UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
----------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 5(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
---------------------- ----------
Commission file number 0-11997
-------------------------------------------------
CARRINGTON LABORATORIES, INC.
(Exact name of registrant as specified in its
charter)
Texas 75-1435663
--------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Walnut Hill Lane, Irving, Texas 75038
----------------------------------------------------------------------
(Address of principal executive offices and Zip Code)
972-518-1300
-----------------------------------------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------------- ------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
---------- -----------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date. 8,865,503
shares of Common Stock, $.01 par value, were outstanding at November
11, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
(unaudited)
September 30, December 31,
1996 1995
------------- ------------
Assets
Cash and Cash Equivalents $ 4,815 $ 6,222
Accounts Receivable, net 1,943 2,227
Inventories 3,599 5,104
Prepaid Expenses 224 858
---------- ------------
Total Current Assets 10,581 14,411
Property, Plant and Equipment, net 11,968 12,711
Other Assets 2,071 812
---------- ------------
Total Assets $24,620 $27,934
========== ============
The accompanying notes are an integral part of these statements.
<PAGE>
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
(unaudited)
September 30, December 31,
1996 1995
------------- ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Portion of Long-Term Debt $ 45 $ 3,026
Accounts Payable and Accrued Liabilities 3,132 2,420
----------- ------------
Total Current Liabilities 3,177 5,446
Long-Term Debt, Net of Current Portion 50 89
Shareholders Investment:
Preferred Stock - 1,167
Common Stock 89 84
Capital in Excess of Par 50,424 44,666
Deficit (28,946) (23,344)
Foreign Currency Translation Adjustment (174) (174)
----------- ------------
Total Shareholders' Investment 21,393 22,399
----------- ------------
$ 24,620 $ 27,934
=========== ============
The accompanying notes are an integral part of these statements.
<PAGE>
Condensed Consolidated Statement of Operations (unaudited)
(Dollar amounts in 000's, except per share amounts)
Three Months Ended
September 30,
1996 1995
--------- ---------
Net Sales $5,112 $6,621
Cost and Expenses:
Cost of Sales 2,145 2,270
Selling, General and Administrative 2,504 2,867
Research and Development 1,376 1,287
Interest, net (74) 19
--------- ---------
(Loss) Income from Operations Before
Income Taxes (839) 178
Provision for Income Taxes - 15
--------- ---------
Net (Loss) Income ($ 839) $ 163
========= =========
Net (Loss) Income per Common
Equivalent Share ($ 0.09) $ 0.01
========= =========
Weighted Average Common and
Common Equivalent Shares 8,854,533 8,965,476
========= =========
The accompanying notes are an integral part of these statements.
<PAGE>
Condensed Consolidated Statement of Operations (unaudited)
(Dollar amounts in 000's, except per share amounts)
Nine Months Ended
September 30,
1996 1995
--------- ---------
Net Sales $16,064 $19,305
Cost and Expenses:
Cost of Sales 8,440 5,973
Selling, General and Administrative 8,253 9,501
Research and Development 5,079 4,282
Interest, net (168) 139
---------- ----------
Loss from Operations Before
Income Taxes (5,540) (590)
Provision for Income Taxes - 31
---------- ----------
Net Loss ($ 5,540) ($ 621)
========== ==========
Net Loss per Common Equivalent Share ($ 0.63) ($ 0.09)
========== ==========
Weighted Average Common and
Common Equivalent Shares 8,775,089 7,854,076
========== ==========
The accompanying notes are an integral part of these statements.
