<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 June 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
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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
--------------------------------------------------------------------------------
(Address of principal executive offices and Zip Code)
214-518-1300
--------------------------------------------------------------------------------
(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.
8,162,900 shares of Common Stock, $.01 par value were outstanding at July 31,
-----------------------------------------------------------------------------
1995.
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<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
-----------------------------------------------
INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets at June 30,1995 (unaudited)
and November 30, 1994 3-4
Condensed Consolidated Statements
of Operations for the three and
six months ended June 30, 1995
and 1994 (unaudited). 5
Consolidated Statements of Cash
Flows for the three and six months
ended June 30, 1995 and 1994
(unaudited). 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12-16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matter to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
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>
June 30, November 30,
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,847,932 $ 1,804,638
Accounts receivable, net 2,559,160 2,891,375
Inventories 6,013,669 4,635,769
Prepaid expenses and other 487,758 641,184
----------- -----------
Total current assets 10,908,519 9,972,966
----------- -----------
Property, plant and equipment, net 12,540,271 9,460,389
Other assets 83,595 363,391
----------- -----------
$23,532,385 $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>
June 30, November 30,
1995 1994
------------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S INVESTMENT
Current portion of long-term debt $ 46,723 $ 649,993
Accounts payable and accrued liabilities 3,241,327 4,603,353
------------ ------------
Total current liabilities 3,288,050 5,253,346
------------ ------------
Long-term debt, net of current portion 3,088,703 2,034,563
Shareholders' Investment:
Preferred stock 1,167,434 1,040,634
Common stock 79,876 73,444
Capital in excess of par 38,510,410 33,074,508
Deficit (22,428,277) (21,505,938)
Foreign currency translation adjustment (173,811) (173,811)
------------ ------------
Total shareholders' investment 17,155,632 12,508,837
------------ ------------
23,532,385 $ 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 June 30, Six Months Ended June 30,
1995 1994 1995 1994
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $6,407,881 $6,143,155 $12,683,638 $12,215,767
COST AND EXPENSES:
Cost of sales 2,076,220 1,565,104 3,715,441 2,851,075
Selling, general and
administrative 3,262,293 2,914,385 6,866,711 5,960,704
Research and development 1,305,232 1,012,869 2,749,332 2,675,549
Interest, net 50,691 31,354 119,144 62,236
---------- ---------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (286,555) 619,443 (766,990) 666,203
Provisions for income taxes 0 55,900 16,350 71,900
---------- ---------- ----------- -----------
NET (LOSS) INCOME (286,555) 563,543 (783,340) 594,303
---------- ---------- ----------- -----------
NET (LOSS) INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ (.04) $ .07 $ (.11) $ .07
WT AVERAGE COMMON AND COMMON
EQUIVALENT SHARES 7,884,046 7,340,432 7,621,712 7,339,192
========== ========== =========== ===========
</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 June 30, Six Months Ended June 30,
1995 1994 1995 1994
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (286,555) $ 563,542 $ (783,339) $ 594,303
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 302,756 306,865 629,780 605,382
Changes in assets and liabilities:
Decrease (increase) in
receivables, net (51,375) (199,566) 325,750 351,767
(Increase) decrease in inventories (8,963) (327,791) (966,521) (1,200,311)
Decrease (increase) in prepaid
expenses and other (63,564) (85,295) (50,892) (88,150)
Decrease (increase) in
other assets 49,811 (283,552) 121,932 (346,024)
Increase (decrease) in accounts
payable and accrued liabilities 93,347 (272,449) 333,175 416,652
----------- ---------- ----------- -----------
Net cash (used) by operating activities 35,457 (298,246) (288,331) 333,619
----------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of proeprty, plant and equipment, net (1,948,374) (786,817) (3,411,677) (1,148,966)
----------- ---------- ----------- -----------
Net cash used by financing activities: (1,948,374) (786,817) (3,411,677) (1,148,966)
----------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of 5,275,105 30,588 5,442,335 43,483
common stock
Proceeds from borrowings 0 0 5,510,017 0
Repayment of Debt (2,055,154) 0 (5,782,227) 0
Debt payments (48,127) (163,555) (86,552) (224,623)
----------- ---------- ----------- -----------
Net cash (used) by financing activities 3,171,824 (132,967) 5,083,573 (181,140)
----------- ---------- ----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS 1,258,907 (1,218,030) 1,383,565 (996,487)
----------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 589,025 2,749,281 464,367 2,527,738
----------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,847,932 $ 1,531,251 $ 1,847,932 $ 1,531,251
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 101,559 $ 46,024 $ 162,617 $ 91,112
Cash paid during the period for income tax $ 12,000 $ 10,120 $ 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 sheets as of June 30, 1995 and November
30, 1994, the condensed consolidated statements of operations and cash
flows for the three months and six months period ended June 30, 1995 and
1994 have been prepared by the Company without audit (except period ending
November 30, 1994). 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
June 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 June 30, 1995 and
November 30, 1994.
