has launched its product generically while another manufacturer has launched its approved generic at risk. On October 8, 2005, arguments were heard in the US District Court in the Eastern District of Michigan, on the Corporation’s motion for summary judgment on the issue of non- infringement. On October 19, 2005 the motion for summary judgment was granted in the Corporation’s favor. On December 19, 2005, the FDA approved the manufacture, use and sale of the product. Ortho-McNeil has filed an appeal of the finding of non-infringement by the Eastern District of Michigan. Additionally, the United States Patent and Trademark Office has approved Ortho-McNeil’s request for a reissue patent which will be in effect August 2006. Although the district court determined that we do not infringe the original patent , it is possible Ortho-McNeil could contend that its reissue patent will be infringed by Caraco’s now-marketed product. The Corporation believes that, like its original patent, Ortho-McNeil’s reissue patent will be invalid and unenforceable.

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As previously disclosed, on February 12, 2003, C. Arnold Curry filed a complaint in the Wayne County Circuit Court alleging breach of a written employment agreement. Dr. Curry sought 175,000 shares of the Corporation’s common stock (35,000 shares for each of the first five ANDAs approved by the FDA). The corporation and the plaintiff each filed a motion for summary disposition. Both parties’ motions were denied, and the parties submitted the matter to binding arbitration. In connection with the submission to arbitration, the parties agreed that Mr. Curry would receive a minimum of 15,000 shares of common stock. On April 20, 2006, the arbitrator entered a determination of no cause of action against Mr. Curry and in favor of the Corporation, thus capping the Corporation’s liability to Mr. Curry at 15,000 shares. The Corporation has recorded an expense of approximately $116,000 related to the 15,000 shares earned by Mr. Curry.

 

The Corporation is involved in certain legal proceedings from time to time incidental to normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Corporation does not believe the ultimate resolution of any existing matters would have a material adverse effect on its financial position or results of operations.

 

13.	INVENTORIES

Inventories consist of the following amounts:

 

			June 30, 2006			March 31, 2006
	Raw materials		$	9,776,451		$	9,735,502
	Goods in transit			4,873,398			5,974,600
	Work in process			3,927,249			3,283,911
	Finished goods			10,010,626			7,971,677
	Total		$	28,587,724		$	26,965,690

 

 

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REVIEW REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

July 18, 2006

 

Stockholders and Board of Directors

Caraco Pharmaceutical Laboratories, Ltd.

Detroit, Michigan

 

We have reviewed the balance sheet of Caraco Pharmaceutical Laboratories, Ltd. as of June 30, 2006 and the related statements of operations, stockholders’ equity, and cash flows for the three months ended June 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Caraco Pharmaceutical Laboratories, Ltd. as of March 31, 2006, (presented herein) and the related statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated May 7, 2006, we expressed an unqualified opinion on those financial statements.

 

 

 

 

5750 New King Street o Suite 200 o Troy, MI 48098 o 248.952.5000 o Fax 248.952.5750 o www.rehmann.com

 

 

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that management believes is relevant to an understanding of the Corporation’s results of operations and financial condition. The discussion should be read in conjunction with the financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s 2006 Annual Report on Form 10-K as of and for the year ended March 31, 2006 (the “Annual Report”) and the unaudited interim financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 to our financial statements included in our Annual Report. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require management’s subjective judgments. As a result, these judgments are subject to an inherent degree of uncertainty. In applying these policies, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include, but are not limited to, provisions for estimated customer returns, discounts, rebates and other price adjustments, including customer chargebacks, valuation allowances for deferred tax assets, and valuation of overhead components in inventory. Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. There have neither been material changes to our critical accounting policies for the periods presented nor any material quantitative revisions to our critical accounting estimates for the periods presented.

Revenue Recognition

Revenue from product sales, net of estimated provisions, is recognized when there is persuasive evidence that an arrangement exists, shipment of the goods has occurred, the selling price is fixed or determinable, and collectibility is reasonably probable. Our customers consist primarily of large pharmaceutical wholesalers who sell directly into the retail channel. Provisions for sales discounts, and estimates for chargebacks, rebates, and product returns are established as a reduction of product sales revenue at the time revenues are recognized, based on historical experience and current market trends adjusted to reflect known changes in the factors that impact these reserves. These revenue reductions are reflected as a direct reduction to accounts receivable through an allowance.

