<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 March 31, 1995 and the one month period ended
--------------------------------------------------
December 31, 1994
--------------------------------------------------
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
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CARRINGTON LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
Texas 75-1435663
- ---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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)
December 1 to November 30
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(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. 7,735,217 shares of Common
--------------------------------
Stock, $.01 par value were outstanding at April 29, 1995.
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<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
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INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets at March 31,1995 (unaudited),
December 31, 1994 (unaudited) and
November 30, 1994 3-4
Condensed Consolidated Statements
of Operations for the three months
ended March 31, 1995 and 1994
(unaudited) and for the one month
ended December 31, 1994 and 1993 (unaudited) 5-6
Consolidated Statements of Cash
Flows for the three months
ended March 31, 1995 and 1994
(unaudited) and for the one month ended
December 31, 1994 and 1993 (unaudited) 7-8
Notes to Condensed Consolidated
Financial Statements (unaudited) 9-13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14-19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
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>
March 31, December 31, November 30,
1995 1994 1994
------------ ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 589,025 $ 464,367 $ 1,804,638
Accounts receivable, net 2,507,786 2,884,911 2,891,375
Inventories 6,004,706 5,047,149 4,635,769
Prepaid expenses and other 424,194 538,650 641,184
----------- ----------- -----------
Total current assets 9,525,711 8,935,077 9,972,966
----------- ----------- -----------
Property, plant and equipment, net 10,851,401 9,656,439 9,460,389
Other assets 176,660 307,461 363,391
----------- ----------- -----------
$20,553,772 $18,898,977 $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>
March 31, December 31, November 30,
1995 1994 1994
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current portion of long-term debt $ 218,274 $ 450,395 $ 649,993
Accounts payable and accrued liabilities 5,017,448 4,012,553 4,603,353
------------ ------------ ------------
Total current liabilities 5,235,722 4,462,948 5,253,346
------------ ------------ ------------
Long-term debt, net of current portion 3,115,175 1,997,261 2,034,563
Shareholders' Investment:
Preferred stock 1,167,434 1,040,634 1,040,634
Common stock 73,635 73,444 73,444
Capital in excess of par 33,241,546 33,074,508 33,074,508
Deficit (22,105,929) (21,576,007) (21,505,938)
Foreign currency translation adjustment (173,811) (173,811) (173,811)
------------ ------------ ------------
Total shareholders' investment 12,202,875 12,438,768 12,508,837
------------ ------------ ------------
$ 20,553,772 $ 18,898,977 $ 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 March 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
NET SALES $6,275,759 $6,072,612
COST AND EXPENSES:
Cost of sales 1,639,219 1,285,971
Selling, general and administrative 3,576,031 3,046,319
Research and development 1,472,487 1,662,680
Interest, net 68,454 30,882
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (480,432) 46,760
Provisions for income taxes 16,350 16,000
---------- ----------
NET (LOSS) INCOME $ (496,782) $ 30,760
========== ==========
NET (LOSS) INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ (.07) $ 0.00
========== ==========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 7,359,377 7,337,953
========== ==========
</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 Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
One Month Ended December 31,
----------------------------
1994 1993
---- -----
<S> <C> <C>
NET SALES $1,781,017 $2,316,564
COST AND EXPENSES:
Cost of sales 516,247 493,403
Selling, general and administrative 984,535 1,000,998
Research and development 326,916 455,415
Interest, net 23,388 9,130
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (70,069) 357,618
Provisions for income taxes 0 30,000
---------- ----------
NET (LOSS) INCOME $ (70,069) $ 327,618
---------- ----------
NET (LOSS) INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ (.01) $ .04
========== ==========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 7,344,390 7,336,929
========== ==========
</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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Consolidated Statements of Cash Flow
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (496,782) $ 30,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 327,014 298,527
Changes in assets and liabilities:
Decrease in receivables, net 377,125 551,333
(Increase) in inventories (957,558) (872,520)
Decrease (increase) in prepaid expenses and other 114,456 (2,855)
Decrease (increase) in other assets 72,128 (62,479)
Increase in accounts payable and accrued liabilities 239,828 689,101
----------- ----------
Net cash (used) provided by operating activities (323,789) 631,867
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,463,303) (362,149)
----------- ----------
Net cash used in investing activities (1,463,303) (362,149)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 167,230 12,895
Proceeds from borrowings 1,794,520 0
Debt payments (50,000) (61,068)
Net cash provided (used) by financing activities 1,911,750 (48,173)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 124,658 221,545
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 464,367 2,527,738
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 589,025 $2,749,283
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 56,761 $ 45,088
Cash paid during the period for income tax $ 12,000 $ 22,447
</TABLE>
The accompanying notes are an integral part of these statements.