<PAGE>
Condensed Statement of Cash Flows (unaudited)
(Dollar amounts in 000's)
Nine Months
Ended
September 30,
1996 1995
Cash Flows from Operating Activities -------- --------
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Depreciation and Amortization 958 926
Changes in Assets and Liabilities:
Decrease in Receivables, net 283 30
Decrease (Increase) in Inventories, net 1,505 (224)
Decrease in Prepaid Expenses 635 20
(Increase) Decrease in Other Assets (1,314) 31
Increase (Decrease) in Accounts Payable And
Accrued Liabilities 708 (334)
-------- --------
Net Cash Used by Operating Activities (2,765) (172)
-------- --------
Cash Flows from Investing Activities:
Purchases of Property, Plant and Equipment (183) (4,130)
-------- --------
Net Cash Used by Investing Activities (183) (4,130)
-------- --------
Cash Flows from Financing Activities:
Issuances of Common Stock 4,562 11,188
Proceeds from Borrowing - 5,510
Repayment of Long-term Bank Debt (2,977) (5,787)
Debt Payments (44) (94)
-------- --------
Net Cash Provided by Financing Activities 1,541 10,817
-------- --------
Net (Decrease) Increase in Cash and Cash (1,407) 6,515
Equivalents
Cash and Cash Equivalents, Beginning of Period 6,222 464
-------- --------
Cash and Cash Equivalents, End of Period $4,815 $6,979
======== ========
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest $ 84 $ 224
Cash Paid During the Period for Income Taxes $ - $ 12
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of September 30, 1996 and
the condensed consolidated statements of operations for the three and
nine month periods ended September 30, 1996 and 1995 and the condensed
consolidated statement of cash flows for the nine month periods ended
September 30, 1996 and 1995, 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 September 30, 1996, 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, 1995.
(2) Inventories:
Inventories are recorded at the lower of first-in-first-out cost or
market. The following summarizes the components of inventory at
September 30, 1996 and December 31, 1995:
September 30, December 31,
(in 000's) 1996 1995
--------- -----------
Raw material and supplies $ 704 $ 583
Work-in-process 1,344 2,726
Finished goods 1,551 1,795
--------- --------
Total inventory $3,599 $5,104
========= ========
<PAGE>
Although wound care sales were lower than projected, the Company was
able to effectively manage and reduce inventory levels in the first
nine months of 1996. 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. As a result of these evaluations,
inventory reduction programs were initiated in the latter part of 1995
and early 1996. These programs included reduced production at the
Company's manufacturing facility in Irving, Texas as well as the Costa
Rica facility. As a result of these programs, inventory levels were
reduced by $1,505,000 during the first three quarters of 1996 including
a $630,000 write-down of inventory as described below.
Period costs of $458,000 and $568,000, related to the Irving, Texas
facility and the Costa Rica facility, respectively, were expensed in
the first nine months. These costs resulted from a temporary shutdown
of the Costa Rica plant for annual routine maintenance and the
aforementioned programs to reduce inventory levels to be more in line
with current demand.
Also contributing to the reduction in inventory are the results of the
implementation of various programs to reduce operating and production
costs. These programs prompted several changes that were implemented
at the Company's Costa Rica production facility in early 1996. This
facility produces all of the Company's freeze dried Aloe vera. Among
these changes was a reduction in work force as well as improvements in
efficiencies in the manufacturing process. The implementation of these
changes has significantly reduced the cost of Costa Rica production
over the first half of 1996. As a result of these reductions in cost,
the actual cost of production under FIFO as of June 30, 1996 was
approximately 18% lower than the Company's standard cost which was
equal to the FIFO cost of production at December 31, 1995. The Company
determined that the standard cost should be reset to the then current
actual cost of production. This reduction in standard FIFO cost
decreased inventory valuation by $630,000. This amount represents the
change in the accumulated value of all items currently in inventory
that were produced in Costa Rica as well as those finished goods that
contain component items produced in Costa Rica. This decrease in
inventory value was expensed in the second quarter as a period cost and
is included in cost of goods sold.
Contributing to the increase in raw materials and supplies was the
buildup of materials related to products to be introduced in the latter
half of 1996.
Total Aloe vera extract inventory as of September 30, 1996 and December
31, 1995 was $709,000 and $2,538,000, respectively.