Chargebacks

Chargebacks represent our most significant provision against gross accounts receivable and related reduction to gross revenue. Chargebacks are credits given to our wholesale customers for the price difference on our product they sell (at a contractual price) to retail, chain stores, and managed care organizations at prices lower than we sell to our wholesale customer. We record an estimate at the end of the reporting period to the wholesaler of the amount to be charged back to us, over and above those already received by us. Such estimated amounts, in addition to certain other deductions, are deducted from our gross sales to determine our net revenues. We have recorded provisions for chargebacks based upon various factors, including current contract prices, historical trends, and our future expectations. The amount of actual chargebacks claimed could be either higher or lower than the amounts we accrued. Changes in our estimates, if any, would be recorded in the income statement in the period of the change.

 

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If we over or under estimate the amount that will ultimately be charged back to us by our wholesaler customers, there could be a material impact on our financial statements.

We consider the following factors in the determination of the estimates of chargebacks.

1.     We consider the historical data of chargebacks as a percentage of sales, as well as the various chargeback reports that we receive from the customers.

2.      Volume of product sold to wholesalers and the average chargeback rates, on a quarterly and annualized basis are applied to current period and annual product sales to make a realistic accrual.

3.     The sales trends for future estimated prices, wholesale acquisition cost (WAC), the contract prices with the retailers, chain stores and managed care organizations (end-users). Our prices with the wholesalers and end users are contracted prices.

Shelf Stock Adjustments

Shelf stock adjustments are credits issued to our customers to reflect decreases in the selling prices of our product. These credits are customary in the industry and are intended to reduce the customers’ inventory cost to better reflect current market prices. The determination to grant a shelf stock adjustment to a customer following a price decrease is at our discretion.

Factors considered when recording a reserve for a shelf stock adjustments include estimated launch dates of competing products based on market intelligence, estimated decline in market price of our product based on historical experience and input from customers and levels of inventory held by customers at the date of the adjustments as provided by them.

Product returns and other allowances

In the pharmaceutical industry, customers are normally granted the right to return product for credit if the product has not been used prior to its expiration date. Our return policy typically allows product returns for products within a 12-month window from six months prior to the expiration date and up to six months after the expiration date. We estimate the level of sale, which will ultimately be returned pursuant to our return policy, and record a related reserve at the time of sale. These amounts are deducted from our gross sales to determine our net revenues. Our estimates take into consideration historical returns of our products and our future expectations. We periodically review the reserves established for returns and adjust them based on actual experience, if necessary. The primary factors we consider in estimating our potential product returns include shelf life of expiration date of each product and historical levels of expired product returns. In case we become aware of any returns due to product related issues, such information from the customers, is used to estimate an additional reserve. The amount of actual product return could be either higher or lower than the amounts we accrued. Changes in our estimates, if any, would be recorded in the income statement in the period of the change. If we over or under estimate the quantity of product which will ultimately be returned, there may be a material impact to our financial statements.

Discounts (trade and prompt payment discounts) are accrued at the end of every reporting period based on the gross sales made to the customers during the period and based on their terms of trade. We review the contracts between the customer and us as well as the historical data and percentages to estimate the discount accrual.

 

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Customer rebates are estimated at every period end, based on direct or indirect purchases. If the purchases are direct, the rebates are recognized when products are purchased and a periodic credit is given. For indirect purchases, the rebates are recognized based on the terms with such customer. Medicaid Rebates are estimated based on the historical data we receive from the public sector benefit providers, which is based on the final dispensing of our product by a pharmacy to a benefit plan participant.

 

Doubtful Accounts

Doubtful accounts are estimated based on the data available from external sources, including information on financial condition of customers. Also, a regular review of past due receivables is done on a quarterly basis to identify and make provision for such receivables not expected to be recovered.

Our gross sales for the first quarter of fiscal 2007 ended June 2006 were $64.3 million, as compared to $43.2 million for the corresponding period of fiscal 2006. Chargebacks, returns, discounts and other customary customer deductions and other sales costs constituted approximately 61% for the first quarter of fiscal 2007 ended June 2006 compared to 59% for the corresponding period of fiscal 2006. Net sales for the first quarter of fiscal 2007 ended June 2006 were $24.8 million, as compared to $17.6 million for the corresponding period of fiscal 2006. The primary cause of increase in the sales allowances by almost 2% between the periods is the impact of price erosions for the products we sell and the corresponding impact of such price erosions on chargebacks

The following is a roll forward of the provisions for chargebacks, shelf stock adjustments, returns and allowances and estimated doubtful account allowances during fiscal 2006 and the first quarter of fiscal 2007.

