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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-11997
Carrington Laboratories, Inc.
(Exact name of Registrant as specified in its charter)
Texas 75-1435663
(State of Incorporation) (IRS Employer ID No.)
2001 Walnut Hill Lane, Irving, Texas 75038
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 518-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Preferred Share Purchase Rights
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the Registrant on March 14, 1997, was $51,179,297. (This
figure was computed on the basis of the closing price of such stock on
the NASDAQ National Market on March 14, 1997 using the aggregate number
of shares held on that date by, or in nominee name for, shareholders
who are not officers, directors or record holders of 10% or more of the
Registrant's outstanding voting stock. The characterization of such
officers, directors and 10% shareholders as affiliates is for purposes
of this computation only and should not be construed as an admission
for any other purpose that any of such persons are, in fact, affiliates
of the Registrant.)
Indicate the number of shares outstanding of each of the
Registrant's classes of Common Stock, as of the latest practicable
date:
8,873,639 shares of Common Stock, par value $.01 per share, were
outstanding on March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting
of shareholders to be held on May 22, 1997 are incorporated by
reference into Part III hereof, to the extent indicated herein.
PART I
ITEM 1. BUSINESS.
General
Carrington Laboratories, Inc. ("Carrington" or the "Company") is a
research-based pharmaceutical and medical device company engaged in the
development, manufacturing and marketing of naturally derived complex
carbohydrate and other natural product therapeutics for the treatment
of major illnesses and the dressing and management of wounds. The
Company comprises three business divisions. See Note Sixteen to the
consolidated financial statements in this annual report for financial
information about these business divisions. The Company sells, using a
network of distributors, nonprescription products through its Wound and
Skin Care Division, veterinary medical devices and pharmaceutical
through its Veterinary Medical Division and consumer products through
its consumer products subsidiary, Caraloe, Inc. The Company's research
and product portfolio are based primarily on complex carbohydrate
technology derived from the Aloe vera plant.
The Company was incorporated in Texas in 1973, as Ava Cosmetics, Inc.
In 1986, the Company sold the direct sales business it was then
operating and changed its name to Carrington Laboratories, Inc.
Wound and Skin Care Division
Carrington's Wound and Skin Care Division markets a comprehensive line
of wound management products to hospitals, alternative care facilities
and the home health care market. The Company's products are designed
to maintain a moist wound environment which aids the healing process
and to maintain the integrity of contiguous healthy skin. Carrington
products are used in a wide range of acute and chronic wound and skin
conditions and for incontinence and ostomy care.
The Company is committing significant resources to its wound and skin
care business. Primary marketing emphasis is directed toward
hospitals, managed care organizations, alternate care facilities and
home health care providers, with wound and skin care products being
promoted primarily to physicians and specialty nurses, e.g.
enterostomal therapists. Opportunities in the growing alternate care
and home health care markets are also addressed through a telemarketing
sales team and a National Accounts Department.
The Company's hospital field sales force currently employs 31 sales
representatives, each assigned to a specific geographic area in the
United States, four regional sales managers and a representative in
Puerto Rico. The Company also uses three independent sales company
employing eight sales representatives to sell its products on a
commission basis and an independent sales representative in Canada. In
addition to this field sales force, the Wound and Skin Care Division
employs five telemarketers who focus on alternative care facilities and
the home health care market, and three persons in its National Accounts
Department.
The Company's products are primarily sold through a network of
distributors. Three of the Company's largest distributors in the
hospital market for the last several years have been Allegiance
Healthcare Corporation ("Allegiance", formerly Baxter Healthcare
Corporation), Owens & Minor and Bergen Brunswig, which acquired Durr
Medical and Colonial Healthcare in December 1996. During fiscal 1994,
1995 and 1996, sales of wound and skin care products to Allegiance
represented 11%, 10% and 9%, respectively, of the Company's total net
sales. Sales to Owens & Minor represented 7%, 14%, and 11%,
respectively, of total net sales over the same period. Sales to Bergen
Brunswig represented 8%, 10%, and 12%, respectively, of total net sales
over the same period.
In November 1995, the Company signed a Sales Distribution Agreement
with Laboratories PiSA S.A., a Mexican corporation, for the exclusive
distribution rights to sell the Company's wound care products in
Mexico, Guatemala, Nicaragua, Panama, El Salvador, and the Dominican
Republic for a period of five years.
In May 1996, the Company entered into an agreement with Trudell Medical
Group ("Trudell") granting Trudell exclusive Canadian distribution
rights for the Company's wound care products.
In May 1996, the Company granted Ching Hwa Pharmaceutical Company, Ltd.
("CHP"), exclusive distribution rights to market the Comapny's wound care
products in the Republic of China. CHP is required to register the Company's
products for sale in Taiwan within a specified time.
In October 1996, the Company signed an exclusive contract with Faulding
Pharmaceuticals to market the Company's wound care products in Australia
and New Zealand. In December 1996, the Company entered into an agreement
with Suco International Corp. ("Suco") whereby the Company appointed Suco as
exclusive distributor of certain of the Company's products in Haiti,
Columbia, Venezuela, Uruguay, Bolivia, Peru, Paraguay, and Ecuador for
a five-year term, subject to early termination under certain
circumstances. The agreement requires Suco to register the products
covered by the agreement in each of those countries.
In December 1996, the Company and Darrow Laboratorios S/A ("Darrow")
entered into a Sales Distribution Agreement whereby the Company
appointed Darrow as a marketer and distributor of certain of the
Company's wound care products for a term of 10 years (subject to early
termination under certain circumstances) in Brazil, with a limited right
of first refusal to distribute those products in Argentina, Uruguay,
Paraguay, and Chile. The agreement requires Darrow to register such of
the Company's products as the Company directs, at the Company's
expense, in Brazil and each other country where Darrow is authorized to
distribute such products.
In December 1996, the Company and its Belgian subsidiary entered into
an agreement with Recordati Industria Chimica & Farmaceutica S.P.A.
("Recordati") whereby the Company and its subsidiary jointly granted
exclusive distribution rights to Recordati for certain of the Company's
products in Italy, Vatican City and San Marino for a term of 10 years,
subject to automatic renewal for an additional two years unless
either party elects to terminate the agreement at the end of the
initial term, and subject to early termination under certain
circumstances. In return for the grant of the distribution rights,
Recordati made an initial payment to the Company and is obligated to
make two additional payments contingent on the occurrence of certain
events. Under the agreement, the Company is obligated to apply for a
CE mark for the products covered by the agreement in the United Kingdom
or another member of the European Economic Community, and Recordati is
obligated to register those products in each area covered by the
agreement.
In 1996, sales of the Company related to the above mentioned
international agreements were less than $100,000. The Company can not
estimate what sales associated with these agreements will be in 1997.
Consumer Health
Caraloe, Inc., a separate subsidiary of the Company ("Caraloe"),
markets or licenses consumer products and bulk ingredients utilizing
the Company's patented complex carbohydrate technology. Attention has
been focused on three goals, the first of which is to sell Caraloe's
Aloe Nutritional[R] brand products through the health food store market.
The second goal has been to develop private label aloe products for
entrepreneurs seeking a high quality line of aloe products. The third
goal has been to become a supplier of bulk Aloe vera raw materials to
commercial companies incorporating Aloe vera mucilaginous
polysaccharides into their established product lines.
In May 1994, Caraloe signed an agreement with Mannatech, Inc., formerly
Emprise International, Inc., to supply it a product known as bulk
Manapol[R] powder. In February 1996, an agreement was signed with
Mannatech granting it an exclusive license in the United States for
Manapol[R] powder. During fiscal 1994, 1995, and 1996, sales of Manapol
[R] powder to Mannatech represented 4%, 10%, and 15%, respectively, of the
Company's total net sales. In January 1997, the Company received
notification from Mannatech that the current supply agreement for
Manapol[R] powder would be terminated effective March 31, 1997. As the
supply agreement between Caraloe and Mannatech will not be renewed, the
exclusive license agreement for the Manapol[R] trade name will also
terminate and the Company will then be able to sell Manapol[R] powder
and/or license the trademark to other third parties as well as use
Manapol[R] powder in the Company's products. The Company plans to
reintroduce its Manapol[R] capsules in April 1997.
In October 1996, Caraloe made a $200,000 investment in Aloe Commodities
International, Inc. ("ACI"). In February, 1997 Caraloe entered into a
Supply Agreement with ACI for a term of 10 years (subject to early
termination under certain circumstances). The agreement contemplates
that ACI will purchase from Caraloe all of certain bulk raw materials
that ACI needs for drinks and other consumer products.
In February 1997, Caraloe entered into a Supply Agreement with Light
Resources Unlimited ("LRU"), and effective March 1, 1997, Carrington
entered into a related Trademark License Agreement with LRU. The terms
of the Supply Agreement and the Trademark License Agreement end on May
12, 2002 and May 4, 2002, respectively, and the term of each agreement
is subject to early termination under certain circumstances. The
Supply Agreement provides that during the first three months of the
term, LRU will purchase from Caraloe quantities of AVMP[R] Powder and/or
Manapol[R] Gold[TM] Powder ("Product") to be mutually agreed upon, and
beginning May 12, 1997, LRU will purchase from Caraloe annually at
least the minimum quantities of Product specified in the agreement.
The Supply Agreement also contemplates that LRU will be Caraloe's sole
distributor of Product to natural health care practitioners in the
United States and Canada, subject to Caraloe's right to sell simple
purchase bulk Product to natural health care practitioners in
quantities exceeding certain specified limits. The Trademark License
Agreement grants LRU a non-exclusive license to use the trademarks AVMP[R]
Powder and Manapol[R] Gold[TM] Powder in connection with the advertising and
sale of Product.
Veterinary Medical Division
The Carrington Veterinary Medical Division ("CVMD") markets Acemannan
Immunostimulant, a vaccine adjuvant, and several wound and skin care
products to the veterinary market. Acemannan Immunostimulant was
conditionally approved by the United States Department of Agriculture
("USDA") in November 1991, for use as an aid in the treatment of canine
and feline fibrosarcoma, a form of soft tissue cancer that affects dogs
and cats. A conditional approval means that efficacy and potency tests
are required, and the product's label must specify that these studies
are in progress. The "conditional" aspect of the approval is renewed
on an annual basis and will be removed upon completion and acceptance
by the USDA of additional potency testing. However, there can be no
assurance that these tests will result in the removal of the
conditional restriction on the USDA s approval of Acemannan
Immunostimulant.
In September 1990, the Company granted Solvay Animal Health, Inc.
("Solvay") an exclusive, worldwide license to use and sell a bulk
pharmaceutical mannan adjuvant for poultry disease. In January 1992,
Solvay received approval from the USDA to market the bulk
pharmaceutical mannan as an adjuvant to a vaccine for Marek's disease,
a virus infection that kills chickens or renders them unfit for human
consumption. Solvay sells the product under the trademark ACM I.
In March 1996, the Company signed an agreement with Farnam Companies,
Inc., a leading veterinary marketing company, to promote and sell the
CarraVet[R] product line, including Acemannan Immunostimulant. The
CarraVet[R] product line currently consist of nine products.
Research and Development
General
In 1984, the Company isolated and identified a polymeric compound with
a molecular weight between one and two million Daltons from the Aloe
vera plant. This compound has been given the generic name "acemannan"
by the United States Adopted Names Council. The Company intends to
seek approval of the Food and Drug Administration (the "FDA") and other
regulatory agencies to sell products based on a family of complex
carbohydrates in the United States and in foreign countries: (i) to
treat various forms of cancer; (ii) to treat inflammatory bowel
diseases, including ulcerative colitis, a widespread, chronic,
inflammatory disease of the colon; (iii) to treat non-healing and other
wounds; and (iv) for use as an adjuvant to various vaccines. For a
more comprehensive listing of the type, indication and status of
products currently under development by the Company, see "Research and
Development -- Summary" below. The regulatory approval process, both
domestically and internationally, can be protracted and expensive, and
there is no assurance that the Company will obtain approval to sell its
products for any treatment or use (see "Governmental Regulation"
below).
The Company is marketing or developing several products which in the
past were given the general name of acemannan, suggesting the products
were identical. This is not correct because there are ten products in
development or being marketed that are derived from 3 basic extracts of
the Aloe vera plant. The basic freeze-dried Aloe vera extract is
reconstituted to produce Manapol[R] and AVMP[R] powders for both food grade
and cosmetic grade products. Further refinement produces Bulk
Pharmaceutical Mannans ("BAM's") that are used to produce hydrogels;
the Carrington[TM] Patch, an oral care product; Carra Sorb[T]) M, a freeze-
dried wound dressing; adjuvants, ACM I marketed by Solvay, and CARN 500
which is being developed as an adjuvant for various vaccines; and
Aliminase[TM] capsules (formerly CARN 1000) which were being developed for
the ulcerative colitis program. Finally, Bulk Injectable Mannans ("BIM's")
are marketed as Acemannan Immunostimulant (CARN 700), and a product has
been developed for the treatment of cancer, CarraVex[TM] injectable
(formerly CARN 750).
The Company expended approximately $5,334,000, $5,370,000, and
$5,927,000 on research and development in fiscal 1994, 1995, and 1996,
respectively. The Company estimates that in fiscal 1997 it will spend
substantially less on research and development than in 1996.
Currently, the Company's research staff comprises eight full-time
employees as compared to 13 full-time employees at the end of 1995.
Preclinical Research
The Company identified the characteristics of its naturally occurring
complex carbohydrates by a series of studies in the Company's
laboratories and in several contract laboratories. Based on toxicology
tests sponsored by the Company on different animal species with dosages
up to 40 times the proposed intravenous human dosage, in vitro and in
vivo tests for mutagenicity, dermal sensitization tests, results of a
Phase I safety study of an oral product in humans and a Phase I safety
study of an intravenously administered preparation in humans, no
clinically significant toxicity of the Company s products has been
noted. Further safety studies may be required by the FDA prior to the
approval of any applications of complex carbohydrates.
Other preclinical studies conducted in the Company's laboratories and
in outside laboratories have shown that certain of the Company's
complex carbohydrates stimulate macrophages and other white blood cells
to produce cytokines, including interleukin-1, interleukin-6, tumor
necrosis factor alpha ("TNFA") and nitric oxide ("NO"), that regulate
other cells. Interleukin-1 stimulates fibroblasts, which are essential
to wound healing and NO is involved in blood vessel regeneration.
Tumor necrosis factor alpha acts against tumors in the body. In
addition, laboratory experiments conducted by the Company have shown
that some Aloe vera components have both pro- and anti-inflammatory
actions and some products bind to and extend the life of growth
factors.
The Company believes that its products' pharmacological actions and
lack of toxicity make them excellent candidates for further development
as therapeutic agents for the treatments and uses for which the Company
intends to seek regulatory approvals (see "Research and Development --
General" above). There is no assurance, however, that the Company will
be successful in its efforts.
The Company operates a research and development laboratory at the Texas
A&M University Research Park to expand preclinical research in various
wound healing applications and mechanisms of action. Pursuant to this
arrangement, the Company has access to leading authorities in
immunology, as well as facilities and equipment to engage in
experimentation and analysis at the basic research level.
Animal Studies
The Company has pursued a strategy of developing products for certain
animal indications, clinical testing of which may have application to
studies for treatment of human diseases. Animal clinical testing
necessary to obtain eventual approval of a product for treatment of
human diseases may also provide data sufficient to obtain approval for
the related veterinary indication. This approach enables the Company
to obtain revenues from its research efforts at an earlier date and
also expands data available from actual use of the product in animals.
The Company's clinical research efforts to date have focused on the
indications described below.
Vaccine Adjuvants. An adjuvant is a substance that enhances the
antibody response to an antigen. The ability to generate a vigorous
immune response to an antigen is critical to the effectiveness of a
vaccine. The Company's studies indicate that acetylated mannans, when
used as a vaccine adjuvant, produce marked stimulation of the immune
system.
In 1990, the Company received approval from the USDA to sell an
adjuvant to licensed manufacturers for use in combination with animal
vaccines. This use as a vaccine adjuvant for certain poultry diseases
was licensed to Solvay pursuant to an agreement between Solvay and the
Company entered into in September 1990. In January 1992, Solvay
received approval from the USDA to market an adjuvant to its vaccine
for Marek's disease (see "Veterinary Medical Division" above).
The Company has conducted or sponsored studies of CARN 500 adjuvants
with other vaccines for animals. Based on these studies, the Company,
either directly or through third party licensees, intends to pursue
development of adjuvants for other animal vaccines. In 1993, a program
was begun to develop adjuvants for mammalian vaccines and for vaccines
for marine animals under licenses with one European company. There can
be no assurance however, that such development will be successful or
that the Company will be able to develop, or to enter into any
licensing agreements for the development of, any additional adjuvants.
