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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, 1997
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) Preferred Share Purchase Rights
(Title of class) (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 common stock held by non-
affiliates of the Registrant on March 23, 1998, was $38,038,379.
(This figure was computed on the basis of the closing price of such
stock on the NASDAQ National Market on March 23, 1998 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: 9,315,236 shares of Common Stock, par value $.01 per share,
were outstanding on March 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting
of shareholders to be held on May 14, 1998 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
Thirteen 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, consumer and bulk
products through its consumer products subsidiary, Caraloe, Inc., and
veterinary medical devices and pharmaceuticals through its Veterinary
M e dical Division, which relies on third party licensees for
distribution of its products. 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 offers 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 telemarketing
efforts and a National Accounts Coordinator.
The Company currently has 56 employees and independent
representatives engaged in the sales and marketing of the Company s
products. The Company's field sales force currently employs 28 sales
representatives, each assigned to a specific geographic area in the
United States, five regional sales managers and a representative in
Puerto Rico. The Company also uses eight independent sales companies
employing 14 sales representatives to sell its products on a
commission basis. In addition to this field sales force, the Wound
and Skin Care Division employs two telemarketers who focus on
alternative care facilities and the home health care market, one
person in its National Accounts Department and five employees in
customer service and executive management.
The Company's products are primarily sold through a network of
distributors. Three of the Company's largest distributors in the
hospital market are McKesson General ("McKesson"), Owens & Minor and
Bergen Brunswig. During fiscal 1995, 1996 and 1997, sales of wound
and skin care products to McKesson represented 7%, 9%, and 12%,
respectively, of the Company's total net sales. Sales to Owens &
Minor represented 14%, 11%, and 11%, respectively, of total net sales
during the same periods. Sales to Bergen Brunswig represented 10%,
12%, and 9%, respectively, of total net sales during the same
periods.
The Company currently has 18 distribution and licensing agreements
for the promotion and sale of its products. In November 1995, the
Company signed a Sales Distribution Agreement with Laboratorios PiSA
S.A. de C.V., 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 Company 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 September 3, 1996, the Company signed an exclusive contract with
Faulding Pharmaceuticals to market the Company's wound care products
in Australia and New Zealand. On January 12, 1998, Faulding and
Carrington executed Amendment Number One to the existing Distribution
Agreement between the parties. This Amendment adds the following
countries to the "Territories" covered under that Agreement:
Thailand, Vietnam, Singapore, the Philippines, Malaysia and Myanmar.
Pursuant to the Amendment, various terms and conditions associated
with the launch of products for each country must be agreed upon on
or before June 30, 1998.
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 Laboratories 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 in the Company's name 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 applied for and was
granted, in February 1998, the CE mark, a quality certification
recognized by members of the European Economic Community and certain
other countries.
In 1997, sales of the Company related to the above mentioned
international agreements were less than $150,000. The Company
presently estimates the expected sales associated with these
agreements in 1998 to be between $500,000 and $1,000,000.
Consumer Health
Caraloe, Inc., a 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
bulk raw ingredients to manufacturers who desire the highest quality
aloe extracts for their finished products. The second goal is to
develop the contract manufacturing business by providing high quality
products for nutritional and skin care markets, and the third is to
expand the Aloe Nutritional brand and establish it as a leading brand
in the health food market.
In February 1996, Caraloe signed an agreement with Mannatech granting
it an exclusive license in the United States for Manapol[R] powder.
This agreement, including the grant of the exclusive license, was
terminated by Mannatech effective March 31, 1997, and Caraloe began
to market Manapol[R] powder to other third parties as well as use it
in Caraloe's products. In August 1997, Caraloe signed a new
nonexclusive supply agreement with Mannatech, Inc., to supply bulk
Manapol[R] powder. This agreement is effective through July 2000 and
contains monthly minimum purchase requirements. During 1995, 1996
and 1997, sales of bulk Manapol[R] powder to Mannatech, Inc.
represented 10%, 15% and 16%, respectively, of the Company's total
consolidated net sales.
A supply agreement for bulk Manapol[R] powder was signed in
December 1997 with Met-Trim, Inc. The agreement contains minimum
quarterly purchase requirements.
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 December 1997, Caraloe made an additional
investment in ACI of $400,000. Carrington owns less than 10% of the
total outstanding shares of ACI.
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 bulk AVMP[R][R] Powder and/or bulk 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][R] Powder and Manapol[R] Gold[TM] Powder in connection with
the advertising and sale of Product to the targeted group. Sales to
LRU in 1997 under this agreement were $167,000.
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. On March 1, 1997, Fort Dodge Animal
Health ("Fort Dodge"), a division of American Home Products
Corporation, acquired the business and assets of Solvay, including
the License Agreement dated September 20, 1990 and an Addendum
thereto between Carrington and Solvay granting Solvay an exclusive
world-wide field of use license to use and sell acemannan as a
component/adjuvant to enhance the performance of poultry vaccines.
Fort Dodge notified Carrington in the summer of 1997 that, as
successor in interest to Solvay, it intended to terminate the License
Agreement. Discussions concerning that termination have been
ongoing, and the parties have agreed in principle to terminate the
License Agreement in 1998.
In March 1996, the Company signed an agreement with Farnam Companies,
Inc., a leading veterinary marketing company, to promote and sell the
Carravet[R][TM] product line, including Acemannan Immunostimulant.
The Carravet[R][TM] product line currently consists of nine products.
Research and Development
General
Carrington has developed a proprietary process for extracting and
purifying a material that has been designated as bulk pharmaceutical
mannan ("BPM"). This material is a natural product mixture which
contains a high percentage of complex carbohydrate. The Company
intends to seek approval of the Food and Drug Administration (the
"FDA") and other regulatory agencies to sell drugs and medical
devices derived from BPM 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 expended approximately $5,370,000, $5,927,000, and
$3,006,000 on research and development in fiscal 1995, 1996, and
1997, respectively. The Company has adopted a focused approach to
its research and development efforts. As the result of this keen
focus on specific goals, the Company estimates that in fiscal 1998 it
will spend essentially the same on preclinical research and
development as in 1997.
The Company initiated a program in 1996 which continued through 1997
to restructure research and development to meet the challenges and
demands for drug development in the 21st century. This entailed
establishing a strong nucleus or infrastructure for chemistry, assay
development and formulation development with outsourcing capabilities
for high thoughput drug screening, and preclinical and clinical drug
and device development. This approach allows the Company to maximize
its opportunities in a timely and cost effective manner. Currently,
the Company's research staff comprises eight full-time employees.
Dr. Robert A. Fildes, a director of the Company, has been serving as
part-time, interim Executive Vice President, Research and Development
since the resignation of Dr. David G. Shand as the Company s
permanent, full-time officer in charge of research and development on
September 30. 1997. The Company is currently seeking a full-time
successor to Dr. Shand to lead the Company's research and development
efforts.
Preclinical Research
The Company's main preclinical research and development objective for
1997 was to assess the viability of the ulcerative colitis program
following the reported Phase III trial failure of Aliminase[TM]
capsules to demonstrate efficacy. After extensive internal and
external audits of the clinical trial and extensive preclinical
testing, a series of animal studies were conducted to assess the
activity of BPM as the drug substance and the previous formulations
used. BPM demonstrated a dose-dependent response in these studies,
and based on these results, a new drug product formulation project
was initiated for Aliminase[TM]. A decision regarding new clinical
trials for ulcerative colitis will be made by mid-1998.
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
and tumor necrosis factor alpha, which regulate other cells.
Interleukin-1 stimulates fibroblasts, which are essential to wound
healing. 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 as shown in animal models of wound healing and
in inflammation of the lung, colon, joint and ear. 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 sponsors a research and development laboratory at Texas
A&M in association with the College of Veterinary Medicine 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.
Filtered BPM, 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 animal
studies conducted at Texas A&M University in 1988 and 1989 indicated
that a single intraperitoneal dose caused significant tumor reduction
in a statistically significant percentage of animals with highly
malignant tumors. 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 to surgery in
the treatment of canine and feline fibrosarcoma, a form of soft
tissue cancer, under the name Acemannan Immunostimulant. The product
was conditionally approved based on safety and efficacy studies. The
Company continues to work on developing a suitable cost-effective
potency assay that will meet USDA requirements for the purpose of
removal of the conditional status. 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.
An extensive series of animal studies were initiated in 1997 to
assess the direct and adjunct effects of CarraVex[TM] and Acemannan
Immunostimulant. The purpose of these studies was to identify a
suitable model to evaluate new product formulations (see "Human
Studies" below) and to evaluate an in vitro potency test developed to
meet USDA requirements. These studies are planned for completion in
1998.
Human Studies
Evaluation of Aliminase[TM] (formerly CARN 1000) Oral Capsules in the
Treatment of Ulcerative Colitis. In late 1996, the Company placed on
hold its testing of Aliminase[TM] oral capsules for the treatment of
ulcerative colitis, pending an in-depth evaluation of product
formulation, dosage form, timing and frequency of dosing, and method
of administration. (See "Preclinical Research" above and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.)
Evaluation of CarraVex[TM] injectable (formerly CARN 750) in the
Treatment of Solid Tumors in Humans. The Company believes that
CarraVex[TM] injectable 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 and continued until mid-1997. Eighteen patients
have completed the study with no safety concerns noted. The product
required filtration at the bedside which the Company believes is not
the best delivery approach for CarraVex[TM]. A program for improving
the formulation has been initiated (see "Preclinical Research"
above), and a decision on further clinical trials will be made by the
end of 1998.