 

 

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($ in Thousands)

	Balances at beginning of period	Allowances charged to Gross Sales		Credits taken by customers	Balance at the end of period
		Current Period	Prior Period
For fiscal 2006
Chargebacks & shelf stock adjustments	$19,810	$ 111,525	-0-	$119,868	$11,467
Returns and other allowances	1,120	7,471	-0-	7,091	1,500
Doubtful Accounts	100	-0-	-0-	-0-	100
For first quarter fiscal 2007
Chargebacks & shelf stock adjustments	$11,467	$36,662	-0-	$32,654	$15,475
Returns and other allowances	1,500	2,400	-0-	1,277	2,623
Doubtful Accounts	100	-0-	-0-	-0-	100

 

Income Taxes

As part of the process of preparing our financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes by the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted laws and statutory tax rates applicable for the differences that are expected to affect taxable income. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We have not recorded any federal tax provision or benefit for the first quarter of fiscal 2007, and fiscal 2006. We have provided a valuation allowance for the full amount of our net deferred tax assets since realization of any future benefit from deductible temporary differences and net operating loss carry forwards cannot be sufficiently assured at June 30, 2006 and March 31, 2006 At June 30, 2006, we had federal net operating loss carryforwards of approximately $53.8 million available to reduce future

 

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taxable income, which will expire between 2007 and 2017. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may result in a limitation on the amount of net operating loss carry forwards which can be used in future years. We believe that ownership changes to date will not limit future utilization of net operating loss carryforwards.

 

Inventory

We value inventories at the lower of cost or market. We determine the cost of raw materials, work in process and finished goods using the specific identification cost method. We analyze our inventory levels quarterly and write down inventory that has become obsolete and inventory that has a cost basis in excess of its expected net realizable value. Expired inventory is disposed of and the related costs are written off. Materials acquired for R&D on products yet to be launched are written off in the year of acquisition. The determination of whether or not inventory costs will be realizable requires estimates by management. A critical estimate in this determination is the estimate of the future expected inventory requirements, whereby we compare our internal sales forecasts to inventory on hand. Actual results may differ from those estimates and inventory write-offs may be required. We must also make estimates about the amount of manufacturing overhead to allocate to our finished goods and work in process inventories. Although the manufacturing process is generally similar for our products, we must make judgments as to the portion of costs to allocate to purchased product, work in process and finished goods, and such allocations can vary based upon the composition of these components and the fact that each product produced does not necessarily require the same amount of time or effort for the same production step. Accordingly, the assumptions we make can impact the value of reported inventories and cost of sales.

 

OVERVIEW

The first quarter of fiscal 2007 ended June 30, 2006 represents 21 quarters of successive sales revenue growth. During the first quarter of fiscal 2007 ended June 30, 2006, we recorded net sales of $24.8 million compared to $17.6 million during the corresponding period of fiscal 2006. We incurred $6.1 million in R&D expense during the first quarter of fiscal 2007 ended June 30, 2006 compared to $4.9 million during the corresponding period of fiscal 2006. This included $4.4 million in non-cash R&D expense compared to $3.2 million during the corresponding period. We generated cash from operations of $6.8 million during the first quarter of fiscal 2007 ended June 30, 2006 compared to utilization of $0.8 million during the corresponding period of fiscal 2006. We earned net income of $5.0 million during the first quarter of fiscal 2007 ended June 30, 2006 compared to net income of $1.6 million during the corresponding period of fiscal 2006. At June 30, 2006, we had stockholders’ equity of $65.7 million as compared to stockholders’ equity of $36.6 million at June 30, 2005.

 

FDA COMPLIANCE

The FDA completed an inspection of the Company’s facility in June 2006. Observations were provided on FDA Form 483. The Company has responded appropriately. The Company believes that the observations are not material and we remain substantially cGMP compliant. We have since received approval from the FDA for two products previously submitted.

 

 

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First Quarter Fiscal 2007 Compared to First Quarter Fiscal 2006

Net Sales. Net sales for the first quarter of fiscal 2007 was $24.8 million compared to $17.6 million for the corresponding period of fiscal 2006, reflecting an increase of 41%. The increase is due to the higher production and increased marketing of our products to new and existing customers and in part due to the recent launch of Tramadol Hydrochloride with Acetaminophen. Currently, we manufacture and market all except two of the approved products. Sales of four products accounted for approximately 73% of net sales for the first quarter of fiscal 2007 as compared to sales of three products accounting for approximately 82% of net sales during corresponding period of fiscal 2006.

.

Gross Profit. We earned gross profit of $13.0 million during the first quarter of fiscal 2007 as compared to gross profit of $8.2 million during the corresponding period of fiscal 2006, reflecting an increase of 58.5%. The increase in gross profit was primarily due to higher sales and an improved balance in the mix of customers or the class of trade and product selection being sold.