(3) Property, Plant and Equipment:
Net investment in property, plant and equipment as of September 30,
1996 and December 31, 1995 was $11,968,000 and $12,711,000,
respectively. Included in these amounts is the net investment in
property, plant and equipment in Costa Rica as of September 30, 1996
and December 31, 1995 of $3,946,000 and $4,157,000, respectively.
<PAGE>
The production capacity of the Costa Rica plant is larger than the
Company s current usage level. In the fourth quarter of 1996,
management will assess the realizability of the Costa Rica plant assets
and will use the methodology described in SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of.
(4) Debt:
In January 1995, the Company entered into an agreement with NationsBank
of Texas, N.A. (the "Bank") for a $2,000,000 line of credit and a
$6,300,000 term loan. Proceeds from the term loan were used to fund
planned capital expenditures, a letter of credit required by a supplier
and planned research projects. The line of credit was to be used for
operating needs, as required. As of December 31, 1995, the Company was
not in compliance with the term loan's fixed charge ratio covenant.
Rather than amend the terms of the term loan, on April 29, 1996, the
Company's management elected to pay off the entire term loan balance of
$2,977,000 plus $18,000 in accrued interest with available cash to
eliminate the interest expense on the term loan. All assets previously
collateralizing the term loan were released by the Bank. The Company
pledged a $1,500,000 certificate of deposit (CD) to secure the letter
of credit.
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.
The line of credit agreement expired January 30, 1996. The Company had
reached an agreement with the Bank for a new line of collateralized
credit for approximately $1,200,000. However, due to fees that were
attached to the line of credit and the Company's lack of immediate need
of cash, management elected to withdraw from discussions with the Bank
and allowed the agreement to be tabled until such time as a line of
credit is desirable and favorable to the Company.
(5) Shareholders Investment:
Options - Each employee option is either a nonqualified or an
incentive stock option with an exercise price equal to the fair market
value of the Company's common stock on the date of grant. Each
employee option normally becomes exercisable with respect to one-fourth
of the shares covered thereby in each year in the four-year period
beginning one year after the date of grant unless specifically modified
by the Company s Stock Option Committee. Each of the employee options
expires 10 years from the date of the grant. Options issued to non-
employee directors of the Company are nonqualified options that are
exercisable as of, and expire four years from, the grant date. As of
September 30, 1996, 694,165 options to purchase shares of common stock
were outstanding. Exercise prices of the outstanding options range
from $8.25 to $47.75 per share. During the third quarter of 1996,
options for 2,473 shares of common stock were exercised at a price of
$8.625 to $12.75 per share. Total proceeds to the Company from the
exercise of these options were $28,000.
<PAGE>
Warrants - From time to time, the Company has granted warrants to
purchase common stock to the Company's research consultants and certain
other persons rendering services to the Company. The exercise price of
each of such warrants was normally the market price or in excess of the
market price of the common stock at date of grant. As of September 30,
1996, warrants for 51,000 shares were outstanding with exercise prices
of $9.75 to $20.125 per share. These warrants expire between 1998 and
2002.
Employee Stock Purchase Plan - On October 29, 1992, the Company adopted
an Employee Stock Purchase Plan (the "Plan") under which eligible
employees are granted the opportunity to purchase shares of the
Company's common stock. Under the Plan, employees may purchase common
stock at a price equal to the lesser of 85% of the market price of the
Company's common stock on January 1 (or on the quarterly enrollment
date on which the employee's participation in the Plan commences) or
85% of the market price on the last business day of each month. The
Plan provides for the grant of rights to employees to purchase a
maximum of 500,000 shares of common stock of the Company. Under the
Plan, 55,862 shares have been purchased by employees at prices ranging
from $7.23 to $29.54 per share through September 30, 1996.
Preferred Stock (Series C)- In June 1991, the Company completed a
transaction whereby the Company issued 7,909 shares of Series C 12%
cumulative convertible preferred stock (the "Series C Shares") in
exchange for convertible debentures plus interest accrued to the date
of exchange to a private investor (the "Investor"). The Series C
Shares had a par value of $100 per share, were convertible at par into
common stock of the Company at a price of $7.58 per share (subject to
certain adjustments), were callable by the Company and convertible by
the Investor after January 14, 1996 and provided for dividend payments
to be made only through the issuance of additional Series C Shares. In
the first quarter of 1996, all of the outstanding Series C Shares were
converted to 174,935 shares of the Company's common stock.
