<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
--------------------------------------------------
OR
(_)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-11997
--------------------------------------------------------
CARRINGTON LABORATORIES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-1435663
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 Walnut Hill Lane, Irving, Texas 75038
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(Address of principal executive offices and Zip Code)
214-518-1300
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes __________ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
8,429,915 shares of Common Stock, $.01 par value were outstanding at October 31,
- --------------------------------------------------------------------------------
1995.
- -----
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
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INDEX
<TABLE>
<CAPTION>
Page Number
Part I. FINANCIAL INFORMATION -----------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets at September 30,1995 (unaudited)
and November 30, 1994 3,4
Condensed Consolidated Statements
of Operations for the three and
nine months ended September 30, 1995
and 1994 (unaudited). 5
Consolidated Statements of Cash
Flows for the three and nine months
ended September 30, 1995 and 1994
(unaudited). 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, November 30,
1995 1994
------------- ------------
<S> <C> <C>
(unaudited)
ASSETS
Cash and cash equivalents $ 6,979,238 $ 1,804,638
Accounts receivable, net 2,855,209 2,891,375
Inventories 5,271,546 4,635,769
Prepaid expenses and other 518,634 641,184
----------- -----------
Total current assets 15,624,627 9,972,966
----------- -----------
Property, plant and equipment, net 12,974,351 9,460,389
Other assets 161,832 363,391
----------- -----------
$28,760,810 $19,796,746
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, November 30,
1995 1994
-------------- -------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current portion of long-term debt $ 43,408 $ 649,993
Accounts payable and accrued liabilities 2,609,916 4,603,353
------------ ------------
Total current liabilities 2,653,324 5,253,346
------------ ------------
Long-term debt, net of current portion 3,080,079 2,034,563
------------ ------------
Shareholders' Investment:
Preferred stock 1,167,434 1,040,634
Common stock 84,281 73,444
Capital in excess of par 44,251,668 33,074,508
Deficit (22,302,165) (21,505,938)
Foreign currency translation adjustment (173,811) (173,811)
------------ ------------
Total shareholders' investment 23,027,407 12,508,837
------------ ------------
$ 28,760,810 $ 19,796,746
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $6,621,396 $6,251,750 $19,305,035 $18,467,520
COST AND EXPENSES:
Cost of sales 2,270,387 1,654,029 5,972,894 4,486,929
Selling, General and Administrative 2,867,006 2,788,098 9,501,225 8,748,804
Research and development 1,287,012 1,257,781 4,282,391 3,951,505
Interest, net 19,469 60,894 138,614 123,130
---------- ---------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 177,522 490,948 (590,089) 1,157,152
Provision for income taxes 15,000 45,100 31,350 117,000
---------- ---------- ----------- -----------
NET INCOME (LOSS) $ 162,522 $ 445,848 ($621,439) $ 1,040,152
---------- ---------- ----------- -----------
NET INCOME (LOSS) PER COMMON
EQUIVALENT SHARE $0.01 $0.06 ($0.09) $0.13
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES 8,965,476 7,343,640 7,854,076 7,340,675
</TABLE>
The accompanying notes are an integral part of these statements.