7
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Carrington Laboratories, Inc., and Subsidiaries
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Consolidated Statements of Cash Flow
(unaudited)
<TABLE>
<CAPTION>
One Month Ended December 31,
----------------------------
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (70,069) $ 327,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 109,648 95,898
Changes in assets and liabilities:
Decrease (increase) in receivables, net 6,464 (491,058)
(Increase) in inventories (411,380) (72,281)
Decrease (increase) in prepaid expenses and other 102,534 (259,709)
Decrease (increase) in other assets 35,642 (1,588)
(Decrease) in accounts payable and
accrued liabilities (641,620) (350,872)
----------- ----------
Net cash (used) by operating activities (868,781) (751,992)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (285,410) (27,612)
----------- ----------
Net cash used in investing activities (285,410) (27,612)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 0 2,188
Debt payments (186,080) (18,243)
----------- ----------
Net cash (used) by financing activities (186,080) (16,055)
----------- ----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,340,271) (795,659)
----------- ----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,804,638 3,323,396
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 464,367 $2,527,737
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 20,386 $ 15,354
Cash paid during the period for income tax $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
8
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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 sheets as of March 31, 1995, December
31, 1994 and November 30, 1994, the condensed consolidated statements of
operations and cash flows for the three month period ended March 31, 1995
and 1994 and the one month period ended December 31, 1994 and 1993 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 March 31, 1995 and 1994, and December 31, 1994
and 1993 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 March 31, 1995,
December 31, 1994 and November 30, 1994.
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994 November 30, 1994
-------------- ---------------- -----------------
<S> <C> <C> <C>
Raw Materials and Supplies $ 603,000 $ 796,000 $ 577,000
Work-In-Process 3,506,000 2,778,000 2,615,000
Finished Goods 1,896,000 1,473,000 1,443,000
---------- ---------- ----------
Total Inventory $6,005,000 $5,047,000 $4,636,000
========== ========== ==========
</TABLE>
The increase in inventory from November 30, 1994 is partially due to
forecasted shipments of the Company's Manapol(TM) customer being deferred
in the months of December 1994 through February 1995 until a new supply
agreement was reached with this customer in March 1995 that requires
minimum purchases of Manapol(TM) of 225 Kilos per month. Also
9
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Carrington Laboratories, Inc., and Subsidiaries
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Notes to Condensed Consolidated Financial Statements
(unaudited)
contributing to the higher inventory levels were less than projected sales
in the Company's wound and skin care product line in the first quarter of
1995. Production is being adjusted to reflect the higher inventory levels.
The following reflects inventory levels of freeze-dried aloe vera extract,
which includes Manapol(TM), included in the Company's inventory balance:
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994 November 30, 1994
-------------- ----------------- -----------------
<S> <C> <C> <C>
Work-In-Process $2,820,000 $2,428,000 $2,332,000
Finished Goods 136,000 170,000 0
---------- ---------- ----------
Total $2,956,000 $2,598,000 $2,332,000
========== ========== ==========
</TABLE>
(3) Property, Plant and Equipment:
------------------------------
Net investment in property, plant and equipment in Costa Rica as of March
31, 1995, December 31, 1994 and November 30, 1994 was $4,523,000,
$4,797,000 and $4,822,000, respectively, of which $200,000, $257,000 and
$277,000 represent unamortized start-up cost for the respective periods
then ended.