(6) Sales by Product Line
The following summarizes sales by product line and consolidated sales
for the three month periods ending September 30, 1996 and 1995:
(Dollar amounts in 000's)
Three Months Ended Wound Carrington Caraloe Total
September 30, 1996 Care Veterinary Sales Inc. Sales
------- ---------- ---------- ------- -------
Sales, net $4,143 $ 78 $ 4,221 $ 891 $ 5,112
Cost of Goods Sold 1,447 42 1,489 656 2,145
------- ------ -------- ------ -------
Gross Margin $2,696 $ 36 $ 2,732 $ 235 $ 2,967
======= ====== ======== ====== =======
Three Months Ended
September 30, 1995
Sales, net $5,353 $ 84 $ 5,437 $1,184 $ 6,621
Cost of Goods Sold 1,444 44 1,488 782 2,270
------- ------ -------- ------ -------
Gross Margin $3,909 $ 40 $ 3,949 $ 402 $ 4,351
======= ====== ======== ====== =======
<PAGE>
The following summarizes sales by product line and consolidated sales
for the nine month periods ending September 30, 1996 and 1995:
(Dollar amounts in 000's)
Nine Months Ended Wound Carrington Caraloe Total
September 30, 1996 Care Veterinary Sales Inc. Sales
-------- ---------- ---------- ------- -------
Sales, net $12,788 $246 $13,034 $3,030 $16,064
Cost of Goods Sold 5,638 165 5,803 2,637 8,440
-------- ------ -------- ------- -------
Gross Margin $ 7,150 $ 81 $ 7,231 $ 393 $ 7,624
======== ====== ======== ======= =======
Nine Months Ended
September 30, 1995
Sales, net $16,769 $263 $17,032 $2,273 $19,305
Cost of Goods Sold 4,396 135 4,531 1,442 5,973
-------- ------ -------- ------- -------
Gross Margin $12,373 $128 $12,501 $ 831 $13,332
======== ====== ======== ======= =======
(7) Subsequent Event
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 a purchase price of $10,000. After
placement fees, legal and other costs related to the private placement,
the Company expects to realize net proceeds of $6,266,000. Current
plans call 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 percent of the current market price of the
Company ' common stock as calculated over the three trading-day period
ending on the last trading day prior to the Closing Date) or 87% of the
current 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.
Each Series E Share outstanding on the Maturity Date shall
automatically convert into common stock at the then current Conversion
Price. Holders of Series E Shares shall 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 22, 1999 (equal to
5% of the per share Purchase Price). Dividends are payable only if the
preferred shares are held to maturity, and are payable either in shares
of common stock at the then current Conversion Price or in cash, or
both, at the option of the Company.
<PAGE>
The Company has agreed to prepare and file 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) with the Securities and Exchange Commission (the
Commission ). The Company must use its best efforts to cause the
Registration Statement to be declared effective by the Commission on or
before the eightieth day after the Closing Date. If the Registration
Statement is not declared effective on or before the eightieth day
after the Closing Date, the Company must make periodic payments equal
to 1% of the Purchase Price for the first thirty days after such
eightieth day, and 2% of the Purchase Price for each additional thirty
day period, pro rata to the date the Registration Statement is declared
effective. These payments, if required, may be made in either cash or
common shares, or both, at the election of the Company. Management
believes that the Registration Statement will be filed and declared
effective in a timely fashion and that no such payments will be
required.
