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 June 30, 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
- ------------------------------- ---------------------------------
(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.
9,311,329 shares of Common Stock, $.01 par value, were outstanding at
August 14, 1997.
<PAGE>
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1997 (unaudited) and
December 31, 1996 3
Condensed Consolidated Statements of
Operations for the three and six
months ended June 30, 1997 and
1996 (unaudited) 4-5
Consolidated Statements of Cash Flows
for the six months ended June 30,
1997 and 1996 (unaudited) 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
(unaudited)
June 30, December 31,
1997 1996
----------- ------------
Assets
Cash and cash equivalents $ 4,498 $11,406
Accounts receivable, net 2,937 1,912
Inventories 4,107 3,623
Prepaid expenses 296 368
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Total current assets 11,838 17,309
Property, plant and equipment, net 11,276 11,678
Other assets 1,905 2,215
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Total assets $25,019 $31,202
======= =======
Liabilities and Shareholders' Investment
Current portion of long-term debt $ 31 $ 29
Accounts payable and accrued liabilities 2,861 3,370
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Total current liabilities 2,892 3,399
Long-term debt, net of current portion 29 46
Shareholders' investment:
Preferred stock - 66
Common stock 93 89
Capital in excess of par 51,532 56,680
Deficit (29,353) (28,904)
Foreign currency translation adjustment (174) (174)
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Total shareholders' investment 22,098 27,757
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Total liabilities and
shareholders's equity $25,019 $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
June 30,
1997 1996
--------- ---------
Net sales $5,121 $ 5,438
Cost and expenses:
Cost of sales 1,886 3,365
Selling, general and administrative 2,794 2,920
Research and development 796 1,755
Interest, net 154 (57)
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Loss from operations
before income taxes (509) (2,545)
Provision for state income taxes 22 -
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Net loss $ (531) $(2,545)
======= ========
Net loss per common and
common equivalent share $(0.06) $ (0.29)
======= ========
Weighted average common and
common equivalent shares 8,898 8,805
======= ========
The accompanying notes are an integral part of these statements.
<PAGE> 4
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Six Months Ended
June 30,
1997 1996
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Net sales $11,204 $10,952
Cost and expenses:
Cost of sales 4,393 6,296
Selling, general and administrative 5,522 5,749
Research and development 1,594 3,703
Interest, net 98 (95)
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Loss from operations
before income taxes (403) (4,701)
Provision for state income taxes 45 -
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Net loss $ (448) $(4,701)
======= ========
Net loss per common and
common equivalent share $(0.05) $ (0.54)
Less: Earnings attributable to
preferred stock holders (Series E) (0.01) -
------- --------
Net loss available to common
shareholders per common
and common equivalent share $(0.06) $ (0.54)
======= ========
Weighted average common and
common equivalent shares 8,879 8,735
======= ========
The accompanying notes are an integral part of these statements.
<PAGE> 5
Condensed Statements of Cash Flows (unaudited)
(Dollar amounts in 000's)
Six Months
Ended
June 30,
1997 1996
-------- --------
Cash flows from operating activities
Net loss $ (448) $(4,701)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 616 631
Changes in assets and liabilities:
Increase in receivables, net (1,025) (202)
(Increase) decrease in inventories, net (484) 1,564
Decrease in prepaid expenses 72 567
Decrease (increase)in other assets 290 (1,464)
(Decrease) increase in accounts payable and
accrued liabilities (510) 849
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Net cash used by operating activities (1,489) (2,756)
Cash flows from investing activities:
Purchases of property, plant and equipment (194) (138)
------- -------
Net cash used by investing activities (194) (138)
Cash flows from financing activities:
Issuances of common stock 2,556 4,464
Repurchase of preferred stock (7,766) -
Repayment of bank debt - (2,977)
Debt payments (15) (31)
------- -------
Net cash (used) provided by financing activities (5,225) 1,456
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Net decrease in cash
and cash equivalents (6,908) (1,438)
Cash and cash equivalents, beginning of period 11,406 6,222
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Cash and cash equivalents, end of period $ 4,498 $ 4,784
======== =======
Supplemental disclosure of cash flow
information
Cash paid during the period for interest $ 3 $ 82
Cash paid during the period for
federal, state and local income taxes $ 77 -
The accompanying notes are an integral part of these statements.
<PAGE> 6
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of June 30, 1997 and the
condensed consolidated statements of operations for the three and six
month periods ended June 30, 1997 and 1996 and the condensed consolidated
statements of cash flows for the six month periods ended June 30, 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 June 30,
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 June 30, 1997 and December
31, 1996. The Company's long-term debt represents capital equipment
lease obligations of the Company.
(3) Shareholders' Investment:
Common Stock - On June 20, 1997, the Company sold a total of 415,000
shares of its Common Stock, par value $.01 per share (the "Shares"), to
"accredited investors," as defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended, for an aggregate of approximately
$2,496,000 in a self-managed private placement. The purchase price was
determined through discussions between the Company and a representative
of the investors and was based on the last reported sale price of the
Common Stock on June 3, 1997 ($6.875), less a discount of 12.5% to
approximate the liquidity risk inherent in unregistered stock. Net
proceeds to the Company are expected to be approximately $2,475,000 after
payment of expenses. Proceeds of the sale will be used by the Company
for general corporate purposes.