5
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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Condensed Statements of Cash Flow
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 162,522 $ 445,848 ($621,439) $ 1,040,152
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 296,601 299,787 926,380 905,168
Changes in assets and liabilities:
(Increase) decrease in receivables, net (296,049) (89,870) 29,701 261,897
Decrease (Increase) in inventories 742,123 (626,480) (224,398) (1,826,791)
(Increase) decrease in prepaid expenses and other (30,876) 21,162 20,016 (66,988)
(Increase) decrease in other assets (90,301) 310,352 31,631 (35,679)
(Decrease) increase in accounts payable and accrued (667,203) (252,355) (334,028) 164,298
liabilities ---------- ----------- ----------- -----------
Net cash provided (used) by operating activities 116,817 108,444 (172,137) 442,057
---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (718,618) (1,131,677) (4,130,295) (2,280,645)
---------- ----------- ----------- -----------
Net cash (used) by investing activities (718,618) (1,131,677) (4,130,295) (2,280,645)
---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 5,745,664 13,281 11,187,999 56,763
Proceeds from borrowings 0 500,000 5,510,017 500,000
Repayment of debt 0 0 (5,786,884) 0
Debt payments (11,939) (113,013) (93,829) (337,632)
---------- ----------- ----------- -----------
Net cash provided by financing activities 5,733,725 400,268 10,817,303 219,131
---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH 5,131,924 (622,965) 6,514,871 (1,619,457)
CASH AND CASH EQUIVALENTS, BEGINNING OF 1,847,932 1,531,252 464,367 2,527,738
PERIOD ---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,979,238 $ 908,287 $ 6,979,238 $ 908,280
========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 61,422 $ 74,869 $ 224,039 $ 165,981
Cash paid during the period for income tax 0 0 $ 12,000 $ 22,120
</TABLE>
The accompanying notes are an integral part of these statements.
6
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
(unaudited)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
--------------------------------------------
In February 1995, the Company and its Board of Directors decided to change
its fiscal year end from November 30 to December 31.
The condensed consolidated balance sheet as of September 30, 1995, and the
condensed consolidated statements of operations and cash flows for the
three month and nine month period ended September 30, 1995 and 1994 have
been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the consolidated financial position, results of
operations and cash flows at September 30, 1995 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's annual
report to shareholders or Form 10-K for the year ended November 30, 1994.
(2) INVENTORIES:
Inventories are recorded at the lower of first-in-first-out cost or market.
The following summarizes the components of inventory at September 30, 1995
and November 30, 1994:
<TABLE>
<CAPTION>
September 30, November 30,
1995 1994
------------- ------------
<S> <C> <C>
Raw materials and $ 703,000 $ 577,000
supplies
Work-In-Progress 3,312,000 2,615,000
Finished Goods 1,257,000 1,444,000
---------- ----------
Total Inventory $5,272,000 $4,636,000
</TABLE>
7
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
In the first half of 1995, a planned increase in inventory was made to meet
sales requirements during the manufacturing relocation (see Note 3).
However, less than forecasted sales in the Company's bulk Aloe vera
products and wound and skincare products resulted in higher inventory
levels. Inventory in the third quarter was reduced by $742,000.
Total Aloe vera extract inventory as of September 30, 1995 and November 30,
1994 was $2,984,549 and $2,332,000, respectively.
(3) PROPERTY, PLANT AND EQUIPMENT:
Net investment in property, plant and equipment in Costa Rica as of
September 30, 1995 and November 30, 1994 was $4,278,217 and $4,822,000,
respectively, of which $146,000 and $277,000 represent unamortized start-up
cost for the respective periods then ended.
During July 1995 the Company completed the manufacturing and distribution
relocation project started during the first quarter of 1994. This project
involved the physical relocation of its manufacturing facility in Dallas to
its new location in an unused portion of the Company's corporate
headquarters facility in Irving, Texas. The new facility is intended to
meet all federal regulatory requirements applicable to a fully integrated
pharmaceutical manufacturer and to provide the production capacity needed
to meet continued sales growth. At the same location the Company has
upgraded its capability to enable it to produce injectable grade products.
The total cost expended on the relocation project through September 30,
1995 and November 30, 1994 was $4,469,000 and $590,000, respectively.