The gross profit margin for the first quarter of fiscal 2007 increased to 53% as compared to 46% during corresponding period of fiscal 2006. The increase was primarily the result of change in product mix and improved balance in the mix of customers or the class of trade. The 53% profit margin reflects a 2% improvement over the last quarter of fiscal 2006 profit margin, primarily due to mix of products being sold during the quarter partially offset by price erosion.

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the first quarter of fiscal 2007 were $2.1 million compared to $1.7 million during the corresponding period of fiscal 2006, representing an increase of 24%. The selling, general and administrative expenses, as a percentage of net sales, has declined to 8.6% for the first quarter of fiscal 2007, as compared to 9.7% for the corresponding period of fiscal 2006.

Research and Development Expenses. Total R&D expenses for the first quarter of fiscal 2007 were $6.1 million as compared to $4.9 million during the corresponding period of fiscal 2006. Actual cash research and development expenses were $1.7 million during the first quarter of fiscal 2007 compared to $1.6 million during the corresponding period of fiscal 2006. We incurred non-cash research and development expenses (technology transfer cost) of $4.4 million for one product transfer during the first quarter of fiscal 2007, as compared to $3.2 million for one product transfer during the corresponding period of fiscal 2006. Each product transfer earns 544,000 shares of preferred stock. The cash R&D expenses during the first quarter of fiscal 2007 were slightly higher compared to those during the corresponding period of fiscal 2006 due to increased R&D activity.

Results of Operations. We earned net income of $5.0 million in the first quarter of fiscal 2007 as compared to net income of $1.6 million during the corresponding period of fiscal 2006.

 

Liquidity and Capital Resources

We generated cash from operations of $6.8 million during the first quarter of fiscal 2007 as compared to utilization of cash of $0.8 million from operations during the corresponding period of fiscal 2006. Accounts receivable increased by $1.9 million to $22.8 million during the first quarter of fiscal 2007 as compared to $20.9 million at the end of fiscal 2006.

 

At June 30, 2006 we had working capital of $49.9 million compared to working capital of $23.7 million at June 30, 2005. We had working capital of $41.4 million at March 31, 2006. The increase in working capital in fiscal 2007 is primarily in cash and some increase in accounts receivable and inventory balances resulting from higher sales volumes. Additionally we have available the $10.0 million line of

 

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credit obtained through JP Morgan Chase Bank, N.A. which would allow us flexibility in expansion efforts to increase our capacity over the next few years.

 

Future Outlook

We believe the competitive environment we find ourselves in is conducive to our success. Due to our size and management structure, we believe that we are able to move swiftly and effectively. We are disciplined and have the ability to execute our plan. We believe we are substantially compliant with cGMPs. We have received one ANDA approval subsequent to the most recent quarter. Currently, we have 15 products pending approval at the FDA. We continue to expand and upgrade our facilities and improve our customer base. Our efforts, combined with Sun Global in developing new products have also picked up momentum and this should permit us to grow at a reasonable level. We now have five products, Metformin, Metoprolol, Tramadol, Salsalate and Tramadol with Acetaminophen whose market share is ranked third or higher against the same products of our generic competitors. Based on current trends, we believe we will achieve 25-30% growth for fiscal 2007 compared to fiscal 2006.

We are confident that, although gross profit margins may come down due to price erosion, our sales growth, product portfolio improvements and execution of our plans will offset any long-term impact. However, should the pricing pressures become more severe than anticipated; the result may be lower growth rates and gross margins. Management has and will continue to work diligently to counter the pricing pressures through increased sales volumes, expansion of our customer base, improved productivity, better-cost absorption of operational overheads, cost reductions and increased development plans.

As disclosed, under the products agreement dated November 21, 2002 between Sun Global and the Company, Sun Global has agreed to transfer the technology for 25 products to the Company over a five year period in exchange for 544,000 preferred shares (which are convertible on a one-to-one basis into common shares) per product. Since the date of the products agreement, the Company has selected all 25 products for development and twenty two of these products have passed their respective bio-equivalency studies..

While the development of new products will increase our cash R&D expense and will impact EPS, we expect that cash will be available, among other things, to meet increased working capital requirements, fund potential Paragraph IV Certification litigation and finance further capital investments.