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
in an animal model. 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. These studies led to the
development of RadiaCare[TM] Gel for the management 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
managing radiation dermatitis in humans. The study was completed in
the fall of 1997, and statistical analysis is currently underway.
The results of this study should be known by the end of 1998.
Evaluation of Carrasyn[R] Freeze-Dried Gel (CarraSorb[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 sponsoring a small pilot
clinical study at the University of Wales to evaluate the effect of
CarraSorb[TM] M on wound macrophages. The results of this study
should be known in 1999.
Evaluation of RadiaCare[TM] Oral Wound Rinse. In March 1997, the
FDA cleared Carrington to market RadiaCare[TM] Oral Wound Rinse for
the management and relief of pain associated with all types of oral
wounds, including mucositis. The Company is sponsoring individual
case studies and co-sponsoring a 50 patient controlled trial in
radiation-induced oral ulcers. Results will be known in 1999.
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
POTENTIAL INDICATION MARKET APPLICATIONS STATUS
Topical
Dressings Pressure and Vascular Ulcers Marketed
Cleansers Wounds Marketed
Anti-fungal Candida Marketed
Hydrocolloids Wounds Marketed
Alginates Wounds Marketed
Oral
Human Anti-inflammatory Ulcerative Colitis On hold
Pain Mucositis Marketed
Injectable Human Melanoma, Breast, Prostate, Phase I
Anticancer Colon, Hypernephroma, and Clinical
Soft Tissue Sarcoma Trial
Completed
Veterinary
Anticancer Fibrosarcoma Marketed
Dental
Pain reduction Aphthous Ulcers, Oral Wounds Marketed
Vaccine Adjuvant--
Veterinary
Poultry Vaccines Marek's Disease Marketed
Licensing Strategy
The Company expects that prescription pharmaceutical products
containing certain defined drug substances will require a substantial
degree of development effort and expense. Before governmental
approval to market of any such product is obtained, the Company may
license these products 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 or region.
Similarly, the Company intends to license third parties to market
products containing defined chemical entities 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 products 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 L. Through patented processes, the Company produces bulk
pharmaceutical and injectable mannans and freeze-dried aloe extract
from the central portion of the Aloe vera L 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's current need for
leaves exceeds the supply of harvestable leaves from the Company s
farm, requiring the purchase of leaves from other sources in Central
America at considerably higher prices. Additional quantities of
harvestable leaves from the Company's farm will become available in
the second quarter of 1998, but will not completely eliminate the
Company's dependence on other sources of leaves. Due to economic and
political instability in the Central American region, the supply of
imported leaves cannot be guaranteed. The Company plans to plant
additional acreage or secure local contract production of leaves as
the demand for Aloe vera L leaves increases.
Manufacturing
During the last quarter of 1994 and the first three quarters of 1995,
the Company moved its wound- and skin-care product manufacturing
operations from a leased facility in Dallas, Texas to the Company s
headquarters in Irving, Texas. In connection with this move, the
Company upgraded and expanded its manufacturing capacity by
installing higher capacity equipment and upgraded its capabilities to
produce injectable-grade pharmaceutical products. The Company
believes that the 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, hydrocolloids, 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 L 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 and bulk material contracts for the foreseeable
future. Finished oral and injectable dosage forms will be produced
by outside vendors until in-house production becomes economically
justified.
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 (in areas including
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 both in its present wound care market and in
markets associated with products the Company currently has under
development.
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 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, and how both the
drug substance and drug product will be manufactured and controlled.
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 IDE and PLA 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.
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's subsidiary Caraloe, products are also
subject to regulation by one or more federal agencies, including the
FDA, the Federal Trade Commission (the "FTC"), the United States
Department of Agriculture and the Environmental Protection Agency.
These activities are also regulated by various agencies of the
states, localities and foreign countries to which Caraloe's products
are distributed and in which Caraloe's products are sold. The FDA,
in particular, regulates the formulation, manufacture and labeling of
vitamin and other nutritional supplements.
On October 25, 1994, the President signed into law the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"). This new law
revised the provisions of the Federal Food, Drug, and Cosmetic Act
(the "FFDC Act") concerning the composition and labeling of dietary
supplements and, in the judgement of the Company, is favorable to the
dietary supplement industry. The legislation creates a new statutory
class of "dietary supplement." This new class includes vitamins,
minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with
certain limitations, dietary ingredients on the market before October
15, 1994. A dietary supplement which contains a new dietary
ingredient, one not on market before October 15, 1994, will require
evidence of a history of use or other evidence of safety establishing
that it will reasonably be expected to be safe. The majority of the
products marketed by Caraloe are classified as dietary supplements
under the FFDC Act.
Both foods and dietary supplements are subject to the Nutrition
Labeling and Education Act of 1990 (the "NLEA"), which prohibits the
use of any health claim for foods, including dietary supplements,
unless the health claim is supported by significant scientific
agreement and is either pre-approved by the FDA or the subject of
substantial government scientific publications and a notification to
the FDA. To date, the FDA has approved the use of only limited
health claims for dietary supplements. However, among other things,
the DSHEA amends, for dietary supplements, the NLEA by providing that
"statements of nutritional support" may be used in labeling for
dietary supplements without FDA preapproval if certain requirements,
including prominent disclosure on the label of the lack of FDA review
of the relevant statement, possession by the marketer of
substantiating evidence for the statement and post-use notification
to the FDA, are met. Such statements may describe how particular
nutritional supplements affect the structure, function or general
well-being of the body (e.g. "promotes your cardiovascular health").
The FDA issued final dietary supplement labeling regulations in 1997
that may require Caraloe to revise most of its product labels by
1999. The regulations also currently require Caraloe to submit
notification to the FDA of all "statements of nutritional support," a
process that Caraloe has not fully completed.
Advertising and label claims for dietary supplements and conventional
foods have been regulated by state and federal authorities under a
number of disparate regulatory schemes. There can be no assurance
that a state will not interpret claims presumptively valid under
federal law as illegal under that state's regulations, or that future
FDA regulations or FTC decisions will not restrict the permissible
scope of such claims.
Governmental regulations in foreign countries where Caraloe plans to
commence or expand sales may prevent or delay entry into the market
or prevent or delay the introduction, or require the reformulation,
of certain of Caraloe's products. Compliance with such foreign
governmental regulations is generally the responsibility of Caraloe's
distributors for those countries. These distributors are independent
contractors over whom the Company has limited control.
As a result of Caraloe's efforts to comply with applicable statutes
and regulations, Caraloe has from time to time reformulated,
eliminated or relabeled certain of its products and revised certain
provisions of its sales and marketing program. Caraloe cannot
predict the nature of any future laws, regulations, interpretations
or applications, nor can it determine what effect additional
governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could,
however, require the reformulation of certain products to meet new
standards, the recall or discontinuance of certain products not
c a pable of reformulating, additional record keeping, expanded
documentation of the properties of certain products, expanded or
different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the
Company's results of operations and financial condition.
Compliance with the provisions of national, state and local
environmental laws and regulations has not had a material adverse
effect upon the capital expenditures, earnings, financial position,
liquidity or competitive position of the Company. See also "Business
-- Legal Matters" and "-- Regulatory Matters."
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") was 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 has
filed a number of divisional applications to these patents, each
dealing with specific uses of acetylated mannan derivatives. Patent
Cooperation Treaty applications based on the parent United States
applications have been filed designating a number of foreign
countries where the applications are pending. 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 where
the applications are pending.
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). A
Patent Treaty application based on the parent United States
application has been filed designating a number of foreign countries
where the applications are pending.
The Company has obtained a patent in Taiwan related to the uses of a
denture adhesive containing aloe extract (Taiwan Patent No. 89390
issued on August 21, 1997) and also a patent in the United States
relating to methods for the prevention and treatment of infections in
animals (U.S. Patent No. 5,703,060 issued on December 30, 1997).
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 L
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 L 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, on 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 mannans. A selected series of
domestic and foreign trademark applications exists for the marks
Manapol[R], Carrisyn[R] and Carrasyn[R]. Further, the Company has
registered the trademark AVMP[R] and the trade name Carrington[R] in
the United States. The Company believes that its trademarks and
trade names are valuable assets.
Employees
As of March 5, 1998, the Company employed 278 persons, of whom 22
were engaged in the operation and maintenance of its Irving
processing plant, 160 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, 86 were located in
Texas, 160 in Costa Rica and one in Puerto Rico. In addition, 31
sales personnel were located in 25 other states. The Company
considers relations with its employees to be good. The employees are
not represented by a labor union.
Financing
In November 1997, the Company entered into a financing arrangement
with Comerica Bank-Texas ("Comerica"). The agreement was composed of
a $3,000,000 line of credit structured as a demand note without
expiration with an interest rate equal to the Comerica prime rate.
The line of credit is collateralized by the Company's accounts
receivable and inventory. As of December 31, 1997 there was no
outstanding balance owed to Comerica under the terms of the financing
agreement.
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. 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
for the production of injectable dosage forms of Acemannan
Immunostimulant.