<PAGE>
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 September 30, 1996 and December 31, 1995, the Company held cash and
cash equivalents of $4,815,000 and $6,222,000, respectively. The
decrease in cash of $1,407,000 from December 31, 1995 to September 30,
1996 was largely attributable to the retirement of all bank debt and
the purchase of a $1,500,000 certificate of deposit (CD) (see Note 4 to
the consolidated financial statements) as well as increased research
and development expenditures. These cash outflows were partially
offset through the exercise of options and warrants, and purchases of
shares through the Employee Stock Purchase Plan, that resulted in an
additional $4,548,000 cash in the first nine months of 1996.
Although wound care sales have been lower than projected, the Company
has been able to effectively manage and reduce inventory levels
throughout 1996. 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. As a result of these evaluations,
inventory reduction programs were initiated in the latter part of 1995
and early 1996. These programs included reduced production at the
Company's manufacturing facility in Irving, Texas as well as the Costa
Rica facility. As a result of these programs, inventory levels were
reduced by $1,505,000 during the first three quarters of 1996, which
includes a $630,000 write-down of Aloe vera derived products as
described below. As a result of the decreased production levels, the
Company has expensed $1,026,000 of unabsorbed overhead as cost of goods
sold in the first nine months of 1996.
The production capacity of the Costa Rica plant is larger than the
Company's current usage level. In the fourth quarter of 1996,
management will assess the realizability of the Costa Rica plant assets
and will use the methodology described in SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of. As of November 14, 1996, the Company had no material
capital commitments other than its leases, agreements with suppliers
and clinical trials. In January 1995, the Company entered into an
agreement with NationsBank of Texas, N.A. (the "Bank") for a $2,000,000
<PAGE>
line of credit and a $6,300,000 term loan. Proceeds from the term loan
were used to fund planned capital expenditures, a letter of credit
required by a supplier, as discussed below, and planned research
projects. The line of credit was to be used for operating needs, as
required. As of December 31, 1995, the Company was not in compliance
with the term loan's fixed charge ratio covenant. Rather than amend
the terms of the term loan, on April 29, 1996, the Company's management
elected to pay off the entire term loan balance of $2,977,000 plus
$18,000 in accrued interest with available cash to eliminate the
interest expense on the term loan. All assets previously
collateralizing the term loan were released by the Bank. The Company
pledged a $1,500,000 CD to secure the letter of credit as described
below.
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, described below, 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.
The line of credit agreement expired January 30, 1996. The Company had
reached an agreement with the Bank for a new line of collateralized
credit for approximately $1,200,000. However, due to fees that were
attached to the line of credit and the Company's lack of immediate need
of cash, management elected to withdraw from discussions with the Bank
and allowed the agreement to be tabled until such time as a line of
credit is desirable and favorable to the Company.
In February 1995, the Company entered into a supply agreement with its
supplier of freeze-dried products. The agreement required that the
Company establish a $1,500,000 letter of credit. The term loan with
NationsBank was used to fund this letter of credit. The funding of the
letter of credit reduces the amount that the Company can borrow under
the term loan but does not increase the Company's debt unless the
letter of credit is utilized by the supplier. As of March 21, 1996 and
January 16, 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 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 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 buy quantities were waived for the three month
period ending December 31, 1996. The supplier currently produces the
CarraSorb(TM) M Freeze Dried Gel and the Aphthous Ulcer Patch for the
Company. Both of these products represent new technology and are still
in the product launch phase. The Company had approximately $131,000
and $232,000 of CarraSorb(TM) M and Aphthous Ulcer Patch inventory on hand
as of November 14, 1996 and January 16, 1997, respectively. Current
sales are lower than the minimum purchase requirement but the Company
believes that as 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 January 16, 1997, has the
available resources to meet all future minimum purchase requirements.
<PAGE>
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. 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(R) 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 began a second large scale clinical trial for the
testing of Aliminase(R) 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 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(R). Indications
are that no statistically significant differences were found to support
a therapeutic effect. As a result, the Company has terminated the
second large scale clinical trial and further testing of Aliminase(R) has
been placed on hold. Approximately $150,000 in cancellation fees was
recorded in the third quarter and will be paid in the fourth quarter in
relation to this termination. No additional expenses related to phase
III trials of Aliminase(R) are anticipated as of November 14, 1996.