8
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
(4) DEBT:
-----
On January 30, 1995, the Company entered into an agreement with NationsBank
of Texas, N.A. (the "Bank") . The agreement is composed of a $2,000,000
line of credit which expires one year from the date of the agreement and a
$6,300,000 term loan that matures four years from the date of the
agreement. The term loan can be drawn upon as needed for one year from the
date of the agreement. The term loan is payable in equal quarterly
installments of $250,000 principal, plus accrued interest beginning March
31, 1995, and ending January 30, 1999, when the unpaid balance is due. The
interest rate on both credit facilities is the Company's choice of prime
plus .5% or 30, 60, 90, 180 day reserve adjusted LIBOR (London Interbank
Offering Rate) plus 2%. The Company paid a commitment fee of $31,500 on the
closing date. In February, the Bank waived the requirement that the Costa
Rica assets be pledged to secure the term loan. The Company agreed to pay
an additional commitment fee of $31,500 at that time. $1,900,000 of the
borrowings for the Bank were used to pay off all of the outstanding
balances on notes due to Texas Commerce Bank Dallas, N.A. and $1,827,000
was used to pay off the outstanding balance on the mortgage on the
Company's headquarters building in Irving, Texas. Of the term loan,
$1,500,000 was carved out to provide a letter of credit to a supplier. The
letter of credit did not increase long-term debt but reduced the amount
available to borrow under the term loan. The remaining proceeds will be
used to fund planned capital expenditures, planned research projects, and
other operating needs. As of September 30, 1995, no amounts were
outstanding under the line of credit and $2,977,000 was outstanding under
the term loan. The interest rate on the borrowings ranged from 7.88% to
8.07% between July 1, 1995 and September 30, 1995.
The borrowings under the agreement are secured by the Company's assets in
the United States. The Company is required to maintain a consolidated
tangible net worth of $12,000,000 through November 29, 1995; $13,750,000
thereafter through November 29, 1996; $15,250,000 thereafter through
November 29, 1997; and $16,750,000 thereafter. Also, the Company can not
permit the ratio of its consolidated total liabilities to consolidated
tangible net worth to exceed 1.0 to 1.0 at any time; the ratio of the sum
of pretax net income plus unusual charges (severance, extraordinary legal
fees and debt refinancing costs related to terminated debt agreements) plus
interest expense plus lease expense to fixed charges (interest expense and
lease expense) to be less than 1.75 to 1.0; or capital expenditures to
exceed $6,500,000 from the date of the agreement to December 31, 1995 or
$2,000,000 per year for the calendar years thereafter. In addition, the
Company may not pay cash dividends.
9
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CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Continued)
(5) SHAREHOLDERS' INVESTMENT:
-------------------------
OPTIONS - As of September 30, 1995, 567,676 options to purchase shares of
common stock were outstanding. Option prices range from $6.25 to $35.25 per
share. During the third quarter of 1995, options for 428,957 shares of
common stock were exercised at a price of $6.25 to $20.12 per share.
In the third quarter of 1995, the Company granted one director, one officer
and one employee under the Company's 1995 Stock Option Plan nonqualified
options to purchase 25,000, 20,000 and 15,000 shares of the Company's
common stock, respecttively. The market prices at the dates of the grant
were $35.25, $35.25 and $30.25 per share, respectively. Each option will
becone exercisable for 25% of its shares after one year, 50% after two
years, 75% after three years and 100% after four years from the applicable
date of grant. Each of these options will expire 10 years from its date of
grant.
EMPLOYEE STOCK PURCHASE PLAN - On October 29, 1992, the Company adopted an
Employee Stock Purchase Plan (the "Plan") under which eligible employees
are granted the opportunity to purchase shares of the Company's common
stock. Under the Plan, employees may purchase common stock at a price equal
to the lesser of 85% of the market price of the Company's common stock on
January 1 (or on the quarterly enrollment date on which the employee's
participation in the Plan commenses) or 85% of the market price on the last
business day of each month. The Plan provides for the grant of rights to
employees to purchase a maximum of 500,000 shares of common stock of the
Company. Under the Plan, 34,847 shares have been purchased by employees at
prices ranging from $9.14 to $20.4 per share through September 30, 1995.
(6) PRIVATE PLACEMENT:
On April 5, 1995, the Company completed a self-directed private placement
of 300,000 shares of common stock at a price of $10 per share. The average
of the high and low sale prices of the Company's common stock on the NASDAQ
National Market on the day of the placement was $10.69 per share. The total
proceeds from the offering were $3,000,000. In connection with the private
placement, the Company agreed to use its best efforts to file a
registration statement with the Securities Exchange Commission, within 90
days after the closing of the placement, covering the resale of the shares.