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. 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. On March 3, 1998, the Judge in this matter signed an
Order of Nonsuit that dismissed the case with prejudice.
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. In a letter dated
March 21, 1997, the EEOC Dallas District Office notified the Company
that it had terminated its investigation of the Company under the Age
Discrimination in Employment Act.
On October 8, 1996, Allison Kindt ("Kindt"), a former employee of the
Company, filed a Charge of Discrimination against the Company with
the EEOC, Charge No. 141970008, alleging sex discrimination and
retaliation in violation of Title VII of the Civil Rights Act of
1964, as amended. On March 14, 1997 the EEOC, Raleigh NC office,
notified the Company that it had terminated its investigation of the
Company under the Civil Rights Act of 1964, as amended.
On June 12, 1997, Kindt filed a lawsuit styled Allison Kindt v.
Carrington Laboratories, Inc., Civil Action No. 5-97-CV-469-BO(1), in
the United States District Court for the Eastern District of North
Carolina, Western Division, alleging sex discrimination and
retaliation and employment action in violation of public policy
against sex discrimination in connection with her employment with the
Company. Kindt seeks to recover such additional compensation and
other benefits of employment and back pay as she would have received
had her employment not been terminated. The Company has responded to
these allegations and is vigorously defending this action.
On February 3, 1997, Megan Kent ("Kent"), a former employee of the
Company, filed a civil action styled Megan Kent v. Carrington
Laboratories, Inc. (Docket No. DC-681-97) with the Superior Court of
New Jersey Law Division, County of Burlington, Special Civil Part
alleging certain violations of the New Jersey statutes, 2A:61A-1, et.
seq., entitled "Sales Representatives Rights". On March 12, 1997,
the Company agreed to settle the matter by means of an $8,000 payment
to Kent, and the Judge signed a Stipulation of Settlement and Note of
Dismissal with Prejudice.
In November 1997, the Company received a letter from the Texas
Department of Licensing and Regulation (the "TDLR") alleging that the
Company's Walnut Hill Facility in Irving, Texas had been inspected
and found in non-compliance with provisions of the Texas
Architectural Barriers Act (the "Act") and regulations issued
thereunder. The Act and the related regulations contain design
requirements to ensure that disabled persons can make use of public
facilities. An inspection report describing the alleged deficiencies
was enclosed with the letter. The letter stated that the Walnut Hill
Facility was required to be brought into compliance and written
verification furnished to the TDLR within 30 days, and that the
Company should contact the TDLR if compliance could not be
accomplished within that time. The letter also stated that failure
to respond to the letter would result in the matter being referred to
the TDLR's Enforcement Division, which could result in a maximum
administrative penalty of $1,000 per violation per day.
The Company responded to that letter through the architects that the
Company had engaged to design and supervise the work on the Walnut
Hill Facility when the Company moved its wound and skin care product
manufacturing operations to that location in 1995. The response from
the architects to the TDLR proposed that the Company make certain
changes, suggested that a number of the claimed deficiencies do not
constitute violations of the regulations, and sought variances for
certain items. In mid-March 1998, the Company received a letter from
the TDLR stating that the matter would be turned over to its
Enforcement Division unless the Company either informed the TDLR that
the Walnut Hill Facility was in compliance with the Act and related
regulations or specified a date by which the Company would comply
with a plan of action. In the Company's opinion, this letter
indicated that the TDLR did not receive the architects response, so
the Company promptly sent another copy of that response to the TDLR.
As far as the Company is aware, the TDLR has not turned this matter
over to its Enforcement Division or made any claims for penalties to
date. Until the Company receives a response to the proposal made by
its architects for resolving the alleged deficiencies, the Company is
unable to estimate the cost of resolving this matter.
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 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
Fiscal 1997 High Low
----------- ---------- ---------
First Quarter $ 8 1/8 $ 5 1/4
Second Quarter 8 3/4 4 11/16
Third Quarter 6 1/2 4 13/16
Fourth Quarter 6 5/16 3 1/2
At March 23, 1998, there were 949 holders of record (including
brokerage firms and other nominees) of Common Stock.
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, 1997, is derived from the consolidated financial statements of
the Company, of which the years 1993 through 1996, and the month of
December 1994, have been audited by Arthur Andersen LLP, independent
public accountants, and the year 1997 has been audited by Ernst &
Young LLP, independent public accountants. The earnings per share
amounts prior to 1997 have been restated as required to comply with
Statement of Financial Accounting Standards No. 128, Earnings Per
Share. For further discussion of earnings per share and the impact
of Statement No. 128, see the notes to the consolidated financial
statements beginning on page F-6.
Years Ended November 30, 1993, and 1994,
Month Ended December 31, 1994 and Years
Ended December 31, 1995, 1996 and 1997
(Dollars and numbers of shares in November 30 December 31
thousands except per share amounts) 1993 1994 1994 1995 1996 1997
Operations Statement Information:
Net Sales $21,184 $ 25,430 $ 1,781 $ 24,374 $ 21,286 $ 23,559
Cost and expenses:
Cost of sales 5,289 6,415 516 7,944 10,327 9,530
Selling, general and
administrative 9,371 11,968 985 12,442 10,771 10,814
Research and development 5,397 5,334 327 5,370 5,927 3,006
Interest expense (income), net 218 133 23 115 (304) (37)
Income (loss) before income taxes 909 1,580 (70) (1,497) (5,435) 246
Provision for income taxes 104 159 - 131 88 20
Net income (loss) $ 805 $ 1,421 $ (70) $ (1,628) $(5,523) $ 226
Net income (loss) per common
share - basic and diluted (1) $ .09 $ .18 $ (.01) $ (.22) $ (.74) $ .02
Weighted average shares
used in per share computations 7,324 7,341 7,344 7,933 8,798 8,953
BALANCE SHEET INFORMATION:
Working capital $ 5,292 $ 4,720 $ 4,472 $ 9,095 $ 13,910 $ 9,484
Total assets 16,305 19,797 18,899 27,934 31,202 26,163
Long-term debt,
net of current portion 2,168 2,035 1,997 88 46 10
Total shareholders investment $11,041 $ 12,509 $ 12,439 $ 22,399 $ 27,757 $ 22,826
(1) For a description of the calculation of basic and diluted net income (loss) per share, see Note 12 to Consolidated
Financial Statements. All net income (loss) per share amounts presented conform to the requirements of Financial
Accounting Standards Board Statement No. 128, Earnings Per Share.
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 and
bulk ingredients through its consumer products subsidiary, Caraloe,
Inc. (see Note Thirteen to the consolidated financial statements 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, 1997 and 1996, the Company held cash and cash
equivalents of $4,023,000 and $11,406,000, respectively. The
decrease in cash of $7,383,000 was largely attributable to the
repurchase of 100% of the Series E shares outstanding (see Note Seven
to the consolidated financial statements), which totalled $7,785,000.
Also contributing to the decrease in cash was the payment of
approximately $150,000 in cancellation fees related to the second
Phase III clinical study for Aliminase[TM] oral capsules (described
below). Additionally, the Company has invested in inventory to
support the launch of several new product lines during 1997
(described below) and to support sales of bulk products to Mannatech,
Inc., and Aloe Commodities International, Inc. Receivables from
these two customers totaled $781,000 and $591,000, respectively, as
of December 31, 1997. As of March 13, 1998, $1,107,000 of the above
balances has been collected. These decreases in cash were partially
offset by private placement of common stock (see Note Eight to the
consolidated financial statements) which was completed on June 20,
1997. -Total proceeds, net of issuance costs, were $2,454,000.
While wound care sales grew at a rate of 4% to $17,990,000 in 1997,
the consumer products and bulk ingredients sales through Caraloe,
Inc. grew by 47% to $5,444,000. Much of this growth was the result
of the decision to significantly grow the bulk ingredients segment of
the business, where sales grew from $3,328,000 in 1996 to $4,683,000
in 1997. This had a direct impact on the utilization of the Costa
Rica plant (discussed below) as well as on inventory levels both in
Costa Rica and in Irving, Texas, where bulk ingredient inventories
grew by $308,000 and $154,000, respectively, during 1997. In
addition, finished goods inventory grew $501,000 as initial
quantities of products launched in 1997 were produced or brought in
from outside manufacturers.
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 values in the Company based on historical
production levels and future capacity requirements needed to produce
the Company's drug Aliminase[TM], then under initial Phase III
clinical trials (see discussion below). In late October 1996, the
Company received the results of the initial Phase III clinical trial
for the testing of Aliminase[TM] oral capsules, which indicated no
statistically significant differences that would support a conclusion
that Aliminase[TM] oral capsules provide a therapeutic effect in the
treatment of ulcerative colitis. As a result, the Company terminated
the second large scale clinical trial and placed further testing of
Aliminase[TM] oral capsules on hold.
These results triggered a new assessment of the recoverability of the
costs of the Costa Rica plant's assets using the methodology provided
by SFAS 121 in the fourth quarter of 1996. The net book value of the
Costa Rica Plant assets as of 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 indicated
there was no impairment of value under SFAS 121.
