UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
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Commission file number 0-11997
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CARRINGTON LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1435663
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(State or other jurisdiction of (IRS 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)
972-518-1300
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(Registrant's telephone number, including area code)
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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
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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
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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.
8,878,562 shares of Common Stock, $.01 par value, were outstanding at
May 11, 1997.
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INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1997 (unaudited) and
December 31, 1996 3
Condensed Consolidated Statements of
Operations for the three months
ended March 31, 1997 and 1996
(unaudited) 4
Consolidated Statements of Cash Flows
for the three months ended March 31,
1997 and 1996 (unaudited) 5
Notes to Condensed Consolidated
Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
(unaudited)
March 31, December 31,
1997 1996
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Assets
Cash and cash equivalents $ 6,808 $11,406
Accounts receivable, net 2,794 1,912
Inventories 3,461 3,623
Prepaid expenses 379 368
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Total current assets 13,442 17,309
Property, plant and equipment, net 11,452 11,678
Other assets 2,179 2,215
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Total assets $27,073 $31,202
======== ========
Liabilities and Shareholders' Investment
Current portion of long-term debt $ 32 $ 29
Accounts payable and accrued liabilities 3,033 3,370
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Total current liabilities 3,065 3,399
Long-term debt, net of current portion 35 46
Shareholders' investment:
Preferred stock 33 66
Common stock 89 89
Capital in excess of par 52,846 56,680
Deficit (28,821) (28,904)
Foreign currency translation adjustment (174) (174)
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Total shareholders' investment 23,973 27,757
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Total liabilities and
shareholders'equity $27,073 $31,202
======== ========
The accompanying notes are an integral part of these statements.
<PAGE> 3
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Three Months Ended
March 31,
1997 1996
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Net sales $6,084 $ 5,514
Cost and expenses:
Cost of sales 2,507 2,930
Selling, general and administrative 2,728 2,830
Research and development 798 1,948
Interest, net (55) (38)
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Income (loss) from operations
before income taxes 106 (2,156)
Provision for income taxes 22 -
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Net income (loss) $ 84 $(2,156)
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Net income (loss) per common and
common equivalent share $ .01 $ (0.25)
Less: Earnings attributable to
preferred shareholders (Series E) (.01) -
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Net income (loss) available to
common shareholders per common
and common equivalent share $ .00 $ (0.25)
======= ========
Weighted average common and
common equivalent shares 8,874 8,666
======= ========
The accompanying notes are an integral part of these statements.
<PAGE> 4
Condensed Statements of Cash Flows (unaudited)
(Dollar amounts in 000's)
Three Months
Ended
March 31,
1997 1996
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Cash flows from operating activities
Net income (loss) $ 84 $(2,156)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 313 323
Changes in assets and liabilities:
Increase in receivables, net (882) (197)
Decrease in inventories, net 162 622
(Increase) decrease in prepaid expenses (11) 253
Decrease (increase) in other assets 26 (148)
(Decrease) increase in accounts payable and
accrued liabilities (338) 663
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Net cash used by operating activities (646) (640)
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Cash flows from investing activities:
Purchases of property, plant and equipment (77) (104)
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Net cash used by investing activities (77) (104)
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Cash flows from financing activities:
Issuances of common stock 18 2,585
Repurchase of preferred stock (3,885) -
Debt payments (8) (9)
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Net cash (used) provided by
financing activities (3,875) 2,576
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Net (decrease) increase in cash
and cash equivalents (4,598) 1,832
Cash and cash equivalents, beginning of period 11,406 6,222
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Cash and cash equivalents, end of period $ 6,808 $ 8,054
======== ========
Supplemental disclosure of cash flow
information
Cash paid during the period for interest $ 1 $ 2
Cash paid during the period for
Federal, state and local income taxes 78 1
The accompanying notes are an integral part of these statements.
<PAGE> 5
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of March 31, 1997 and the
condensed consolidated statements of operations for the three month
periods ended March 31, 1997 and 1996 and the condensed consolidated
statements of cash flows for the three month periods ended March 31,
1997 and 1996, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include all normal
recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows at March 31,
1997, 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
December 31, 1996.
(2) Debt:
The Company had no outstanding bank debt as of March 31, 1997 and
December 31, 1996. The Company's long-term debt represents capital
equipment lease obligations of the Company.