Of the proceeds, $1,900,000 was used to pay off the outstanding balance and
related interest on the Company's line of credit with NationsBank.
Additionally, $150,000 was used to pay off debt related to the Company's
Costa Rica operations. The remaining proceeds are being used to fund
capital expenditures, research projects and other operating needs. On July
11, 1995, the shares related to the private placement were registered for
resale with the Securities Exchange Commission.
10
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CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
The Company is a research-based pharmaceutical and medical device company
engaged in the development, manufacturing and marketing of carbohydrate-based
therapeutics for the treatment of major illnesses and the dressing and
management of wounds and other skin conditions. The Company sells
nonprescription products through its wound and skin care division, veterinary
medical devices and pharmaceutical products through its veterinary medical
division and consumer products through its consumer products subsidiary,
Caraloe, Inc. The Company's research and product portfolio are based on complex
carbohydrate technology derived naturally from the Aloe vera plant.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995 and November 30, 1994, the Company held cash and cash
equivalents of $6,979,000 and $1,805,000, respectively. The increase in cash of
$5,174,000 from November 30, 1994 to September 30, 1995 was attributable to the
issuance of common stock through either the private placement (see Note 6 to the
condensed consolidated financial statements) or the exercise of options (see
Note 5 to the condensed consolidated financial statements) that resulted in an
additional $11,188,000 of cash. The cash raised through the sale of common stock
has been used for capital expenditures of $4,416,000, to increase inventory by
$636,000, to reduce debt by a net amount of $557,000 and to reduce trade
accounts payable by $605,000. Prior to the private placement, these expenditures
were funded using the Company's line of credit with NationsBank. Subsequent to
the private placement, the line of credit was paid off and no additional
borrowings under the line have occurred. The capital expenditures mainly related
to the construction at the Company's headquarters in Irving, Texas and the
relocation of its manufacturing facility from a leased site to an unused portion
of its headquarters.
An increase in inventory was planned during the first half of the year to meet
sales requirements during the period the manufacturing operations were
relocating. However, less than forecasted sales of the Company's bulk Aloe vera
products and less than projected sales in the Company's wound and skin care
products during this year has resulted in higher than expected inventory levels.
The Company regularly evaluates its inventory levels and adjusts production
levels at both its Costa Rica plant, where the bulk freeze-dried aloe vera
extract is manufactured, and at its U.S. plant to meet anticipated demand.
Inventory during the third quarter was reduced by $742,000.
In January 1995, the Company entered into an agreement with NationsBank of
Texas, N.A. for a $2,000,000 line of credit and a $6,300,000 term loan (see Note
4 to the condensed consolidated financial statements). This agreement increased
the Company's available borrowing capacity by over $3,000,000. As of September
30, 1995, the Company had available $2,000,000 under the line of credit and
$1,073,000 under the term loan. In addition to increasing the Company's credit
capacity, the agreement lowered the interest from the term loan were used to
fund planned capital expenditures, a letter of credit required by a supplier, as
discussed
11
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
below, and planned research projects. The line of credit will be used for
operating needs, as required.
In February 1995, the Company entered into a supply agreement with its supplier
of freeze dried products. The agreement required that the Company establish a
$1,500,000 letter of credit. The term loan with NationsBank was used to fund
this letter of credit. The funding of the letter of credit reduces the amount
that the Company can borrow under the term loan but does not increase the
Company's debt unless the letter of credit is utilized by the supplier. As of
November 10, 1995, the supplier has not made a presentation for payment under
the letter of credit. The contract also requires the Company to accept minimum
monthly shipments of $30,000 and to purchase a minimum of $2,500,000 worth of
product over a period of five years.
On April 5, 1995, the Company completed a self-directed private placement of
300,000 shares of common stock at a price of $10 per share (see Note 6 to the
condensed consolidated financial statements). The total proceeds from this
offering were $3,000,000. Of these proceeds, $1,919,000 was used to pay off the
outstanding balance and related interest on the Company's line of credit with
NationsBank. Additionally, $150,000 was used to pay off debt related to the
Company's Costa Rica operations which bore an interest rate of 10.875%.