In addition, the increase in bulk ingredients sales discussed above
prompted the Company to announce in December 1997 that it was
increasing production at the Costa Rica plant in 1998 through the
installation of a high speed filling line for health maintenance
drinks and that it was planning for the acquisition of additional
acreage to be used for production of Aloe Vera L. As a result of the
increased production levels, the Company believes that the risk of a
future impairment of value for the Costa Rica plant under SFAS 121
has been greatly diminished. 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 6, 1998, the Company had no material capital commitments
other than its leases and agreements with suppliers. In February
1995, the Company entered into a supply agreement with its supplier
of freeze-dried products. The agreement required that the Company
establish a letter of credit equal to 60% of the minimum purchase
commitment of $2,500,000, but allowed for the amount of the letter of
credit to be reduced by 60% of the purchases made under the
agreement. In July 1997, the letter of credit was reduced under this
provision of the agreement to $1,250,000. 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 early phase of
marketing. The Company had approximately $340,000 of CarraSorb[TM] M
and Carrington[TM] (Aphthous Ulcer) Patch inventory on hand as of
December 31, 1997.
The supply agreement also requires the Company to make minimum
monthly purchases of $30,000. In February 1998, the supply agreement
was amended to allow for unmet monthly minimum purchase amounts to be
met by prepayments, to be applied to future purchases under the
agreement, which allows the Company to keep inventory at levels
appropriate for sales demand. 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 aggregate minimum purchase requirement. As of
March 6, 1998, the Company has purchased products totaling
approximately $515,000 from this supplier. The Company is in full
compliance with the agreement and, as of March 6, 1998, 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 in
November 1995, and in July 1997 and October 1997, additional payments
of $166,000 and $167,000, respectively, were paid to this supplier
upon delivery of the Carrasmart[TM] Hydrocolloid, a new product
launched in the third quarter of 1997. These payments resulted in
increasing other assets of the Company. As of December 31, 1997, the
net book value of this agreement was $710,000. Additional payments
totaling $167,000 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. In
1997, the Company began efforts to reformulate Aliminase[TM] into a
reconstitutable powder form. The reformulation was completed, and
the Company began collecting sufficient data to submit to the FDA for
permission to conduct a new Phase III clinical study for
Aliminase[TM]. As of March 6, 1998 the Company has not yet met with
the FDA on this matter.
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 $295,000 had been expensed as of
December 31, 1997. Expenses totaling $94,000 were recorded in 1997.
No expenses have been incurred in the first quarter of 1998.
In October 1996, the Company completed a $6,600,000 financing
involving the private placement of Series E Convertible Preferred
Stock (the "Series E Shares"). At that time, plans called for much
of the proceeds from this sale to be used to continue Carrington s
clinical research programs (see Note Seven 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 had 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 repurchase the Series E Shares (see Note Seven to the
consolidated financial statements). On March 4, 1997, the Company
completed a repurchase of 50% of the Series E Shares for a premium of
13% over the original purchase. On May 21, 1997 the Company
repurchased the remaining Series E Shares from the Series E
shareholders for a total cash purchase price of approximately
$3,852,000. For both transactions, amounts paid to preferred
shareholders in excess of par totaled $70,000 more than the embedded
deemed dividend recognized in 1996. This additional deemed dividend
was used in the earnings per share calculation in 1997 to reduce net
income available to common shareholders.
In November 1997, the Company entered into an agreement with Comerica
Bank-Texas for a $3,000,000 line of credit, secured by accounts
receivable and inventory. This credit facility will be used for
operating needs, as required, and to secure the reissuance of the
letter of credit described above. This will result in freeing an
additional $1,250,000 in operating funds, as the certificate of
deposit currently serving as collateral will no longer be required.
The Company believes that its available cash resources 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 1997 Compared to Fiscal 1996
Net sales were $23,559,000 in 1997, compared with $21,286,000 in
1996. This increase of $2,273,000, or 10.7%, resulted from an
increase of $1,750,000, or 47.4%, in sales of Caraloe, Inc., the
Company's consumer products subsidiary, and an increase of $688,000,
or 4.0%, in sales of the Company's wound and skin care products.
Total sales of the Company's wound and skin care products in 1997
were $17,990,000 as compared to $17,302,000 in 1996, an increase of
$688,000, or 4%. New products introduced in 1997 accounted for
$682,000 in wound and skin care sales during 1997.
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). These changes
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%. 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 1996 and nine new wound care product types in 1997.
Caraloe's sales increased from $3,694,000 to $5,444,000, or 47.4%.
Caraloe sales to Mannatech increased from $3,273,000 to $3,547,000.
Of the 1997 sales, $4,102,000 was related to the sale of bulk
Manapol[R] powder. The supply agreement in effect during 1996
provided Mannatech with an exclusive license for the Manapol[R]
trademark worldwide and contained a provision for termination of the
agreement upon 90 days advance notice. Caraloe was informed by
Mannatech in January 1997 that the supply agreement would be
terminated on March 31, 1997. As the supply agreement between
Mannatech and Caraloe was terminated, the exclusive license agreement
for the Manapol[R] trade mark also terminated on March 31, 1997.
Caraloe was then able to sell Manapol[R] powder or license the
trademark to other third parties as well as use it in Caraloe s
products. In August 1997, Caraloe entered into new licensing and
supply agreements with Mannatech granting a non-exclusive license for
the use of the Manapol[R] trademark for a three year period.
Sales of the Company's veterinary products decreased from $283,000 to
$125,000. 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,
including the introduction of the Company's products under Farnam's
private label. In 1997, Farnam's sales of the Company's products
were negatively impacted by the backorder of Acemannan
Immunostimulant. Production should recommence on schedule in 1998.
Farnam has increased its sales force to improve the market share of
the private labeled products.
Cost of sales decreased from $10,327,000 to $9,530,000, or 7.7%. As
a percentage of sales, cost of sales decreased from 42.2%, after
adjusting for period cost write-offs (discussed below), to 40.5%.
The decrease in cost of goods sold is largely attributable to volume-
related manufacturing efficiencies realized in Costa Rica due to the
increased Caraloe Manapol[R] sales. The benefits of these
manufacturing efficiencies were partially offset by the lower profit
margins earned on Manapol[R] as compared to wound care products.
Cost of goods sold in 1996 included $1,396,000 of additional expenses
which consisted of a $630,000 inventory valuation decrease on June
30, 1996, as described below, and period costs of $766,000. The
period costs were related to the annual shutdown of the facility in
Costa Rica for routine maintenance and inventory reduction programs.
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 represented 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 1996 as a period cost and was
included in cost of sales.
Selling, general and administrative ("SG&A") expenses increased to
$10,814,000 from $10,771,000, or 0.4%. Partially offsetting the
increase was approximately $242,000 in one-time charges incurred in
1996 which were not incurred in 1997. These one-time charges
included 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 modest
size of the increase in SG&A expenses were the ongoing benefits
received from cost reduction programs put in place in 1996 and the
restructuring of the sales force, also put in place in 1996, which
were continued in 1997.
Research and development ("R&D") expenses decreased to $3,006,000
from $5,927,000, or 49.3%. This decrease was the result of
discontinuing the Phase III clinical program for the testing of
Aliminase[TM] oral capsules for the treatment of acute flare-ups of
ulcerative colitis. The first clinical study under this program was
initiated in the third quarter of 1995 and 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. 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 $317,000 of
expenses for this program was incurred in 1997.
Net interest income of $36,000 was realized in 1997, versus $304,000
in 1996, due to having less excess cash to invest as well as the
repurchase of the remainder of the Series E Preferred Stock issue in
May 1997.
Net income for 1997 was $226,000, versus a net loss of $5,523,000 for
1996. This change is a result of increased volume in Caraloe, Inc.
sales, increased production volumes in Costa Rica resulting in the
realization of manufacturing efficiencies and the full absorption of
production, and decreased research and development expenditures
related to the cancellation of the second Phase III ulcerative
colitis study. Assuming dilution, net income per share was $.02 in
1997, compared to a loss per share of $.74 in 1996.
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 12.7%, 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.
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. 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.
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 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.
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, 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.
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.
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
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, and approximately
$150,000 in cancellation fees were also recorded in the third quarter
of 1996 after this clinical trial was canceled. 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 R&D expenditures related to the Phase III ulcerative
colitis study and the ongoing Phase I cancer study. Loss per share
was $.74 in 1996, compared to a loss per share of $.22 in 1995. The
loss per share available to common shareholders in 1996 includes the
recognition of a $986,000, or $.11 per share, beneficial conversion
feature of the Company's Series E convertible preferred stock,
accounted for as a preferred dividend in the calculation of loss per
share for the year ended December 31, 1996.
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 initiate, continue or complete clinical and
other research programs, to vigorously defend the legal proceedings
described in this report, 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, that one or more of the customers that
the Company expects to purchase significant quantities of products
from the Company or Caraloe may fail to do so, that competitive
pressures may require the Company to lower the prices of or increase
the discounts on its products, and that the Company may be unable to
produce or obtain, or may have to pay excessive prices for, the raw
materials or products it needs.
All forward-looking statements in this report are expressly qualified
in their entirety by the cautionary statements in the two immediately
preceding paragraphs.