(3) Shareholders' Investment:
Preferred Stock (Series E)- On October 21, 1996 (the "Closing Date"),
the Company completed a $6,600,000 financing involving the private
placement of Series E Convertible Preferred Stock (the "Series E
Shares"). Each Series E Share has a par value of $100 and an initial
purchase price of $10,000 (the "Purchase Price"). After placement fees,
legal and other costs related to the private placement, the Company
realized net proceeds of $6,266,000. At the Closing Date, the Company's
plans called for much of the proceeds from this sale to be used to
continue Carrington's clinical research programs.
The Series E Shares are convertible, at the option of the holder
thereof, into shares of the Company's common stock beginning on
December 20, 1996, and prior to October 21, 1999 (the "Maturity Date"),
at a conversion price per share (the "Conversion Price") equal to the
lower of $25.20 (120% of the market price of the Company's common
stock as calculated over the three trading-day period ended on the last
trading day prior to the Closing Date) or 87% of the market price as
calculated over the three trading-day period ending on the last trading
day immediately preceding the conversion date. The Conversion Price is
subject to adjustment to take into account stock dividends, stock
splits and share combinations involving the Company's common stock.
Each Series E Share will be convertible into the number of whole shares
of common stock determined by dividing $10,000 by the Conversion Price.
The Securities and Exchange Commission (the "Commission") has taken the
position that when preferred stock is convertible to common stock at a
conversion rate that is the lower of a rate fixed at issuance or a
fixed discount from the common stock market price at the time of
conversion, the discounted amount is an assured incremental yield, the
"beneficial conversion feature," to the preferred shareholders and
should be accounted for as an embedded dividend to preferred
<PAGE> 6
shareholders. As such, a dividend of $986,000, or $0.11 per share, was
recognized in the earnings per share calculation as of December 31,
1996.
Each Series E Share outstanding on the Maturity Date will automatically
convert into common stock at the then current Conversion Price.
Holders of Series E Shares will be entitled to receive an annual
dividend payment equal to $500 per share for the one year period
commencing on October 21, 1998 and ending on October 20, 1999 (equal to
5% of the per share Purchase Price). Dividends are payable only if the
Series E Shares are held to maturity, and are payable either in shares
of common stock at the then current Conversion Price or in cash, or a
combination of both, at the option of the Company.
The Company entered into Registration Rights Agreements (collectively,
the "Registration Agreements") with the holders of the Series E Shares
obligating the Company to prepare and file with the Securities and
Exchange Commission (the "Commission") a registration statement (the
"Registration Statement") with respect to the resale of the underlying
shares of common stock (including any shares issued in payment of
dividends on the Series E Shares or the periodic payments described
below). The Registration Agreements provided that if the Commission did
not declare the Registration Statement effective on or before January
9, 1997, the Company would make periodic payments to the holders of the
Series E Shares equal to 1% of the Purchase Price for the first 30-day
period thereafter and 2% of the Purchase Price for each additional 30-
day period, prorated to the date on which the Commission declared the
Registration Statement effective. Such payments could be made in cash
or shares of common stock or a combination of both, at the election of
the Company. The Company filed the Registration Statement with the
Commission on December 2, 1996.
On October 31, 1996, the Company announced that the results of its
first Phase III trial of Aliminase[TM] oral capsules were not favorable
and that the Company had placed the Aliminase[TM] project on hold and
terminated the second Phase III trial of that product. Those
developments resulted in changes in the Company's planned uses of and
need for funds. In addition, a decline in the market price of the
Company's common stock that followed that announcement increased the
extent of dilution that would have occurred if all of the outstanding
Series E Shares issued in October 1996 were converted into common
stock. Also, since the Registration Statement covering the shares of
common stock underlying the Series E Shares had not been declared effective
by the Commission, the periodic payments required by the Registration
Agreements had begun to accrue (see above).