Evaluation of Anti-Tumor Activity. Acetylated mannans, including
CarraVex[TM] injectable (formerly CARN 750), are immunomodulating agents
that increase circulating levels of interleukin-1 and tumor necrosis
factor alpha. A series of studies conducted at Texas A&M University in
1988 and 1989 on mice with highly malignant tumors indicated that a
single intraperitoneal dose caused significant tumor reduction in a
statistically significant percentage of mice. This effect in many
instances was dramatic, with complete regression of the tumor and with
continuing immunity. Recovered animals were resistant to syngeneic
tumor reimplantation for up to six months after initial tumor
regression.
In 1991, the USDA granted the Company conditional approval to market an
injectable form of a complex carbohydrate as an aid in the treatment of
canine and feline fibrosarcoma, a form of soft tissue cancer, under the
name Acemannan Immunostimulant. The Company believes, based on
discussions with the USDA in 1996, that the USDA's remaining requirements
to remove the conditional restriction can be completed in 1997
(see "Veterinary Medical Division" above). Of course, there can be no
assurance as to whether or when the USDA will remove the conditional
restriction on its approval of this product.
Human Studies
Evaluation of Aliminase[TM] (formerly CARN 1000) oral capsules in the
Treatment of Inflammatory Bowel Diseases. In October 1991, the Company
filed an investigational new drug ("IND") application requesting
approval to conduct human clinical trials on the efficacy of Aliminase[TM]
capsules in the treatment of ulcerative colitis. In November 1991, the
Company received notice that the FDA was withholding approval of the
study, pending submission of additional information. Additional
studies requested by the FDA were completed, and the results were
submitted in October 1992. In December 1992, the Company received
authorization from the FDA to commence human clinical trials under the
IND application. In early 1993, the Company began a pilot safety and
efficacy study with oral Aliminase[TM] capsules in the treatment of
ulcerative colitis patients who are experiencing an acute flare-up of
the disease. This study, completed in May 1994, was conducted by
treating 54 patients with 400 or 800 milligram doses twice daily for
two or four weeks. After four weeks, the disease activity index and
the signs and symptoms of the disease were significantly improved, and
the safety of the oral product continued to be confirmed. A large
controlled trial of Aliminase[TM] capsules in patients with ulcerative
colitis began in September 1995. Over 300 patients were enrolled in
four groups comparing a placebo with three doses of Aliminase[TM] capsules
(150, 300 and 600 mg dosage levels, administered twice daily for six
weeks). Results were assessed in October 1996 and failed to show a
therapeutic effect of Aliminase[TM] capsules as compared with the placebo.
The program was placed on hold pending an in-depth evaluation of dosage
form, timing of dosing, frequency of dosing and route of
administration. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources.")
Evaluation of CarraVex[TM] injectable (formerly CARN 750) in the Treatment
of Solid Tumors in Humans. The Company believes that CarraVex[TM]
injecttible may be broadly useful in cancer therapy, with potential
application in the treatment of major solid tumors, including melanoma,
breast carcinoma, prostate carcinoma, colon carcinoma, hypernephroma
and soft tissue sarcoma. The Company initiated a Phase I human
clinical trial of CarraVex[TM] injectable in certain solid tumor
indications. The trial began in the United States in late 1995. As a
result of the success of Acemannan Immunostimulant in treating dogs and
cats, the Company has reason to believe that CarraVex[TM] injectable may
play a significant role in the treatment of cancer in humans.
Evaluation of the Carrington[TM] Patch in the Treatment of Aphthous
Ulcers. Carrington's efforts to broaden the claims for wound care
products containing Carrasyn[R] Hydrogel were expanded to include an
application within the oral health care field. Two studies were
conducted at Baylor College of Dentistry to examine the efficacy and
safety of two formulations of Carrasyn[R] Hydrogel wound dressing in the
treatment of oral aphthous ulcers (canker sores). The first study
involved Carrasyn[R] Hydrogel wound dressing modified for intraoral use
versus a leading product. The second trial involved the modified oral
formulation of Carrasyn[R] Hydrogel that had been freeze-dried. This
product, the Carrington[TM] Patch, reduced the pain of these ulcers. The
Company was given clearance by the FDA to market the freeze-dried
formulation for the management of oral aphthous ulcers in 1994. In
1996, the FDA cleared these additional indications to market: oral
wounds, mouth sores, injuries and ulcers of the oral mucosa including
traumatic ulcers such as those caused by braces and ill fitting
dentures. The product is being marketed as the Carrington[TM] Patch.
Evaluation of Carrasyn[R] in Wound Healing. In 1993, a study was
conducted at M.D. Anderson Cancer Center to determine if Carrasyn[R]
Hydrogel was of benefit in treating radiation-induced skin reactions of
mice. These studies clearly showed that, when compared to controls,
Carrasyn[R] Hydrogel could significantly reduce radiation-induced
inflammation and tissue damage in animals. As a result of this work, a
small clinical trial was performed in 1994, studying the radiation-
sparing effects of Carrasyn[R] Hydrogel wound dressing in four oncology
patients. A study conducted at the Diabetic Foot and Wound Center in
Denver, Colorado, suggested a higher incidence in wounds healed at
sixteen weeks with Carrasyn[R] wound gel as compared to saline gauze.
Four new indications (post-surgical incisions, sunburn, diabetic ulcers
and radiation dermatitis) for Carrasyn[R] were added in 1995. Further
studies may be conducted in 1997.
Evaluation of RadiaCare[TM] Gel in the Treatment of Radiation Dermatitis.
In 1996, a study was begun at the Texas Oncology Center of Dallas to
determine if RadiaCare[TM] Gel was of benefit in treating radiation
dermatitis in humans. The results of this study should be known in mid-
1997.
Evaluation of Carrasyn[R] Freeze-Dried Gel (Carra Sorb[TM] M) in Wound
Healing. Following the submission of a 510(k) pre-market notification
for a preservative-free freeze-dried gel for wound care, the FDA
cleared Carrington to market CarraSorb[TM] M, and it was launched in early
1996. The Company is performing a case study to support the marketing
effort for this product.
Summary. The following table outlines the status of the products and
potential indications of the Company's aloe-based products developed,
planned or under development. There is no assurance of successful
development, completion or regulatory approval of any product not yet
on the market.
PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED,
PLANNED OR UNDER DEVELOPMENT
PRODUCT OR
POTENTIAL INDICATION POTENTIAL MARKET APPLICATIONS STATUS
Topical
Dressings Pressure and Vascular Ulcers Marketed
Cleansers Wounds
Marketed
Antifungal Candida Marketed
Oral
Human
Anti-inflammatory Ulcerative Colitis On hold
Injectable
Human
Anticancer Melanoma, Breast, Prostate, Colon, Phase I
Hypernephroma, and Soft Tissue Clinical
Sarcoma Trial
Veterinary
Anticancer Fibrosarcoma Marketed
Dental
Pain reduction Aphthous Ulcers, Oral Wounds Marketed
Vaccine Adjuvant
Veterinary
Poultry Vaccines Marek's Disease Marketed
Livestock Cattle, Sheep Clinical
Trials
Marine
(water treatment) Trout, Shrimp Clinical
Trials
Licensing Strategy
The Company expects that prescription pharmaceutical products
containing certain defined mannans will require a substantial degree of
development effort and expense. Before governmental approval to market
any such product is obtained, the Company may license these mannans for
certain indications to other pharmaceutical companies in the United
States or foreign countries and require such licensees to undertake the
steps necessary to obtain marketing approval for specific indications
or in a particular country.
Similarly, the Company intends to license third parties to market
products containing defined mannans for certain human indications when
it lacks the expertise or financial resources to market effectively.
If the Company is unable to enter into such agreements, it may
undertake to market the products itself for such indications. The
Company's ability to market these mannans for specific indications will
depend largely on its financial condition at the time and the results
of related clinical trials. There is no assurance that the Company
will be able to enter into any license agreements with third parties or
that, if such license agreements are concluded, they will contribute to
the Company's overall profits.
Raw Materials and Processing
The principal raw material used by the Company in its operations is the
leaf of the plant Aloe barbadensis Miller, popularly known as Aloe
vera. Through a patented process, the Company produces bulk
pharmaceutical and injectable mannans and freeze-dried aloe extract
from the central portion of the Aloe vera leaf known as the gel. Bulk
pharmaceutical mannan, in the form of a hydrogel, is used as an
ingredient in certain of the Company's wound and skin care products.
Through additional processing, bulk mannans may be produced in both
oral and injectable dosage forms.
In May 1990, the Company purchased a 405-acre farm in the Guanacaste
province of northwest Costa Rica which currently has approximately 210
acres planted with Aloe vera. The Company plans to plant additional
acreage as demand for Aloe vera leaves increases. The Company believes
that the Costa Rica farm will be capable of providing substantially all
of the Aloe vera leaves required to meet the Company's presently
anticipated needs (see "Properties --Costa Rica Facility" below).
Manufacturing
Prior to the second quarter of 1995, the Company produced substantially
all of its wound and skin care products in a leased facility in Dallas,
Texas. During the first quarter of 1994, the Company completed an
evaluation of the production requirements that would be needed to meet
all federal regulatory requirements as a fully integrated
pharmaceutical manufacturer, as well as the production capacity that
would be required to meet continued growth in the Company's wound and
skin care business. It was decided to move its wound and skin care
manufacturing operation to the Company's headquarters facility in
Irving, Texas, and expand the facility through higher capacity
equipment. The moving, upgrading and expansion of the manufacturing
operation began in the fourth quarter of 1994, and the project was
completed and production began during the third quarter of 1995. At
the same location, the Company has upgraded its capabilities to produce
injectable grade pharmaceutical products. The Company believes that
the new plant's capacity will provide sufficient capacity for the
present line of products, and accommodate new products and sales
growth. Final packaging of certain of the Company's wound care
products is completed by outside vendors. The Company's calcium
alginates, films, foam dressings, gel sheets, tablets, capsules, and
freeze-dried products are being provided by third parties.
All of the Company's bulk pharmaceutical mannans, bulk injectable
mannans and freeze-dried Aloe vera extracts are produced in its
processing plant in Costa Rica. This facility has the ability to
supply the bulk aloe raw materials requirements of the Company's
current product lines for the foreseeable future. During the first
quarter of 1994, the Company initiated a project in Costa Rica to
upgrade the production plant to meet regulatory requirements for the
production of bulk pharmaceutical oral and injectable mannans as
required for IND's. This project was completed in the fourth quarter
of 1994. Finished oral and injectable dosage forms will be produced by
outside vendors until in-house production becomes economically
justified.
The production capacity of the Costa Rica plant is larger than the
Company's current usage level. Management believes, however, that the
cost of the Costa Rica facility will eventually be recovered through
operations. The larger production capacity will be required to conduct
large scale clinical trials with bulk pharmaceutical and injectable
mannans.
Competition
Research and Development. The biopharmaceutical field is expected to
continue to undergo rapid and significant technological change.
Potential competitors in the United States are numerous and include
pharmaceutical, chemical and biotechnology companies. Many of these
companies have substantially greater capital resources, research and
development staffs, facilities and expertise (including in research and
development, manufacturing, testing, obtaining regulatory approvals and
marketing) than the Company. This competition can be expected to
become more intense as commercial applications for biotechnology and
pharmaceutical products increase. Some of these companies may be
better able than the Company to develop, refine, manufacture and market
products which have application to the same indications as bulk
pharmaceutical mannans and bulk injectable mannans. The Company
understands that certain of these competitors are in the process of
conducting human clinical trials of, or have filed applications with
government agencies for approval to market, certain products that will
compete with the Company's products.
Wound and Skin Care Division, Caraloe, Inc., and CVMD. The Company
competes against many companies that sell products which are
competitive with the Company's products, with many of its competitors
using very aggressive marketing efforts. Many of the Company's
competitors are substantially larger than the Company in terms of sales
and distribution networks and have substantially greater financial and
other resources. The Company's ability to compete against these
companies will depend in part on the continued expansion of the
marketing network for its products. The Company believes that the
principal competitive factors in the marketing of its products is their
quality, and that they are naturally based and competitively priced.
Governmental Regulation
The production and marketing of the Company's products, and the
Company's research and development activities, are subject to
regulation for safety, efficacy and quality by numerous governmental
authorities in the United States and other countries. In the United
States, drugs for human use are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act, as amended, the regulations
promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval,
advertising and promotion of the Company's products. For marketing
outside the United States, the Company is subject to foreign regulatory
requirements governing human clinical trials and marketing approval for
drugs and devices. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement may vary widely
from country to country.
Food and Drug Administration. The contents, labeling and advertising
of many of the Company's products are regulated by the FDA. The
Company is required to obtain FDA approval before it can study or
market any proposed prescription drugs and may be required to obtain
such approval for proposed nonprescription products. This procedure
involves extensive clinical research, and separate FDA approvals are
required at various stages of product development. The approval
process requires, among other things, presentation of substantial
evidence to the FDA, based on clinical studies, as to the safety and
efficacy of the proposed product.
In order to initiate human clinical trials on a product, extensive
basic research and development information must be submitted to the FDA
in an investigational new drug ("IND") application. The IND
application contains a general investigational plan, a copy of the
investigator's brochure (a comprehensive document provided by the drug
manufacturer), copies of the initial protocol for the first study, a
review of the chemistry, manufacturing and controls information for the
drug, pharmacology and toxicology information, any previous human
experience with the drug, results of preclinical studies and any other
information requested by the FDA.
If permission is obtained to proceed to clinical trials based on the
IND application, initial trials, usually categorized as Phase I, are
instituted. The initial or Phase I trials typically involve the
administration of small, increasing doses of the investigational drug
to healthy volunteers, and sometimes patients, in order to determine
the general overall safety profile of the drug and how it is
metabolized. Once the safety of the drug has been established, Phase
II efficacy trials are conducted in which the expected therapeutic
doses of the drug are administered to patients having the disease for
which the drug is indicated, and a therapeutic response is sought as
compared to the expected progression of the underlying disease or
compared to a competitive product or placebo. Information also is
sought on any possible short-term side effects of the drug. If
efficacy and safety are observed in the Phase II trials, Phase III
trials are undertaken on an expanded group in which the patients
receiving the drug are compared to a different group receiving either a
placebo or some form of accepted therapy in order to establish the
relative safety and efficacy of the new drug compared with the control
group. Data are also collected to provide an adequate basis for future
physician prescribing information.
If Phases I through III are successfully completed, the data from these
trials are compiled into a new drug application ("NDA"), which is filed
with the FDA in an effort to obtain marketing approval. In general, an
NDA will include a summary of the components of the IND application, a
clinical data section reviewing in detail the studies from Phases I
through III and the proposed description of the benefits, risks and
uses, or labeling, of the drug.
In general, a more comprehensive NDA and a more prolonged review
process are required for drugs not previously approved for marketing by
the FDA. If a second indication for an already approved product is
sought, since many of the components of the review process are the
same, a shortened review process generally can be anticipated.
However, the FDA gives high priority to novel drugs providing unique
therapeutic benefits and a correspondingly lower priority to drugs
similar to or providing comparable benefits to others already on the
market.
In addition to submitting safety and efficacy data derived from
clinical trials for FDA approval, NDA approval requires the
manufacturer of the drug to demonstrate the identity, potency, quality
and purity of the active ingredients of the product involved, the
stability of these ingredients and compliance of the manufacturing
facilities, processes and quality control with the FDA's current Good
Manufacturing Practices regulations. After approval, manufacturers
must continue to expend time, money and effort in production and
quality control to assure continual compliance with the current Good
Manufacturing Practices regulations.
Certain of the Company's wound and skin care products are registered
with the FDA as "devices" pursuant to the regulations under Section
510(k) of the Federal Food, Drug and Cosmetic Act, as amended. A
device is a product used for a particular medical purpose, such as to
cover a wound, with respect to which no pharmacological claim can be
made. A device which is "substantially equivalent" to another device
existing in the market prior to May 1976 can be registered with the FDA
under Section 510(k) and marketed without further testing. A device
which is not "substantially equivalent" is subject to an FDA approval
process similar to that required for a new drug, beginning with an
Investigational Device Exemption and culminating in a Premarket
Approval. The Company has sought and obtained all its device approvals
under Section 510(k). With respect to certain of its wound and skin
care products, the Company intends to develop claims for which IND and
NDA submissions will be required.
Department of Agriculture. Certain products being developed by the
Company for animal health indications must be approved by the USDA.