Year 2000 Issues
During 1997, the Company began an investigation of computer systems
used in the activities of the business to process data and
information to determine the exposure the Company has to software
problems arising from the year 2000 issue. The Company surveyed its
business, scientific and network systems and discovered numerous
software programs which had not been updated or corrected to address
the year 2000. In all cases, software vendors were contacted and the
scope and nature of the problem was discussed. For most of these
cases, program fixes or version upgrades were obtained, installed and
tested to insure that the matter was remedied. In one case, the
Company has experienced some difficulty with a program that has
already been updated. In this case, the software vendor has been
contacted and is investigating the matter. As of December 31, 1997,
there remained two minor programs to be updated. The Company expects
that program fixes or version upgrades will be available and
implemented by June 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The Company is not required to make the disclosures contemplated by
Item 7A in this Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to Item 8 is submitted as a separate section of this
Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Effective March 19, 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, which resigned on
that same date. 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 1995 and 1996 and the period from January 1, 1997 through
March 18, 1997, there were 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 years 1995 and 1996 contained no adverse opinion
or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
The Company provided Arthur Andersen LLP with a copy of this
disclosure and requested that Arthur Andersen LLP furnish it with a
letter addressed to the Securities and Exchange Commission (the
"Commission") stating whether it agreed with the above statements. A
copy of Arthur Andersen LLP's letter to the Commission, dated April
7, 1997, was filed as Exhibit 16.1 to the Company's Form 10-K/A
amendment to its Form 10-K Annual Report for the year ended December
31, 1996, which amendment was filed with the Commission on April 7,
1997.
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 1998 annual meeting of
shareholders, which will be filed pursuant to Regulation 14A within
120 days after the Company's fiscal year ended December 31, 1997.
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 1998 annual meeting of shareholders, which
will be filed pursuant to Regulation 14A within 120 days after the
Company's fiscal year ended December 31, 1997.
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 1998 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the Company's fiscal year
ended December 31, 1997.
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 1998 annual meeting of shareholders, which
will be filed pursuant to Regulation 14A within 120 days after the
Company's fiscal year ended December 31, 1997.
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.
The Company filed no reports on Form 8-K during the last quarter
of its fiscal year ended December 31, 1997.
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets --
December 31, 1996 and 1997 F - 2
Consolidated Statements of Operations -- years ended
December 31, 1995, 1996 and 1997 F - 3
Consolidated Statements of Shareholders' Investment --
years ended December 31, 1995, 1996 and 1997 F - 4
Consolidated Statements of Cash Flows -- years ended
December 31, 1995, 1996 and 1997 F - 5
Notes to Consolidated Financial Statements F - 6
Financial Statement Schedule
Valuation and Qualifying Accounts F - 21
Report of Ernst & Young LLP, Independent
Public Accountants F - 22
Report of Arthur Andersen LLP, Independent
Public Accountants F - 23
Consolidated Balance Sheets
(Dollar amounts in thousands, except share amounts)
December 31 December 31
1996 1997
ASSETS
Current assets:
Cash and cash equivalents $11,406 $ 4,023
Accounts receivable, net of
allowance for doubtful accounts of
$213 and $478
1996 and 1997, respectively 1,912 3,457
Inventories 3,623 5,003
Prepaid expenses 368 328
Total current assets 17,309 12,811
Property, plant and equipment, net 11,678 10,815
Other assets 2,215 2,537
Total assets $31,202 $26,163
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,621 $ 1,143
Accrued liabilities 1,824 2,194
Total current liabilities 3,445 3,337
Commitments and contingencies
SHAREHOLDERS' INVESTMENT:
Preferred stock, 1,000,000 shares
authorized (all series)
Series C, $100 par value,
No shares issued at December 31, 1996
and 1997 - -
Series E Convertible, $100 par value, 660
shares issued at December 31, 1996 66 -
Common stock, $.01 par value,
30,000,000 shares authorized,
8,869,819 and 9,306,462 shares issued
and outstanding at December 31, 1996
and 1997, respectively 89 93
Capital in excess of par value 56,680 51,585
Deficit (29,078) (28,852)
Total shareholders' investment 27,757 22,826
Total liabilities and shareholders'investment $31,202 $26,163
The accompanying notes are an integral part of these balance sheets.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Years Ended December 31
----------------------------------
1995 1996 1997
Net sales $24,374 $21,286 $23,559
Cost and expenses:
Cost of sales 7,944 10,327 9,530
Selling, general and
administrative 12,442 10,771 10,814
Research and development 5,370 5,927 3,006
Interest expense 251 88 6
Interest income (136) (392) (43)
Income (loss) before
income taxes (1,497) (5,435) 246
Provision for
income taxes 131 88 20
Net income (loss) (1,628) 5,523) 226
Dividends and income attributed
to preferred shareholders (140) (1,023) (70)
Net income (loss) available to
common shareholders $ (1,768) $ (6,546) $ 156
Net income (loss) available to
common shareholders per share -
basic and diluted $ (.22) $ (.74) $ .02
The accompanying notes are an integral part of these statements.
Consolidated Statements of Shareholders' Investment
For the Years Ended December 31, 1995, 1996 and 1997
(Dollar amounts and share amounts in thousands)
Capital in Total
Preferred Common Excess of Shareholder's
Stock Stock Par Value Deficit Investment
Shares Amount Shares Amount
Balance,
December 31, 1994 11 $1,041 7,344 $ 74 $33,075 $(21,750) $12,440
Sales of common stock
net of issuance
costs of $41 - - 300 3 2,956 - 2,959
Issuance of common
stock upon exercise
of stock options
and warrants - - 711 7 8,426 - 8,433
Issuance of common
stock for management
and directors
compensation - - 24 - 209 - 209
Dividends on
preferred stock 1 126 - - - (140) (14)
Net loss - - - - - (1,628) (1,628)
- --------------------------------------------------------------------------------------------
Balance,
December 31, 1995 12 1,167 8,379 84 44,666 (23,518) 22,399
Issuance of common
stock upon exercise
of stock options,
warrants and
employee stock
purchase plan - - 316 3 4,604 - 4,607
Dividends on
preferred stock - 35 - - - (37) (2)
Conversion of
preferred to common
stock (Series C) (12) (1,202) 175 2 1,200 - -
Sales of convertible
preferred stock
(Series E), $100 Par,
net of issuance costs
of $324 1 66 - - 6,210 - 6,276
Net loss - - - - - (5,523) (5,523)
- --------------------------------------------------------------------------------------------
Balance,
December 31, 1996 1 66 8,870 89 56,680 (29,078) 27,757
Issuance of common
stock upon exercise
of stock options
and employee stock
purchase plan - - 21 - 153 - 153
Sale of common stock
net of issuance costs
of $21 - - 415 4 2,471 - 2,475
Re-purchase of convertible
preferred stock
(Series E), $100 Par (1) (66) - - (7,719) - (7,785)
Net income - - - - - 226 226
- --------------------------------------------------------------------------------------------
Balance,
December 31, 1997 - $ - 9,306 $ 93 $51,585 $ (28,852) $22,826
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Years ended December 31,
---------------------------------
1995 1996 1997
Cash flows from operating activities:
Net income (loss) $ (1628) $(5,523) $ 226
Adjustments to reconcile income (loss)
to net cash used by
operating activities:
Depreciation and amortization 1,277 1,273 1,196
Provision for inventory obsolescence 476 545 523
Changes in assets and liabilities:
Accounts receivable, net 658 315 (1,545)
Inventories (664) 1,067 (1,903)
Prepaid expenses (319) 490 40
Other assets (514) (1,534) (360)
Accounts payable and accrued liabilities (545) 949 (76)
Net cash used by operating
activities (1,259) (2,418) (1,899)
Cash flows from investing activities:
Purchases of property, plant and equipment (4,206) (242) (295)
Net cash used by investing activities (4,206) (242) (295)
Cash flows from financing activities:
Issuances of common stock 11,393 4,607 2,628
Issuance (retirement) of preferred stock - 6,276 (7,785)
Proceeds from short and long-term borrowings 5,742 - -
Payments of short and long-term debt (5,848) (2,999) -
Principal payments of capital lease obligations (64) (40) (32)
Net cash provided (used) by financing activities 11,223 7,844 (5,189)
Net increase (decrease) in cash and
cash equivalents 5,758 5,184 (7,383)
Cash and cash equivalents at beginning of year 464 6,222 11,406
Cash and cash equivalents at end of year $ 6,222 $11,406 $ 4,023
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the year for interest $ 281 $ 87 $ 10
Cash paid during the year for income taxes 99 13 -
Supplemental Disclosure of Non-Cash
Financing Activities:
Equipment acquired through capital leases - 39 -
Issuances of common stock and warrants 209 - -
The accompanying notes are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. BUSINESS
Carrington Laboratories, Inc. (The "Company") is a research-based
pharmaceutical and medical device company engaged in the development,
manufacture and marketing of complex carbohydrate and other natural
products derived from the Aloe vera plant.
The Company's Wound and Skin Care division offers a comprehensive line
of wound management products to hospitals, alternative care facilities
and the home health care market. Sales are primarily in the United
States through a network of distributors.
Caraloe, Inc., a subsidiary, markets or licenses consumer products and
bulk ingredients. Principal sales of Caraloe, Inc. are bulk
ingredients which are sold to United States manufacturers who include
the high quality aloe extracts in their finished products.
The Company's Veterinary Medical division markets vaccines and wound
and skin care products to the veterinary market through third party
licensees principally in the United States.
The Company's products are produced at its plants in Irving, Texas and
in Costa Rica. A portion of the Aloe vera leaves used for
manufacturing the Company's products are grown on a Company-owned farm
in Costa Rica. The remaining leaves are purchased from independent
producers in Mexico and Central America.
NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1997
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.
INVENTORY Inventories are recorded at lower of first-in, first-out
cost or market.
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. Leasehold improvements and equipment under capital leases are
depreciated over the terms of the respective leases.
LONG-LIVED ASSETS The Company regularly reviews long-lived assets
for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be recoverable.
Recoverability is based on whether the carrying amount of the asset
exceeds the current and anticipated undiscounted cash flows related to
the asset.
TRANSLATION OF FOREIGN CURRENCIES The functional currency for
international operations (primarily Costa Rica) is 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 the consolidated statement of operations in the year of
occurrence.
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 shipment.
FEDERAL INCOME TAXES 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.
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.
ADVERTISING Advertising expense is charged to operations in the
year in which such costs are incurred. Advertising expense has not
been significant for 1995, 1996, or 1997.
STOCK BASED COMPENSATION The Company has elected to follow APB
Opinion No. 25, "Accounting for Stock Issued to Employees" in the
primary financial statements and to provide supplementary disclosures
required by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (See Note Eight).
NET INCOME (LOSS) PER SHARE In 1997, the Financial Accounting
Standards Board issued Statement No, 128, Earnings Per Share.
Statement 128 replaced the calculation of primary and fully diluted net
income (loss) per share with basic and diluted earnings per share.
Unlike primary net income (loss) per share, basic net income (loss) per
share excludes any dilutive effects of options, warrants and
convertible securities. Diluted net income (loss) per share is very
similar to the previously reported fully diluted earnings per share and
includes the dilutive effects of options, warrants and convertible
securities using the treasury stock method. No restatement of
previously reported net income (loss) available to common shareholders
per share for 1995 or 1996 was required to conform to the Statement 128
requirements.
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.
OPERATING SEGMENTS In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
(Statement 131), which is effective for years beginning after December
15, 1997. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
Statement 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore the Company will adopt
the new requirements retroactively in 1998. Management has not
completed its review of Statement 131, but does not anticipate that the
adoption of this statement will have a significant effect on the
Company's segments.
NOTE THREE. 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, 1996 and 1997, in thousands:
1996 1997
---------------------------------------------------------------
Raw materials and supplies $ 658 $1,438
Work-in-process 1,197 1,296
Finished goods 1,768 2,269
---------------------------------------------------------------
Total $3,623 $5,003
----------------------------------------------------------------
The inventory balances above are net of $322,000 and $516,000 of
reserves for obsolete and slow moving inventory at December 31,1996 and
1997, respectively.
NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1996, and 1997, in thousands:
Estimated
1996 1997 Useful Lives
- --------------------------------------------------------------------------
Land and improvements $ 1,389 $ 1,389
Buildings and improvements 8,085 8,086 7 to 25 years
Furniture and fixtures 880 892 4 to 8 years
Machinery and equipment 7,589 7,836 3 to 10 years
Leasehold improvements 756 793 1 to 3 years
Equipment under capital leases 152 150 4 years
- ----------------------------------------------------------------------
Total 18,851 19,146
Less accumulated depreciation
and amortization 7,173 8,331
- ----------------------------------------------------------------------
Property, plant and equipment, net $11,678 $10,815
The Company's net investment in property, plant and equipment and other
assets in Costa Rica at December 31, 1996 and 1997 were $3,958,000 and
$3,738,000, respectively.
NOTE FIVE. ACCRUED LIABILITIES
The following summarizes significant components of accrued liabilities
at December 31, 1996 and 1997, in thousands:
1996 1997
----------------------------------------------------------------------
Accrued payroll $ 232 $ 232
Accrued sales commissions 187 238
Accrued taxes 512 633
Other 893 1,091
----------------------------------------------------------------------
Total $1,824 $2,194
----------------------------------------------------------------------
NOTE SIX. LINE OF CREDIT
In November 1997, the Company entered into an agreement with a bank for
a $3,000,000 line of credit, collateralized by accounts receivable and
inventory. This credit facility will be used for operating needs, as
required, and to issue a letter of credit to replace a certificate of
deposit of $1,250,000 at December 31, 1997 (included in other assets)
collateralizing a supply agreement with its supplier of freeze dried
products (See Note Nine). The interest rate on this credit facility is
equal to the bank's prime rate. As of December 31, 1997 there was no
balance outstanding on the credit line.
In 1996, average short-term borrowings on a line of credit with a bank
were $991,000 at an average interest rate of 7.7% with the maximum
borrowings outstanding during the year of $2,977,000. No such short-
term borrowings were outstanding in 1997.
NOTE SEVEN. PREFERRED STOCK
SERIES C SHARES The Series C Shares were convertible into common
stock of the Company at a price of $7.58 per share; 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.
Dividends of $140,000 and $37,000 were recorded in 1995 and 1996 on the
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,
and related warrants to purchase 55,000 shares of common stock at $15
per share were exercised.
SERIES E SHARES In October 1996, the Company sold 660 shares of
Series E Convertible Preferred Stock (the "Series E Shares") for
$6,600,000 before offering fees and costs of $324,000. The Series E
Shares were convertible into shares of the Company's common stock
beginning on December 20, 1996, and prior to October 21, 1999 at a
conversion price per share equal to the lower of $25.20 (120% of the
market price per share of the Company's common stock) or 87% of the
market price immediately preceding the conversion date. Each Series E
Share was convertible into the number of whole shares of common stock
determined by dividing $10,000 by the conversion price. Because the
preferred stock is convertible into common stock at a conversion rate
that is the lower of a rate fixed at issuance or a fixed discount from
the common stock market price at the time of conversion, the discounted
amount is considered to be an assured incremental yield to the
preferred shareholders which must be recognized as a deemed preferred
dividend over the period from issuance to the first date when the
preferred stock first becomes convertible. As such, a deemed dividend
of $986,000 or $0.11 per share was recognized in the net income (loss)
per share calculation for 1996 as a reduction in earnings available to
common shareholders.
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, the decline in the market price of
the Company's common stock had 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 repurchase the
Series E Shares. In March 1997 the Company completed a repurchase of
50% of the above Series E Shares for $3,832,000, a premium of 13% over
the original purchase price. In May 1997 the Company repurchased the
remaining shares of its Series E Shares for a total cash purchase price
of $3,852,000. For both transactions, amounts paid to preferred
shareholders in excess of par totaled $70,000 more than the embedded
deemed dividend recognized in 1996 of $986,000. This additional deemed
dividend was used in the net income (loss) per share calculation in
1997 to reduce net income available to common shareholders.
NOTE EIGHT. COMMON STOCK
PRIVATE PLACEMENT OF COMMON STOCK In April 1995, the Company sold
300,000 shares of common stock at a price of $10.00 per share. Total
proceeds, net of issuance costs, were $2,959,000. In June 1997, the
Company sold 415,000 shares of common stock at a price of $6.00 per
share. Total proceeds, net of issuance costs, were $2,454,000.
SHARE PURCHASE RIGHTS PLAN The Company has a share purchase rights
plan which provides, among other rights, for the purchase of common
stock by certain existing common stockholders at significantly
discounted amounts in the event a person or group acquires or announces
the intent to acquire 20% or more of the Company's common stock. The
rights expire in 2001 and may be redeemed at any time at the option of
the Board of Directors for $.01 per right.
EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock
Purchase Plan (the "Stock Purchase Plan") under which 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. A maximum of 500,000 shares of common stock
was reserved for purchase pursuant to the Stock Purchase Plan. As of
December 31, 1997, 93,044 shares had been purchased by employees at
prices ranging from $3.67 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 to
employees are excercisable at the rate of 25% per year after the
anniversary of the grant. Options granted to directors are exercisable
in whole or in part on the date of the grant. Options granted expire
four to ten years from the dates of grant. The Company has reserved
1,500,000 shares of common stock for issuance under the Option Plan.
As of December 31, 1997, options to purchase 990,550 shares had been
granted under the option plan, of which options for 17,200 shares had
been exercised. As of December 31, 1997, options covering 752,225
shares were outstanding with exercise prices between $5.31 and $47.75,
with a weighted average exercise price of $16.13 and a weighted average
contractual life of 9.0 years. Of these options, 181,282 are currently
exercisable with a weighted average exercise price of $27.42.
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, 1997, options covering 206,915
shares were outstanding with exercise prices between $6.25 and $29.00,
with a weighted average exercise price of $11.72 and a weighted average
contractual life of 6.7 years. Of these options, 132,960 are currently
exercisable with a weighted average exercise price of $11.93.
The following summarizes stock option activity for each of the three
years ended December 31, 1995, 1996 and 1997, shares in thousands:
Weighted
Average
Shares Price Per Share Exercise
Price
- ----------------------------------------------------------------------------
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 $ 6.25 to $47.75 $21.99
Granted 470 $ 5.31 to $ 7.50 $ 6.84
Lapsed or canceled (178) $ 7.50 to $47.75 $18.38
- ----------------------------------------------------------------------------
Balance, December 31, 1997 959 $ 5.31 to $47.75 $15.19
- ----------------------------------------------------------------------------
Options exercisable at
December 31, 1997 314 $ 7.50 to $47.75 $20.87
- ----------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Shares Remaining Exercise Shares Exercise
Contractual Price Price
Life
---------------- -------- ----------- --------- -------- --------
$ 5.31 to $13.13 612 8.7 years $ 8.10 131 $10.65
$16.56 to $20.13 74 6.4 $17.92 47 $18.18
$24.25 to $30.25 203 9.1 $27.17 92 $27.41
$35.25 35 8.6 $35.25 25 $35.25
$47.75 35 6.5 $47.75 19 $47.75
---------------- --------- ----------- --------- -------- ---------
$ 5.31 to $47.75 959 8.5 $15.19 314 $20.87
============== ========= ========== ======== ======== =========
As of January 30, 1998 the Company offered all option holders the
option to exchange their outstanding options for new options at
$4.81 per share. The new employee options are subject to four year
vesting with new director options immediately vested. New options for
673,897 shares were issued in connection with the offer.