Remaining proceeds are being used to fund capital expenditures, research
projects and other operating needs.
During February 1995 through October 1995, 69 employees and 6 directors
exercised options for 562,411 shares of common stock. The option prices ranged
from $6.25 to $20.125. A total of $7,013,627 was raised by the Company through
the exercise of these options. As part of registering for resale the shares
issued in the April 1995 private placement, the Company allowed certain warrant
holders to include the shares of common stock underlying their warrants in the
registration if they would exercise the warrants within 30 days of the effective
date of the registration statement. Warrants covering a total of 92,000 shares
were exercised at prices of $6.25 to $16.25 per share, resulting in the
Company's receipt of a total of $1,083,812.
During the first quarter of 1994, the Company completed an evaluation of the
production requirements necessary to meet all federal regulatory requirements as
a fully integrated pharmaceutical manufacturer and to provide the production
capacity needed to meet continued sales growth. The Company has moved its wound
and skin care manufacturing operation from its present location to an unused
portion of the Company's headquarters facility in Irving, Texas and expanded its
production capability through the addition of higher capacity equipment. At the
same location, the Company has upgraded its capability to enable it to produce
injectable grade products. In September 1994, the Company's distribution center
was relocated and upgraded to a new leased facility near its headquarters. The
total cost of these projects is expected to be approximately $4,500,000, of
which $4,469,000 had been expended through September 30, 1995.
12
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CARRINGTON LABORATORIES, INC., and Subsidiaries
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
The Company began a large scale clinical trial for the testing of its CARN 1000
oral capsules for the treatment of acute flare-ups of ulcerative colitis during
the third quarter of 1995. The Company estimates that the cost of this clinical
trial will be approximately $2,000,000, of which 20% was required as an up front
payment. In late 1995, the Company expects to begin an initial Phase I study
using an injectable CARN 750 in cancer patients involving six cancer types. The
estimated cost of this study is $400,000. In early 1996, the Company may begin a
second large scale clinical trial for the testing of CARN 1000 oral capsules for
the treatment of ulcerative colitis. The cost of this trial is expected to be
approximately the same as the one that began in the third quarter of 1995.
In November 1995, the Company signed a licensing agreement with its supplier of
calcium alginates and other wound care products. Under the agreement, the
Company has exclusive marketing rights to advanced calcium alginate products for
North and South America and in the People's Republic of China. Per the
agreement, the Company made an up-front payment to the supplier of $500,000.
Additional payments totaling $500,000 will be made to the supplier as new
products are delivered.
The Company believes that its cash resources, including available cash, bank
line of credit and term loan agreement (see Note 4 to the condensed consolidated
financial statements) and expected revenues from sales of wound and skin care,
veterinary and consumer products will provide the funds necessary to finance its
current operations. The Company does not expect that these cash resources will
be sufficient to finance the major clinical studies necessary to develop its
products to their full commercial potential. Additional funds, therefore, may
have to be raised through equity offerings, borrowings, licensing arrangements,
or other means.
The Company is subject to regulation by numerous governmental authorities in the
United States and other countries. Certain of the Company's proposed products
will require governmental approval prior to commercial use. The approval process
applicable to prescription pharmaceutical products usually takes several years
and typically requires substantial expenditures. The Company and any licensees
may encounter significant delays or excessive costs in their respective efforts
to secure necessary approvals. Future United States or foreign legislative or
administrative acts could also prevent or delay regulatory approval of the
Company's or any licensees' products. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope requested could delay or
preclude the Company or any licensees from marketing their products, or could
limit the commercial use of the products, and thereby have a material adverse
effect on the Company's liquidity and financial condition.
At November 10, 1995, the Company had no material capital commitments other than
its promissory notes, leases, agreement with suppliers and clinical trials
described above.
13
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CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations.