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 as well as
the production capacity needed to meet continued sales growth. The Company
will move 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 expand it 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 $2,041,000, $806,000 and
$590,000 had been expended through March 31, 1995, December 31, 1994 and
November 30, 1994, respectively. The expected date of completion of the
manufacturing relocation project is June 1995.
10
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Carrington Laboratories, Inc., and Subsidiaries
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Notes to Condensed Consolidated Financial Statements
(unaudited)
(4) Debt:
-----
In June 1994, the Company entered into agreements with Texas Commerce Bank
Dallas, N.A. for a $4,000,000 loan package. The $4,000,000 loan package
included a $1,500,000 revolving line of credit ("Revolving Note"), a
$2,000,000 revolver/term loan ("Term Loan 1") and a $500,000 term loan
("Term Loan 2"). The Revolving Note had an interest rate of prime plus .75%
and matured on March 31, 1995. The Company paid a .25% commitment fee for
the unused portion of the line. Term Loan 1 was a revolving line of credit
until May 31, 1995, at which time all outstanding balances were to be
converted to a five-year term loan. It carried an interest rate of prime
plus 1% and the Company paid a facility fee of .5% of the original amount
of the commitment. Term Loan 2 was a 30 month straight-line amortizing term
loan effective on June 10, 1994, maturing December 31, 1996, with monthly
payments beginning July 31, 1994, and had an interest rate of prime plus
1%. The Company paid a facility fee of .5% of the original principal amount
of Term Loan 2. As of December 31, 1994, approximately $847,000 was
outstanding under the Revolving Note and $400,000 under Term Note 2.
Borrowings under the agreements were secured by receivables, inventory and
unencumbered equipment. The Company was required to maintain earnings
before depreciation, interest, taxes and amortization plus research and
development expense of $7,500,000 through November 29, 1994 and $8,000,000
thereafter, a current ratio of 1.05 to 1.0 and a cash flow coverage of 1.05
to 1.0. In addition, the Company was not allowed to pay cash dividends.
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 beginning March 31, 1995 with the final
installment being 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
11
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Carrington Laboratories, Inc., and Subsidiaries
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Notes to Condensed Consolidated Financial Statements
(unaudited)
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
proceeds was used to pay off all of the outstanding balances on the
Revolving Note, Term Loan 1 and Term Loan 2 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.
$1,500,000 of the term loan will be used to provide a letter of credit to a
supplier. The remaining proceeds will be used to fund planned capital
expenditures, planned research projects, and other operating needs. As of
March 31, 1995, $1,905,000 was outstanding under the line of credit and
$2,977,000 was outstanding under the term loan. The interest rate on the
borrowings ranged from 8.09% to 8.125% between the date of closing and
March 31, 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 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.
(5) Shareholders' Investment:
-------------------------
Options - In December 1994, the Company granted to an employee under the
Company's 1985 Stock Option Plan an nonqualified option to purchase 8,000
shares of the Company's common stock at a price of $8.375, which was the
market price of the stock at the date of the grant. In January 1995, the
Company granted to among 91 employees nonqualified options under the
Company's 1985 Stock Option Plan to purchase an aggregate of 172,550
shares of the Company's common stock at a price of $11.125, which was the
market price of the stock at the date of the grants. Also, in January 1995,
the Company granted to an employee under the Company's 1985 Stock Option
Plan nonqualified options to purchase 30,000 shares of the Company's common
stock at the price of $12.50, which was the market price at the date of the
grant. None of the options granted are exercisable at this time. Each
option will become 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.
12
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Carrington Laboratories, Inc., and Subsidiaries
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Notes to Condensed Consolidated Financial Statements
(unaudited)
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 in the first year of participation, July 1 if participation
begins on such date) or 85% of the market price on the last business day of
the 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, 19,325 of shares have been purchased by employees at prices
ranging from $7.23 to $11.37 per share through March 31, 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 and Exchange Commission, within
90 days after the closing of the placement, covering the resale of the
shares. Proceeds from the placement will go towards planned capital
expenditures, research and development expenditures, the payment of bank
debt and other operating needs.