The procedure involves extensive clinical research, and USDA approvals
are required at various stages of product development. The approval
process requires, among other things, presentation of substantial
evidence to the USDA as to the safety and efficacy of the proposed
product. Furthermore, even if approval to test a product is obtained,
there is no assurance that ultimate approval for marketing the product
will be granted. USDA approval procedures can be protracted.
Other Regulatory Authorities. The Company's advertising and sales
practices are subject to regulation by the Federal Trade Commission,
the FDA and state agencies. The Company's processing and manufacturing
plants are subject to federal, state and foreign laws and to regulation
by the Bureau of Alcohol, Tobacco and Firearms of the Department of the
Treasury and by the Environmental Protection Agency as well as the FDA.
The Company believes that it is in substantial compliance with all
applicable laws and regulations relating to its operations, but there
is no assurance that such laws and regulations will not be changed.
Any such change may have a material adverse effect on the Company's
operations.
Patents and Proprietary Rights
As is industry practice, the Company has a policy of using patent,
trademark and trade secret protection with a view to preserving its
right to exploit the results of its research and development activities
and, to the extent it may be necessary or advisable, to exclude others
from appropriating the Company's proprietary technology. The Company's
policy is to protect aggressively its proprietary technology by seeking
and enforcing patents in a worldwide program.
The Company has obtained patents or filed patent applications in the
United States and approximately 24 other countries in three series
regarding the compositions of acetylated mannan derivatives, the
processes by which they are produced and the methods of their use. The
first series of patent applications, relating to the compositions of
acetylated mannan derivatives and certain basic processes of their
production, was filed in a chain of United States patent applications
and its counterparts in the other 24 countries. The first United
States patent application in this first series, covering the
composition claims of acetylated mannan derivatives, matured into
United States Patent No. 4,735,935 (the "935 Patent"), which was issued
on April 5, 1988. United States Patent No. 4,917,890 (the "890
Patent") issued on April 17, 1990 from a divisional application to the
935 Patent. This divisional application pertains to most of the
remaining claims in the original application not covered by the 935
Patent. The 890 Patent generally relates to the basic processes of
producing acetylated mannan derivatives, to certain specific examples
of such processes and to certain formulations of acetylated mannan
derivatives. Two other divisional applications covering the remaining
claims not covered by the 890 Patent matured into patents, the first on
September 25, 1990, as United States Patent No. 4,959,214, and the
second on October 30, 1990, as United States Patent No. 4,966,892.
Foreign patents that are counterparts to the foregoing United States
patents have been granted in some of the member states of the European
Economic Community and several other countries.
The second series of patent applications related to preferred processes
for the production of acetylated mannan derivatives. One of them
matured into United States Patent No. 4,851,224, which was issued on
July 25, 1989. This patent is the subject of a Patent Cooperation
Treaty application and national foreign applications in several
countries. An additional United States patent based on the second
series was issued on September 18, 1990, as United States Patent
No. 4,957,907.
The third series of patent applications, relating to the uses of
acetylated mannan derivatives, was filed subsequent to the second
series. Three of them matured into United States Patent
Nos. 5,106,616, issued on April 21, 1992, 5,118,673, issued on June 2,
1992, and 5,308,838, issued on May 3, 1994. The Company intends to
file a number of divisional applications to these patents, each dealing
with specific uses of acetylated mannan derivatives. A Patent
Cooperation Treaty application based on the parent United States
application has been filed designating a number of foreign countries in
which the Company has the option to file specific applications.
In addition, the Company has also obtained a patent in the United
States relating to a wound cleanser, U.S. Patent No. 5,284,833, issued
on February 8, 1994. This patent application is the subject of a
Patent Cooperation Treaty application designating a number of foreign
countries in which the Company has the option to file specific
applications in the designated foreign countries.
The Company has obtained a patent in the United States relating to a
therapeutic device made from freeze-dried complex carbohydrate hydrogel
(U.S. Patent No. 5,409,703 issued on April 25, 1995).
The Company intends to file patent applications with respect to
subsequent developments and improvements when it believes such
protection is in the best interest of the Company. Although the scope
of protection which ultimately may be afforded by the patents and
patent applications of the Company is difficult to quantify, the
Company believes its patents will afford adequate protection to conduct
the business operations of the Company. However, there can be no
assurance that (i) any additional patents will be issued to the Company
in any or all appropriate jurisdictions, (ii) litigation will not be
commenced seeking to challenge the Company's patent protection or such
challenges will not be successful, (iii) processes or products of the
Company do not or will not infringe upon the patents of third parties
or (iv) the scope of patents issued to the Company will successfully
prevent third parties from developing similar and competitive products.
It is not possible to predict how any patent litigation will affect the
Company's efforts to develop, manufacture or market its products.
The Company also relies upon, and intends to continue to rely upon,
trade secrets, unpatented proprietary know-how and continuing
technological innovation to develop and maintain its competitive
position. The Company typically enters into confidentiality agreements
with its scientific consultants, and the Company's key employees have
entered into agreements with the Company requiring that they forbear
from disclosing confidential information of the Company and assign to
the Company all rights in any inventions made while in the Company's
employ relating to the Company's activities. Accordingly, the Company
believes that its valuable trade secrets and unpatented proprietary
know-how are adequately protected.
The technology applicable to the Company's products is developing
rapidly. A substantial number of patents have been issued to other
biopharmaceutical companies. In addition, competitors have filed
applications for, or have been issued, patents and may obtain
additional patents and proprietary rights relating to products or
processes competitive with those of the Company.
To the Company's knowledge, acetylated mannan derivatives do not
infringe any valid, enforceable, United States patents. A number of
patents have been issued to others with respect to various extracts of
the Aloe vera plant and their uses and formulations, particularly in
respect to skin care and cosmetic uses. While the Company is not aware
of any existing patents which conflict with its current and planned
business activities, there can be no assurance that holders of such
other Aloe vera based patents will not claim that particular
formulations and uses of acetylated mannan derivatives in combination
with other ingredients or compounds infringe, in some respect, these
other patents. In addition, others may have filed patent applications
and may have been issued patents relating to products and technologies
potentially useful to the Company or necessary to commercialize its
products or achieve their business goals. There is no assurance that
the Company will be able to obtain licenses of such patents on
acceptable terms.
The Company has given the trade name Carrasyn[R] to certain of its
products containing acetylated mannan derivatives. A selected series
of domestic and foreign trademark applications exists for the marks
Carrisyn[R], Manapol[R] and Carrasyn[R] which are registered in the United
States and several foreign countries. Further, the Company has filed
applications for the registration of a number of other trademarks,
including AVMP[R], both in the United States and in certain foreign
countries. The Company believes that its trademarks and trade names
are valuable assets.
Employees
As of March 3, 1997, the Company employed 252 persons, of whom 19 were
engaged in the operation and maintenance of its Irving processing
plant, 127 were employed at the Company's facility in Costa Rica and
the remainder were executive, research, quality assurance,
manufacturing, administrative, sales, and clerical personnel. Of the
total number of employees, 87 were located in Texas, 127 in Costa Rica
and one in Puerto Rico. In addition, 37 sales personnel were located
in 21 other states. The Company considers relations with its employees
to be good. The employees are not represented by a labor union.
Financing
In January 1995, the Company entered into a financing arrangement with
NationsBank of Texas, N.A. (the Bank ). The agreement was composed of
a $2,000,000 line of credit which expired one year from the date of the
agreement and a $6,300,000 term loan that was to mature five years from
the date of the agreement. The interest rate on both credit facilities
was the Company's option of prime plus one-half percent or the London
Interbank Offering Rate plus 200 basis points set for a period of
thirty, sixty, ninety or one hundred eighty days. The loans were
collateralized by the Company's assets and contained certain covenants.
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 agreement, 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. The Company's line of credit
expired January 30, 1996. The Company had reached an oral agreement
with the Bank for a new line of collateralized credit for approximately
$1,200,000. However due to fees that were payable for the unused 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.
ITEM 2. PROPERTIES.
The Company believes that all its farming property, manufacturing and
laboratory facilities, as described below, and material farm,
manufacturing and laboratory equipment are in satisfactory condition
and are adequate for the purposes for which they are used.
Walnut Hill Facility. The Company's corporate headquarters and
principal U.S. manufacturing facility occupy all of the 35,000 square
foot office and manufacturing building (the "Walnut Hill Facility"),
which is situated on an approximately 6.6 acre tract of land located in
the Las Colinas area of Irving, Texas. The Company owns the land and
the building. During the fourth quarter of 1994, the Company began a
project to move its manufacturing operation from a leased facility in
Dallas to the unused space in this facility and expand the amount of
office space. This project was completed during the third quarter of
1995. The manufacturing operations occupy approximately 19,000 square
feet of the facility, and administrative offices occupy approximately
16,000 square feet.
Laboratory Facility. The Company leases 24,000 square feet of office,
manufacturing and laboratory space (the "Laboratory Facility") in
Irving, Texas pursuant to a lease that expires in January 2000. The
Company's in-house research and development and quality assurance
activities are conducted at the Laboratory Facility. The Company also
maintains sterile production facilities (which occupy 4,000 square feet
of the total space) at the Laboratory Facility for the production of
injectable dosage forms of Acemannan Immunostimulant.
Warehouse and Distribution Facility. In August 1994, the Company
leased a 35,050 square foot office and warehouse facility in Irving,
Texas near the Walnut Hill Facility, and moved its warehouse and
distribution center from a leased facility in Dallas to this location
in September 1994. The warehouse and distribution center occupy
approximately 27,000 square feet and the remaining space is used for
offices. This lease expires in October 2001.
Costa Rica Facility. The Company owns approximately 405 acres of land
in the Guanacaste province of northwest Costa Rica. This land is being
used for the farming of Aloe vera plants and for a processing plant to
produce bulk pharmaceutical and injectable mannans and freeze-dried
Aloe vera extracts used in the Company s operations. Construction of
the processing plant was completed during the second quarter of 1993,
and the plant became operational in June 1993. The Company believes
that the Costa Rica farm will provide substantially all the Aloe vera
leaves required to meet the Company's needs. Development of this
facility was partially financed with borrowings under a five-year, U.S.
dollar-denominated loan from Corporacion Privada de Inversiones de
CentroAmerica, S.A., a private bank operating in San Jose, Costa Rica.
The loan was paid off in May 1995. During the first quarter of 1994,
the Company initiated a project in Costa Rica to upgrade the production
plant to meet regulatory requirements for the production of bulk
pharmaceutical oral and injectable mannans as required for IND's. This
project was completed in the fourth quarter of 1994.
ITEM 3. LEGAL PROCEEDINGS.
On March 2, 1996, Dianna Gold (the "Plaintiff"), a former employee of
the Company, filed an action styled Dianna Gold vs. Carrington
Laboratories, Inc., and Fireman's Fund Insurance Company with the
Workers Compensation Appeals Board for the State of California (Case
No. SFO 394660). On March 27, 1996, Plaintiff filed an Application for
Discrimination Benefits Pursuant to Labor Code Section 132(a) in that
case. The Company is vigorously defending this action.
On June 26, 1996, Robert W. Brown ("Brown"), a former employee of the
Company, filed a lawsuit styled Robert W. Brown vs. Carrington
Laboratories, Inc., Cause No. 96-6469-L in the 193rd District Court of
Dallas County, Texas, alleging breach of contract, promissory estoppel,
fraud, negligent misrepresentation and slander in connection with his
employment and the termination of his employment with the Company.
Brown sought to recover unspecified common law and statutory damages,
punitive damages, interest, attorneys fees and cost of suit.
On December 6, 1996, the Judge signed an Order of Nonsuit in Cause No.
96-6469-L that dismissed the suit without prejudice to any party and
ordered each party to bear its own costs and attorneys fees.
On November 3, 1996, Brown filed a Charge of Discrimination against the
Company with the Equal Employment Opportunity Commission ("EEOC")
alleging age discrimination. The Company received a notification of
this charge dated February 13, 1997 from the EEOC. To date, the EEOC
has not required any action of the Company. The Company intends to
vigorously defend this charge.
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 Company is
vigorously defending this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of security holders
during the fourth quarter of the fiscal year covered by this Annual
Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol "CARN." The following table sets forth the high and
low sales prices of the Common Stock for each of the periods indicated.
Fiscal 1995 High Low
----------- ------- -------
First Quarter $13 1/8 $11
Second Quarter 24 1/2 11 1/4
Third Quarter 40 3/4 25 1/2
Fourth Quarter 32 1/2 14 3/4
Fiscal 1996 High Low
----------- ------- -------
First Quarter $34 1/2 $23 1/2
Second Quarter 50 7/8 21
Third Quarter 26 3/4 17 1/2
Fourth Quarter 23 1/4 6 7/8
At March 10, 1997, there were 971 holders of record. (including
brokerage firms and other nominees)
The Company has not paid any cash dividends on the Common Stock and
presently intends to retain all earnings for use in its operations.
Any decision by the Board of Directors of the Company to pay cash
dividends in the future will depend upon, among other factors, the
Company's earnings, financial condition and capital requirements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data below should be read in
conjunction with the consolidated financial statements of the Company and
notes thereto and Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations. The selected consolidated financial
information for the five years ended December 31, 1996, is derived from
the consolidated financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants.
Years Ended November 30, 1992, 1993, and 1994,
and Month Ended December 31, 1994 and
Years Ended December 31, 1995 and 1996
(Dollars and numbers of shares in thousands,
except per share amounts)
November 30, December 31,
----------------------------- ------------------------------
1992 1993 1994 1994 1995 1996
--------- --------- -------- ------- ------- -------
Operations Statement Information:
Net Sales $ 20,064 $ 21,184 $ 25,430 $ 1,781 $ 24,374 $ 21,286
Cost and expenses:
Cost of sales 5,113 5,289 6,415 516 7,944 10,327
Selling, general and
administrative 9,687 9,371 11,968 985 12,442 10,771
Research and development 4,141 5,397 5,334 327 5,370 5,927
Cost of uncompleted public
offering 400 - - - - -
Interest, net 249 218 133 23 115 (304)
----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 474 909 1,580 (70) (1,497) (5,435)
Provision for income taxes 159 104 159 - 131 88
Net income (loss) $ 315 $ 805 $ 1,421 $ (70) $ (1,628) $ (5,523)
Net income (loss) per common
and common equivalent share: $ .03 $ .09 $ .18 $ (.01) $ (.22) $ (.63)
-----------------------------------------------------------------------------------------------------------------
Weighted average shares
used in per share computations 6,801 7,324 7,341 7,344 7,933 8,798
-----------------------------------------------------------------------------------------------------------------
BALANCE SHEET INFORMATION:
Working capital $ 5,702 $ 5,292 $ 4,720 $ 4,472 $ 9,095 $ 13,910
Total assets 15,115 16,305 19,797 18,899 27,934 31,202
Long-term debt,
net of current portion 2,821 2,168 2,035 1,997 88 46
Total shareholders' investment $ 10,062 $ 11,041 $ 12,509 $ 12,439 $ 22,399 $ 27,757
----------------------------------------------------------------------------------------------------------------
ITEM 7. 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
naturally occurring complex carbohydrate and other natural products for
therapeutics in 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. (see Note 16 for financial
information on each of the segments). 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 December 31, 1996 and 1995, the Company held cash and cash
equivalents of $11,406,000 and $6,222,000, respectively. The increase
in cash of $5,184,000 is attributable to a private placement of
preferred stock (see Note Eight to the consolidated financial
statements) and the issuance of common stock through the exercise of
stock options and warrants (see Note Nine to the consolidated financial
statements) that resulted in an additional $10,883,000 cash. This
increase in cash was partially offset by the retirement of all bank
debt and the purchase of a $1,500,000 certificate of deposit ("CD")
(see Note Four to the consolidated financial statements) as well as
increased research and development expenditures. In March 1997, the
Company repurchased 50% of the outstanding preferred stock for cash
(see Note Eighteen to the consolidated financial statements).
Although wound care sales for 1996 were lower than projected, the
Company was 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 extracts are 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 $1,481,000 during 1996, including a $630,000 reduction in the
production cost of Aloe vera derived products as described below. As a
result of the decreased production levels, the Company expensed
$1,396,000 of unabsorbed overhead as cost of goods sold in 1996.