<TABLE>
<CAPTION>
June 30, 1995 November 30, 1994
------------- -----------------
<S> <C> <C>
Raw Materials and supplies $ 659,000 $ 577,000
Work-In-Progress 3,877,000 2,615,000
Finished Goods 1,478,000 1,444,000
---------- ----------
Total Inventory $6,014,000 $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)
Contributing to the higher inventory levels were less than projected sales
in the Company's wound and skin care product line during the first and
second quarter of 1995. Also contributing to the higher inventory levels
was production scale-up due to the temporary shutdown and relocation of the
manufacturing plant to its new location in Irving, Texas. The following
reflects inventory levels of freeze-dried aloe vera extract included in the
Company's inventory balance:
June 30, 1995 November 30,1994
-------------- ----------------
Work-In-Progress $3,374,000 $2,332,000
Finished Goods 215,000 0
---------- ----------
Total $3,589,000 $2,332,000
(3) PROPERTY, PLANT AND EQUIPMENT:
Net investment in property, plant and equipment in Costa Rica as of June
30, 1995 and November 30, 1994 was $4,478,000 and $4,822,000, respectively,
of which $158,000 and $277,000 represent unamortized start-up cost for the
respective periods then ended.
As of June 30, 1995, the Company substantially 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 headquarter facility in Irving, Texas. The new facility
will meet all federal regulatory requirements as a fully integrated
pharmaceutical manufacturer as well as 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 June 30, 1995 and November
30, 1994 was $3,803,000 and $590,000, respectfully.
8
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Carrington Laboratories, Inc., and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
(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 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
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 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 June 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 8.09% to 8.125% between the date of closing and June 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
9
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Carrington Laboratories, Inc., and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
may not pay cash dividends.
(5) SHAREHOLDERS' INVESTMENT:
OPTIONS - As of June 30, 1995, 862,752 nonqualified options to purchase
shares of common stock remain outstanding. Option prices range from $6.25
to $20.12 per share. During the second quarter 1995, options for 217,554
shares of common stock were exercised at a price of $6.25 to $14.25 per
share.
In April 1995, the Company granted to three employees under the Company's
1995 Stock Option Plan nonqualified options to purchase 33,000 shares of
the Company's common stock at a price of $18.625, which was the market
price at the date of the grant. 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.
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, 27,419 shares have been purchased by employees at prices ranging
from $7.23 to $11.37 per share through June 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 and Exchange Commission, within
90 days after the closing of the placement, covering the resale of the
shares. Of the 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. The remaining proceeds are being used to
fund capital expenditures, research projects and other operating needs.
10
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Carrington Laboratories, Inc., and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
On July 11, 1995, the shares related to the private placement were
registered for resale with the Securities Exchange Commission.
11
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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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995 and November 30, 1994, the Company held cash and cash
equivalents of $1,848,000 and $1,805,000, respectively. The increase in cash of
$43,000 from November 30, 1994 to June 30, 1995 was attributable to the issuance
of common stock through either the private placement (see Note 6) or the
exercise of options (see Note 5) that resulted in an additional $5,442,000 of
cash. The cash raised through the sale of common stock was used for capital
expenditures of $3,697,000 and to increase inventory by $1,378,000. 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 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 this time frame 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 sales this
period, 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.
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 June 30, 1995, the Company had available $2,000,000 under the
line of credit and $1,323,000 under the 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
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)
loan were used to fund planned capital expenditures, a letter of credit required
by a supplier, 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 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 August 12, 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). 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 July 1995, 67 employees and 6 directors exercised
options for 432,228 shares of common stock. The option prices ranged from $6.25
to $20.125. A total of $3,751,387 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 88,500 shares were
exercised with a price of $6.25 to $16.25.
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 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 has expanded
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 $3,803,000 had
been expended through June 30, 1995.
13
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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 will begin 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. The Company estimates that the cost of
this clinical trial will be approximately $2,000,000, with 20% being 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 five
cancer types. The estimated cost of this study is $400,000. In late 1995 or
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 is
scheduled to begin in the third quarter of 1995.
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 June 30, 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.
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)
SECOND QUARTER OF 1995 COMPARED WITH SECOND QUARTER OF 1994
Net sales were $6,408,000 in the second quarter of 1995, compared with
$6,143,000 in the second quarter of 1994. This increase of $265,000, or 4.3%,
resulted from a $474,000, or 250.4% increase in sales of Caraloe, Inc., the
Company's consumer products subsidiary. Of this, $450,000 is related to the
sale of bulk Manapol(R). Sales of the Company's wound and skin care products
decreased from $5,764,000 to $5,627,000, or 2.4%. 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. Sales of
the Company's veterinary products were $118,000 in the second quarter of 1995,
compared with $189,000 in the same period in 1994. During the first half of
1994, the Company's Acemannan Immunostimulant was back ordered. The product was
released in June of 1994 and all back orders were shipped during that month.
Cost of sales increased to $2,076,000 from $1,565,000, or 32.7%. As a
percentage of sales, cost of sales increased from 25.5% to 32.4%. This increase
is primarily attributable to the increased sales of bulk Manapol(R) which has a
substantially lower margin that the Company's wound and skin care products.