The Company will continue to aggressively move forward with the development of new products. We believe that receiving products from Sun provides us with a partner with a proven track record; one that already has provided us with quality products. Moreover, Sun Pharma’s increased beneficial ownership in us to approximately 64% (approximately 75.2% including the convertible Series B Preferred Stock), should, we believe, provide it with the incentive to continue to help us succeed. Sun Pharma has previously provided us with capital, loans, guarantees of loans, personnel, raw materials and equipment, which have significantly helped us to date.

 

Management’s plans for fiscal 2007 include:

•

Continued focus and improvement on FDA compliance.

•

Increased pace of research and development activities, with a view to maximize the number of ANDA filings.

•

Continue to invest in equipment and facilities to expand capacity to meet requirements of

 

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projected short term and long term growth.

•

Increased market share for certain existing products and recently introduced new products and enhanced customer reach and satisfaction.

•

Prompt introduction of new approved products to the market.

•

Achieving further operational efficiencies by attaining economies of scale and cost reduction per unit.

•

Increase the number of products, as well as anticipated volume increases for existing products, which, in turn, will improve manufacturing capacity utilization.

•

Consider alternative ways of increasing cash, such as marketing ANDAs owned by Sun Pharma,

•

Expand our relationships with financial institutions to fortify our credit position and borrowings as necessary.

•

Research alternate product development sources and product licenses such as in licensing authorized generics from brand innovator companies and acquisitions of ANDAs from competitor manufacturers both domestically and abroad.

Forward Looking Statements

This report, other than the historical financial and business information, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Without limitation, the words “believes,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. Those statements include statements regarding our intent, belief, and current expectation. These statements are not guarantees of future performance and are subject to risks and uncertainties that cannot be predicted or quantified. Consequently, actual results could differ materially from those expressed or implied by such forward-looking statements.

Such risks and uncertainties include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment; (ii) not obtaining FDA approval for new products or delays in receiving FDA approvals; (iii) governmental restrictions on the sale of certain products; (iv) dependence on key personnel; (v) development by competitors of new or superior products or cheaper products or new technology for the production of products or the entry into the market of new competitors; (vi) market and customer acceptance and demand for new pharmaceutical products; (vii) availability of raw materials in a timely manner, at competitive prices, and in required quantities; (viii) timing and success of product development and launch; (ix) integrity and reliability of the Company’s data; (x) lack of success in attaining full compliance with regard to regulatory and cGMP compliance; (xi) experiencing difficulty in managing our recent rapid growth and anticipated future growth; (xii) dependence on limited customer base; (xiii) occasional credits to certain customers reflecting price reductions on products previously sold to them and still available as shelf-stock; (xiv) possibility of an incorrect estimate of charge-backs and the impact of such an incorrect estimate on net sales, gross profit and net income; (xv) dependence on few products generating majority of sales; (xvi) product liability claims for which the Company may be inadequately insured; (xvii) subjectivity in judgment of management in applying certain significant accounting policies derived based on historical experience, terms of contracts, our observations of trends of industry, information received from our customers and other sources, to estimate revenues, accounts receivable allowances including chargebacks, rebates, income taxes, values of assets and inventories; (xviii) litigation involving claims of patent infringement; (xix) litigation involving claims for royalties and/or options relating to a prior contract for one product and (xx) other risks identified in this report and identified from time to time in our reports and

 

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registration statements filed with the Securities and Exchange Commission (see our Annual Report, Part I, Item 1A, for more detailed discussion of such risks). These forward-looking statements represent our judgment as of the date of this report. We disclaim, however, any intent or obligation to update our forward-looking statements.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no debt or other market risk securities or transactions in foreign exchange.

 

ITEM 4.

CONTROLS AND PROCEDURES

a.) The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in providing them with material information relating to the Company known to others within the Company which is required to be included in our periodic reports filed under the Exchange Act.

b. There has been no change in the Company’s internal control over financial reporting that occurred during the first quarter of fiscal 2007 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II -- OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

The information presented in Note 12 of Part I, Notes to Financial Statements, is incorporated herein by reference.

 

ITEM 6.		EXHIBITS
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
	906 of the Sarbanes-Oxley Act of 2002.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

			CARACO PHARMACEUTICAL        LABORATORIES, LTD.
Date: July 26, 2006			By: /s/ Daniel H. Movens                           Daniel H. Movens        Chief Executive Officer
Date: July 26, 2006			By: /s/ Jitendra N. Doshi                           Jitendra N. Doshi        Chief Financial Officer

 

 

 

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EXHIBIT INDEX

 

31.1	Certificate of Chief Executive Officer

31.2	Certificate of Chief Financial Officer

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Surbanes Oxley Act of 2002.

 

 

 

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