The production capacity of the Costa Rica plant is larger than the
Company's current usage level. 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 the first quarter of 1996. SFAS 121 requires that
long-lived assets held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable. At the time of adoption,
there was no impairment of asset value in Costa Rica based on
historical production levels and future capacity requirements needed to
produce the Company's drug Aliminase[TM], then under initial phase III
clinical trials (see discussion below). In late October 1996, the
Company received the results of the initial phase III clinical trial
for the testing of Aliminase[TM] oral capsules, which indicated no
statistically significant differences that would support a conclusion
that Aliminase[TM] oral capsules provides a therapeutic effect in the
treatment of ulcerative colitis. As a result, the Company terminated
the second large scale clinical trial and placed further testing of
Aliminase[TM] oral capsules on hold. These results triggered a new
assessment of the recoverability of the costs of the Costa Rica plant's
assets using the methodology provided by SFAS 121 in the fourth quarter
of 1996. The net book value of the Costa Rica Plant assets as of
December 31, 1996, was $3,958,000. The Company evaluated the value of
Costa Rica produced components in its current product mix to determine
the amount of net revenues, excluding Manapol[R] powder sales to
Mannatech (see discussion of Caraloe sales to Mannatech below),
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 SFAS 121 methodology.
As of March 14, 1997, the Company had no material capital commitments
other than its leases and agreements with suppliers. 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, 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 oral agreement with the Bank for a new line of
collateralized credit for approximately $1,200,000. However, due to
fees that were payable for the unused 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 initially used to fund this letter of credit. The
funding of the letter of credit reduced the amount that the Company
could borrow under the term loan but did not increase the Company's
debt unless the letter of credit was utilized by the supplier. As of
March 14, 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 purchase requirements were waived for the three
month period ending December 31, 1996. The supplier currently
produces the CarraSorb[TM] M Freeze Dried Gel and the Carrington[TM]
(Aphthous Ulcer) Patch for the Company. Both of these products
represent new technology and are still in the product acceptance and
launch phase. The Company had approximately $325,000 and $370,000 of
CarraSorb[TM] M and Carrington[TM] (Aphthous Ulcer) Patch inventory on hand
as of December 31, 1996 and March 11, 1997, respectively. Current
sales of both items are lower than the minimum purchase requirement,
but the Company believes that as licensing, acceptance and demand for
the new technology increases, demand will exceed the minimum purchase
requirement. As of March 11, 1997, the Company has purchased products
totaling approximately $281,000 from this supplier. The Company is in
full compliance with the agreement and, as of March 14, 1997, has the
available resources to meet all future minimum purchase requirements.
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[TM] oral capsules for the
treatment of acute flare-ups of ulcerative colitis. The cost of this
clinical trial was approximately $2,300,000. All expenses related to
this trial have been recognized and paid. In the third quarter of
1996, the Company began a second large scale clinical trial for the
testing of Aliminase[TM] oral capsules for the treatment of ulcerative
colitis. The cost of this trial was expected to be approximately
$2,500,000, of which approximately $212,000 was required as an initial
payment when the research contract was signed on September 19, 1996.
The full amount of the initial payment was expensed in the third
quarter. In late October 1996, the Company received the results of the
initial phase III clinical trial for the testing of Aliminase[TM] oral
capsules, which indicated that no statistically significant
differences were found to support a therapeutic effect. As a result,
the Company terminated the second large scale clinical trial and placed
further testing of Aliminase[TM] oral capsules on hold. Approximately
$150,000 in cancellation fees was recorded in relation to this
termination. No significant additional expenses related to phase III
trials of Aliminase[TM] oral capsules are anticipated as of March 14,
1997.
In late 1995, the Company began an initial Phase I study using
CarraVex[TM] injectable (formerly CARN 750) in cancer patients involving
six cancer types. The estimated cost of this study is $475,000, of
which, approximately $201,000 had been expensed as of December 31,
1996. An additional $95,000 has been expensed in the first quarter of
1997.
Also in late 1995, the Company initiated an ongoing program to reduce
expenses and the cost of manufacturing, thereby increasing the gross
margin on existing sales. This program included a restructuring of the
work force in Costa Rica as well as a change in the manufacturing
process for Aloe vera based raw materials. Product costs have been
decreased through changes in product packaging and other costs have
been reduced through competitive bidding. Where appropriate, the
Company now complies with lower USDA or food grade requirements instead
of more stringent FDA requirements. The Company 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. As
part of this restructuring, the Company eliminated six sales positions,
including representatives in five sales territories. The Company
replaced three of these positions with commission based independent
manufacturer's representatives. Two of the positions were integrated
into existing sales territories. And finally, sales representatives in
territories that were contributing a low return are now compensated
under a compensation plan that emphasizes increased sales. This
compensation plan rewards the employee by paying a commission on every
sales dollar. To offset the higher commissions, the employees have a
significantly lower base salary and are responsible for covering their
own travel and entertainment expenses. This program will continue into
the foreseeable future and will continually challenge the costs of
doing business and where possible, further reduce the cost of
operations.
In October 1996, the Company completed a $6,600,000 financing involving
the private placement of Series E Convertible Preferred Stock (the
"Series E Shares". At that time, plans called for much of the
proceeds from this sale to be used to continue Carrington's clinical
research programs (see Footnote Eight to the consolidated financial
statements). On October 31, 1996, the Company announced the results of
the first Phase III trial of Aliminase[TM] oral capsules. Due to the
unfavorable results of the first Phase III trial, the Aliminase[TM]
project was placed on hold. Additionally, the Company's management
canceled the second Phase III clinical trial then under contract. This
event resulted in significant changes in the Company's planned uses of
and need for these funds.
In addition to the change in the Company's needs, the decline in the
market price of the Company's Common Stock has increased the extent of
the 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 50% of the Series E Shares
(see Note Eighteen to the consolidated financial statements). On
March 4, 1997, the Company completed a repurchase of 50% of the above
Series E Shares.
The Company believes that its available cash resources, after the above
described repurchase of the Series E Shares, and expected cash flows
from operations, will provide the funds necessary to finance its current
operations. However, the Company does not expect that its current cash
resources will be sufficient to finance the major clinical studies and
costs of filing new drug applications necessary to develop its products
to their full commercial potential. Additional funds, therefore, may
have to be raised through equity offerings, borrowings, licensing
arrangements or other means, and there is no assurance that the Company
will be able to obtain such funds on satisfactory terms when they are
needed.
The Company is subject to regulation by numerous governmental
authorities in the United States and other countries. Certain of the
Company's proposed products will require governmental approval prior to
commercial use. The approval process applicable to prescription
pharmaceutical products usually takes several years and typically
requires substantial expenditures. The Company and any licensees may
encounter significant delays or excessive costs in their respective
efforts to secure necessary approvals. Future United States or foreign
legislative or administrative acts could also prevent or delay
regulatory approval of the Company's or any licensees products.
Failure to obtain requisite governmental approvals or failure to obtain
approvals of the scope requested could delay or preclude the Company or
any licensees from marketing their products, or could limit the
commercial use of the products, and thereby have a material adverse
effect on the Company's liquidity and financial condition.
Impact of Inflation
The Company does not believe that inflation has had a material impact
on its results of operations.
Fiscal 1996 Compared to Fiscal 1995
Net sales were $21,286,000 in 1996, compared with $24,374,000 in 1995.
This decrease of $3,088,000, or 12.6%, resulted from a decrease of
$3,845,000 in sales of the Company's wound and skin care products from
$21,147,000 to $17,302,000, or 18.2%. New products introduced in late
January accounted for $1,182,000 in wound and skin care sales during
1996. The decrease in wound and skin care sales was partially offset
by a $787,000, or 27.1%, 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.
Additionally, in the fourth quarter of 1995, the Medicare/ Medicaid
reimbursement rate for hydrogels was significantly reduced (from 1
ounce per day to 3 ounces per month). This change significantly
reduced the demand for hydrogels in the market place. In February
1996, the Company revised its price list to more accurately reflect
current market conditions. Overall wound and skin care prices were
lowered by a weighted average of 19.1%. With the February price
reduction, the Company expected, and began to realize, a decrease in
the amount of discounts required. In addition to these cost pressures,
over the last several years the average hospital stay has decreased
over 50%, resulting in more patients being treated at alternative care
facilities and at home by home health care providers. This also had a
negative impact on sales since the Company's sales force had been
primarily focused on the hospital market. To counter the market
changes, the sales force is now also aggressively pursuing the
alternative and home health 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 estimated billion
dollar 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 1997.
Caraloe's sales increased from $2,907,000 to $3,694,000, or 27.1%.
Caraloe sales to Mannatech increased from $2,488,000 to $3,273,000. Of
the 1996 sales, $3,213,000 was related to the sale of bulk Manapol[R]
powder. Pursuant to the Supply Agreement, Mannatech is currently
required to purchase a minimum of 225 kilograms of Manapol[R] powder per
month at a purchase price of $1,200 per kilogram. The Supply Agreement
provides for an increase in Mannatech's minimum purchase requirement
commencing in April 1997, but it also provides for renegotiation by the
parties by March 15, 1997 of the purchase price to be paid by Mannatech
for Manapol[R] powder. The Company has been informed by Mannatech that
the supply agreement will not be renewed. Mannatech has indicated it
will honor the minimum purchase requirements through March 31, 1997,
the termination date. As the Supply Agreement between Mannatech and
the Company will not be renewed, the exclusive license agreement for
the Manapol[R] trade mark will also terminate on March 31, 1997. The
Company will then be able to sell Manapol[R] powder or license the trade
mark to other third parties as well as use it in the Company's
products. Mannatech may continue to purchase Manapol[R] powder on an as-
needed basis. The termination of the Supply Agreement could have a
material effect on the Company s results of operations.
Sales of the Company's veterinary products decreased from $320,000 to
$290,000. In March 1996, the Company entered into an agreement with
Farnam Companies, Inc., a leading marketer of veterinary products, to
promote and sell the Company s veterinary line on a broader scale. In
1997, the Company will begin to private label the veterinary line under
the Farnam name. Farnam has increased its sales force to improve the
market share of the private labeled products.
Cost of sales increased from $7,944,000 to $10,327,000, or 30.0%. As a
percentage of sales, cost of sales increased from 32.2% to 42.0% after
adjusting for a $630,000 inventory valuation decrease on June 30, 1996,
as described below, and period costs of $104,000 and $766,000 in 1995
and 1996, respectively. The period costs are 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] powder,
which had a substantially lower profit margin in the first quarter of
1996 as compared to 1995, as a result of decreased production levels in
the first quarter of 1996, and as compared to the margins on the
Company's wound and skin care products, and the overall 19.1% 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 raw materials. Among these
changes was a restructuring of the work force as well as improvements
in efficiencies in the manufacturing process. The implementation of
these changes significantly reduced the cost of Costa Rica production
in the second quarter 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 and March 31,
1996. 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 in inventory
as of June 30, 1996 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 sales.
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 $1,400,000 of one-time charges were
taken during 1995. Of these charges, approximately $147,000 of
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.
Selling, general and administrative ("SG&A") expenses decreased to
$10,771,000 from $12,442,000, or 13.4%. This decrease was attributable
in part 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 in 1996.
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 $5,927,000 from
$5,370,000, or 10.4%. This increase was the result of beginning the
initial large scale phase III clinical trial for the testing of
Aliminase[TM] 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[TM] oral capsules. The initial payment of approximately
$212,000 was expensed in the third quarter. In late October 1996, the
Company received the results of the initial phase III clinical trial
for the testing of Aliminase[TM] 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 the Aliminase[TM]
oral formulation on hold. Approximately $150,000 in cancellation fees
was recorded in the third quarter of 1996. Additional R&D costs
related to the ongoing cancer research contributed to the increase in
R&D during 1996 as well. These costs were partially offset by a
reduction of internal salaries and other operating expenses.
Net interest income of $304,000 was realized in 1996, versus net
interest costs of $115,000 in 1995, due to having more excess cash to
invest as well as the retirement of all bank debt in April 1996.
Net loss for 1996 was $5,523,000, versus a net loss of $1,628,000 for
1995. This change is a result of a changing product mix, more products
manufactured by third parties, decreased sales which resulted from a
change in the Medicare reimbursement rates, and increased research and
development expenditures related to the Phase III ulcerative colitis
study and the ongoing Phase I cancer study. Loss per share was $.63 in
1996, compared to a loss per share of $.22 in 1995.
Fiscal 1995 Compared to Fiscal 1994
Net sales decreased from $25,430,000 to $24,374,000, or 4%. The
decrease of $1,056,000 resulted from a $2,557,000, or 11%, decrease in
sales of the Company's wound and skin care products. Sales of these
products decreased from $23,665,000 to $21,147,000. Fourth quarter
sales of the wound and skin care products decreased from $5,900,000 to
$4,348,000, or 26%. 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 during 1995 to maintain customer
accounts. Discounts and allowances increased from $1,267,000 to
$3,063,000. They averaged 6.2% of gross wound care sales in the fiscal
fourth quarter of 1994, compared with an 18.3% average during the fourth
quarter of 1995. In February 1996, the Company revised its price list
to more accurately reflect current market conditions. Overall wound
care prices were lowered by an average of 19%. 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 and home health care markets.
The decrease in the Company's wound and skin care products was
partially offset by an increase in sales of Caraloe, Inc., the
Company's consumer products subsidiary. Caraloe's sales increased from
$1,361,000 to $2,907,000, or 114%. Of this, $1,513,000 is related to
the sale of bulk Manapol[R] powder to one customer, Mannatech. Sales of
bulk Manapol[R] powder to Mannatech increased from $934,000 to
$2,447,000. Sales of the Company's veterinary products decreased from
$404,000 to $320,000. In March 1996, the Company entered into an
agreement with Farnam Companies, Inc., a leading marketer of veterinary
products, to promote and sell its veterinary line on a broader scale.
Cost of sales increased from $6,415,000 to $7,944,000, or 23.8%. As a
percentage of sales, cost of sales increased from 25.2% to 32.6%. This
increase was attributable in part to the increased sales of bulk
Manapol[R] powder, which has a substantially lower profit margin, 33%, as
compared to the Company's wound and skin care products. In January
1996, the profit margin on Manapol[R] powder was reduced to 8% as a
result of current production levels and costs at the Company's Costa
Rica facility. Also, the increasing discounts, as discussed earlier,
resulted in the Company's wound and skin care product costs increasing
by approximately 4% as a percentage of sales.
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. 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
$1,400,000 of one-time charges were taken during 1995. Of these
charges, only $275,000 remained unpaid as of December 31, 1995.
Of the above charges, approximately $700,000 were selling, general and
administrative expenses, $500,000 related to severance agreements,
$130,000 was due to increased legal fees and a $70,000 write off of
unamortized legal and banking costs that resulted when the Company
refinanced its long-term debt in 1993. Approximately, $90,000 of costs
were incurred in 1995 to complete the refinancing. These costs were
included in other long-term assets and were amortized over the term of
the loan. As a result, selling, general and administrative expenses
increased from $11,968,000 to $12,442,000, or 4%.
Research and development expenses increased from $5,334,000 to
$5,370,000, or 1%. During the first half of 1995, $564,000 of cost
associated with severance agreements resulting from the above described
restructuring was charged to research and development. These charges
will reduce internal salaries on an ongoing basis. However, this
reduction was offset in 1995 by beginning the large scale clinical
trial for the testing of Aliminase[TM] (formerly CARN 1000) oral capsules
for the treatment of acute flare-ups of ulcerative colitis during the
third quarter of 1995.
Interest expense increased from $171,000 to $251,000, or 47%, due to
increased borrowings during the first four months of 1995. Interest
income increased from $38,000 to $136,000, or 258%, due to having more
excess cash to invest.
The net loss for 1995 was $1,628,000, compared with net income of
$1,421,000 for 1994. This change is a result of a changing product
mix, increased discounts and one-time charges related to restructuring.
Losses per share were $.22 in 1995, compared to earnings per share of
$.18 in 1994.
All statements other than statements of historical fact contained in
this report, including but not limited to statements in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" (and similar statements contained in the Notes
to 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 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 and home health 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 and reduce its costs 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Consolidated Financial Statements of the
Company and its subsidiaries listed on page F-1 of this Annual Report,
which are hereby incorporated by reference in this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Effective March 10, 1997, the Company appointed the accounting firm of
Ernst & Young LLP as the Company's independent public accountants for
fiscal 1997 to replace Arthur Andersen LLP effective with such
appointment. The Company's Board of Directors approved the selection
of Ernst & Young LLP as independent public accountants upon the
recommendation of the Board s Audit Committee.
During the two most recent fiscal years, there have been no
disagreements with Arthur Andersen LLP on any matter of accounting
principle or practice, financial statement disclosure or auditing scope
or procedures or any reportable events. Arthur Andersen LLP's report
on the financial statements for the past two years contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles.