Accordingly, the Company's Board of Directors concluded that it was in
the best interest of the Company and its shareholders to use a portion
of its existing funds to repurchase 50% of the outstanding Series E
Shares. This repurchase was completed on March 4, 1997 (the
"Repurchase Date"). The price paid by the Company was $11,300 per
Series E Share, or a premium of $1,300 over the original Purchase
Price. In connection with the repurchase, the parties agreed (i) that
no periodic payments would be due for the period from February 15, 1997
through May 15, 1997; (ii) that the Company would pay in cash on the
Repurchase Date the periodic payments that had accrued from January 10
through February 14, 1997; (iii) that the Company would pay the holders
of the Series E Shares interest at the rate of 7% per annum on the
original Purchase Price of their outstanding Series E Shares for the
period from February 15, 1997 through the earliest of (a) May 15, 1997,
(b) the Repurchase Date (in the case of Series E Shares repurchased by
the Company), or (c) the date on which the Registration Statement is
declared effective by the Commission; and (iv) that if the Commission
does not declare the Registration Statement effective on or before May
15, 1997, the periodic payments required by the Registration Agreements
will resume accruing on May 16, 1997, but will be equal to 1% of the
<PAGE> 7
original Purchase Price of the outstanding Series E Shares through June
15, 1997 and 2% for each additional 30-day period, prorated to the date
on which the Commission declares the Registration Statement effective,
and will be payable only in cash.
On the Repurchase Date, the Company paid the Series E Shareholders
$3,729,000 (330 Series E Shares at $11,300 per share), $92,400 (the
periodic payment due on all 660 Series E Shares from January 10, 1997
through February 14, 1997) and $10,759 (7% per annum interest on
$3,300,000 from February 15, 1997 to the Repurchase Date). These
amounts are included in Shareholders' Investment. Amounts paid to
preferred shareholders in excess of par total $68,000 more than the
embedded dividend recognized in the fourth of 1996. This additional
deemed dividend was used in the earnings per share calculation for the
first quarter of 1997 to reduce net income available to common
shareholders.
(4) New Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", ("SFAS 128"), which is required
to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock
options will be excluded. Utilizing the new method would not impact
either primary earnings (loss) per share or fully diluted earnings
(loss) per share for the quarters ended March 31, 1997 or March 31,
1996.
(5) Subsequent Event:
Following the closing of the Series E Preferred Stock repurchase
described in Note Three above, the price of the Company's Common Stock
continued to feel the pressure of the potential dilutive effect of a
conversion of the remaining preferred shares and the expected future
sale of the resulting common shares. The closing sales price of the
Company's Common Stock on NASDAQ on April 28, 1997 was $4.875. If all
330 Series E Shares currently outstanding were converted when the market
price was $4.875, the resulting conversion price would be $4.24125
(87% of $4.875), and the Series E Shares would convert into 778,072
shares of Common Stock. Considering the dilution that could occur if
all of the remaining Series E Shares currently outstanding were converted
into Common Stock at a low conversion price, as well as the effect that
sales of those shares of Common Stock would have on the market price of
the Common Stock, the Company's Board of Directors concluded that it was
in the best interest of the Company and its shareholders to use a portion
of its existing funds to repurchase the remaining Series E Shares. In
May 1997, the Company initiated negotiations with a representative of
the holders of the Series E Shares regarding a proposal for the Company
to repurchase all remaining outstanding shares. The terms of the proposal
will require the Company to pay $11,490 per Series E Share, or a premium
of 14.9% over the original Purchase Price. In addition, the Company will
pay holders of the Series E Shares interest at the rate of 7% per annum on
the original Purchase Price of their outstanding Series E Shares for the
period from February 15, 1997 through the closing date of the proposed
repurchase. The Company believes that this transaction will be successfully
completed before the end of May 1997.
The proposed repurchase would require the holders of the outstanding
Series E Shares to sell all of such shares to the Company. If the
repurchase is consumated in accordance with the proposal, the Company
expects to pay the holders of the Series E Shares $3,792,000
(for 330 Series E Shares at $11,490 per share) plus $633 interest per
day (7% per annum interest on $3,300,000) from February 15, 1997 to the
closing date. These amounts will be paid in cash and will be shown as a
reduction of Shareholders' Investment in the second quarter of 1997.
Amounts paid to preferred shareholders in excess of par are expected to
total approximately $33,000 more than the embedded dividend recognized
in the fourth quarter of 1996 and the deemed dividends recognized in the
first quarter of 1997. This additional deemed dividend will be used in
the earnings per share calculation for the second quarter of 1997 to reduce
net income available to common shareholders. However, there is no
assurance that the terms of the proposed repurchase will not change or
that the repurchase will be consummated on the terms proposed or on any
other terms.