13
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Carrington Laboratories, Inc., and Subsidiaries
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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. In February
1995, the Company and its Board of Directors decided to change its fiscal year
end from November 30 to December 31.
Liquidity and Capital Resources
At March 31, 1995 and November 30, 1994, the Company held cash and cash
equivalents of $589,000 and $1,805,000, respectively. The decrease in cash of
$1,216,000 from November 30, 1994 to March 31, 1995 was attributable to capital
expenditures of $1,749,000 and to increased inventory of $1,369,000. These
expenditures were also funded by $1,795,000 of additional borrowings. $1,451,000
of the capital expenditures relate 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.
The increase in inventory partially results from deferring forecasted shipments
of bulk Manapol(TM) to the Company's bulk Manapol(TM) customer in the months of
December 1994 through February 1995 while negotiations with the customer were
taking place. In March 1995, new agreements were reached with this customer and
shipments resumed. In addition, the Company's wound and skin care sales were
less than projected during this period, resulting in higher than expected
inventory levels. An increase in inventory was planned during this time to meet
sales requirements during the period when the manufacturing operation will be
relocating. Manufacturing was substantially curtailed in late April in
preparation for the move. The Company expects production to begin at its
headquarters location by the middle of June, with finished products available
for shipment in July. Between December 1, 1994 and March 31, 1995, the Company
received from an independent supplier four shipments of a new product intended
for the hospital market and having a cost to the Company of approximately
$270,000. The plan launch of the product, which has a shelf life of two years,
has been delayed pending the Company's reevaluation of the product's integrity
and its market strategy. As of the date of this report, the Company believes
that its investment in this product is realizable. 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.
14
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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)
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). This agreement increased the Company's available borrowing capacity by over
$3,000,000. As of March 31, 1995, the Company had available $3,148,000 under the
line of credit and term loan. In addition to increasing the Company's credit
capacity, the agreement lowered the interest rate that the Company has to pay on
its outstanding debt by over one percent. Proceeds from the term loan will be
used to fund planned capital expenditures, a letter of credit required by a
supplier which was funded in May 1995, as discussed 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. Proceeds from the term loan with NationsBank will
be used to fund this 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). 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, $170,000 was used to
pay off debt related to the Company's Costa Rica operations which bore an
interest rate of 10.875%. Remaining proceeds will be used to fund capital
expenditures, research projects, or other operating needs.
During February 1995 through April 1995, 33 employees and one director exercised
options for 80,240 shares of common stock, of which 71,690 shares were purchased
in April 1995. The option prices ranged from $6.25 to $12.75. A total of
$777,000 was raised by the Company through the exercise of these options. The
Company expects more options to be exercised by employees and directors during
May, as several options are due to expire during May that have exercise prices
that are less than the common stock current market value.
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, as well as the production
capacity needed to meet continued sales growth. The Company will move 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 expand it
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
15
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Carrington Laboratories, Inc., and Subsidiaries
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$2,041,000 had been expended through March 31, 1995.
The Company expects to begin at least one 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. If the Company receives FDA
clearance, it may run two large scale trials for ulcerative colitis
concurrently. The Company estimates that the cost of each clinical trial will be
approximately $2,000,000, with 20% being required as an up front payment. As of
the date of this report no contracts have been signed with any clinical research
organization to perform these trials.
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 and complete its budgeted capital expenditures. 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 March 31, 1995, the Company had no material capital commitments other than
its promissory notes, leases and projects described above.
Impact of Inflation
The Company does not believe that inflation has had a material impact on its
results of operations.
16
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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)
December 1994 Compared with December 1993
Net sales were $1,781,000 in December 1994, compared with $2,317,000 in the same
month in 1993. This decrease of $536,000, or 23.1%, resulted from a $552,000, or
24.2%, decrease in sales of wound and skin care products. In December 1993, the
Company announced a price increase for its wound and skin care line that went
into effect in January 1994. This resulted in the Company's customers placing
larger than normal orders in December 1993. Because of the large orders prior to
the price increase, total sales of wound and skin care products during December
1993 were the largest ever recorded for any month in the Company's history,
including any month from that time through the date of this report. Sales of the
Company's veterinary products were $18,000 in December 1994 compared with
$17,000 in December 1993. Sales of Caraloe Inc., the Company's consumer products
subsidiary, grew from $21,000 in December 1993 to $36,000 in December 1994.