In late 1995, the Company began an initial Phase I study using
injectable CarraVex(TM)(formerly Alovex ) in cancer patients involving
six cancer types. The estimated cost of this study is $475,000.
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 includes a reduction in 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 has restructured the sales force to position
it for growth and is refocusing the sales effort to increase market
share in the alternative care markets. The Company eliminated six
sales positions including representatives in five sales territories.
The Company replaced three of these positions with commission based
independent manufacturer 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 salary and are responsible for
covering their own travel and entertainment expenses. This program
<PAGE>
will continue into the foreseeable future and will continually
challenge the costs of doing business and where possible, further
reduce the cost of operations. If the implementation of this program
is successful, the Company believes that its cash resources, including
available cash and improved revenues, will provide the funds necessary
to finance its current operations. The Company does not expect that
these cash resources will be sufficient to finance the major clinical
studies necessary to develop its products to their full commercial
potential. Additional funds, therefore, may have to be raised through
equity offerings, borrowings, licensing arrangements, or other means,
and there is no assurance that the Company will be able to obtain such
funds on satisfactory terms when they are needed.
Subsequent to the third quarter end, the Company completed a $6,600,000
financing involving the private placement of Series E Convertible
Preferred Stock. Current plans call for much of the proceeds from this
sale to be used to continue Carrington s clinical research programs
(see Footnote 7 to the consolidated financial statements). The Company
does not expect that these 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.
<PAGE>
Third Quarter of 1996 Compared With Third Quarter of 1995
Net sales were $5,112,000 in the third quarter of 1996, compared with
$6,621,000 in the third quarter of 1995. This decrease of $1,509,000,
or 22.8%, resulted from a decrease of $1,210,000 in sales of the
Company's wound and skin care products from $5,353,000 to $4,143,000,
or 22.6%. New products introduced in late January accounted for
$242,000 in wound and skin care sales during the third quarter of 1996.
Also contributing to the decrease in net sales was a decrease in sales
of Caraloe, Inc., the Company's consumer products subsidiary.
Caraloe's sales decreased from $1,184,000 to $891,000, or 32.9%.
Caraloe sales to Mannatech, Inc., which are primarily Manapol(R),
decreased from $1,090,000 to $830,000. Sales of the Company's
veterinary products decreased from $84,000 to $78,000. 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.
Cost of sales decreased from $2,270,000 to $2,145,000, or 5.5%. As a
percentage of sales, cost of sales increased from 33.7% to 42.2% after
adjusting for period costs of $36,000 and ($10,000) in the third
quarter of 1995 and 1996, respectively. The period costs are related
to the aforementioned inventory reduction programs. The increase in
cost of goods sold is largely attributable to the 19% overall price
decrease which occurred in February of 1996. Additionally, all of the
new products introduced in the first half of 1996 are manufactured for
the Company by third-party manufacturers and have a lower profit margin
than the products manufactured by the Company.
To accelerate new product development and reduce overhead, the Company
was restructured in 1995. The restructuring included the lay-off of
seventeen high level and under-utilized positions in administration,
marketing, and research and development for a net reduction in salaries
and benefits of approximately $120,000 per month. Approximately
$15,000 of these savings were offset with the hiring of Kirk Meares,
Vice President of Sales and Marketing, in the second quarter of 1996.
Also, the Company relocated its manufacturing operations to its current
facility on Walnut Hill in Irving, Texas and immediately realized a
reduction in overhead and production costs as the new facility is more
efficient than the prior location. As the Walnut Hill facility is
owned by the Company, rent and other facility expenses related to the
former production facility of approximately $25,000 per month were
eliminated. Each of these items is expected to reduce future expenses
and improve cash flow results. As a result of the restructuring,
approximately $1.4 million of one-time charges were taken during 1995.
As of June 30, 1996, all liabilities resulting from the restructuring
were paid in full or otherwise relieved.