The sale of the Shares to the investors was made pursuant to a Stock
Purchase Agreement between the Company and each investor (collectively,
the "Stock Purchase Agreements"). Under the Stock Purchase Agreements,
the Company agreed to use its reasonable best efforts to (i) amend its
pending Form S-3 Registration Statement No. 333-17177 (the "Registration
Statement"), as described below, currently on file with the Securities
and Exchange Commission (the "SEC"), to the extent necessary to permit
the sale or other disposition of the Shares by the investors, and (ii)
cause the Registration Statement to be declared effective by the SEC by
September 19, 1997, and to remain effective for up to June 20, 1998.
However, under the terms of the Stock Purchase Agreements, the Company
would not be penalized for failing to effect such registration or to keep
it effective, provided the Company used its reasonable best efforts to do
so.
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
<PAGE> 7
Shares"). Each Series E Share had 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.
The Series E Shares were 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 was
subject to adjustment to take into account stock dividends, stock splits
and share combinations involving the Company's common stock. Each Series
E Share was convertible into the number of whole shares of common stock
determined by dividing $10,000 by the Conversion Price.
The SEC 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
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 would have
automatically converted into common stock at the then current Conversion
Price. Holders of Series E Shares would have been 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 were payable only if the
Series E Shares were held to maturity, and would have been 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
(the "Series E Share holders") obligating the Company to prepare and file
with the SEC 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 SEC did not
declare the Registration Statement effective on or before January 9,
1997, the Company would make periodic payments to the Series E Share
holders 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 SEC 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.
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. On October 31, 1996, the Company announced that the results of
its first Phase III trial of Aliminase oral capsules were not favorable
and that the Company had placed the Aliminase 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
<PAGE> 8
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 SEC, 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 the outstanding Series E Shares. The
repurchase of 50% of the outstanding Series E Shares 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 Series
E Share holders 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 was
declared effective by the SEC; and (iv) that if the SEC did not declare
the Registration Statement effective on or before May 15, 1997, the
periodic payments required by the Registration Agreements would resume
accruing on May 16, 1997, but would be equal to 1% of the 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 SEC declared the Registration Statement effective, and would 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 quarter 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.
On May 21, 1997, the Company repurchased the remaining 330 outstanding
shares of its Series E Shares from the Series E Shareholders for a total
cash purchase price of approximately $3,852,000. The purchase price was
determined through discussions between the Company and a representative
of the Series E Shareholders and was based on the original price at which
the Series E Shareholders had purchased the Series E Shares from the
Company ($10,000 per share) plus a premium of $1,490 per share (equal to
the premium that would have resulted from a conversion of the Series E
Shares into Common Stock of the Company at the applicable conversion
price) plus interest at the rate of 7% per annum on $10,000 per Series E
Share from February 15, 1997 through the date of the purchase
(approximately $60,000). The Company was already obligated to pay the
interest portion of the purchase price through May 15, 1997 pursuant to
agreements entered into with the Series E Shareholders in March 1997 in
connection with the Company's previous repurchase of other Series E
Shares. The Company used funds already on hand to repurchase the Series
<PAGE> 9
E Shares. On May 31, 1997, the Company's balance of cash and cash
equivalents was approximately $1,173,000, excluding a $1,500,000
certificate of deposit that was pledged to secure a letter of credit
issued to a supplier.
(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 or six month periods ended June 30, 1997 or
June 30, 1996.
<PAGE> 10
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 L. plant.
The following summarizes unaudited sales by division and unaudited
consolidated sales for the three month periods ended June 30, 1997 and
1996: (Dollar amounts in 000's)
Carrington Laboratories, Inc.
-----------------------------------------------------
Three Months Ended Wound Carrington Caraloe Consolidated
June 30, 1997 Care Veterinary Sales Inc. Sales
- ------------------ ------ ---------- ------- ------- ------
Sales, net $4,436 $ 24 $ 4,460 $ 661 $5,121
Cost of sales 1,378 29 1,407 479 1,886
------ ----- ------- ------ ------
Gross margin $3,058 $ (5) $ 3,053 $ 182 $3,235
====== ===== ======= ====== ======
Three Months Ended
June 30, 1996
- ------------------
Sales, net $4,392 $101 $4,493 $ 945 $5,438
Cost of sales 2,461 83 2,544 821 3,365
------ ----- ------ ------ ------
Gross margin $1,931 $ 18 $1,949 $ 124 $2,073
====== ===== ====== ====== ======
The following summarizes unaudited sales by division and unaudited
consolidated sales for the six month periods ended June 30, 1997 and
1996: (Dollar amounts in 000's)
Carrington Laboratories, Inc.