The Company has provided Arthur Andersen LLP with a copy of this
disclosure and has requested that Arthur Andersen LLP furnish it with a
letter addressed to the Securities and Exchange Commission (the
"Commission") stating whether it agrees with the above statements. (A
copy of Arthur Andersen LLP's letter to the Commission, dated March
19 1997, is filed as Exhibit 16.1 to this report.)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K is hereby incorporated
by reference from the information appearing under the captions
"Election of Directors", "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive
Proxy Statement relating to its 1997 annual meeting of shareholders,
which will be filed pursuant to Regulation 14A within 120 days after
the Company's fiscal year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K is hereby incorporated
by reference from the information appearing under the caption
"Executive Compensation" in the Company's definitive Proxy Statement
relating to its 1997 annual meeting of shareholders, which will be
filed pursuant to Regulation 14A within 120 days after the Company's
fiscal year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 of Form 10-K is hereby incorporated
by reference from the information appearing under the captions
"Security Ownership of Management" and "Principal Shareholders" in the
Company's definitive Proxy Statement relating to its 1997 annual
meeting of shareholders, which will be filed pursuant to Regulation 14A
within 120 days after the Company's fiscal year ended December 31,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K is hereby incorporated
by reference from the information appearing under the caption "Certain
Transactions" in the Company's definitive Proxy Statement relating to
its 1997 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a)(1) Financial Statements.
Reference is made to the index on page F-1 for a list of all
financial statements filed as a part of this Annual Report.
(2) Financial Statement Schedules.
Reference is made to the index on page F-1 for a list of all
financial statement schedules filed as a part of this Annual Report.
(3) Exhibits.
Reference is made to the Index to Exhibits on pages E-1 through
E-10 for a list of all exhibits filed as a part of this Annual Report.
(b) Reports on Form 8-K.
During the last quarter of 1996, the Company filed a Form 8- K Current
Report dated October 21, 1996 with the Securities and Exchange
Commission describing the Comapny's private placement of 660 shares of
Series E Convertible Preferred Stock. See Notes Seven and Seventeen to
the consolidated financial statements for a description of that private
placement and subsequent repurchase by the Company of 330 of such
shares.
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets --
December 31, 1995 and 1996 F - 2
Consolidated Statements of Operations -- year ended
November 30, 1994, month ended December 31, 1994
and years ended December 31, 1995 and 1996 F - 3
Consolidated Statements of Shareholders' Investment --
year ended November 30 1994, month ended December 31, 1994
and years ended December 31, 1995 and 1996 F - 4
Consolidated Statements of Cash Flows -- year ended
November 30, 1994, month ended December 31, 1994
and years ended December 31, 1995 and 1996 F - 5
Notes to Consolidated Financial Statements F - 6
Report of Independent Public Accountants F - 28
Consolidated Balance Sheets
(Dollar amounts in thousands, except share amounts)
December 31, December 31,
As of 1995 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,222 $11,406
Accounts receivable, net of
allowance for doubtful accounts of
$227 and $213 as of December 31,
1995 and 1996, respectively 2,227 1,912
Inventories 5,235 3,623
Prepaid expenses 858 368
--------- -------
Total current assets 14,542 17,309
Property, plant and equipment, at cost 18,933 18,851
Less: Accumulated depreciation (6,222) (7,173)
--------- -------
12,711 11,678
Other assets 681 2,215
--------- --------
Total assets $27,934 $31,202
========= ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
LIABILITIES:
Current portion of long-term debt $ 3,026 $ 29
Accounts payable 590 1,621
Accrued liabilities 1,831 1,749
Short-term borrowings - -
-------- --------
Total current liabilities 5,447 3,399
Long-term debt,
net of current portion 88 46
SHAREHOLDERS' INVESTMENT:
Preferred stock, 1,000,000 shares
authorized (all series)
Series C, $100 par value,
11,840, and 0 shares issued
December 31, 1995 and
1996, respectively 1,167 -
Series E Convertible, $100 par value
and 660 issued at December 31, 1996 - 66
Common stock, $.01 par value,
30,000,000 shares authorized,
8,378,999, and 8,869,819
shares issued and outstanding at
December 31, 1995 and 1996,
respectively 84 89
Capital in excess of par value 44,666 56,680
Deficit (23,344) (28,904)
Foreign currency translation adjustment (174) (174)
-------- ---------
Total shareholders' investment 22,399 27,757
-------- ---------
Total liabilities and
shareholders' investment $27,934 $31,202
======= =========
[FN]
The accompanying notes are an integral part of these balance sheets.
F - 2
Consolidated Statements of Operations For the Year Ended November 30, 1994,
the Month Ended December 31, 1994 and the Years Ended December 31, 1995 and 1996
(Dollar amounts in thousands, except per share amounts)
November 30, December 31,
------------ --------------------------------
1994 1994 1995 1996
------ ------- ------- -------
Net sales $25,430 $1,781 $24,374 $21,286
Cost and expenses:
Cost of sales 6,415 516 7,944 10,327
Selling, general and
administrative 11,968 985 12,442 10,771
Research and development 5,334 327 5,370 5,927
Interest expense 171 23 251 88
Interest income (38) - (136) (392)
Income (loss) before
income taxes 1,580 (70) (1,497) (5,435)
Provision for
income taxes 159 - 131 88
------- ------- -------- --------
Net income (loss) $ 1,421 $ (70) $(1,628) $(5,523)
======= ======= ======== ========
Weighted average
shares outstanding 7,341 7,344 7,933 8,798
Net income (loss) per common
and common equivalent share: $ .18 $ (.01) $ (.22) $ (.63)
======== ======= ======== ========
[FN]
The accompanying notes are an integral part of these statements.
F - 3
Consolidated Statements of Shareholders' Investment
For the Year Ended November 30, 1994, the Month
Ended December 31, 1994, and the Years Ended
December 31, 1995 and 1996
(Dollar amounts and share amounts in thousands)
Foreign
Capital in Currency
Preferred Common Excess of Translation
Stock Stock Par Value Deficit Adjustment
Shares Amount Shares Amount
------ ------ ------ ------ ---------- -------- -----------
------------------------------------------------------------------------------------------
Balance,
November 30, 1993 10 $928 7,336 $ 74 $33,016 $(22,802) $(174)
------------------------------------------------------------------------------------------
Issuance of
common stock upon
exercise of stock
options and warrants - - 8 - 59 - -
Dividends on
Preferred stock 1 113 - - - (125) -
Net income - - - - - 1,421 -
------------------------------------------------------------------------------------------
Balance,
November 30, 1994 11 $1,041 7,344 $ 74 $33,075 $(21,506) $(174)
------------------------------------------------------------------------------------------
Net loss - - - - - (70) -
------------------------------------------------------------------------------------------
Balance,
December 31, 1994 11 $1,041 7,344 $ 74 $33,075 $(21,576) $(174)
------------------------------------------------------------------------------------------
Sales of common stock
at $10 per share,
net of issuance
costs of $41,000 - - 300 3 2,956 - -
Issuance of common
stock upon exercise
of stock options
and warrants - - 711 7 8,426 - -
Issuance of common
stock for management
and directors
compensation - - 24 - 209 - -
Dividends on
preferred stock 1 126 - - - (140) -
Net loss - - - - - (1,628) -
-----------------------------------------------------------------------------------------
Balance,
December 31, 1995 12 $1,167 8,379 $ 84 $44,666 $(23,344) $(174)
-----------------------------------------------------------------------------------------
Issuance of common
stock upon exercise
of stock options,
warrants and
employee stock
purchase plan - - 316 3 4,604 - -
Dividends on
preferred stock - 35 - - - (37) -
Conversion of
preferred to common
stock (Series C) (12) (1,202) 175 2 1,200 - -
Sales of preferred
convertible stock
(Series E), $100 Par,
net of issuance costs
of $58,000 1 66 - - 6,210 - -
Net loss - - - - - (5,523) -
-----------------------------------------------------------------------------------------
Balance,
December 31, 1996 1 66 8,870 89 56,680 (28,904) (174)
-----------------------------------------------------------------------------------------
[FN]
The accompanying notes are an integral part of these statements.
F - 4
Consolidated Statements of Cash Flows
For the Year Ended November 30, 1994, the
Month Ended December 31, 1994 and the Years Ended
December 31, 1995 and 1996
(Dollar amounts in thousands)
November 30, December 31,
------------ ------------------------
1994 1994 1995 1996
------ ------ ------ -------
Cash flows from operating activities:
Net income (loss) $ 1,421 $ (70) $(1,628) $(5,523)
Adjustments to reconcile income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 1,206 110 1,277 1,273
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (603) 6 658 315
(Increase) decrease in inventories (2,072) (411) (188) 1,612
(Increase) decrease in prepaid expenses (428) 102 (319) 490
Decrease (increase) in other assets 8 36 (514) (1,534)
Increase (decrease) in accounts payable
and accrued liabilities 838 (638) (545) 949
------- ------ ------- -------
Net cash provided (used) by operating
activities 370 (865) (1,259) (2,418)
------- ------ ------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,014) (286) (4,206) (242)
------- ------ ------- -------
Net cash used by investing activities (3,014) (286) (4,206) (242)
------- ------ ------- -------
Cash flows from financing activities:
Issuances of common stock 59 - 11,393 4,607
Issuance of preferred stock - - - 6,276
Proceeds from short- and long-term borrowings 1,500 - 5,742 -
Payments of short- and long-term debt (385) (187) (5,848) (2,999)
Principal payments of capital lease obligations (49) (3) (64) (40)
------- ------ ------- -------
Net cash provided (used) by financing activities 1,125 (190) 11,223 7,844
------- ------ ------- -------
Net (decrease) increase in cash and
cash equivalents (1,519) (1,341) 5,758 5,184
Cash and cash equivalents at beginning of year 3,324 1,805 464 6,222
------- ------- ------- -------
Cash and cash equivalents at end of year $ 1,805 $ 464 $ 6,222 $11,406
======== ======== ======= ========
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the year for interest $ 206 $ 20 $ 281 $ 87
Cash paid during the year for income taxes 124 - 99 13
Supplemental Disclosure of Non-Cash
Financing Activities:
Equipment acquired through capital leases 114 - - 39
Issuances of common stock and warrants - - 209 -
[FN]
The accompanying notes are an integral part of these statements.
F - 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
In February 1995, the Company changed its fiscal year end from November 30
to December 31. Comparative financial statements reflect the fiscal year
ended November 30, 1994, the single month of December 1994, and the fiscal
years ended December 31, 1995 and 1996.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of Carrington Laboratories, Inc. (the "Company"), and
its subsidiaries, all of which are wholly owned. All intercompany
accounts and transactions have been eliminated in consolidation. Certain
prior year amounts have been reclassified to conform with 1996
presentation.
CASH EQUIVALENTS The Company's policy is that all highly liquid
investments purchased with a maturity of three months or less are
considered to be cash equivalents unless otherwise restricted.
REVENUE RECOGNITION The Company recognizes revenue when title to the
goods transfers. For the majority of the Company's sales, this occurs at
the time of shipping. However, certain customers do not take title until
the goods are delivered to their location or agent at which time revenue
is recognized.
DEPRECIATION AND AMORTIZATION Land improvements, buildings and
improvements, furniture and fixtures and machinery and equipment are
depreciated on the straight-line method over their estimated useful lives
(3 - 40 years). Leasehold improvements and equipment under capital leases
are depreciated over the terms of the respective leases (2 - 5 years).
TRANSLATION OF FOREIGN CURRENCIES Based on an evaluation of the
activities of its Costa Rica subsidiaries, as of September 1, 1993, the
Company concluded that the functional currency for these operations was
the U.S. dollar. Accordingly, such foreign entities translate monetary
assets and liabilities at year-end exchange rates while non-monetary items
are translated at historical rates. Revenue and expense accounts are
translated at the average rates in effect during the year, except for
depreciation and cost of sales which are translated at historical rates.
Translation adjustments and transaction gains or losses are recognized in
consolidated income in the year of occurrence.
Prior to September 1, 1993, all assets and liabilities of foreign
subsidiaries were translated into U.S. dollars at the exchange rates in
effect at the balance sheet date. Revenue and expense accounts were
translated at weighted average exchange rates. Translation gains and
losses were reflected as a separate component of shareholders' investment.
FEDERAL INCOME TAXES The Company applies Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109")
which was issued in February 1992 to account for federal income taxes.
F - 6
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial
reporting and tax purposes. These deferred taxes are measured by applying
currently enacted tax laws. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Certain of the Company's research and development expenditures qualify for
tax credits and such credits are accounted for as a reduction of the
current provision for income taxes in the year they are realized.
RESEARCH AND DEVELOPMENT Research and development costs are expensed
as incurred. Certain laboratory and test equipment determined to have
alternative future uses in other research and development activities has
been capitalized and is depreciated as research and development expense
over the life of the equipment.
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS The Company does not
offer any post-retirement or post-employment benefits.
EARNINGS PER SHARE Earnings per share are based on the weighted
average number of common and common equivalent shares outstanding during
each period. Stock options and warrants are included as common stock
equivalents if the dilutive effect on net earnings per share is greater
than 3%. The common stock equivalents were either antidilutive, or
represented dilution of less than 3%, in 1994, 1995 and 1996. The
weighted average numbers of common shares used in computing earnings per
share were 7,340,982, 7,932,675, and 8,798,211 for the fiscal years ended
November 30, 1994, and December 31, 1995 and 1996, respectively.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE TWO. INVENTORIES:
Inventories are recorded at the lower of first-in, first-out cost or
market. The following summarizes the components of inventory at December
31, 1995 and 1996:
(Dollar amounts in thousands)
1995 1996
------------------------------------------------------
Raw materials and supplies $ 714 $ 658
Work-in-process 2,726 1,197
Finished goods 1,795 1,768
------------------------------------------------------
Total $5,235 $3,623
------------------------------------------------------
F - 6
Included in work-in-process are $2,538,000 and $1,124,000 of freeze-dried
Aloe vera inventory as of December 31, 1995 and 1996, respectively.
Finished goods consist of materials, labor and manufacturing overhead.
NOTE THREE. PROPERTY, PLANT AND EQUIPMENT:
The Company has a 6.6 acre tract of land and a 35,000 square foot office
and manufacturing building situated thereon. This facility is located in
Irving, Texas, a suburb of Dallas, and is used as the Company's
headquarters and primary manufacturing facility.
During July 1995, the Company completed the manufacturing and distribution
project started during the first quarter of 1994. The project involved
the physical relocation of its manufacturing operation from a leased
facility in Dallas to an unused portion of the Company's corporate
headquarters facility in Irving, Texas. The new facility is intended to
meet all federal regulatory requirements applicable to provide the
production capacity needed to meet long-term sales growth. At the same
location, the Company has upgraded its capability to enable it to produce
injectable products that meet FDA standards. The total cost expended on
the project was $4,469,000.
During the first quarter of 1994, the Company initiated a project in Costa
Rica to upgrade its production plant to meet regulatory requirements for
the production of bulk acetylated oral and injectable mannans as required
for investigational new drugs ("INDs"). This project was completed in the
fourth quarter of 1994 and cost approximately $1,200,000. Funding was
provided by existing cash on hand and cash flow from operations. The
Company's net investment in property, plant, equipment and other assets in
Costa Rica at November 30, 1994 and December 31, 1995 and 1996 were
$4,545,000, $4,280,000, and $3,958,000, respectively.
The production capacity of the Company's Aloe vera processing plant in
Costa Rica, where its bulk freeze-dried Aloe vera extract is manufactured,
is greater than the Company's current level of usage of the plant. The
Company is currently exploring other options to utilize the available
capacity. There is no assurance that the Company will be able to fully
utilize the Costa Rica plant s capacity. 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 the first quarter of 1996. SFAS 121 requires that long-lived
assets held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts of
the assets may not be recoverable. At the time of adoption, there was no
impairment of asset value in Costa Rica based on historical production
levels and future capacity requirements needed to produce the Company's
drug Aliminase[TM], then under initial phase III clinical trials. Under
SFAS 121, when there is an event or change in circumstances that may
impair the recoverability of the assets, the carrying amount of the asset
should be assessed. In late October 1996, the Company received the results
of the initial phase III clinical trial for the testing of Aliminase[TM]
oral capsules, which no statistically significant differences that would
support a conclusion that Aliminase[TM] oral capsules provide a
therapeutic effect in the treatment of ulcerative colitis. As a result,
the Company terminated the second large scale clinical trial and placed
further testing of Aliminase[TM] oral formulation on hold. These results
triggered a new assessment of the
F - 6
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 December 31, 1996, was
$3,958,000. The Company evaluated the value of Costa Rica produced
components in its current product mix to determine the amount of net
revenues, excluding Manapol[R] powder sales to Mannatech (see also Note
Thirteen), attributable to the Costa Rica plant. Sales to Mannatech were
excluded from the analysis as the Company has been informed by Mannatech
that the supply agreement in effect throughout 1996 will not be renewed.