Selling, general and administrative expenses decreased to $2,504,000
from $2,867,000, or 12.7%. This decrease is primarily attributable to
cost reduction programs put in place earlier in the year as well as
savings generated from the restructuring of the sales force.
Research and development (R&D) expenses remained constant with only a
small increase to $1,376,000 from $1,287,000, or 6.9%. This increase
was the result of the first phase III pivotal large scale clinical
trial for the testing of Aliminase(R) oral capsules for the treatment of
acute flare-ups of ulcerative colitis began 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(R). 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(R). Indications are that no statistically
significant differences were found to support a therapeutic effect. As
a result, the Company has terminated the second large scale clinical
trial and further testing of Aliminase(R) has been placed on hold.
Approximately $150,000 in cancellation fees was recorded in the third
quarter and will be paid in the fourth quarter in relation to this
termination. This increase was offset by a reduction of internal
salaries and other operating expenses.
Net interest income of $74,000 was realized in the third quarter of
1996, versus net interest costs of $19,000 in the third quarter of
1995, due to having more excess cash to invest as well as the early
retirement of all bank debt in April of 1996.
<PAGE>
First Nine Months of 1996 Compared With First Nine Months of 1995
Net sales were $16,064,000 in the first nine months of 1996, compared
with $19,305,000 in the first nine months of 1995. This decrease of
$3,241,000, or 16.8%, resulted from a decrease of $3,981,000 in sales
of the Company's wound and skin care products from $16,769,000 to
$12,788,000, or 23.8%. New products introduced in late January
accounted for $912,000 in wound and skin care sales during the first
nine months of 1996. The decrease in wound and skin care sales was
partially offset by a $757,000, or 33.3%, increase in sales of Caraloe,
Inc., the Company's consumer products subsidiary.
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 expects, and has begun 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 is now also aggressively pursuing the
alternative care markets.
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. The
Company expects to launch additional products in late 1996 and 1997.
Caraloe's sales increased from $2,273,000 to $3,030,000, or 40.7%.
Caraloe sales to Mannatech increased from $2,488,000 to $2,733,000. Of
the 1996 sales, $2,673,000 is related to the sale of bulk Manapol(R).
Sales of the Company's veterinary products decreased from $263,000 to
$243,000. 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.
Cost of sales increased from $5,973,000 to $8,440,000, or 41.3%. As a
percentage of sales, cost of sales increased from 30.5% to 42.2% after
adjusting for a $630,000 write-down of inventory on June 30, 1996, as
described below, and period costs of $94,000 and $1,026,000 in the
first nine months of 1995 and 1996, respectively. The period costs are
<PAGE>
related to the annual shutdown of the facility in Costa Rica for
routine maintenance and inventory reduction programs. The increase in
cost of goods sold is largely attributable to the increased sales of
bulk Manapol(R), which has a substantially lower profit margin in 1996 as
compared to the margin on Manapol(R) in the prior year and the margins on
the Company's wound and skin care products, and the overall 19% price
decrease which occurred in February of 1996. Additionally, all of the
new products introduced in the first half of 1996 are manufactured for
the Company by third-party manufacturers and have a lower profit margin
than the products manufactured by the Company.
As a result of the implementation of programs to reduce operating and
production costs, several changes were implemented at the Company's
Costa Rica production facility in early 1996. This facility produces
all of the Company's freeze dried Aloe vera. Among these changes was a
reduction in work force as well as improvements in efficiencies in the
manufacturing process. The implementation of these changes has
significantly reduced the cost of Costa Rica production over the first
half of 1996. As a result of these reductions in cost, the actual cost
of production under FIFO as of June 30, 1996 was approximately 18%
lower than the Company's standard cost which was equal to the FIFO cost
of production at December 31, 1995. The Company determined that the
standard cost should be reset to the then current actual cost of
production. This reduction in standard FIFO cost decreased inventory
valuation by $630,000. This amount represents the change in the
accumulated value of all items currently in inventory that were
produced in Costa Rica as well as those finished goods that contain
component items produced in Costa Rica. This decrease in inventory
value was expensed in the second quarter as a period cost and is
included in cost of goods sold.