Cost of sales increased to $516,000 from $493,000, or 5%. As a percentage of
sales, cost of sales increased from 21.3% to 29%. In December 1994, the Company
wrote off approximately $35,000 of inventory that had been previously identified
as not usable and reserved. The Company decided not to reverse the corresponding
reserve at the time of the write-off. Over the past year the Company has been
experiencing price increases from some of its suppliers. These price increases
have resulted in approximately a 2% increase in cost of sales as a percent of
sales. The Company is currently negotiating with all of its major suppliers in
an effort to reduce costs. In addition, in December 1993, approximately $20,000
of favorable manufacturing variances partially offset cost of sales.
Selling, general and administrative expenses decreased to $985,000 from
$1,001,000, or 2%. Selling expense decreased by $218,000 due to reduced salaries
and related benefits because of open positions. The sales force was fully
staffed in December 1993. A $19,000 increase in general and administrative
expenses was primarily attributable to increased personnel.
Research and development expenses decreased to $327,000, from $455,000, or 28%.
This decrease was primarily attributable to deferring clinical studies while the
Company is upgrading its manufacturing facilities to meet new product
specification requirements and defining product formulations for the products to
be used in clinical trials. The Company expects to begin its large scale
clinical trial of CARN 1000 for the treatment of acute flare-ups of ulcerative
colitis in the third quarter of 1995. Also, expenses associated with the
Company's subsidiary in Belgium have previously been reflected in research and
development expense. Since the Company is not currently performing any studies
in Europe, it was decided that costs associated with the Belgium operation more
accurately reflected selling expense. Starting in December 1994, Belgium costs
were included in selling, general and administrative expenses.
Net interest costs increased to $23,000 from $9,000, or 156%, due to increased
borrowings.
17
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
First Three Months of 1995 Compared with First Three Months of 1994
Net sales were $6,276,000 in the first three months of 1995 compared with
$6,073,000 in the same period last year. This increase of $203,000, or 3.3%,
resulted from a $348,000, or 424%, increase in sales of Caraloe, Inc. $285,000
of this is related to the sale of bulk Manapol(TM), which the Company began
selling in May 1994. Sales of the Company's wound and skin care products
decreased to $5,791,000 from $5,954,000, or 2.7%. 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 reevaluating 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
eight to ten months. The Company's new freeze dried products are expected to be
launched in the fourth quarter of 1995. Sales of veterinary products decreased
to $43,000 from $61,000, or 30%, because no royalty payments were received for
the Company's vaccine adjuvant.
Cost of sales increased to $1,639,000 from $1,286,000, or 27%. As a percentage
of sales, cost of sales increased to 26.1% from 21.2%. This increase is
primarily attributable to bulk Manapol(TM) which has a substantially lower
margin as compared to the Company's wound and skin care products. In addition,
over the past year the Company has been experiencing price increases from some
of its suppliers. These price increases have resulted in approximately a 2%
increase in cost of sales as a percent of sales. The Company is currently
negotiating with all of its major suppliers in an effort to reduce costs.
Selling, general and administrative expenses increased to $3,576,000 from
$3,046,000, or 17%. Selling expenses decreased $246,000, which is attributable
to lower commissions paid to field sales representatives due to lower than
projected sales, reduce travel expenses and lower product literature costs. A
$776,000 increase in general and administrative expenses was primarily
attributable to a $188,000 charge relating to the severance agreement of the
Company's President who retired in March 1995 whom the Company agreed to pay
until the end of his contract in December 1995; $199,000 of increased legal
expenses that includes $130,000 paid to settle certain lawsuits; $70,000 of debt
refinancing costs which related to terminated debt agreements; and increases in
personnel related costs.