<PAGE> 9
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 is primarily based on complex carbohydrate
technology derived naturally from the Aloe vera plant.
Liquidity and Capital Resources
At March 31, 1997 and December 31, 1996, the Company held cash and cash
equivalents of $6,808,000 and $11,406,000, respectively. The decrease
in cash of $4,598,000 from December 31, 1996 to March 31, 1997 was
largely attributable to the repurchase of 50% of the Series E Preferred
Shares outstanding on March 4, 1997 (see Note 3 to the condensed
consolidated financial statements). Also contributing to the decrease
in cash was the payment of approximately $150,000 in cancellation fees
related to the second Phase III clinical study for Aliminase[TM] oral
capsules (described below) and extended payment terms granted to
Mannatech, Inc.
The Company regularly evaluates its inventory levels and adjusts
production 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. Additionally, the production capacity of the Costa
Rica plant is larger than the Company's current usage level. As a
result of these evaluations and excess capacity, production levels may
be reduced to the point that the Company may expense unabsorbed
overhead as cost of sales.
The Company adopted Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of ("SFAS 121"), in January 1996. SFAS
121 requires that long-lived assets held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be
recoverable. At the time of adoption, there was no impairment of asset
value in Costa Rica based on historical production levels and future
capacity requirements needed to produce the Company's drug Aliminase[TM],
then under initial phase III clinical trials (see discussion below).
In late October 1996, the Company received the results of the initial
phase III clinical trial for the testing of Aliminase[TM] oral capsules,
which indicated no statistically significant differences that would
support a conclusion that Aliminase[TM] oral capsules provide a
therapeutic effect in the treatment of ulcerative colitis. As a
result, the Company terminated the second large scale clinical trial
and placed further testing of Aliminase[TM] oral capsules on hold. These
results triggered a new assessment of the recoverability of the costs
of the Costa Rica plant's assets using the methodology provided by SFAS
121 in the fourth quarter of 1996. The net book value of the Costa
Rica Plant assets as of March 31, 1997 and December 31, 1996 was
$3,785,000 and $3,958,000, respectively. The Company evaluated the
value of Costa Rica produced components in its current product mix to
determine the amount of net revenues, excluding Manapol[R] powder sales
to Mannatech (see discussion of Caraloe sales to Mannatech below),
<PAGE> 10
attributable to the Costa Rica plant. Cash inflows for 1997 and future
years were estimated using management's current forecast and business
plan. All direct costs of the facility, including certain allocations
of Company overhead, were considered in the evaluation of cash
outflows. Results indicate there is no impairment of value under SFAS
121. However, there is no assurance that future changes in product mix
or the content of Costa Rica produced components in the current
products will generate sufficient revenues to recover the costs of the
plant under the methodology described in SFAS 121.
As of March 14, 1997, the Company had no material capital commitments
other than its leases and agreements with suppliers. 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. A term loan with NationsBank
was initially used to fund this letter of credit. As of April 30,
1997, the supplier had not made a presentation for payment under the
letter of credit. In April 1996, and in conjunction with the Company's
settlement of the term loan, the Bank agreed to reduce the fees on the
letter of credit by one percentage point in consideration of the
Company's agreement to purchase and assign to the Bank a certificate of
deposit ("CD") in an amount equal to the letter of credit. The Company
will maintain the CD until such time as the letter of credit expires or
is otherwise released. The contract with the supplier 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. At
the request of the supplier, the minimum purchase requirements were waived
for the three month period ending December 31, 1996. The supplier
currently produces the CarraSorb[TM] M Freeze Dried Gel and the
Carrington[TM] (Aphthous Ulcer) Patch for the Company. Both of these
products represent new technology and are still in the product
acceptance and launch phase. The Company had approximately $308,000
and $325,000 of CarraSorb[TM] M and Carrington[TM] (Aphthous Ulcer) Patch
inventory on hand as of March 31, 1997 and December 31, 1996,
respectively. Current sales of both items are lower than the minimum
purchase requirement, but the Company believes that as licensing,
acceptance and demand for the new technology increases, demand will
exceed the minimum purchase requirement. As of April 30, 1997, the
Company has purchased products totaling approximately $331,000 from
this supplier. The Company is in full compliance with the agreement
and, as of April 30, 1997, has the available resources to meet all
future minimum purchase requirements.