Also, 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. In addition, the Company's
manufacturing operation was shut down over a month and a half to relocate to its
new facility.
Selling, general and administrative expenses increased to $3,262,000 from
$2,914,000, or 12%. This increase was primarily attributable to charges relating
to severance agreements and closing the Company's office in Belgium.
Research and development expenses increased to $1,305,000, from $1,013,000, or
29%. During the second quarter of 1994, charges that have been taken for
expected clinical studies were reversed when it was determined that the studies
would not take place.
Net interest costs increased to $51,000 from $31,000, or 65%, due to increased
borrowings.
FIRST SIX MONTHS OF 1995 COMPARED WITH FIRST SIX MONTHS OF 1994
Net sales were $12,684,000 in the first six months of 1995 compared with
$12,216,000 in the same period last year. This increase of $468,000, or 3.8%,
resulted from a $822,000, or 310% increase in sales of Caraloe, Inc. Of this,
$735,000 is related to the sale of bulk Manapol(R), which the Company began
selling in May 1994. Sales of the Company's wound and skin care products
decreased to $11,418,000 from $11,718,000, or 3%. In the past year, the
Company's competitors
15
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
-----------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 five to seven 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 $179,000 from
$232,000, or 23% due to reduced vaccine adjuvant sales.
Cost of sales increased to $3,715,000 from $2,851,000, or 30%. As a percentage
of sales, cost of sales increased to 29.3% from 23.3%. This increase is
primarily attributable to bulk Manapol(R) 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.
Selling, general and administrative expenses increased to $6,867,000 from
$5,961,000, or 15%. 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 $2,749,000, from $2,676,000, or
3%. This increase is due to charges relating to severance agreements.
Net interest expense increased to $119,000 from $62,000, or 92%, due to
increased borrowings.
16
<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 had 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 concluded its litigation with MPM Medical, Inc,
Jerry Pyle, Paul Miller and John Maverick with the dismissal without
prejudice of the lawsuits filed in the 101st District Court of Dallas
County.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1995 Annual Meeting of Shareholders held on April 27, 1995,
Thomas J. Marquez and Selvi Vescovi were elected to serve as directors
of the Company for terms expiring at the 1998 annual meeting. The votes
for each director were:
Thomas J. Marquez: 6,092,956
Selvi Vescovi: 6,094,446
The 1995 Stock Option Plan was approved by a vote of outstanding shares
of the Company's common stock. Under the plan the Company from time to
time may grant options to purchase an aggregate of 1,500,000 shares of
the authorized Common Stock. The vote on the 1995 Stock Option Plan
was:
For: 3,719,792
Against: 956,851
Abstained: 52,637
The Company's 1995 Management Incentive Plan was approved by a vote of
the outstanding shares of the Company's common stock. The vote on the
1995 Management Incentive Plan was:
For: 3,999,084
Against: 673,325
Abstained: 56,871
Arthur Andersen LLP was appointed as independent auditors for the
Company for the fiscal year ended December 31, 1995 by a vote of
outstanding shares of the Company's common stock. The vote on Arthur
Andersen LLP was:
For: 6,414,562
Against: 172,920
Abstained: 26,023
17
<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 June 30, 1995.
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 August 14, 1995 By /s/ Carlton E. Turner
Carlton E. Turner,
President
Date August 14, 1995 By /s/ Christopher S. Record
Christopher S. Record,
Vice President
(Chief Financial Officer)
19
<PAGE>
Carrington Laboratories, Inc., and Subsidiaries
-----------------------------------------------
INDEX TO EXHIBITS
-----------------
Sequentially
Exhibit Numbered
Number Exhibit Page
11.1 Computation of Net Income Per Common 24
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 Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income $ (286,555) $ 563,543 $ (783,340) $ 594,303
Preferred stock dividend
requirements (35,792) (31,961) (68,932) (61,550)
Net income for computing
income per common share (322,347) 531,582 (852,272) 532,753
Average common and common
equivalent shares out-
standing/(1)/ 7,884,046 7,340,432 7,621,712 7,339,192
Net income per common and
common equivalent share (.04) .07 (.11) .07
</TABLE>
/(1)/ Common stock equivalents have been excluded since the the Company was in
a loss position. However, the common stock equivalents represented a
dilution of greater than 3% as of June 30, 1995.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,847,932
<SECURITIES> 0
<RECEIVABLES> 2,559,160
<ALLOWANCES> 0
<INVENTORY> 6,013,669
<CURRENT-ASSETS> 10,908,519
<PP&E> 12,540,271
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,532,385
<CURRENT-LIABILITIES> 3,288,050
<BONDS> 3,088,703
<COMMON> 79,876
0
1,167,734
<OTHER-SE> 15,908,322
<TOTAL-LIABILITY-AND-EQUITY> 23,532,385
<SALES> 12,683,638
<TOTAL-REVENUES> 12,683,638
<CGS> 3,715,441
<TOTAL-COSTS> 13,331,484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,144
<INCOME-PRETAX> (766,990)
<INCOME-TAX> 16,350
<INCOME-CONTINUING> (783,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (783,340)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