THIRD QUARTER OF 1995 COMPARED WITH THIRD QUARTER OF 1994
Net sales were $6,621,000 in the third quarter of 1995, compared with $6,252,000
in the third quarter of 1994. This increase of $369,000, or 5.9%, resulted from
a $743,000, or 168.6%, increase in sales of Caraloe, Inc., the Company's
consumer products subsidiary. Of this, $760,000 is related to the sale of bulk
Manapol(R). Sales of the Company's wound and skin care products decreased from
$5,885,000 to $5,354,000, or 9%. In the past year, competitors with lower priced
products have been actively pursuing the Company's customers. The Company is
addressing this competition by re-evaluating the pricing of its products,
conducting research to obtain FDA clearance for product claims, developing new
products, and evaluating new markets for its products. Actual unit sales of the
Company's wound and skin care products increased over 5% when compared to the
third quarter of 1994. Sales of the Company's veterinary products were $84,000
in the third quarter of 1995, compared with $121,000 in the same period in 1994.
Cost of sales increased to $2,270,000 from $1,654,000, or 37.2.%. As a
percentage of sales, cost of sales increased from 26.5% to 34.3%. This increase
is attributable to the increased sales of bulk Manapol(R), which has a
substantially lower margin than the Company's wound and skin care products.
Also, in order to remain competitive, the Company has been increasing the
discounts that it is allowing its customers on selected products. This increase
in sales discounts has resulted in cost of sales of the Company's wound and skin
care products increasing by approximately 3.5% as a percentage of sales.
Selling, general and administrative expenses increased to $2,867,000 from
$2,787,000, or 2.9%. This increase was due to increased salaries and commissions
paid to field sales representatives.
Research and development expenses increased to $1,287,000 from $1,257,000, or
2.4%. This increase was the result of beginning the large scale clinical trial
for the testing of CARN 1000 oral capsules for the treatment of acute flare-ups
of ulcerative colitis during the third quarter of 1995. These costs were
partially offset by a reduction of internal salaries.
Net interest costs decreased to $19,000 from $61,000, or 65%, due to having more
excess cash to invest.
14
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Continued)
FIRST NINE MONTHS OF 1995 COMPARED WITH FIRST NINE MONTHS OF 1994
Net sales were $19,305,000 in the first nine months of 1995 compared with
$18,468,000 in the same period last year. This increase of $837,000, or 4.5%,
resulted from a $1,565,000, or 222%, increase in sales of Caraloe, Inc. Of this
increase, $1,480,000 is attributable to Caraloe's increased sales of bulk
Manapol(R), which the Company began selling in May 1994. Sales of the Company's
wound and skin care products decreased to $16,772,000 from $17,603,000, or 4.7%.
In the past year, the Company's competitors have been actively pursuing the
Company's customers with lower priced products. The Company is addressing this
competition by developing new products to allow the Company's customers to do
"one stop shopping" for the treatment of wounds, doing research to obtain FDA
clearance for product claims and re-evaluating the pricing of the Company's
products. The Company expects sales in the wound and skin care product line to
be relatively flat for the next four to six months. The Company's new freeze
dried products, calcium alginates and thin film dressings are expected to be
launched in the first quarter of 1996. Sales of veterinary products decreased to
$263,000 from $353,000, or 25.5%. In October 1994, the Company decided to no
longer use one outside sales representative who promoted its veterinary
products. This decision had a negative impact on sales. The Company is
evaluating several ways of improving the sales of its veterinary products,
including third party alliances, reinstating the outside sales representative
and launching new products.
Cost of sales increased to $5,973,000 from $4,516,000, or 32.3%. As a percentage
of sales, cost of sales increased to 30.9% from 24.5%. This increase is
attributable to bulk Manapol(R), which has a substantially lower margin as
compared to the Company's wound and skin care products. Also, in order to remain
competitive, the Company has been increasing the discounts that it is allowing
its customers on selected products. This increase in sales discounts has
resulted in cost of sales of the Company's wound and skin care products
increasing by approximately 3.5% as a percentage of sales.
Selling, general and administrative expenses increased to $9,501,000 from
$8,749,000, or 8.6%. The increase is related to charges resulting from severance
agreements, increased legal expenses including $130,000 paid in law suit
settlements and $70,000 of debt refinancing costs which related to terminated
debt agreements.