-----------------------------------------------------
Six Months Ended Wound Carrington Caraloe Consolidated
June 30, 1997 Care Veterinary Sales Inc. Sales
- ------------------ ------ ---------- ------- ------- -------
Sales, net $9,059 $ 57 $ 9,116 $2,088 $11,204
Cost of sales 2,808 56 2,864 1,529 4,393
------ ----- ------- ------ -------
Gross margin $6,251 $ 1 $ 6,252 $ 559 $ 6,811
====== ===== ======= ====== =======
Six Months Ended
June 30, 1996
- ------------------
Sales, net $8,646 $167 $8,813 $2,139 $10,952
Cost of sales 4,328 123 4,451 1,845 6,296
------ ----- ------ ------ -------
Gross margin $4,318 $ 44 $4,362 $ 294 $ 4,656
====== ===== ====== ====== =======
<PAGE> 11
Liquidity and Capital Resources
At June 30, 1997 and December 31, 1996, the Company held cash and cash
equivalents of $4,498,000 and $11,406,000, respectively. The decrease in
cash of $6,908,000 from December 31, 1996 to June 30, 1997 was largely
attributable to the repurchase of 100% of the Series E Shares outstanding
(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 oral capsules (described below). Additionally, the
Company has invested in inventory to support the launch of several new
product lines during the first half and third quarter of 1997 and to
support sales to Mannatech, Inc., and Aloe Commodities International,
Inc. Receivables from these two customers totaled $769,000 and $282,000,
respectively, as of June 30, 1997. As of August 14, 1997, most of the
above balance has been collected. These draws on the Company's cash were
partially offset by a $2,496,000 private placement of common stock on
June 20, 1997 (see Note 3 to the condensed consolidated financial
statements).
The Company regularly evaluates its inventory levels and adjusts
production at both its Costa Rica plant, where the products from Aloe
vera L. are 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 experience unabsorbed overhead. The Company
expenses 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 , 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 oral capsules, which indicated no statistically
significant differences that would support a conclusion that Aliminase
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 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 June 30, 1997 and December 31, 1996 was
$3,802,000 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 powder sales to Mannatech
(see discussion of Caraloe sales to Mannatech below), 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.
<PAGE> 12
As of August 10, 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 letter of credit equal to 60% of the minimum purchase commitment, as
described below. The letter of credit was initially established at
$1,500,000 to fulfill this requirement. A term loan with NationsBank was
initially used to fund this letter of credit. As of June 30, 1997, the
Company had purchased products totaling approximately $425,000 from this
supplier, thereby reducing the future minimum purchase commitment to
$2,075,000. The letter of credit has therefore been reduced by $250,000
to $1,250,000. As of August 10, 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
monthly purchase requirements were waived for the three month period
ended December 31, 1996. The supplier currently produces the CarraSorb
M Freeze Dried Gel and the Carrington (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 $370,000 and $325,000 of CarraSorb M and Carrington
(Aphthous Ulcer) Patch inventory on hand as of June 30, 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. The Company is in full
compliance with the agreement and, as of August 10, 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 portion of the CD that secures
the $1,250,000 letter of credit as a cash equivalent. As this portion of
the CD secures the 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 of $500,000 to the supplier. This payment resulted in
increasing the prepaid assets of the Company. As of June 30, 1997, the
net book value of this agreement was $367,000. In July 1997, an
additional payment of $166,000 was paid to this supplier upon delivery of
the CarraSmart Hydrocolloid, a new product scheduled for launch in the
third quarter of 1997. Additional payments totaling $334,000 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 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 1996, the Company
<PAGE> 13
began a second large scale clinical trial for the testing of Aliminase
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 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 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. The Company anticipates that it will deicde in late 1997 or early
1998 whether reenter clinical trials or to terminate the project. No
significant additional expenses related to phase III trials of Aliminase
oral capsules are anticipated.
In late 1995, the Company began an initial Phase I dosing study using
CarraVex injectable (formerly CARN 750) in cancer patients involving
six cancer types. The estimated cost of this study is $475,000, of which
approximately $315,000 had been expensed as of June 30, 1996. Based on
results of the study the Company will select a reformulated dosage form
and anticipates making a decision on the future of the project in the
first quarter of 1998.
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 L. based raw materials that was completed in early 1996.
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. 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 condensed consolidated financial statements).
On October 31, 1996, the Company announced the results of the first Phase
III trial of Aliminase oral capsules. Due to the unfavorable results of
the first Phase III trial, the Aliminase project was placed on hold.
Additionally, the Company's management canceled the second Phase III
<PAGE> 14
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
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. The remaining 330 Series E Shares were repurchased on May 21,
1997.
The Company believes that its available cash resources, after the above
described repurchases 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.
Second Quarter of 1997 Compared With Second 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
<PAGE> 15
lowered by a weighted average of 19.1%. With the February 1996 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.
To continue to grow its wound care business, the Company realized that it
had to expand from the estimated $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
half of 1997, the Company launched an additional three new product lines
and expanded another product line. The Company expects to launch
additional products in the second half of 1997.