Mannatech has indicated it will honor the minimum purchase requirements
through March 31, 1997, the termination date. As the Supply Agreement
between Mannatech and the Company will not be renewed, the exclusive
license agreement for the Manapol[R] trademark will also terminate on
March 31, 1997. The Company will then be able to sell Manapol[R] powder
or license the trademark to other third parties as well as use it in the
Company's products. Mannatech may continue to purchase Manapol[R] powder
on an as-needed basis, but no such purchases could be anticipated for the
SFAS 121 analysis. 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 SFAS 121 methodology.
The following summarizes the components of property, plant and equipment
at December 31, 1995 and 1996:
(Dollar amounts in thousands)
1995 1996
----------------------------------------------------------------
Land and improvements $ 1,389 $ 1,389
Buildings and improvements 8,073 8,085
Furniture and fixtures 868 880
Machinery and equipment 7,826 7,589
Leasehold improvements 330 756
Equipment under capital leases 447 152
-----------------------------------------------------------------
Total $18,933 $18,851
-----------------------------------------------------------------
NOTE FOUR. OTHER ASSETS
The Company owns a $1,500,000 certificate of deposit ("CD") that matures
every 90 days. Although includable in cash as a cash equivalent, the
Company's management has elected not to classify the CD as such. Because
the CD secures a letter of credit (see Note Seven), 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.
F - 6
Also included in other assets are the unamortized portion of a Product
Development and Exclusive Distribution Agreement with Innovative
Technologies Limited ("IT"), capitalized legal and start-up costs related
to the Costa Rica operation, and a $200,000 investment in Aloe Commodities
International, Inc. ("ACI").
The following summarizes the components of other assets at December 31,
1995 and 1996:
(Dollar amounts in thousands) 1995 1996
-----------------------------------------------------------------------
Certificate of Deposit $ - $1,500
IT Product Development
and Exclusive Distribution Agreement 442 392
Callable Note to ACI - 200
Costa Rica Start-up Costs 123 81
Cost of 1995 restructuring bank debt 77 -
Other 39 42
------------------------------------------------------------------------
Total $681 $2,215
------------------------------------------------------------------------
NOTE FIVE. ACCRUED LIABILITIES:
The following summarizes significant components of accrued liabilities at
December 31, 1995 and 1996:
(Dollar amounts in thousands)
1995 1996
-------------------------------------------------------------------------
Accrued payroll $ 210 $ 232
Accrued sales commissions 251 187
Accrued taxes 165 512
Preferred dividends (Series C Shares) 124 -
Accrued severance liability 267 -
Rebates 182 129
Legal 30 125
Other 602 564
-------------------------------------------------------------------------
Total $1,831 $1,749
-------------------------------------------------------------------------
F - 6
NOTE SIX. SHORT-TERM BORROWINGS:
Short-term debt activity for each of the years ended December 31, 1995 and
1996 was as follows:
(Dollar amounts in thousands)
1995 1996
------------------------------------------------------
Average amount
of short-term
debt outstanding
during the year $ 468 $ 991
Maximum amount
of short-term
debt outstanding
during the year 2,977 2,977
Average interest rate
for the year 7.9% 7.7%
------------------------------------------------------
NOTE SEVEN. 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, as discussed
below, and planned research projects. The line of credit was to be used
for operating needs, as required. The term loan was payable in equal
quarterly installments of $250,000 principal plus accrued interest
beginning March 31, 1995 and ending January 30, 1999, when the unpaid
balance was due. The interest rate on both credit facilities was the
Company's option of prime plus .5% or 30, 60, 90, or 180 day reserve
adjusted LIBOR (London Interbank Offering Rate) plus 2%. The Company paid
a commitment fee of $31,500 on the closing date. In February 1995, the
Bank waived the requirement that the Costa Rica assets be pledged to
secure the term loan. The Company agreed to pay an additional commitment
fee of $31,500 at that time. As of December 31, 1995, the Company was not
in compliance with the term loan's fixed charge ratio covenant.
Therefore, the entire balance was classified as current debt for reporting
purposes. 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.
The interest rate on the borrowing ranged from 7.70% to 8.125% between
January 30, 1995 and December 31, 1995. In 1996, the interest rate was
7.7% from January 1, 1996 through April 29, 1996.
In order to help finance the development of the Company's Costa Rica
facilities, the Company arranged a five-year U.S. dollar-denominated loan
in the amount of $600,000 from Corporacion Privada de Inversiones de
CentroAmerica, S.A. In May 1995, the note was paid off using proceeds of
the Company's private placement (see Note Nine).
F - 6
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 reduced the amount that the Company could borrow under
the term loan but did not increase the Company's debt unless the letter of
credit was utilized by the supplier. As of March 14, 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.
Long-term debt of the Company for the years ended December 31, 1995 and
1996 is summarized as follows:
(Dollar amounts in thousands)
1995 1996
--------------------------------------------------------
Term Loan $2,977 $ -
Obligations under capital leases 137 75
--------------------------------------------------------
3,114 75
Less - Current portion 3,026 29
--------------------------------------------------------
Long-term debt, net of current $ 88 $ 46
--------------------------------------------------------
The Company leases certain computer and other equipment under capital
leases expiring at various dates through 2001. The following is a
schedule of future minimum lease payments under the capital lease
agreements together with the present value of these payments as of
December 31, 1996:
(Dollar amounts in thousands)
Fiscal years ending December 31,
-----------------------------------------------
1997 $ 35
1998 35
1999 9
2000 6
2001 1
-----------------------------------------------
Aggregate minimum lease payments 86
Less - Imputed interest included in
aggregate minimum lease payments 11
-----------------------------------------------
Present value of aggregate minimum
lease payments $ 75
-----------------------------------------------
F - 6
NOTE EIGHT. PREFERRED STOCK:
SERIES C SHARES 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), and were
callable by the Company, after January 14, 1996 and provided for dividend
payments to be made only through the issuance of additional Series C
Shares.
In January 1996, all of the outstanding Series C shares were converted to
174,935 shares of the Company's common stock.
The Company had previously issued to the Investor warrants to purchase
55,000 shares of common stock of the Company at $15 per share through
February 1, 1996. In addition to issuing the Series C Shares to the
Investor, the Company reduced the exercise price of warrants held by the
Investor from $15 per share to $12.75 per share, which was above the
market price of the common stock at the date of adjustment. These
warrants were exercised in the first quarter of 1996. The Company also
extended by three years, to February 1, 1996, the life of certain warrants
that had previously been issued to this Investor for the purchase of
20,000 shares of common stock of the Company (all of which are now owned
10,000 shares each by two executives of the Investor, one of whom is a
director of the Company), and reduced the exercise price of such warrants
from $25 to $15 per share, which was above the market price of the common
stock at the date of adjustment.
SERIES E SHARES On October 21, 1996 (the "Closing Date"), the Company
completed a $6,600,000 financing involving the private placement of Series
E Convertible Preferred Stock (the "Series E Shares"). Each Series E
Share has a par value of $100 and an initial purchase price of $10,000.
After placement fees, legal and other costs related to the private
placement, the Company expects to realize net proceeds of $6,266,000. At
the Closing Date, the Company's plans called for much of the proceeds from
this sale to be used to continue Carrington's clinical research programs.
The Series E Shares are convertible, at the option of the holder thereof,
into shares of the Compan's common stock beginning on December 20, 1996,
and prior to October 21, 1999 (the "Maturity Date"), at a conversion price
per share (the "Conversion Price") equal to the lower of $25.20 (120 %
of the market price of the Company's common stock as calculated
over the three trading-day period ended on the last trading day prior to
the Closing Date) or 87% of the market price as calculated over the three
trading-day period ending on the last trading day immediately preceding
the conversion date. The Conversion Price is subject to adjustment to
take into account stock dividends, stock splits and share combinations
involving the Company's common stock. Each Series E Share will be
convertible into the number of whole shares of common stock determined by
dividing $10,000 by the Conversion Price.
F - 6
Each Series E Share outstanding on the Maturity Date will automatically
convert into common stock at the then current Conversion Price. Holders
of Series E Shares will be entitled to receive an annual dividend payment
equal to $500 per share for the one year period commencing on October 21,
1998 and ending on October 20, 1999 (equal to 5% of the per share Purchase
Price). Dividends are payable only if the 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 a combination of both, at the
option of the Company.
The Company entered into Registration Rights Agreements (collectively, the
"Registration Agreements") with the holders of the Series E Shares
obligating the Company to prepare and file with the Securities and
Exchange Commission (the "Commission") a registration statement (the
"Registration Statement") with respect to the resale of the underlying
shares of common stock (including any shares issued in payment of
dividends on the Series E Shares or the periodic payments described below.
The Registration Agreements provided that if the Commission did not
declare the Registration Statement effective on or before January 9, 1997,
the Company would make periodic payments to the holders of the Series E
Shares equal to 1% of the Purchase Price for the first 30-day period
thereafter and 2% of the Purchase Price for each additional 30-day period,
prorated to the date on which the Commission declared the Registration
Statement effective. Such payments could be made in cash or shares of
common stock or a combination of both, at the election of the Company.
The Company filed the Registration Statement with the Commission on
December 2, 1996.
In March 1997, the Company repurchased 50% of the above Series E shares
for $3,729,000. See Note Eighteen for further discussion.
NOTE NINE. COMMON STOCK:
PRIVATE PLACEMENT OF COMMON STOCK In April 1995, the Company completed
a self-directed private placement of 300,000 shares of common stock at a
price of $10.00 per share. The average of the high and low sale prices of
the Company's common stock on the NASDAQ National Market on the day of the
placement was $10.69 per share. Total proceeds net of issuance costs were
$2,956,000. The Company agreed to use its best efforts to file a
registration statement with the Securities and Exchange Commission within
90 days after the placement. Effective July 11, 1995, shares related to
the private placement were registered for resale with the Securities and
Exchange Commission. Proceeds from the placement were used for planned
capital expenditures, payment of bank debt, research and development
expenditures and other operating needs.
EMPLOYEE STOCK PURCHASE PLAN On October 29, 1992, the Company adopted
an Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the
Stock Purchase 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
the last business day preceding the enrollment date (defined as January 1,
April 1, July 1 or October 1 of any plan year) or 85% of the market price
on the last business day of the month. If any employee elects to
terminate participation in the Stock Purchase Plan, the employee is not
F - 6
eligible to re-enroll until the first enrollment date following six months
from such election. The Stock Purchase Plan provides for the grant of
rights to employees to purchase a maximum of 500,000 shares of common
stock of the Company commencing on January 1, 1993. As of December 31,
1996, 62,970 shares had been purchased by employees at prices ranging from
$7.23 to $29.54 per share.
STOCK OPTIONS The Company has an incentive stock option plan (the
"Option Plan") under which incentive stock options and nonqualified stock
options may be granted to certain employees as well as non-employee
directors. Options are granted at a price no less than the market value
of the shares on the date of the grant, except for incentive options to
employees who own more than 10% of the total voting power of the Company's
common stock, which are granted at a price no less than 110% of the market
value. Options granted expire four to ten years from the dates of grant.
The Company accounts for employee stock based compensation under APB Opinion
No. 25, under which no compensation cost has been recognized. Had
compensation cost been determined based on the fair value of options at their
grant dates consistent with the method of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), the Company's net loss and losses per share
would have been reduced to the following pro forma amounts:
--------------------------------------------------------
1995 1996
--------------------------------------------------------
Net loss (in thousands):
As reported $(1,628) $(5,523)
Pro forma (2,656) (8,022)
Loss per share:
As reported $ (0.22) $ (0.63)
Pro forma (0.35) (0.92)
--------------------------------------------------------
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not
be representative of the pro forma cost to be expected in future years.
F - 6
The following summarizes stock option activity for each of the three years
ended November 30, 1994 and December 31, 1995 and 1996:
(Shares in thousands)
Options Outstanding
-------------------------------------------------------------------------
Weighted
Average
Exercise
Shares Price Per Share Price
-------------------------------------------------------------------------
Balance, November 30, 1993 754 $ 6.25 to $29.00 $13.96
Granted 268 $ 8.25 to $12.75 $11.47
Lapsed or canceled (118) $ 6.25 to $21.72 $14.45
Exercised (7) $ 6.25 to $10.25 $ 6.25
-------------------------------------------------------------------------
Balance, November 30, 1994 897 $ 6.25 to $29.00 $12.95
Granted 592 $11.12 to $35.25 $20.63
Lapsed or canceled (72) $ 8.62 to $20.12 $11.93
Exercised (581) $ 6.25 to $29.00 $12.45
-------------------------------------------------------------------------
Balance, December 31, 1995 836 $ 6.25 to $35.25 $18.82
Granted 141 $24.25 to $47.75 $32.69
Lapsed or canceled (109) $11.25 to $28.75 $23.81
Exercised (201) $ 6.25 to $29.00 $15.33
-------------------------------------------------------------------------
Balance, December 31, 1996 667 $ 8.25 to $47.75 $21.99
-------------------------------------------------------------------------
Options exercisable at
December 31, 1996 223 $ 8.25 to $47.75 $22.84
-------------------------------------------------------------------------
Weighted Average Fair Value of Options
Granted using SFAS 123 Valuation Method:
1995 $11.86
1996 18.70
-------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------- ---------------------------------
Number Weighted-Avg Number
Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 8.25 to $13.13 227 7.0 years $11.18 71 $10.74
$16.56 to $20.13 107 7.0 $18.22 45 $18.62
$24.25 to $30.25 251 9.1 $27.16 62 $27.62
$35.25 45 8.6 $35.25 30 $35.25
$47.75 37 7.0 $47.75 15 $47.75
---------------- ----------- --------------- ------------- ---------- -------------
$ 8.25 to $47.75 667 7.9 $21.99 223 $22.84
================ =========== =============== ============= ========== =============
The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996,
respectively: risk-free interest rates of 6.50% and 6.47%, expected
volatility of 64.2% and 63.0%. The Company used the following weighted-
average assumptions for grants in 1995 and 1996: expected dividend yields
of 0% and expected lives of 5.0 years on options granted to employees and
4.0 years on grants to directors.
The Company has reserved 1,500,000 shares of common stock for issuance
under the Option Plan. As of December 31, 1996, options to purchase
525,125 shares had been granted under the option plan, of which options
for 17,200 shares had been exercised. As of December 31, 1996, options
covering 422,675 shares were outstanding with exercise prices between
$16.56 and $47.75, with a weighted average exercise price of $27.87 and a
weighted average contractual life of 8.8 years. Of these options, 134,518
are currently exercisable with a weighted average exercise price of
$29.56.
The Company's 1985 Stock Option Plan expired in February 1995. The
Company had reserved 1,400,000 shares of common stock for issuance under
this plan. At the time the plan expired, options to purchase 1,150,440
had been granted, of which options for 863,540 shares have been exercised.
As of December 31, 1996, options covering 244,089 shares were outstanding
with exercise prices between $6.25 and $29.00, with a weighted average
exercise price of $11.81 and a weighted average contractual life of 6.8
years. Of these options, 88,330 are currently exercisable with a weighted
average exercise price of $12.57.
F - 6
STOCK 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
such warrants was normally the market price or in excess of the market
price of the common stock at date of issuance. The following summarizes
warrant activity for each of the years ended November 30, 1994, and
December 31, 1995 and 1996:
Warrants Outstanding
(Shares in thousands) --------------------------------------------
Weighted
Average
Exercise
Shares Price per Share Price
--------------------------------------------------------------------------
Balance, November 30, 1993 331 $ 6.25 to $26.00 $14.43
Granted 10 $ 9.75 $ 9.75
Lapsed or canceled (42) $18.00 to $26.00 $23.66
--------------------------------------------------------------------------
Balance, November 30, 1994 299 $ 6.25 to $26.00 $14.27
Granted 20 $16.00 $16.00
Lapsed or canceled (88) $11.25 to $26.00 $17.88
Exercised (102) $ 6.25 to $16.25 $11.88
--------------------------------------------------------------------------
Balance, December 31, 1995 129 $ 9.75 to $20.13 $13.99
Lapsed or canceled (3) $12.13 $12.13
Exercised (75) $12.75 to $15.00 $13.35
--------------------------------------------------------------------------
Balance, December 31, 1996 51 $ 9.75 to $20.13 $15.03
--------------------------------------------------------------------------
Warrants exercisable at
December 31, 1996 49 $ 9.75 to $20.13 $15.14
--------------------------------------------------------------------------
The following table summarizes information about stock warrants oustanding
at December 31, 1996:
Warrants Outstanding Warrants Exercisable
------------------------------------------------------- --------------------------------
Number Weighted-Avg Number
Range of Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 9.75 to $13.00 20 2.8 Years $11.38 18 $11.14
$16.00 to $20.13 31 2.8 $17.39 31 $17.39
---------------- ----------- ---------------- -------------- ----------- --------------
$ 9.75 to $20.13 51 2.8 $15.03 49 $15.14
================ =========== ================ ============== =========== ==============
F - 6
NOTE TEN. SHARE PURCHASE RIGHTS PLAN:
In September 1991, the Company's Board of Directors adopted a share
purchase rights plan by declaring a dividend distribution of one preferred
share purchase right (a "Right") on each outstanding share of the
Company's common stock (the "Common Shares"). The dividend distribution
was made October 15, 1991, payable to shareholders of record on that date.