To accelerate new product development and reduce overhead, the Company
was restructured in 1995. The restructuring included the lay-off of
seventeen high level and under-utilized positions in administration,
marketing, and research and development for a net reduction in salaries
and benefits of approximately $120,000 per month. Approximately
$15,000 of these savings were offset with the hiring of Kirk Meares,
Vice President of Sales and Marketing, in the second quarter of 1996.
Also, the Company relocated its manufacturing operations to its current
facility on Walnut Hill in Irving, Texas and immediately realized a
reduction in overhead and production costs as the new facility is more
efficient than the prior location. As the Walnut Hill facility is
owned by the Company, rent and other facility expenses related to the
former production facility of approximately $25,000 per month were
eliminated. Each of these items is expected to reduce future expenses
and improve cash flow results. As a result of the restructuring,
approximately $1.4 million of one-time charges were taken during 1995.
Of these charges, approximately $147,000 of unpaid severance
compensation was paid in the first two quarters of 1996. Of this
amount, $75,000 was a final payment to a single former high ranking
research and development employee. This negotiated payment relieved
the Company of $128,000 in future severance compensation liability to
this employee. As of June 30, 1996, all liabilities resulting from the
restructuring were paid in full or otherwise relieved.
<PAGE>
Selling, general and administrative (SG&A) expenses decreased to
$8,253,000 from $9,501,000, or 13.1%. This decrease was attributable
to approximately $900,000 in one-time charges in the first nine months
of 1995. These one-time charges were related to severance agreements,
legal expenses and settlements and debt refinancing costs. This was
partially offset as the Company incurred approximately $150,000 in
additional costs related to the launch of three new product types and a
one-time write-off of approximately $92,000 of bank and legal charges
related to the early retirement of all bank debt. Also contributing to
the reduced SG&A expenses were the benefits received from the cost
reduction programs put in place earlier in the year as well as savings
generated from the restructuring of the sales force.
Research and development (R&D) expenses increased to $5,079,000 from
$4,282,000, or 18.6%. This increase was the result of beginning the
large scale phase III clinical trial for the testing of Aliminase(R) oral
capsules for the treatment of acute flare-ups of ulcerative colitis
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(R).
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(R).
Indications are that no statistically significant differences were
found to support a therapeutic effect. As a result, the Company has
terminated the second large scale clinical trial and further testing of
Aliminase(R) has been placed on hold. Approximately $150,000 in
cancellation fees was recorded in the third quarter and will be paid in
the fourth quarter of 1996. Additional R&D costs related to the
ongoing cancer research contributed to the increase in R&D during the
first nine months of 1996 as well. These costs were partially offset
by a reduction of internal salaries and other operating expenses.
Net interest income of $168,000 was realized in the first nine months
of 1996, versus net interest costs of $139,000 in the first nine months
of 1995, due to having more excess cash to invest as well as the
retirement of all bank debt in April 1996.
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 use the proceeds from its sale of
Series E Convertible Preferred Stock to continue its clinical research
programs, to file a registration statement and have it declared
effective within the time required by its agreements with the holders
of its Series E Convertible Preferred Stock, to vigorously defend the
<PAGE>
legal proceedings described in this report, 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 and increase its market share in the
alternative care markets, to promote and sell its veterinary products
on a broader scale, and various other matters.
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>
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: January __, 1996 By:
---------------------- -----------------------------
Carlton E. Turner,
President
Date: January __, 1996 By:
---------------------- -----------------------------
Sheri L. Pantermuehl,
Chief Financial Officer
<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: January __, 1996 By: /s/ Carlton E. Turner
------------------ ----------------------------
Carlton E. Turner,
President
Date: January __, 1996 By: /s/ Sheri L. Pantermuehl
---------------------- ----------------------------
Sheri L. Pantermuehl,
Chief Financial Officer
<PAGE>