Net sales were $5,121,000 in the second quarter of 1997, compared with
$5,438,000 in the second quarter of 1996. This decrease of $317,000, or
5.8%, resulted from a decrease in sales of Caraloe, Inc., the Company's
consumer products subsidiary. Caraloe's sales decreased from $945,000 to
$661,000, or 30.1%. Caraloe sales to Mannatech, Inc., which were
primarily Manapol powder, decreased from $831,000 in 1996 (1996 sales of
Manapol powder to Mannatech were made under an exclusive license
agreement and a supply agreement) to $365,000 in 1997. Additionally,
Caraloe made shipments to Aloe Commodities International, Inc., ("ACI")
under a supply agreement signed in late 1996. These shipments resulted
in $156,000 in sales in the second quarter of 1997.
Also contributing to the decrease in net sales was a reduction in sales
of the Company's veterinary products from $101,000 to $24,000. 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 late 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.
Partially offsetting the above sales decreases was an increase of $44,000
in sales of the Company's wound and skin care products from $4,392,000 to
$4,436,000, or 1.0%. New products introduced in the first quarter of
1997 accounted for $117,000 in wound and skin care sales during the
second quarter of 1997.
Cost of sales decreased from $3,365,000 to $1,886,000, or 44.0%. As a
percentage of sales, cost of sales decreased from 61.9% in the second
quarter of 1996 to 36.8% in the second quarter of 1997. The high 1996
cost of sales was the result of period costs related to inventory
reduction programs in the first half 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 $2,794,000 from
$2,920,000, or 4.3%. This decrease was primarily attributable to cost
reduction programs put in place in 1996, including savings generated from
the restructuring of the sales force.
<PAGE> 16
Research and development ("R&D") expenses decreased to $796,000 from
$1,755,000, or 54.6%. This decrease was the result of the completion of
the first phase III pivotal large scale clinical trial for the testing of
Aliminase 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 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 . 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 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 and other expenses of $154,000 was realized in the second
quarter of 1997, versus net interest income of $57,000 in the second
quarter of 1996. In the second quarter of 1997, the Company realized
losses on its mutual fund account of $204,000, or 1.8% of the beginning
year cash balance, when the account was converted to cash to meet the
financing needs of the Company. This mutual fund account was based on
various blue-chip and treasury fixed income securities. Although
considered among the most conservative type of investments, the Company
is reevaluating its idle cash strategies to further reduce the risk of
losses by minimizing market risk.
Net loss for the second quarter of 1997 was $531,000, versus a net loss
of $2,545,000 for the second quarter of 1996. This change was a result
of 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 $.06 in the second quarter of 1997,
compared to a loss per share of $.29 in 1996.
First Six Months of 1997 Compared With First Six Months of 1996
Net sales were $11,204,000 in the first six months of 1997, compared with
$10,952,000 in the first six months of 1996. This increase of $252,000,
or 2.3%, resulted from an increase of $413,000 in sales of the Company's
wound and skin care products from $8,646,000 to $9,059,000, or 4.8%. New
products introduced in the first six months of 1997 accounted for
$237,000 in wound and skin care sales in the first six months of 1997.
Partially offsetting the above sales increase was a decrease in sales of
Caraloe, Inc., the Company's consumer products subsidiary. Caraloe's
sales decreased from $2,139,000 to $2,088,000, or 2.4%. Caraloe sales to
Mannatech, Inc., which were primarily Manapol powder, decreased from
$1,903,000 in 1996 (sales of Manapol powder to Mannatech were made under
an exclusive license agreement and a supply agreement through March 31,
1997) to $1,445,000 in 1997. Additionally, Caraloe made its first
shipments to Aloe Commodities International, Inc., ("ACI") under a supply
agreement signed in late 1996. These shipments resulted in $301,000 in
sales in the first six months of 1997.
Also contributing to the decrease in net sales was a reduction in sales
of the Company's veterinary products from $167,000 to $57,000. In March
1996, the Company entered into an agreement with Farnam Companies, Inc.,
a leading marketer of veterinary products, to promote and sell the
<PAGE> 17
Company's veterinary line on a broader scale. In late 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 $6,296,000 to $4,393,000, or 30.2%. As a
percentage of sales, cost of sales decreased from 57.5% in the first six
months of 1996 to 39.2% in the fist six months of 1997. The high 1996
cost of sales was the result of period costs related to inventory
reduction programs in the first half 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 $5,522,000 from
$5,749,000, or 3.9%. This decrease was 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 $1,594,000 from
$3,703,000, or 57.0%. This decrease was the result of the completion of
the first phase III pivotal large scale clinical trial for the testing of
Aliminase 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 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 . 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 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 and other expenses of $99,000 was realized in the fist six
months of 1997, versus net interest income of $95,000 in the first six
months of 1996. In the first half of 1997, the Company realized losses
on its mutual fund account of $204,000, or 1.8% of the beginning year
cash balance, when the account was converted to cash to meet the
financing needs of the Company.