The Rights are subject to an agreement (the "Rights Agreement") between
the Company and the Company's stock transfer agent, and will expire
October 15, 2001, unless redeemed at an earlier date.
Pursuant to the Rights Agreement, each Right will entitle the holder
thereof to buy one one-hundredth of a share of the Company's Series D
Preferred Stock (the "Preferred Shares"), at an exercise price of $80,
subject to certain antidilution adjustments. The Rights will not be
exercisable or transferable apart from the Common Shares, until (i) the
tenth day after a person or group acquires 20% or more of the Common
Shares or (ii) the tenth business day following the commencement of, or
the announcement of an intention to make, a tender or exchange offer for
20% or more of the Common Shares. The Rights will not have any voting
rights or be entitled to dividends. If the Company is acquired in a
merger or other business combination, each Right will entitle its holder
to purchase, at the exercise price of the Right, a number of the acquiring
company's common shares having a current market value of twice such price.
Alternatively, if a person or group acquires 20% or more of the Common
Shares, then each Right not owned by such acquiring person or group will
entitle the holder to purchase, for the exercise price, a number of Common
Shares having a market value of twice such price. The Rights are
redeemable at the Company's option for $.01 per Right at any time prior to
the close of business on the seventh day after the first date of public
announcement that a person or group has acquired beneficial ownership of
20% or more of the Common Shares. At any time after a person or group
acquires 20% or more of the Common Shares, but prior to the time such
acquiring person acquires 50% or more of the Common Shares, the Company's
Board of Directors may redeem the Rights (other than those owned by the
acquiring person or group), in whole or in part, by exchanging one Common
Share for each Right.
NOTE ELEVEN. OPERATING LEASES:
The Company conducts a significant portion of its operations from an
office/ warehouse/distribution facility and an office/laboratory facility
under operating leases that expire over the next five years. In addition,
the Company leases certain office equipment under operating leases that
expire over the next four years.
F - 6
The Company is committed under noncancellable operating leases, with
minimum lease payments as of December 31, 1996 as follows:
(Dollar in thousands)
Fiscal Years Ending December 31,
----------------------------------------------
1997 $ 409
1998 421
1999 394
2000 394
Thereafter 97
----------------------------------------------
Total minimum lease payments $1,715
----------------------------------------------
Total rental expenses under operating leases were $447,000, $364,000 and
$451,000 for the years ended November 30, 1994 and December 31, 1995 and
1996, respectively.
NOTE TWELVE. INCOME TAXES:
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1996 are as
follows:
(Dollars in thousands)
1995 1996
--------------------------------------------------------
Net operating loss carryforward $ 9,835 $ 12,875
Research and development
and other credits 839 839
Patent fees 308 318
Other, net 795 791
Less - Valuation allowance (11,777) (14,823)
--------------------------------------------------------
Deferred income tax asset $ - $ -
--------------------------------------------------------
Pursuant to the requirements to SFAS 109, a valuation allowance is
provided when it is more likely than not the deferred income tax asset
will not be realized. The Company has provided a valuation allowance
against the entire deferred tax asset at December 31, 1995 and 1996.
F -6
The provisions for federal income and state franchise taxes for the years
ended November 30, 1994 and December 31, 1995 and 1996 consisted of the
following:
(Dollars in thousands)
1994 1995 1996
-------------------------------------------------------
Current provision $159 $131 $ 88
Deferred provision, net - - -
-------------------------------------------------------
Total provision $159 $131 $ 88
-------------------------------------------------------
The differences (expressed as a percentage of pre-tax income) between the
statutory and effective federal income tax rates are as follows:
1994 1995 1996
-------------------------------------------------------
Statutory tax rate 34.0% (34.0%) (34.0%)
State income taxes 5.4 2.8 .5
Recognition of previously
unrecognized deferred
tax benefits (35.3) - -
Unrecognized deferred tax
benefit - 34.6 34.9
Expenses related to foreign
operations 4.7 4.1 -
Research and development
tax credit adjustment .5 - -
Other .8 1.3 .2
-------------------------------------------------------
Effective tax rate 10.1% 8.8% 1.6%
-------------------------------------------------------
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $37,868,000 for federal income tax purposes, which expire
during the period from 1999 to 2011, and investment and research and
development tax credit carryforwards of approximately $839,000, which
expire during the period from 1999 to 2008, all of which are available to
offset federal income taxes due in future periods.
NOTE THIRTEEN. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist
primarily of trade accounts receivable. The Company's customers are not
concentrated in any specific geographic region but are concentrated in the
health care industry. Significant sales were made to three unaffiliated
customers. Allegiance Healthcare Corporation (Allegiance, formerly
Baxter Healthcare Corporation) accounted for $2,775,000, $2,492,000 and
F - 6
$1,877,000; Owens & Minor accounted for $1,795,000, $3,348,000 and
$2,433,000; and Bergen Brunswig, which acquired Durr Medical and Colonial
Healthcare in December 1996, accounted for $2,042,000, $2,359,000, and
$2,568,000 of the Company's net sales in 1994, 1995 and 1996,
respectively. Sales by Caraloe, Inc., to an unaffiliated customer,
Mannatech, Inc., formerly Emprise International, Inc., accounted for
$934,000, $2,488,000 and $3,273,000 of the Company's net sales in 1994,
1995 and 1996, respectively. The Company performs ongoing credit
evaluations of its customers' financial condition and establishes an
allowance for doubtful accounts based on factors surrounding the credit
risk of specific customers and historical trends and other information.
In the first quarter of 1997, the Company granted extended payment terms
to Mannatech for orders placed in January through March, 1997, after which
Mannatech's exclusive supply agreement will terminate. Orders placed in
1997, which should total approximately $810,000, will be paid in even
monthly installments of $101,250 from February through September 1997.
The Company's normal terms for sales to Mannatech are net 30.
NOTE FOURTEEN. FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments. The
following methods and assumptions were used by the Company in estimating
the fair value disclosures for its financial instruments. For cash, trade
receivables and payables, the net carrying amounts reported in the
Consolidated Balance Sheets approximate fair value. The carrying amounts
for revolving notes and notes payable approximate fair value based upon
the borrowing rates currently available to the Company for similar bank
loans. No such instruments were outstanding as of December 31, 1996.
NOTE FIFTEEN. RELATED PARTY TRANSACTIONS
In April 1996, the Company hired an independent manufacturer's
representative as Vice President of Sales and Marketing. This individual
continues to maintain his sales territory, primarily Alabama and Georgia,
as an independent manufacturer's representative and currently employs
three sales representatives to cover the territory. From April 1996
through December 31, 1996, the Company paid commissions of approximately
$268,000 to this individual.
F - 6
NOTE SIXTEEN. SALES BY DIVISION
The following summarizes the Company's sales by division and consolidated
sales for the years ended November 30, 1994, December 31, 1995, and
December 31, 1996:
(Dollar amounts in thousands)
Carrington Laboratories Consolidated
------------------------------- ----------------
Year Ended Wound Carrington Caraloe Total
November 30, 1994 Care Veterinary Sales Inc. Sales
------------------- -------- ---------- ---------- ------- -------
Net Sales $23,665 $404 $24,069 $1,361 $25,430
Cost of Sales 5,392 190 5,582 833 6,415
-------- ------ -------- ------- -------
Gross Margin $18,273 $214 $18,487 $ 528 $19,015
======== ====== ======== ======= =======
Year Ended
December 31, 1995
------------------
Net Sales $21,147 $320 $21,467 $2,907 $24,374
Cost of Sales 5,971 163 6,134 1,810 7,944
-------- ------ -------- ------- -------
Gross Margin $15,176 $157 $15,333 $1,097 $16,430
======== ====== ======== ======= =======
Year Ended
December 31, 1996
------------------
Net Sales $17,302 $290 $17,592 $3,694 $21,286
Cost of Sales 7,128 249 7,377 2,950 10,327
-------- ------ -------- ------- -------
Gross Margin $10,174 $ 41 $10,215 $ 744 $10,959
======== ====== ======== ======= =======
F - 6
NOTE SEVENTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA:
The unaudited selected quarterly financial data below reflect the fiscal
years ended December 31, 1995 and 1996, respectively.
(Dollar and share amounts in thousands, except per share amounts)
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Net sales $6,276 $6,408 $6,621 $ 5,069
Gross profit 4,636 4,332 4,351 3,111
Net (loss) income (497) (287) 163 (1,007)
(Loss) income
per share $ (.07) $ (.04) $ .02 $ (.12)
Weighted average
common shares 7,359 7,813 8,213 8,345
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Net sales $5,515 $5,438 $5,112 $5,221
Gross profit 2,584 2,073 2,967 3,335
Net (loss) income (2,156) (2,545) ( 839) 17
(Loss) income
per share $ (.25) $ (.29) $ (.09) $ -
Weighted average
common shares 8,666 8,805 8,855 8,868
--------------------------------------------------------------------------
NOTE EIGHTEEN. SUBSEQUENT EVENT
On October 31, 1996, the Company announced that the results of its first
Phase III trial of Aliminase[TM] oral capsules were not favorable and that
the Company had placed the Aliminase[TM] project on hold and terminated the
second Phase III trial of that product. Those developments resulted in
changes in the Company's planned uses of and need for funds. In addition, a
decline in the market price of the Company's common stock that followed
that announcement increased the extent of the dilution that would have
occurred if all of the outstanding Series E Shares issued in October 1996
were converted into common stock (see Note Eight). Also, since the
Registration Statement covering the shares of common stock underlying the
Series E Shares had not been declared effective by the Commission, the
periodic payments required by the Registration Agreements had begun to
accrue (see Note Eight).
Accordingly, the Company's Board of Directors concluded that it was in the
best interest of the Company and its shareholders to use a portion of its
existing funds to repurchase 50% of the outstanding Series E Shares, and
that repurchase was completed on March 4, 1997 (the "Repurchase Date").
The price paid by the Company was $11,300 per Series E Share, or a premium
of $1,300 over the original Purchase Price. In connection with the
repurchase, the parties agreed (i) that no periodic payments would be due
F - 6
for the period from February 15, 1997 through May 15, 1997; (ii) that the
Company would pay in cash on the Repurchase Date the periodic payments
that had accrued from January 10 through February 14, 1997; (iii) that the
Company would pay the holders of the Series E Shares interest at the rate
of 7% per annum on the original Purchase Price of their outstanding Series
E Shares for the period from February 15, 1997 through the earliest of (a)
May 15, 1997, (b) the Repurchase Date (in the case of Series E Shares
repurchased by the Company), or (c) the date on which the Registration
Statement is declared effective by the Commission; and (iv) that if the
Commission does not declare the Registration Statement effective on or
before May 15, 1997, the periodic payments required by the Registration
Agreements will resume accruing on May 16, 1997, but will be equal to 1%
of the original Purchase Price of the outstanding Series E Shares through
June 15, 1997 and 2% for each additional 30-day period, prorated to the
date on which the Commission declares the Registration Statement
effective, and will be payable only in cash.
On the Repurchase Date, the Company paid the Series E Shareholders
$3,729,000 (330 Series E Shares at $11,300 per share), $92,400 (periodic
payment due on all 660 Series E Shares from January 10, 1997 through
February 14, 1997) and $10,759 (7% per annum interest earned on $3,300,000
from February 15, 1997 to the Repurchase Date). These amounts will be
shown as a reduction of Shareholders Investment in the first quarter of
1997.
F - 6
-------------------------------------------------------------------------
Report of Independent Public Accountants
-------------------------------------------------------------------------
To the Shareholders and Board of Directors
of Carrington Laboratories, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Carrington
Laboratories, Inc. (a Texas corporation), and subsidiaries as of December
31, 1995, and December 31, 1996, and the related consolidated statements
of operations, shareholders' investment, and cash flows for the year ended
November 30, 1994, the month ended December 31, 1994, and the two years
ended December 31, 1995 and December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Carrington Laboratories, Inc., and subsidiaries as of December 31, 1995
and December 31, 1996, and the results of their operations and their cash
flows for the year ended November 30, 1994, the month ended December
31, 1994 and the two years ended December 31, 1995 and December 31, 1996,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas
February 9, 1997 (except with respect to the matter discussed in Note
Eighteen, as to which the date is March 4, 1997).
F - 6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 26, 1997 By: /s/ Carlton E. Turner
--------------------------
Carlton E. Turner, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Carlton E. Turner President, Chief Executive March 26, 1997
------------------------- Officer and Director
Carlton E. Turner
/s/ Sheri L. Pantermuehl Chief Financial Officer March 26, 1997
------------------------- (principal financial and
Sheri L. Pantermuehl accounting officer)
/s/ R. Dale Bowerman Director March 26, 1997
-----------------------------
R. Dale Bowerman
/s/ George DeMott Director March 26, 1997
-----------------------------
George DeMott
/s/ Robert A. Fildes, Ph.D. Director March 26, 1997
-----------------------------
Robert A. Fildes, Ph.D.
/s/ Thomas J. Marquez Director March 26, 1997
-----------------------------
Thomas J. Marquez
/s/ James T. O'Brien Director March 26, 1997
-----------------------------
James T. O'Brien
/s/ Selvi Vescovi Director March 26, 1997
-----------------------------
Selvi Vescovi
S - 1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 26, 1997 By: --------------------------
Carlton E. Turner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
President, Chief Executive March 26, 1997
------------------------- Officer and Director
Carlton E. Turner
Chief Financial Officer March 26, 1997
------------------------- (principal financial and
Sheri L. Pantermuehl accounting officer)
Director March 26, 1997
-------------------------
R. Dale Bowerman
Director March 26, 1997
-------------------------
George DeMott
Director March 26, 1997
-------------------------
Robert A. Fildes, Ph.D.
Director March 26, 1997
-------------------------
Thomas J. Marquez
Director March 26, 1997
-------------------------
James T. O'Brien
Director March 26, 1997
-------------------------
Selvi Vescovi
S - 1
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
3.1 Restated Articles of Incorporation of
Carrington Laboratories, Inc. (incorporated herein
by reference to Exhibit 3.1 to Carrington's 1988
Annual Report on Form 10-K).
3.2 Statement of Cancellation of Redeemable Shares
of Carrington Laboratories, Inc., dated June 9,
1989 (incorporated herein by reference to Exhibit 3.2
to Carrington's 1991 Annual Report on Form 10-K).
3.3 Statement of Change of Registered Office and
Registered Agent of Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit 3.1 to
Carrington's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1991).
3.4 Statement of Resolution Establishing Series D
Preferred Stock of Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit 3.1 to
Carrington's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1991).
3.5 Statement of Resolution Establishing Series E
Convertible Preferred Stock of Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit 3.1 to Carrington's
Form 8-K Current Report dated October 21, 1996).
3.6 Bylaws of Carrington Laboratories, Inc., as amended
through April 27, 1995 (incorporated herein by reference
to Exhibit 3.5 to Carrington's 1995 Annual Report on Form 10-K).
4.1 Form of certificate for Common Stock of
Carrington Laboratories, Inc. (incorporated herein by
reference to Exhibit 4.5 to Carrington's Registration
Statement on Form S-3 (No. 33-57360) filed with
the Securities and Exchange Commission on
January 25, 1993).
4.23 Rights Agreement dated as of September 19, 1991, between
Carrington Laboratories, Inc., and Ameritrust Company
National Association (incorporated herein by
reference to Exhibit 1 to Carrington's Report
on Form 8-K dated September 19, 1991).
E - 1
Exhibit Sequentially
Number Exhibit Numbered Page
10.1+ 1985 Stock Option Plan of Carrington Laboratories, Inc.,
as amended through April 28, 1994 (incorporated herein
by reference to Exhibit 4.1 to Carrington's Form S-8
Registration Statement (No. 33-64407) filed with the
Securities and Exchange Commission on November 17, 1995).