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 "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net income (loss) and diluted
net income (loss) available to common shareholders per share would have
been reduced to the following pro forma amounts:
- ----------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------
Net income(loss)
(in thousands):
As reported $(1,628) $(5,523) $226
Pro forma (2,656) (8,022) (2,199)
Diluted net income(loss)
available to common shareholders per share:
As reported $ (0.22) $ (0.74) $.02
Pro forma (0.35) (1.03) (.25)
- -----------------------------------------------------------------------------
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.
The fair value of each option granted was 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, 1996, and 1997,
respectively: risk-free interest rates of 6.50%, 6.47% and 6.13%,
expected volatility of 64.2%, 63.0% and 57.0%. The Company used the
following weighted-average assumptions for grants in 1995, 1996 and
1997: 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
weighted average fair value of options granted were $11.86, $18.70 and
$6.84 in 1995, 1996, and 1997 respectively.
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 periods ending
December 31, 1995, 1996 and 1997, shares in thousands:
Weighted
Average
Shares Price Per Share Exercise
Price
- ------------------------------------------------------------------------
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
and December 31, 1997 51 $ 9.75 to $20.13 $15.03
- ------------------------------------------------------------------------
Warrants exercisable at
December 31, 1997 51 $ 9.75 to $20.13 $15.03
- ------------------------------------------------------------------------
The following table summarizes information about stock warrants
outstanding at December 31, 1997, shares in thousands:
Warrants Outstanding Warrants Exercisable
------------------------------------ -------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Shares Remaining Exercise Shares Exercise
Contractual Price Price
Life
- ---------------- -------- ----------- --------- -------- ---------
$ 9.75 to $13.00 20 2.8 years $11.38 18 $11.38
$16.00 to $20.13 31 2.8 $17.39 31 $17.39
- ---------------- -------- ----------- --------- -------- ---------
$ 9.75 to $20.13 51 2.8 $15.03 49 $15.03
================ ======== =========== ========= ========= =========
COMMON STOCK RESERVED The Company has reserved a toal of 2,096,671
common shares for future issuance relating to the employee stock
purchase plan, stock option plans, and stock warrants, disclosed above.
NOTE NINE. COMMITMENTS AND CONTINGENCIES
The Company conducts a significant portion of its operations from an
o f fice/ 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. The Company s
commitments under noncancellable operating leases, as of December 31,
1997 are as follows, in thousands:
Years Ending December 31,
----------------------------------------------
1998 $ 440
1999 439
2000 182
2001 131
2002 5
----------------------------------------------
Total minimum lease payments $1,197
----------------------------------------------
Total rental expenses under operating leases were $364,000, $451,000
and $465,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
In February 1995 the Company entered into a commitment to purchase $2.5
million of freeze dried products from its principal supplier over a 66
month period ending in August 2000. The commitment, which also
provides for monthly minimum purchases, is required to be supported to
the extent of 60% of the remaining commitment by a letter of credit
from a bank or a pledged certificate of deposit (See Note Six).
Through December 31, 1997, the Company has purchased $515,000 of
products pursuant to this commitment and in February 1998 made
prepayments of $115,000 toward future deliveries under the commitment.
Although management believes that new products which they began to
actively market in late 1997, as well as additional products to be
developed, will result in no losses pursuant to this commitment, the
Company could incur significant losses if they are not able to meet the
minimum purchase commitments.
NOTE TEN. INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995, 1996 and 1997
are as follows, in thousands:
1995 1996 1997
- ----------------------------------------------------------------------------
Net operating loss carryforward $ 9,835 $ 12,875 $12,468
Research and development
and other credits 839 839 858
Property, plant and equipment 184 184 225
Patents 308 318 318
Inventory 200 249 315
Other, net 411 357 592
Less - Valuation allowance (11,777) (14,822) (14,776)
$ - $ - $ -
The Company has provided a valuation allowance against the entire
deferred tax asset at December 31, 1995, 1996 and 1997 due to the
uncertainty as to the realization of the asset.
The provisions for federal income taxes for the years ended December
31, 1995, 1996 and 1997 consisted of the following, in thousands:
1995 1996 1997
- ----------------------------------------------------------------------------
Current provision $131 $ 88 $ 20
Deferred provision, net - - -
- ----------------------------------------------------------------------------
Total provision $131 $ 88 $ 20
- ----------------------------------------------------------------------------
The differences (expressed as a percentage of pre-tax income or loss)
between the statutory and effective federal income tax rates are as
follows:
1995 1996 1997
- ---------------------------------------------------------------------------
Statutory tax rate (34.0%) (34.0%) 34.0%
State Income Taxes 2.8 .5 -
Unrecognized deferred tax
benefit/change in valuation allowance 34.6 34.9 (20.8)
Expenses related to foreign
operations 4.1 - -
Other 1.3 .2 (4.9)
- ---------------------------------------------------------------------------
Effective tax rate 8.8% 1.6% 8.3%
- ---------------------------------------------------------------------------
At December 31, 1997, the Company had net operating loss carryforwards
of approximately $36,670,000 for federal income tax purposes, which
expire during the period from 1999 to 2011, 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 ELEVEN. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentrations of credit risk 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 customers. McKesson
General accounted for 7%, 9% and 12%; Owens & Minor accounted for 14%,
11% and 11%; and Bergen Brunswig, which acquired Durr Medical and
Colonial Healthcare in December 1996, accounted for 10%, 12% and 9% of
the Company's net sales in 1995, 1996 and 1997, respectively. Sales by
Caraloe, Inc., to Mannatech, Inc., , accounted for 10%, 15% and 15% of
the Company's net sales in 1995, 1996 and 1997, respectively. Sales by
Caraloe, Inc. to Aloe Commodities International, Inc. ("ACI") accounted
for 4% of the Company's net sales in 1997. Accounts receivable from
Mannatech and ACI represented 20% and 15% of accounts receivable,
respectively, at December 31, 1997. The Company also has an investment
of $600,000 (less than 10% ownership interest) in common stock of ACI.
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.
NOTE TWELVE. NET INCOME (LOSS) PER SHARE
Basic net income (loss) available to common shareholders per share was
computed by dividing net income (loss) available to common shareholders
by the weighted average number of common shares outstanding of
7,933,000, 8,798,000 and 8,953,000 in 1995, 1996, and 1997, respectively.
In calculating the diluted net loss available to common shareholders
per share for 1995 and 1996, no effect was given to options, warrants
or convertible securities because the effect of including these
securities would have been antidilutive. In 1997, diluted net income
available to common shareholders per share is also based only on the
weighted average number of common shares outstanding. There was no
additional dilution related to options whose exercise price was below
the average market price due to the application of the treasury stock
method. Remaining options and warrants to purchase 885,000 shares at
an average exercise price of $16.84 per share were excluded because
their exercise price exceeded the average market price and were,
therefore, antidilutive.
NOTE THIRTEEN. BUSINESS SEGMENTS
The Company operates in three business segments: Wound Care Products;
Caraloe, Inc., a consumer products subsidiary, including bulk
ingredients, consumer beverages, nutritional and skin care products;
and Veterinary Products, including veterinary wound care and cancer
therapy products.
Corporate Income Before Income Taxes set forth in the following table
includes research and development expenses which were related to the
development of pharmaceutical products not associated with the
reporting segments. Assets which are used in more than one segment are
reported in the segment where the predominant use occurs. The
Company's production facility in Costa Rica, which provides bulk
ingredients for all segments, and total cash for the Company is
included in the Corporate Assets figure.
Business Segments (in thousands)
Wound Caraloe
1995 Care Inc. Veterinary Corporate Total
- ----------------------------------------------------------------------------
Sales to unaffiliated
customers $21,147 $2,907 $320 $ - $24,374
Income(loss) before
income taxes 2,903 494 (222) (4,672) (1,497)
Identifiable assets 16,241 299 116 11,278 27,934
Capital expenditures 4,206 - - - 4,206
Depreciation and
amortization 1,262 - 15 - 1,277
- ----------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------
Sales to unaffiliated
customers $17,302 $3,694 $290 $ - $21,286
Income(loss) before
income taxes (641) 375 (9) (5,160) (5,435)
Identifiable assets 14,834 231 51 16,086 31,202
Capital expenditures 242 - - - 242
Depreciation and
amortization 1,259 - 14 - 1,273
- ---------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------
Sales to unaffiliated
customers $17,990 $5,444 $125 $ - $23,559
Income(loss) before
income taxes 1,522 1,381 (42) (2,615) 246
Identifiable assets 16,068 1,426 17 8,652 26,163
Capital expenditures 295 - - - 295
Depreciation and
amortization 1,191 - 5 - 1,196
- ---------------------------------------------------------------------------
NOTE FOURTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited selected quarterly financial data below reflect the
fiscal years ended December 31, 1996, and 1997 respectively.