Net loss for the first six months of 1997 was $448,000, versus a net loss
of $4,701,000 for the first six months of 1996. This change was a result
of 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 $0.06 in the first six months of 1997,
compared to a loss per share of $0.54 in 1996. The loss per common share
in 1997 included the recognition of a $70,000, or $0.01 per common share,
deemed dividend on the Company's Series E Convertible Preferred Stock in
the calculation of loss per common share for the six month period ended
June 30, 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
<PAGE> 18
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, 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
abroad 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> 19
Part II
Item 1. Legal Proceedings
On September 13, 1996, Linda M. Miller ("Miller"), a former
employee of the Company, filed a lawsuit styled Linda M.
Miller vs. Carrington Laboratories, Inc., Cause No. 96-9971
in the 191st District Court of Dallas County, Texas, alleging
breach of contract in connection with her employment with the
Company. Miller seeks to recover damages in excess of
$50,000, exclusive of interest and costs. The Parties
entered into an agreed order of dismissal on June 24, 1997.
With each party bearing their own legal costs.
On June 12, 1997, Allison Kindt ("Kindt"), a former employee
of the Company, filed a lawsuit styled Allison Kindt v.
Carrington Laboratories, Inc., Civil Action No. 5-97-CV-469-BO(1),
in the United States District Court for the Eastern District of
North Carolina, Western Division, alleging sex discrimination and
retaliation and employment action in violation of public policy
against sex discrimination in connection with her employment with
the Company. Kindt seeks to recover such additional compensation
and other benefits of employment and back pay as she would have
received had her employment not been terminated. The Company has
responded to these allegations and is vigorously defending this action.
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1997 Annual Meeting of Shareholders held on May 22, 1997, George
DeMott, Robert A. Fildes, Ph.D., and Carlton E. Turner, Ph.D., D.Sc.,
were elected to serve as directors of the Company for terms expiring at
the 2000 annual meeting. The votes for each director were:
FOR AGAINST
--------- ---------
George DeMott: 7,009,830 95,031
Robert A. Fildes, Ph.D.: 7,009,727 95,134
Carlton E. Turner, Ph.D., D.Sc.: 7,009,392 95,469
The appointment of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ended December 31, 1997 was approved by a
vote of outstanding shares of the Company's common stock. The vote was:
For: 7,058,657
Against: 28,951
Abstained: 17,253
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
-------------------
4.1+* Agreement Regarding Termination of Employment and Full
and Final Release dated June 2, 1997, between Carrington
Laboratories, Inc., and Sheri L. Pantermuehl
4.2 Form of Letter Agreement dated May 9, 1997 between the
Registrant and each holder of Series E Convertible
Preferred Stock (incorporated herein by reference to
Exhibit 10.1 to Carrington's Current Report on Form 8-K
dated May 21, 1997)
4.3 Form of Second Offer and Agreement of Sale and Purchase
dated May 15, 1997 between the Registrant and each holder
of Series E Convertible Preferred Stock (incorporated
herein by reference to Exhibit 10.2 to Carrington's Current
Report on Form 8-K dated May 21, 1997)
4.4 Form of Stock Purchase Agreement dated June 20, 1997
between the Registrant and each purchaser of Common Stock
(incorporated herein by reference to Exhibit 10.1 to
Carrington's Current Report on Form 8-K dated June 20,
1997)
11.1* Computation of Net Income (Loss) Per Common and Common
Equivalent Share
27.1* Financial Data Schedule
b. Reports on Form 8-K:
--------------------
Reports on Form 8-K dated May 21, 1997 and June 20, 1997
were was filed by the Company on June 5, 1997 and July 7,
1997, respectively.
* Filed herewith.
+ Management contract or compensatory plan.
<PAGE> 22
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, 1997 By: /s/ Carlton E. Turner
------------------ ------------------------
Carlton E. Turner,
President and C.E.O.
Date: August 14 , 1997 By: /s/ F. Gene Winfield
------------------ -----------------------
F. Gene Winfield,
Corporate Controller
<PAGE> S-1
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, 1997 By:
------------------ -----------------------
Carlton E. Turner,
President and C.E.O.
Date: August 14, 1997 By:
------------------ -----------------------
F. Gene Winfield,
Corporate Controller
<PAGE> S-1
INDEX TO EXHIBITS:
Page
4.1+* Agreement Regarding Termination of Employment
and Full and Final Release dated June 2, 1997,
between Carrington Laboratories, Inc., and Sheri L.
Pantermuehl E-2
4.2 Form of Letter Agreement dated May 9, 1997 between
the Registrant and each holder of Series E Convertible
Preferred Stock (incorporated herein by reference to
Exhibit 10.1 to Carrington's Current Report on Form
8-K dated May 21, 1997)
4.3 Form of Second Offer and Agreement of Sale and
Purchase dated May 15, 1997 between the Registrant
and each holder of Series E Convertible Preferred
Stock (incorporated herein by reference to Exhibit
10.2 to Carrington's Current Report on Form 8-K
dated May 21, 1997)
4.4 Form of Stock Purchase Agreement dated June 20, 1997
between the Registrant and each purchaser of Common
Stock (incorporated herein by reference to Exhibit
10.1 to Carrington's Current Report on Form 8-K dated
June 20, 1997)
11.1* Computation of Net Income (Loss) Per Common and
Common Equivalent Share E-7
27.1* Financial Data Schedule E-8
* Filed herewith.