10.2+ Form of Nonqualified Stock Option Agreement for
employees, as amended, relating to Carrington's
1985 Stock Option Plan (incorporated herein by
reference to Exhibit 4.2 to Carrington's
Registration Statement on Form S-8 (No. 33-
50430) filed with the Securities and Exchange
Commission on August 4, 1992).
10.3+ Form of Nonqualified Stock Option Agreement for
nonemployee directors, as amended, relating to
Carrington's 1985 Stock Option Plan (incorporated
herein by reference to Exhibit 4.3 to Carrington's
Registration Statement on Form S-8 (No. 33-64407)
filed with the Securities and Exchange Commission
on November 17, 1995).
10.4 License Agreement dated September 20, 1990,
between Carrington Laboratories, Inc., and Solvay
Animal Health, Inc. (incorporated herein by reference
to Exhibit 10.1 to Carrington's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1990).
10.5 Contract Research Agreement dated as of August
8, 1991, between Carrington Laboratories, Inc., and
Texas Agriculture Experimental Station, as agent for
the Texas A&M University System (incorporated
herein by reference to Exhibit 10.55 to
Carrington's 1991 Annual Report on Form 10-K).
10.6 Lease Agreement dated as of August 30, 1991,
between Carrington Laboratories, Inc., and Western Atlas
International, Inc. (incorporated herein by
reference to Exhibit 10.59 to Carrington's 1991
Annual Report on Form 10-K).
10.7+ Employee Stock Purchase Plan of Carrington Laboratories,
Inc., as amended through June 15, 1995 (incorporated
herein by reference to Exhibit 10.29 to Carrington's
1995 Annual Report of Form 10-K).
E - 2
Exhibit Sequentially
Number Exhibit Numbered Page
10.8+ Employment Agreement dated July 6, 1993, between
Carrington Laboratories, Inc., and Luiz F. Cerqueira
(incorporated herein by reference to Exhibit 10.43
to Carrington's 1993 Annual Report on Form 10-K).
10.9 Common Stock Purchase Warrant dated September
14, 1993, issued by Carrington Laboratories, Inc.,
to E. Don Lovelace (incorporated herein by reference to
Exhibit 10.44 to Carrington's 1993 Annual Report on
Form 10-K).
10.10 Common Stock Purchase Warrant dated September
14, 1993, issued by Carrington Laboratories, Inc.,
to Jerry L. Lovelace (incorporated herein by
reference to Exhibit 10.45 to Carrington's 1993
Annual Report on Form 10-K).
10.11+ Agreement Regarding Termination of Employment
and Full and Final Release dated February 16,
1994, between Carrington Laboratories, Inc.,
and David A. Hotchkiss (incorporated herein by
reference to Exhibit 10.49 to Carrington's 1993
Annual Report on Form 10-K).
10.12 License Agreement dated March 18, 1994, between
Carrington Laboratories, Inc., and Socie'te'
Europe'enne de Biotechnologie (incorporated herein by
reference to Exhibit 10.53 to Carrington's 1994
Annual Report on Form 10-K).
10.13 Agreement dated March 28, 1994, between
Carrington Laboratories, Inc., and Keun Wha
Pharmaceutical Co., Ltd., (incorporated herein by
reference to Exhibit 10.54 to Carrington's 1994 Annual
Report on Form 10-K).
10.14 Lease Agreement dated June 15, 1994, between
DFW Nine, a California limited partnership, and
Carrington Laboratories, Inc. (incorporated herein by
reference to Exhibit 10.55 to Carrington's 1994 Annual
Report on Form 10-K).
10.15 Lease Amendment dated August 23, 1994, amending
Lease Agreement listed as Exhibit 10.14
(incorporated herein by reference to Exhibit
10.57 to Carrington's 1994 Annual Report on
Form 10-K).
E - 3
Exhibit Sequentially
Number Exhibit Numbered Page
10.16 License Agreement dated September 29, 1994, between
Carrington Laboratories, Inc., and Immucell Corporation
(incorporated herein by reference to Exhibit 10.58
to Carrington's 1994 Annual Report on Form 10-K).
10.17 Third Lease Amendment dated December 1, 1994,
amending Lease Agreement listed as Exhibit
10.6 (incorporated herein by reference to
Exhibit 10.60 to Carrington's 1994 Annual
Report on Form 10-K).
10.18 Production Contract dated February 13, 1995,
between Carrington Laboratories, Inc., and
Oregon Freeze Dry, Inc. (incorporated herein
by reference to Exhibit 10.63 to Carrington's
1994 Annual Report on Form 10-K).
10.19+ Management Compensation Plan (incorporated
herein by reference to Exhibit 10.64 to
Carrington's 1994 Annual Report on Form 10-K).
10.20 Research Agreements dated June 24, 1994,
September 16, 1994, and February 2, 1995,
between Southern Research Institute and
Carrington Laboratories, Inc. (incorporated
herein by reference to Exhibit 10.65 to
Carrington's 1994 Annual Report on Form 10-K).
10.21 Trademark License Agreement between Caraloe,
Inc. (Licensor) and Emprise International, Inc.
(Licensee) dated March 31, 1995 (incorporated
herein by reference to Exhibit 10.2 to
Carrington's Second Quarter 1995 Report on Form
10-Q).
10.22 Supply Agreement between Caraloe, Inc. (Seller),
and Emprise International, Inc. (Buyer), dated
March 31,1995 (incorporated herein by reference
to Exhibit 10.3 to Carrington's Second Quarter
1995 Report on Form 10-Q).
10.23 Sales Distribution Agreement between the
Chinese Academy of Sciences and Carrington
Laboratories, Inc., dated August 16, 1995
(incorporated herein by reference to Exhibit
10.1 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
E - 4
Exhibit Sequentially
Number Exhibit Numbered Page
10.24 Sales Distribution Agreement between the
Chinese Academy of Sciences and Carrington
Laboratories, Inc., dated August 16, 1995
(incorporated herein by reference to Exhibit
10.2 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.25 Sales Distribution Agreement between the
Chinese Academy of Sciences and Carrington
Laboratories, Inc., dated August 16, 1995
(incorporated herein by reference to Exhibit
10.3 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.26 Supply and Distribution Agreement between
Medical Polymers, Inc., and Carrington
Laboratories, Inc., dated September 15, 1995
(incorporated herein by reference to Exhibit
10.4 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.27 Clinical Services Agreement between
Pharmaceutical Products Development, Inc., and
Carrington Laboratories, Inc., dated July 10,
1995 (incorporated herein by reference to
Exhibit 10.5 to Carrington's Third Quarter 1995
Report on Form 10-Q).
10.28 Non-exclusive Sales and Distribution Agreement
between Innovative Technologies Limited and
Carrington Laboratories, Inc., dated August 22,
1995 (incorporated herein by reference to
Exhibit 10.6 to Carrington's Third Quarter 1995
Report on Form 10-Q).
10.29 Supplemental Agreement to Non-exclusive Sales
and Distribution Agreement between Innovative
Technologies Limited and Carrington
Laboratories, Inc., dated October 16, 1995
(incorporated herein by reference to Exhibit
10.7 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.30 Product Development and Exclusive Distribution
Agreement between Innovative Technologies
Limited and Carrington Laboratories, Inc., dated
November 10, 1995 (incorporated herein by
reference to Exhibit 10.8 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
E - 5
Exhibit Sequentially
Number Exhibit Numbered Page
10.31+ Resignation Agreement and Full and Final
Release dated February 24, 1995, between
Carrington Laboratories, Inc., and Bill H.
McAnalley (incorporated herein by reference
to Exhibit 10.68 to Carrington's 1995 Annual
Report on Form 10-K).
10.32+ Revised and Restated Resignation Agreement
dated March 14, 1995, between Carrington Laboratories,
Inc., and Karl H. Meister (incorporated herein by
reference to Exhibit 10.69 to Carrington's 1995
Annual Report on Form 10-K).
10.33 Common Stock Purchase Warrant dated August 4,
1995, issued by Carrington Laboratories, Inc., to
Clifford T. Kalista. (incorporated herein by
reference to Exhibit 10.70 to Carrington's 1995
Annual Report on Form 10-K).
10.34 Form of Stock Purchase Agreement dated April 5, 1995
between Carrington Laboratories, Inc., and persons
named in Annex I thereto (incorporated herein by
reference to Exhibit 2.1 to Carrington's Registration
Statement 33-60833 on Form S-3).
10.35 Form of Registration Rights Agreement dated
June 20, 1995 between Carrington Laboratories, Inc.,
and persons named in Annex I thereto (incorporated herein
by reference to Exhibit 2.2 to Carrington's
Registration Statement 33-60833 on Form S-3).
10.36 Supply and Distribution Agreement between
Farnam Companies, Inc., and Carrington
Laboratories, Inc., dated March 22, 1996.
(incorporated herein by reference to Exhibit
10.76 to Carrington's 1995 Annual Report on
Form 10-K).
10.37 Placement Agent Agreement between Carrington Laboratories,
Inc., and First Granite Securities, Inc. (incorporated
herein by reference to Exhibit 10.1 to Carrington's
Current Report on Form 8-K dated October 21, 1996).
10.38 Indemnification Agreement between Carrington laboratories,
Inc., and First Granite Securities, Inc. (incorporated herein
by reference to Exhibit 10.2 to Carrington's Current Report
on Form 8-K dated October 21, 1996).
E - 6
Exhibit Sequentially
Number Exhibit Numbered Page
10.39 Joint Escrow Instructions from Carrington Laboratories, Inc.,
and accepted by Krieger & Prager, Esqs., as escrow agent
(incorporated herein by reference to Exhibit 10.3 to
Carrington's Current Report on Form 8-K dated
October 21, 1996).
10.40 Stock Purchase Agreement between Carrington Laboratories,
Inc., and each of the purchasers of shares of the
Registrant's Series E Convertible Preferred Stock
(incorporated herein by reference to Exhibit 10.4 to
Carrington's Current Report on Form 8-K dated
October 21, 1996).
10.41 Amendment to the Stock Purchase Agreement between
Carrington Laboratories, Inc., and each of the purchasers
of shares of Carrington's Series E Convertible Preferred
Stock, dated October 15, 1996 (incorporated herein by
reference to Exhibit 10.5 to Carrington's Current Report
on Form 8-K dated October 21, 1996).
10.42 Registration Right Agreement between Carrington
Laboratories, Inc., and each of the purchasers of shares
of Carrington's Series E Convertible Preferred Stock
(incorporated herein by reference to Exhibit 10.6 to
Carrington's Current Report on Form 8-K dated
October 21, 1996).
10.43 Distribution Agreement between Carrington
Laboratories, Inc., and Ching Hwa Pharmaceutical
Co., Ltd., dated March 1, 1996 (incorporated herein
by reference to Exhibit 10.1 to Carrington's First
Quarter 1996 Report on Form 10-Q).
10.44 Fourth Amendment to Credit Agreement and Term
Note between Carrington Laboratories, Inc., and
NationsBank of Texas, N.A., dated May 1, 1996
(incorporated herein by reference to Exhibit 10.2
to Carrington's First Quarter 1996 Report on Form 10-Q).
10.45 Assignment of Certificate of Deposit to
NationsBank of Texas, N.A., dated May 1, 1996
(incorporated herein by reference to Exhibit 10.3
to Carrington's First Quarter 1996 Report on Form 10-Q).
E - 7
Exhibit Sequentially
Number Exhibit Numbered Page
10.46 Release of Liens agreement between Carrington
Laboratories, Inc., and NationsBank of Texas,
N.A., dated May 1, 1996 (incorporated herein by reference
to Exhibit 10.4 to Carrington's First Quarter 1996
Report on Form 10-Q).
10.47+ Form of Nonqualified Stock Option Agreement for
Employees (incorporated herein by reference to
Exhibit 4.1 to Carrington's Second Quarter 1996
Report on Form 10-Q).
10.48+ Carrington Laboratories, Inc., 1995 Stock Option
Plan, As Amended and Restated effective March
27, 1996 (incorporated herein by reference to
Exhibit 4.2 to Carrington's Second Quarter 1996
Report on Form 10-Q).
10.49+ Form of Nonqualified Stock Option Agreement for
Nonemployee Directors (incorporated herein by
reference to Exhibit 4.3 to Carrington's Second
Quarter 1996 Report on Form 10-Q).
10.50+ Form of Incentive Stock Option Agreement for
Employees (incorporated herein by reference to
Exhibit 4.4 to Carrington's Second Quarter 1996
Report on Form 10-Q).
10.51 Sales Distribution Agreement between Faulding
Pharmaceuticals Laboratories and Carrington
Laboratories, Inc., dated September 30, 1996
(incorporated herein by reference to Exhibit 10.1
to Carrington's Third Quarter 1996 Report on Form 10-Q).
10.52 Sales Distribution Agreement between Trudell
Medical Marketing Limited and Carrington
Laboratories, Inc., dated may 15, 1996 (incorporated
herein by reference to Exhibit 10.2 to Carrington's Third
Quarter 1996 Report on Form 10-Q).
10.53 Clinical Research Agreement between ICON and
Carrington Laboratories, Inc., dated July 15, 1996
(incorporated herein by reference to Exhibit 10.3 to
Carrington's Third Quarter 1996 Report on Form
10-Q).
10.54* Sales Distribution Agreement between Suco
International Corp. and Carrington Laboratories,
Inc., dated December 1, 1996.
E - 8
Exhibit Sequentially
Number Exhibit Numbered Page
10.55* Sales Distribution Agreement between Recordati,
S.P.A., and Carrington Laboratories, Inc., and
Carrington Laboratories Belgium N.V., dated December
20, 1996.
10.56* Nonexclusive Distribution Agreement between
Polymedica Industries, Inc., and Carrington
Laboratories, Inc., dated November 15, 1996.
10.57* Sales Distribution Agreement between Gamida-
Medequip Ltd., and Carrington Laboratories,
Inc., dated December 24, 1996.
10.58* Sales Distribution Agreement between Gamida For
Life BV, and Carrington Laboratories, Inc., dated
December 24, 1996.
10.59* Sales Distribution Agreement between Darrow
Laboratorios S/A and Carrington Laboratories,
Inc., dated December 4, 1996.
10.60* Independent Sales Representative Agreement
between Vision Medical and Carrington
Laboratories, Inc., dated October 1, 1996.
10.61* Independent Sales Representative Agreement
between Think Medical, Inc., and Carrington
Laboratories, Inc., dated October 1, 1996.
10.62* Independent Sales Representative Agreement
between Meares Medical Sales Associates and
Carrington Laboratories, Inc., dated October
1, 1996.
10.63* Supply Agreement between Aloe Commodities
International, Inc., and Caraloe, Inc., dated
February 13, 1997.
10.64* Trademark License Agreement between Light
Resources Unlimited and Carrington Laboratories,
Inc., dated March 1, 1997.
10.65* Supply Agreement between Light Resources
Unlimited and Caraloe, Inc., dated february 13, 1997.
10.66* Sales Distribution Agreement between Penta
Farmaceutica, S.A., and Carrington Laboratories,
Inc., dated December 27, 1996.
10.67* Stock Subscription Offer of Aloe Commodities,
Inc., and Caraloe, Inc., dated October 30, 1996.
E - 9
Exhibit Sequentially
Number Exhibit Numbered Page
10.68* Modification Number Two to the Production
Contract dated February 13, 1995, between
Carrington Laboratories, Inc., and Oregon Freeze Dry,
Inc., listed as Exhibit 10.18, dated November 19, 1996.
10.69* Offer and Agreement of Sale and Purchase of
Convertible Preferred Series E Stock between
Holders' of Carrington Laboratories, Inc., Convertible
Preferred Series E Stock and Carrington
Laboratories, Inc., dated February 26, 1997.
10.70* Sales Distribution Agreement between Laboratorios PiSA
S.A. DE C.V. and Carrington Laboratories, Inc., dated
November 1, 1995.
10.71* Terminination Acknowledgement between China Academy of
Sciences and Carrington Laboratories, Inc., dated February
12, 1996, regarding the three agreements listed as Exhibits
10.23, 10.24 and 10.25.
10.72* Letter from Immucell Corporation to Carrington Laboratories
Inc., dated February 7, 1996 canceling the License Agreement
listed as Exhibit 10.16.
11.1* Computation of Net Income (Loss) Per Common and
Common Equivalent Share.
16.1* Letter from Arthur Andersen LLP to the
Securities and Exchange Commission.
21.1* Subsidiaries of Carrington.
23.1* Consent of Arthur Andersen LLP
27.1* Financial Data Schedule
* Filed herewith.
+ Management contract or compensatory plan.
E - 10