Although the aforementioned CD matures every 90 days, the Company's
management has elected not to classify the CD as a cash equivalent. As
the CD secures a letter of credit, it is effectively unavailable to the
Company for other purposes until such time as the letter of credit expires
or is otherwise released. Therefore, the CD is included in Other
non-current assets for reporting purposes.
In November 1995, the Company signed a licensing agreement with a
supplier of calcium alginates and other wound care products. Under the
agreement, the Company has exclusive marketing rights for ten years to
advanced calcium alginate products for North and South America and in
the People's Republic of China. Under the agreement, the Company made
an up-front payment to the supplier of $500,000. This payment resulted
in increasing the prepaid assets of the Company. As of March 31, 1997,
the net book value of this agreement was $379,000. Additional payments
totaling $500,000 will be made to the supplier as new products are
delivered.
The Company began a large scale clinical trial during the third quarter
of 1995 for the testing of its Aliminase[TM] oral capsules for the
treatment of acute flare-ups of ulcerative colitis. The cost of this
clinical trial was approximately $2,300,000. All expenses related to
this trial have been recognized and paid. In the third quarter of
<PAGE> 11
1996, the Company began a second large scale clinical trial for the
testing of Aliminase[TM] oral capsules for the treatment of ulcerative
colitis. The cost of this trial was expected to be approximately
$2,500,000, of which approximately $212,000 was required as an initial
payment when the research contract was signed on September 19, 1996.
The full amount of the initial payment was expensed in the third
quarter. In late October 1996, the Company received the results of the
initial phase III clinical trial for the testing of Aliminase[TM] oral
capsules, which indicated that no statistically significant differences
were found to support a therapeutic effect. As a result, the Company
terminated the second large scale clinical trial and placed further
testing of Aliminase[TM] oral capsules on hold. Approximately $150,000 in
cancellation fees was expensed in relation to this termination in 1996.
This amount was paid in January 1997. No significant additional
expenses related to phase III trials of Aliminase[TM] oral capsules are
anticipated.
In late 1995, the Company began an initial Phase I study using
CarraVex[TM] injectable (formerly CARN 750) in cancer patients involving
six cancer types. The estimated cost of this study is $475,000, of
which approximately $296,000 had been expensed as of March 31, 1996.
Also in late 1995, the Company initiated an ongoing program to reduce
expenses and the cost of manufacturing, thereby increasing the gross
margin on existing sales. This program included a restructuring of the
work force in Costa Rica as well as a change in the manufacturing
process for Aloe vera based raw materials. Product costs have been
decreased through changes in product packaging, and other costs have
been reduced through competitive bidding. Where appropriate, the
Company now complies with lower USDA or food grade requirements instead
of more stringent FDA requirements. The Company completed a restructuring
of the sales force in mid-1996 to position it for growth and is refocusing
the sales effort to increase market share in the alternative care markets.
As part of this restructuring, the Company eliminated six sales positions,
including representatives in five sales territories. The Company replaced
three of these positions with commission based independent manufacturer's
representatives. Two of the positions were integrated into existing sales
territories. And finally, sales representatives in territories that were
contributing a low return are now compensated under a compensation plan
that emphasizes increased sales. This compensation plan rewards the
employee by paying a commission on every sales dollar. To offset the
higher commissions, the employees have a significantly lower base salary
and are responsible for covering their own travel and entertainment
expenses. This program will continue into the foreseeable future and will
continually challenge the costs of doing business and, where possible,
further reduce the cost of operations.
In October 1996, the Company completed a $6,600,000 financing involving
the private placement of Series E Convertible Preferred Stock (the
"Series E Shares"). At that time, plans called for much of the
proceeds from this sale to be used to continue Carrington's clinical
research programs (see Note 3 to the consolidated financial statements).
On October 31, 1996, the Company announced the results of the first Phase
III trial of Aliminase[TM] oral capsules. Due to the unfavorable results
of the first Phase III trial, the Aliminase[TM] project was placed on hold.