+ Management contract or compensatory plan.
<PAGE> E-1
TERMINATION AGREEMENT
AND FULL AND FINAL RELEASE
Carrington Laboratories, Inc. (Carrington") and Sheri L. Pantermuehl
("Pantermuehl") hereby agree upon a compromise and full and final settlement
of all issues and disputes between them on the terms set forth below:
1. Salary and Benefits. In accordance with Carrington's existing
policies, Pantermuehl has received or will receive the following pay and
benefits regardless of whether she enters into this Agreement: (i) payment of
Pantermuehl's regular base salary through May 23, 1997, less all normal
withholdings; (ii) payment for all accrued and unused vacation leave through
May 23, 1997, less all normal withholdings. In addition, Carrington will
settle promptly all authorized reimbursable business expenses, if any, when
Pantermuehl has submitted appropriate documentation to Carrington.
2. Special Separation Benefits. In consideration of the General
Release, Nondisparagement, and Confidentiality Obligations provisions of this
Agreement, and contingent upon Pantermuehl's acceptance of the terms of this
Agreement, Carrington offers to continue to employ Pantermuehl as an inactive
employee at a salary rate of $8,333.33 per month, payable in accordance with
its normal payroll practices and subject to normal withholdings, from May 24,
1997 to December 1, 1997 (the "Inactive Period"), under the following
conditions: (1) During the Inactive Period, Pantermuehl agrees to use her
best efforts to seek employment with a company other than Carrington.
Pantermuehl may employ the services of an outplacement agency of her choosing,
and, contingent upon pre-approval by Carrington, Carrington agrees to pay
reasonable and customary fees associated with certain of those services
contracted for and provided no earlier than forty-five (45) days after
June 2, 1997. (2) In the event that Pantermuehl becomes a fulltime employee
of a company other than Carrington on or before December 1, 1997,
Pantermuehl will immediately advise Carrington of such other employment and
commencement date thereof. Upon the commencement date Pantermuehl's other
employment, Carrington's obligation under this Agreement will then be
reduced from $8,333.33 per month to $4,166.67 per month for the period
beginning with the commencement date of other employment through December 1,
1997. Carrington at its sole option may elect to pay its obligation remaining
under this Agreement either as one lump sum payment or continue the equal
biweekly payments through December 1, 1997. (3) In the event that Pantermuehl
does not become a fulltime employee of a company other than Carrington on or
before December 1, 1997, Pantermuehl and Carrington may mutually agree to
extend this Agreement and compensation payable hereunder on a month-to-month
basis for a period of up to an additional three (3) months.
3. Employee Benefit Plans. In consideration of the General Release,
Nondisparagement, and Confidentiality Obligations provisions of this
Agreement, and contingent upon Pantermuehl's acceptance of the terms of
this Agreement, Carrington offers to continue Pantermuehl's eligibility to
participate in any group insurance or stock purchase plans offered by
Carrington, subject to the terms of each such plan and provided she timely
pays any cost that she would be required as an employee to pay in connection
therewith, until the earlier of her commencement of other employment or
December 1, 1997, unless earlier terminated in accordance with the terms of
any such plan, except to the extent, if any, that she is entitled, and
elects, to continue insurance coverage thereafter at her own expense pursuant
to the Consolidated Omnibus
1
<PAGE> E-2
Budget Reconciliation Act.
4. Stock Options. For purposes of determining Pantermuehl's date of
termination of employment with Carrington as it relates to any stock option
grants by Carrington to Pantermuehl, Pantermuehl's Employment Termination
Date will be December 1, 1997. Pantermuehl understands that all stock options
will expire on the close of business on the 30th day following the Employment
Termination Date, unless they are earlier exercised or terminated or they
earlier expire in accordance with their terms, or unless the period for their
exercise is extended in accordance with their respective terms due to the
termination of Pantermuehl's employment with Carrington by reason of her death
or disability.
5. Services. During the Inactive Period, Pantermuehl agrees to make
herself available to Carrington from time to time, and to perform for
Carrington upon reasonable request by Carrington, services (hereinafter
referred to as the "Services"). The Services shall include such services as
Pantermuehl performed for Carrington as Chief Financial Officer. Pantermuehl
will specifically exercise her best efforts to secure for Carrington a bank
line of credit consistent with Carrington's corporate objectives.
6. Authority. Except when performing services described in Section 5
of this Agreement, after May 23, 1997, Pantermuehl has not been and will not be
obligated or authorized, and has not held herself out and shall not hold herself
out as being authorized, to make any representations, enter into any contracts,
commitments, or obligations, or perform any other acts of any kind whatsoever
on behalf of Carrington, nor has Pantermuehl been and will not be authorized
to hold herself out as an agent or active employee of Carrington after May 23,
1997.