Research and development expenses increased to $4,282,000 from $3,951,000, or
8.4%. This increase is due to charges relating to severance agreements.
Net interest expense increased to $139,000 from $123,000, or 13%, due to
increased borrowings.
15
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
In May 1994, the Company received a federal documents subpoena from the
Office of Inspector General of the United States Department of Health
and Human Services relating to an investigation of possible abuses
under the Medicare and Medicaid reimbursement programs. The subpoena
requested documentation relating to numerous parties, including the
Company and former employees. The Company is cooperating fully with the
government in its investigation and is confident that the Company is
not and no current employees are engaged in any improper activities.
The Company has conducted an internal review to determine the extent of
the involvement of any former employees. The Company, having fully
complied with the civil subpoena, does not anticipate any further
response on its part but has indicated a willingness to assist the
government in any way that the Company deems reasonably possible and
appropriate.
On October 17, 1995, David L. Hinchey (the "Plaintiff") filed a lawsuit
styled David L. Hnchey v. Carrington Laboratories, Inc., Cause No. 95-
------------------------------------------------
11007-C in the 68th Judicial District Court of Dallas County, Texas,
alleging breach of contract in connection with the termination of his
employment by the Company. The lawsuit alleges that the Plantiff's
damages are in excess of $50,000 but does not allege a specific amount
of damages. The Company has filed an answer denying the Plaintiff's
claims and intends to defend the lawsuit vigorously.
16
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits:
---------
11.1 Computation of Net Income Per Common and Common
Equivalent Share
b. Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company during the quarter
ended September 30, 1995.
17
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
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.
CARRINGTON LABORATORIES, INC.
(Registrant)
Date: November 14, 1995 By
-----------------------------------
Carlton E. Turner,
President
Date: November 14, 1995 By
-----------------------------------
Sheri L. Pantermuehl,
Chief Financial Officer
18
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
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.
CARRINGTON LABORATORIES, INC.
(Registrant)
Date: November 14, 1995 By Carlton E. Turner,
President
Date: November 14, 1995 By Sheri L. Pantermuehl,
Chief Financial Officer
19
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
Sequentially
Exhibit
Number Exhibit
------- -------
11.1 Computation of Net Income Per Common and Common
Equivalent Share.
20
<PAGE>
CARRINGTON LABORATORIES, INC., and Subsidiaries
- --------------------------------------------------------------------------------
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net income $ 162,522 $ 445,848 $ (621,439) $1,040,152
Preferred stock dividend
requirements (35,792) (31,961) (104,724) (93,511)
Net income for computing
income per common share $ 126,730 $ 413,887 $ (726,163) $946,641
Average common and common
equivalent shares out-
standing 8,965,476 7,343,640/(1)/ 7,854,076/(1)/ 7,340,675/(1)/
Net income per common and
common equivalent share $ .01 $ .06 ($.09) $.13
</TABLE>
/(1)/ Common stock equivalents have been excluded since the effect on net
income per share of their inclusions would either be antidilutive or
represent dilution of less than 3%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1)
STATEMENTS OF BALANCE SHEET, 2) STATEMENTS OF OPERATIONS AND 3) STATEMENT OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 6,979,238
<SECURITIES> 0
<RECEIVABLES> 2,855,209
<ALLOWANCES> 0
<INVENTORY> 5,271,546
<CURRENT-ASSETS> 15,624,627
<PP&E> 12,974,351
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,760,810
<CURRENT-LIABILITIES> 2,653,324
<BONDS> 3,080,079
<COMMON> 84,281
0
1,167,434
<OTHER-SE> 21,775,692
<TOTAL-LIABILITY-AND-EQUITY> 28,760,810
<SALES> 19,305,035
<TOTAL-REVENUES> 19,305,035
<CGS> 5,977,894
<TOTAL-COSTS> 13,783,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,614
<INCOME-PRETAX> (590,089)
<INCOME-TAX> 31,350
<INCOME-CONTINUING> (621,439)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (621,439)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