Additionally, the Company's management canceled the second Phase III
clinical trial then under contract. This event resulted in significant
changes in the Company's planned uses of and need for these funds.
In addition to the change in the Company's needs, the decline in the
market price of the Company's Common Stock increased the extent of
dilution that would have occurred if all of the Series E Shares then
outstanding were converted into Common Stock. For these and other
<PAGE> 12
reasons, the Company's Board of Directors concluded that it was in the
best interest of the Company and its shareholders that the Company use
a portion of its existing funds to repurchase 100% of the Series E
Shares (see Note 3 to the condensed consolidated financial statements).
On March 4, 1997, the Company completed a repurchase of 50% of the Series
E Shares and expects to complete a second repurchase for the remaining 50%
of the outstanding Series E Shares before the end of May 1997.
The Company believes that its available cash resources, after the above
described repurchase of the Series E Shares, and expected cash flows
from operations will provide the funds necessary to finance its current
operations. However, the Company does not expect that its current cash
resources will be sufficient to finance the major clinical studies and
costs of filing new drug applications 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, and there is no assurance that the Company
will be able to obtain such funds on satisfactory terms when they are
needed.
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.
Impact of Inflation
The Company does not believe that inflation has had a material impact
on its results of operations.
First Quarter of 1997 Compared With First Quarter of 1996
In the past, the Company's wound and skin care products have been
marketed primarily to hospitals and select acute care providers. This
market has become increasingly competitive as a result of pressures to
control health care costs. Hospitals and distributors have reduced
their inventory levels and the number of suppliers used. Also, health
care providers have formed group purchasing consortiums to leverage
their buying power. This environment required the Company to offer
greater discounts and allowances to maintain customer accounts. In
February 1996, the Company revised its price list to more accurately
reflect current market conditions. Overall wound and skin care prices
were lowered by a weighted average of 19.1%. With the February price
reduction, the Company expected, and began to realize, a decrease in
the amount of discounts required. In addition to these cost pressures,
over the last several years the average hospital stay has decreased
over 50%, resulting in more patients being treated at alternative care
facilities and at home by home health care providers. This also had a
negative impact on sales since the Company's sales force had been
primarily focused on the hospital market. To counter the market
changes, the sales force has been aggressively pursuing the alternative
care markets.
<PAGE> 13
To continue to grow its wound care business, the Company realized that
it had to expand from the $38 million hydrogel market in which it
competed to a much larger segment of the billion dollar plus wound care
market. To achieve this objective, an aggressive program of new
product development and licensing was undertaken in 1995 with the goal
of creating a complete line of wound care products to address all
stages of wound management. As a result of this program, the Company
launched three new wound care product types in late January 1996. In
the first quarter of 1997, the Company launched an additional three new
product lines and expanded another product line. The Company expects
to launch additional products in mid-1997.
<TABLE>
<CAPTION>
The following summarizes sales by division and consolidated sales for
the three month periods ended March 31, 1997 and 1996:
(Dollar amounts in 000's)
Carrington Laboratories, Inc.
-------------------------------------------------
Three Months Ended Wound Carrington Caraloe Consolidated
March 31, 1997 Care Veterinary Sales Inc. Sales
------ ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales, net $4,623 $ 33 $4,656 $1,428 $6,084
Cost of sales 1,431 26 1,457 1,050 2,507
------ ----- ------ ------ ------
Gross margin $3,192 $ 7 $3,199 $ 378 $3,577
====== ===== ====== ====== ======
Three Months Ended
March 31, 1996
Sales, net $4,253 $ 66 $ 4,319 $1,195 $5,514
Cost of sales 1,867 40 1,907 1,023 2,930
------ ----- ------- ------ ------
Gross margin $2,386 $ 26 $ 2,412 $ 172 $2,584
====== ===== ======= ====== ======
</TABLE>
Net sales were $6,084,000 in the first quarter of 1997, compared with
$5,514,000 in the first quarter of 1996. This increase of $1,570,000,
or 10.3%, resulted from an increase of $370,000 in sales of the
Company's wound and skin care products from $4,253,000 to $4,623,000,
or 8.7%. New products introduced in the first quarter accounted for
$121,000 of the increase in wound and skin care sales during the first
quarter of 1997.