Research and development expenses decreased to $1,472,000, from $1,663,000, or
11%. Included in 1995 costs are $346,000 of charges relating to severance
agreements. The decrease in research and development expenses was primarily
attributable to deferring clinical studies while the Company is upgrading its
manufacturing facilities to meet new product specification requirements and
defining product formulations for the products to be used in clinical trials.
The Company expects to begin its large scale clinical trial of CARN 1000 for the
treatment of acute flare-ups of ulcerative colitis in the third quarter of 1995.
Also, expenses associated with the Company's subsidiary in Belgium have
previously been reflected in research and development expense. Since the Company
is not
18
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
currently performing any studies in Europe, it was decided that costs associated
with the Belgium operation more accurately reflected selling expense. Starting
in December 1994, Belgium costs were included in selling, general and
administrative expenses.
Net interest costs increased to $68,000 from $31,000, or 119%, due to increased
borrowings.
19
<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.
Based upon the Company's internal review, the Company filed suit on
June 16, 1994 against MPM Medical, Inc., Jerry Pyle, Paul Miller and
John Maverick (Case No. 94-6032) in the 101st District Court of Dallas
County, Texas. Jerry Pyle, Paul Miller and John Maverick are former
employees of the Company. The Company has alleged that the former
employees named in the lawsuit engaged in activities that defrauded the
Company in connection with the Company's sales of various products
covered by the Medicare and Medicaid programs, thereby breaching
fiduciary and other duties owed to the Company by the individual
defendants. The Company is seeking resolution of any damages incurred
by the Company in connection with the alleged activities.
20
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
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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 month
of December 1994. On February 23, 1995, the Company filed a
report on Form 8-K dated February 21, 1995, reporting under Item
8 thereof a change in its fiscal year end that was authorized by
its Board of Directors on February 9, 1995.
21
<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 May 12, 1995 By /s/ Carlton E. Turner
------------------- ---------------------------
Carlton E. Turner,
President
Date May 12, 1995 By /s/ Christopher S. Record
------------------- ---------------------------
Christopher S. Record,
Vice President
(Chief Financial Officer)
22
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
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INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
-------- -------------------------------- ------------
11.1 Computation of Net Income Per Common 24
and Common Equivalent Share.
23
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
- --------------------------------------------------------------------------------
Exhibit 11.1
Computation of Net Income Per Common and Common Equivalent Share
<TABLE>
<CAPTION>
Three Months Ended One Month Ended
March 31, December 31,
------------------ -----------------
1995 1994 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ (496,782) $ 30,760 $ (70,069) $ 327,618
Preferred stock dividend
requirements (33,140) (29,589) -- --
Net income for computing
income per common share (528,922) 1,171 (70,069) 327,618
Average common and common
equivalent shares out-
standing/(1)/ 7,359,377 7,337,953 7,344,390 7,336,929
Net income per common and
common equivalent share (.07) .00 (.01) .04
</TABLE>
/(1)/ Common stock equivalents have been excluded since the effect on net
income per share of their inclusion 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 STATEMENTS
OF BALANCE SHEET, STATEMENTS OF OPERATIONS, STATEMENT OF CASH FLOWS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 589,025
<SECURITIES> 0
<RECEIVABLES> 2,507,786
<ALLOWANCES> 0
<INVENTORY> 6,004,706
<CURRENT-ASSETS> 9,525,711
<PP&E> 10,851,401
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,553,772
<CURRENT-LIABILITIES> 5,235,722
<BONDS> 3,115,175
<COMMON> 73,635
0
1,167,434
<OTHER-SE> 10,961,806
<TOTAL-LIABILITY-AND-EQUITY> 20,553,772
<SALES> 6,275,759
<TOTAL-REVENUES> 6,275,759
<CGS> 1,639,219
<TOTAL-COSTS> 6,687,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,454
<INCOME-PRETAX> (480,432)
<INCOME-TAX> 16,350
<INCOME-CONTINUING> (496,782)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (496,782)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