7. General Release. Pantermuehl and her family members, heirs,
successors, and assigns (hereinafter referred to collectively as the "Releasing
Parties") hereby release, acquit and forever discharge Carrington and its
shareholders, officers, directors, fiduciaries, agents, servants, employees,
representatives, attorneys, insurers, successors, and assigns (hereinafter
referred to collectively as the "Released Parties") from any and all claims,
demands, and causes of action of every kind and character, whether vicarious,
derivative, or direct, that any of the Releasing Parties now has or may
hereafter have or assert against any or all of the Released Parties growing
out of, resulting from, or connected in any way with Pantermuehl's employment
or the termination of her employment with Carrington, including but not
limited to any and all claims for damages (actual, exemplary, liquidated, or
unliquidated), back pay, future pay, deferred compensation, bonuses,
commissions, severance payments, vacation and leave benefits, unreimbursed
business expenses, overtime compensation, reinstatement or priority placement,
past and future medical or other employee benefits for Pantermuehl or her
dependents, employee retirement benefits, contributions to company sponsored
401(k) plans (except as presently vested in any savings plan sponsored by
Carrington in which Pantermuehl is a participant), medical and counseling costs,
injunctive relief, declaratory relief, attorney's fees, costs of court,
disbursements, interest, or any other form whatsoever of legal or equitable
relief to which any of the Releasing Parties claims or might claim entitlement
as a result of any alleged act or omission of any of the Releasing Parties,
including but not limited to any alleged
2
<PAGE> E-3
unlawful age discrimination or any other form of unlawful employment
discrimination, retaliation, wrongful termination, breach of contract (express
or implied), tortious interference with contract, promissory estoppel,
detrimental reliance, negligent or intentional infliction of emotional
distress, negligent hiring and supervision, assault, battery, defamation of
character, any alleged act of harassment or intimidation, negligent or
intentional misrepresentation or fraud, invasion of privacy, or any other
intentional or negligent tort, or any alleged violation of the Age
Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of
1964, the Texas Commission on Human Rights Act, the Americans With Disabilities
Act, the Employee Retirement Income Security Act of 1974, the public policy
of the United States, the State of Texas, or any other state, or any other
federal or state statutory or common law, or any other alleged adverse
employment action by any of the Released Parties, and all other loss, expense,
or detriment of every kind and character, whether past or future, that any of
the Releasing Parties may have sustained or may hereafter sustain by reason of
any act or omission of any of the Released Parties growing out of, resulting
from, or connected in any way with Pantermuehl's employment or the
termination of her employment with Carrington. This general release does not
apply to any rights or claims that may arise after the date this Agreement is
executed by Pantermuehl.
8. Nondisparagement. Pantermuehl shall not make any statements, orally
or in writing, or engage in any other acts that would directly or indirectly
cause any harm or damage to Carrington or any of the other Released Parties.
9. Confidentiality Obligations. Pantermuehl acknowledges and confirm all
agreements and obligations, including the obligation of confidentiality, set
forth in that certain Employee's Confidentiality and Invention Agreement by and
between Carrington and Pantermuehl, which is attached as Appendix A, and shall
be executed or reconfirmed in conjunction with this Agreement. In addition,
Pantermuehl agrees that the terms of this Agreement shall be and remain
confidential, and shall not be disclosed by her to any person other than her
spouse, attorney, and accountant or tax return preparer if such persons have
agreed to keep such information confidential, and except as may be required
by law or judicial process. If any confidential information is released by
Pantermuehl, such release shall be grounds for immediate termination of all
benefits listed herein.
10. Effect of Breach. Pantermuehl acknowledges and agrees that should
she or any of the other Releasing Parties breach any of their obligations set
forth in this Agreement, (i) Carrington will have no further obligation to
comply with its undertakings in Sections 2 or 3 hereof, but that all of the
other provisions of this Agreement shall remain in full force and effect; (ii)
Pantermuehl may be required to repay any payments made to her and reimburse
Carrington for any payments made on her behalf or for her benefit pursuant to
Sections 2 and 3 hereof; (iii) the Releasing Parties also may be liable for
any of the Released Parties' damages caused by the breach, including without
limitation their costs and attorney's fees incurred in defending claims
brought in breach of this Agreement or bringing claims to enforce this
Agreement.
11. Effect and Use of Agreement. Pantermuehl agrees that this Agreement
does not in any manner constitute an admission of liability or wrongdoing on
the part of Carrington or any
3
<PAGE> E-4
of the other Released Parties, but that Carrington expressly denies any such
liability or wrongdoing and enters into this Agreement in compromise and
settlement of a disputed claim for the sole purpose of avoiding trouble,
litigation and expense. Pantermuehl further agrees that, except to the extent
necessary to enforce this Agreement, neither this Agreement nor any part of it
may be construed, used, or admitted into evidence in any judicial,
administrative, or arbitral proceeding as an admission of any kind by
Carrington or any of the other Released Parties.