Also contributing to the increase in net sales was an increase in sales
of Caraloe, Inc., the Company's consumer products subsidiary.
Caraloe's sales increased from $1,195,000 to $1,428,000, or 19.5%.
Caraloe sales to Mannatech, Inc., which were primarily Manapol[R] powder,
increased from $1,071,000 to $1,080,000. Additionally, Caraloe made
its first shipments to Aloe Commodities International, Inc., ("ACI") under
a supply agreement signed in late 1996. These shipments resulted in
$86,000 in sales in the first quarter of 1997.
Sales of the Company's veterinary products decreased from $66,000 to
$33,000. In March 1996, the Company entered into an agreement with
Farnam Companies, Inc., a leading marketer of veterinary products, to
promote and sell the Company's veterinary line on a broader scale. In
1997, the Company will begin to private label the veterinary line under
the Farnam name. Farnam has increased its sales force and expects to
improve its market share with the private labeled products.
Cost of sales decreased from $2,930,000 to $2,507,000, or 14.4%. As a
percentage of sales, cost of sales decreased from 53.1% in the first
<PAGE> 14
quarter of 1996 to 41.2% in the first quarter of 1997. The high 1996 cost
of sales is the result of period costs related to inventory reduction
programs in the first quarter of 1996. In 1997, these period costs
were eliminated as desired inventory levels had been obtained by the
latter half of 1996.
Selling, general and administrative expenses decreased to $2,728,000
from $2,830,000, or 3.6%. This decrease is primarily attributable to
cost reduction programs put in place in 1996, including savings
generated from the restructuring of the sales force.
Research and development ("R&D") expenses decreased to $798,000 from
$1,948,000, or 59.0%. This decrease was the result of the completion of
the first phase III pivotal large scale clinical trial for the testing of
Aliminase[TM] oral capsules for the treatment of acute flare-ups of
ulcerative colitis begun during the third quarter of 1995. This study was
substantially completed in the third quarter of 1996. In September of
1996, the Company initiated the second pivotal phase III testing of
Aliminase[TM] oral capsules. The initial payment of approximately
$212,000 was expensed in the third quarter. In late October 1996, the
Company received the results of the initial phase III clinical trial
for the testing of Aliminase[TM]. Indications were that no statistically
significant differences were found to support a therapeutic effect. As
a result, the Company terminated the second large scale clinical trial and
further testing of the Aliminase[TM] oral formulation was placed on hold.
Approximately $150,000 in cancellation fees was recorded in the third
quarter of 1996 and was paid in the first quarter of 1997 in relation to
this termination. Also contributing to the decrease in R&D expenses was a
reduction of internal salaries and other operating expenses.
Net interest income of $55,000 was realized in the first quarter of
1997, versus net interest income of $33,000 in the first quarter of
1996, due to having more cash to invest as well as the early retirement of
all bank debt in April of 1996.
Net income for the first quarter of 1997 was $84,000, versus a net loss
of $2,156,000 for the first quarter of 1996. This change is a result
of a sales increase, the elimination of period costs associated with
the inventory reduction programs put in place in early 1996, and reduced
research expenditures. Loss per share was $.00 in the first quarter of
1997, compared to a loss per share of $.25 in 1996. The income per share
available to common shareholders in 1997 includes the recognition of a
$68,000, or $.01 per common share, deemed dividend on the Company's Series
E Convertible Preferred Stock in the calculation of income per share for
the quarter ended March 31, 1997.
All statements other than statements of historical fact contained in
this report, including statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (and similar
statements contained in the Notes to Condensed Consolidated Financial
Statements), concerning the Company's financial position, liquidity,
capital resources and results of operations, its prospects for the
future and other matters, are forward-looking statements.