12. Representation Regarding Certain Laws. Pantermuehl understands and
acknowledges that various state and federal laws (including the Age
Discrimination in Employment Act of 1967) prohibit discrimination in
employment based on sex, race, age, color, national origin, religion,
disability, citizenship and veteran status, and that the law also prohibits
breach of contract (express or implied) and intentional or negligent tortious
conduct.
13. Effective Period of Offer. Carrington's offer of the terms set
forth in this Agreement will expire at midnight on the fourteenth day following
the date of Carrington's execution of this Agreement, i.e., on June 16, 1997.
Pantermuehl may accept this offer at any time before such expiration by
executing this Agreement and returning it to Carrington.
14. Effective Date of Agreement. This Agreement will become effective and
enforceable seven (7) days after Pantermuehl's execution and delivery to
Carrington of this Agreement (the "Effective Date"). At any time before the
Effective Date, Pantermuehl may revoke her acceptance of this Agreement.
15. Consulting With An Attorney. Carrington hereby advises Pantermuehl
to consult an attorney before executing this Agreement.
16. Representation Regarding Meaning and Execution of Agreement.
Pantermuehl further acknowledges and represents that she has read this
Agreement, that she has had the opportunity to have this Agreement read and
explained to her by her attorney, that she fully understands the meaning and
effect of her action in executing this Agreement, and that her execution of
this Agreement is knowing and voluntary.
17. Miscellaneous. Pantermuehl and Carrington agree that this Agreement
and the Confidentiality Agreement (a) contain and constitute the entire
understanding and agreement between them regarding the subject matter hereof;
(b) contain captions and definitions that are included only for convenience or
reference and are not intended and shall not be construed to change the express
provisions of the Agreement; (c) supersede and cancel any previous negotiations,
agreements, commitments and writings regarding the subject matter of this
Agreement; (d) may not be released, discharged, abandoned, supplemented,
changed or modified in any manner except by a writing of concurrent or
subsequent date signed by both parties hereto; (e) are binding on and shall
inure to the benefit of Pantermuehl, her heirs, successors and assigns, and
Carrington and its successors and assigns, and that the terms of Section 5
hereof shall inure to the benefit of all of the Released Parties; and (f)
shall be governed by and construed in accordance with the laws of the State
of Texas and the applicable laws of the
4
<PAGE> E-5
United Sates. Pantermuehl and Carrington further agree that (i) if any
provision of this Agreement is held to be unenforceable, such provision shall
be considered to be separate, distinct, and severable from the remaining
provisions of this Agreement and shall not affect the validity or
enforceability of such remaining provisions, all of which shall remain in full
force and effect; and (ii) if any provision of this Agreement is held to be
unenforceable as written but may be made to be enforceable by limitation
thereof, then such provision shall be deemed to be so limited and shall be
enforceable to the maximum extent permitted by applicable law.
SIGNED on the dates shown below.
CARRINGTON LABORATORIES, INC.
Dated: June 2, 1997 By: /s/ Carlton E. Turner
-------------------------
Carlton E. Turner
President and Chief Executive Officer
Dated: June 2, 1997 By: /s/ Sheri L. Pantermuehl
-------------------------
Sheri L. Pantermuehl
5
<PAGE> E-6
Exhibit 11.1
Computation of Net Income Per Common and Common equivalent Share
(unaudited)
(Dollar amounts in 000's, except shares and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------- ---------- ---------- ----------
Net Income ($531) ($2,545) ($448) ($4,701)
Preferred Stock Dividend
Requirement (Series C) -- -- -- (34)
Earnings Attributable to
Preferred Holders (Series E) (3) -- (70) --
------ -------- ------ --------
Net Income for Computing
Income per Common Share ($534) ($2,545) ($518) ($4,735)
====== ======== ====== ========
Average Common and Common
Equivalent Shares
Outstanding 8,898,454 8,804,567 8,879,197 8,735,367
Net Income per Common and
Common Equivalent Share ($0.06) ($0.29) ($0.06) ($0.54)
======== ========= ========= =========
(1) Common stock equivalents have been excluded since the effect on net
income per share of their inclusions would either be antidilutive
or represent dilution of less than 3%.
<PAGE> E-7
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,498
<SECURITIES> 0
<RECEIVABLES> 3,165
<ALLOWANCES> 228
<INVENTORY> 4,107
<CURRENT-ASSETS> 11,838
<PP&E> 19,045
<DEPRECIATION> 7,769
<TOTAL-ASSETS> 25,019
<CURRENT-LIABILITIES> 2,892
<BONDS> 29
0
0
<COMMON> 93
<OTHER-SE> 22,005
<TOTAL-LIABILITY-AND-EQUITY> 25,019
<SALES> 11,204
<TOTAL-REVENUES> 11,204
<CGS> 4,393
<TOTAL-COSTS> 4,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (403)
<INCOME-TAX> 45
<INCOME-CONTINUING> (448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (448)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<PAGE> E-8
</TABLE>