Forward-looking statements in this report generally include or are
accompanied by words such as "anticipate", "believe", "estimate",
"expect", "intend" or words of similar import. Such forward-looking
statements include, but are not limited to, statements regarding the
Company's plan or ability to recover the cost of the Costa Rica plant,
to absorb the plant's operating cost, to achieve growth in demand for,
or sales of, products, to reduce expenses and manufacturing costs and
increase gross margin on existing sales, to maintain the CD that secures
its outstanding letter of credit, to obtain financing when it is needed,
to increase the Company's market share in the alternative care markets,
<PAGE> 15
to improve its revenues and fund its operations from such revenues and
other available cash resources, to enter into licensing agreements, to
develop and market new products and increase sales of existing products,
to obtain government approval to market new products, to expand its
business into a larger segment of the market for wound care products, to
increase its market share in the alternative care markets, to promote and
sell its veterinary products on a broad scale and various other matters,
and to repurchase its outstanding Series E Shares.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, no assurance can be given
that such expectations will prove correct. Factors that could cause
the Company's results to differ materially from the results discussed
in such forward-looking statements include but are not limited to the
possibilities that the Company may be unable to obtain the funds needed
to carry out large scale clinical trials and other research and
development projects, that the results of the Company's clinical trials
may not be sufficiently positive to warrant continued development and
marketing of the products tested, that new products may not receive
required approvals by the appropriate government agencies or may not
meet with adequate customer acceptance, that the Company may not be
able to obtain financing when needed, that the Company may not be able
to obtain appropriate licensing agreements for products that it wishes
to market or products that it needs assistance in developing, that
demand for the Company's products may not be sufficient to enable it to
recover the cost of the Costa Rica plant or to absorb all of that
plant's operating costs, and that the Company's efforts to improve its
sales may not be sufficient to enable it to fund its operating costs
from revenues and available cash resources.
All forward-looking statements in this report are expressly qualified
in their entirety by the cautionary statements in the two immediately
preceding paragraphs.
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
-------------------
11.1 Computation of Net Income (Loss) Per Common and Common
Equivalent Share
27.1 Financial Data Schedule
b. Reports on Form 8-K:
--------------------
No report on Form 8-K was filed by the Company during
the quarter ended March 31, 1997.
<PAGE> 17
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 15, 1997 By: /s/ Carlton E. Turner
------------------ ------------------------
Carlton E. Turner,
President and C.E.O.
Date: May 15, 1997 By: /s/ Sheri L. Pantermuehl
------------------ -------------------------
Sheri L. Pantermuehl,
Chief Financial Officer
and Treasurer
<PAGE>
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 15, 1997 By:
------------------ ------------------------
Carlton E. Turner,
President and C.E.O.
Date: May 15, 1997 By:
------------------ ------------------------
Sheri L. Pantermuehl,
Chief Financial Officer
and Treasurer
<PAGE>
INDEX TO EXHIBITS:
11.1 Computation of Net Income (Loss) Per Common and Common
Equivalent Share
27.1 Financial Data Schedule
<PAGE>
Exhibit 11.1
Computation of Net Income (Loss) Per Common and Common Equivalent Share
(unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Three Months Ended
March 31,
1997 1996
------- -------
Net income (loss) $ 84 ($2,156)
Preferred stock dividend
requirement (Series C) - (37)
Earnings attributable to preferred
holders (Series E) $ (68) -
====== ========
Net income (loss) available
to common stock shareholders $ 16 ($2,193)
====== ========
Average common and
common equivalent
shares outstanding (1) 8,874 8,666
Net income (loss) per
common and common
equivalent share $0.00 ($0.25)
====== ========
(1) Common stock equivalents have been excluded since the effect on
net income per share of their inclusion would be antidilutive.
E - 1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from (1) Statements of Balance Sheets, (2) Statements of
Operations and (3) Statements of Cash Flows, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,808
<SECURITIES> 0
<RECEIVABLES> 2,999
<ALLOWANCES> 205
<INVENTORY> 3,461
<CURRENT-ASSETS> 13,442
<PP&E> 18,928
<DEPRECIATION> 7,476
<TOTAL-ASSETS> 27,073
<CURRENT-LIABILITIES> 3,065
<BONDS> 35
0
33
<COMMON> 89
<OTHER-SE> 23,851
<TOTAL-LIABILITY-AND-EQUITY> 27,073
<SALES> 6,084
<TOTAL-REVENUES> 6,084
<CGS> 2,507
<TOTAL-COSTS> 2,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (55)
<INCOME-PRETAX> 106
<INCOME-TAX> 22
<INCOME-CONTINUING> 84
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16 <F1>
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
EARNINGS PER COMMON SHARE, AFTER ATTRIBUTIBLE
PREFERRED SHARES DIVIDEND (SERIES E).
</FN>
</TABLE>