(Dollar amounts in thousands, except shares and per share amounts)
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 income (loss) (2,156) (2,545) ( 839) 17
Diluted income (loss)
available to common
shareholders per share$ (.25) $ (.29) $ (.09) $ (.11) *
Weighted average
common shares 8,666,177 8,804,567 8,854,533 8,867,575
- -----------------------------------------------------------------------------
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------
Net sales $ 6,083 $ 5,121 $ 6,229 $ 6,126
Gross Profit 3,576 3,234 3,653 3,566
Net income (loss) 83 (531) 463 211
Diluted income (loss)
available to common
shareholders per share $ .00 $ (.05) $ .05 $ .02
Weighted average
common shares 8,870,148 8,896,078 9,239,109 9,293,450
- -----------------------------------------------------------------------------
* Net loss per share for the quarter ended December 31, 1996, gives
effect to the accounting treatment announced by the staff of the
Securities and Exchange Commission relevant to the Company's Series
E convertible preferred stock having "beneficial conversion
features." The net loss per share includes a $986,000 preferred
dividend as a result of this treatment. This treatment reflects the
discount in the conversion price as a reduction of net income available
to common shareholders between the date of issuance of the preferred
stock, October 21, 1996, and the first available conversion date,
December 20, 1996, to more closely reflect the evolving accounting
literature regarding accounting for beneficial conversion features.
Financial Statement Schedule
Valuation and Qualifying Accounts
(In thousands)
Description Additions
Balance at Charged to Charged to Deductions Balance at
Beginning Costs and Other End of
Of Period Expenses Accounts Period
- -------------------------------------------------------------------------
1995
Bad Debt Reserve $205 $107 $ - $ 85 $227
Inventory Reserve 321 476 - 579 218
Rebates 55 90 - 63 82
- -------------------------------------------------------------------------
1996
Bad Debt Reserve $227 $ 82 $ - $ 96 $213
Inventory Reserve 218 545 - 441 322
Rebates 82 90 - 36 136
- -------------------------------------------------------------------------
1997
Bad Debt Reserve $213 $280 $ - $ 15 $478
Inventory Reserve 322 523 - 329 516
Rebates 136 331 - 125 342
- -------------------------------------------------------------------------
-----------------------------------------------------------------------
Report of Independent Public Accountants
-----------------------------------------------------------------------
Shareholders and Board of Directors
Carrington Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of
Carrington Laboratories, Inc. and subsidiaries as of December 31, 1997
and the related consolidated statements of operations, shareholders'
investment and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at item
14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit 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 1997 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Carrington Laboratories, Inc. and subsidiaries as
of December 31, 1997, and the consolidated results of their operations
and their cash flows for year then ended in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
February 25, 1998
Report of Independent Public Accountants
To the Stockholders 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, 1996 and the related consolidated statements of
operations, shareholders' investment and cash flows for the two years
ended December 31, 1995 and 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, 1996,
and the results of their operations and their cash flows for the two
years ended December 31, 1995 and 1996, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule on
page F-21 of this form 10-K is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements
taken as a whole.
Arthur Andersen LLP
Dallas, Texas,
February 7, 1997 (except with respect
to certain matters discussed in Note 7,
as to which the date is April 25, 1997)
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 30, 1998 By: /s/ Carlton E. Turner
-----------------------
Carlton E. Turner, Ph.D., 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 30, 1998
------------------------- Officer and Director
Carlton E. Turner, Ph.D. (principal executive officer)
/s/ Robert W. Schnitzius Chief Financial Officer March 30, 1998
------------------------- (principal financial and
Robert W. Schnitzius accounting officer)
/s/ R. Dale Bowerman Director March 30, 1998
-----------------------------
R. Dale Bowerman
/s/ George DeMott Director March 30, 1998
-----------------------------
George DeMott
/s/ Robert A. Fildes, Ph.D. Director March 30, 1998
-----------------------------
Robert A. Fildes, Ph.D.
/s/ Thomas J. Marquez Director March 30, 1998
-----------------------------
Thomas J. Marquez
/s/ James T. O'Brien Director March 30, 1998
-----------------------------
James T. O'Brien
/s/ Selvi Vescovi Director March 30, 1998
-----------------------------
Selvi Vescovi
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* Statement of Cancellation of Treasury Shares, dated
July 17, 1997.
3.7* Statement of Resolution Eliminating Four Series of
Preferred Stock, dated July 17, 1997.
3.8* By-laws of Carrington Laboratories, Inc., as
amended through March 3, 1998
E - 1
Exhibit Sequentially
Number Exhibit Numbered Page
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).
4.2 Agreement Regarding Termination of Employment and
Full and Final Release dated June 2, 1997, between
Carrington Laboratories, Inc., and Sheri L.
Pantermuehl (incorporated herein by reference to
Exhibit 4.1 to Carrington's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).
E - 2
Exhibit Sequentially
Number Exhibit Numbered Page
4.3 Form of Letter Agreement dated May 9, 1997 between
the Registrant and each holder of Series E
Convertible Preferred Stock (incorporated herein by
reference to Exhibit 10.1 to Carrington's Current
Report on Form 8-K dated
May 21, 1997).
4.4 Form of Second Offer and Agreement of Sale and
Purchase dated May 15, 1997 between the Registrant
and each holder of Series E Convertible Preferred
Stock (incorporated herein by reference to Exhibit
10.2 to Carrington's Current Report on Form 8-K
dated May 21, 1997).
4.5 Form of Stock Purchase Agreement dated June 20,
1997 between the Registrant and each purchaser of
Common Stock (incorporated herein by reference to
Exhibit 10.1 to Carrington's Current Report on Form
8-K dated June 20, 1997).
4.6 Retirement and Consulting Agreement dated August
14, 1997, between Carrington Laboratories, Inc.,
and David G. Shand (incorporated herein by
reference to Exhibit 4.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1997).
4.7 First Amendment to Retirement and Consulting
Agreement dated September 30, 1997, between
Carrington Laboratories, Inc., and David G. Shand
(incorporated herein by reference to Exhibit 4.2 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
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).
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).
E - 3
Exhibit Sequentially
Number Exhibit Numbered Page
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
non-employee 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 on Form
10-K).
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).
E - 4
Exhibit Sequentially
Number Exhibit Numbered Page
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 Societe
Europeenne 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).
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).
E - 5
Exhibit Sequentially
Number Exhibit Numbered Page
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).
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).
E - 6
Exhibit Sequentially
Number Exhibit Numbered Page
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).
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).
E - 7
Exhibit Sequentially
Number Exhibit Numbered Page
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 the 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).
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 Rights 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).
E - 8
Exhibit Sequentially
Number Exhibit Numbered Page
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).
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).
E - 9
Exhibit Sequentially
Number Exhibit Numbered Page
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 (incorporated by
reference to Exhibit 10.54 to Carrington's 1996
Annual Report on Form 10-K).
10.55 Sales Distribution Agreement between Recordati,
S.P.A., and Carrington Laboratories, Inc., and
Carrington Laboratories Belgium N.V., dated
December 20, 1996 (incorporated by reference to
Exhibit 10.55 to Carrington's 1996 Annual Report on
Form 10-K).
10.56 Nonexclusive Distribution Agreement between
Polymedica Industries, Inc., and Carrington
Laboratories, Inc., dated November 15, 1996
(incorporated by reference to Exhibit 10.56 to
Carrington's 1996 Annual Report on Form 10-K).
10.57 Sales Distribution Agreement between Gamida-
Medequip Ltd., and Carrington Laboratories, Inc.,
dated December 24, 1996 (incorporated by reference
to Exhibit 10.57 to Carrington's 1996 Annual Report
on Form 10-K).
10.58 Sales Distribution Agreement between Gamida For
Life BV, and Carrington Laboratories, Inc., dated
December 24, 1996 (incorporated by reference to
Exhibit 10.58 to Carrington's 1996 Annual Report on
Form 10-K).
10.59 Sales Distribution Agreement between Darrow
Laboratorios S/A and Carrington Laboratories, Inc.,
dated December 4, 1996 (incorporated by reference
to Exhibit 10.59 to Carrington's 1996 Annual Report
on Form 10-K).
E - 10
Exhibit Sequentially
Number Exhibit Numbered Page
10.60 Independent Sales Representative Agreement between
Vision Medical and Carrington Laboratories, Inc.,
dated October 1, 1996 (incorporated by reference to
Exhibit 10.60 to Carrington's 1996 Annual Report on
Form 10-K).
10.61 Independent Sales Representative Agreement between
Think Medical, Inc., and Carrington Laboratories,
Inc., dated October 1, 1996 (incorporated by
reference to Exhibit 10.61 to Carrington's 1996
Annual Report on Form 10-K).
10.62 Independent Sales Representative Agreement between
Meares Medical Sales Associates and Carrington
Laboratories, Inc., dated October 1, 1996
(incorporated by reference to Exhibit 10.62 to
Carrington's 1996 Annual Report on Form 10-K).
10.63 Supply Agreement between Aloe Commodities
International, Inc., and Caraloe, Inc., dated
February 13, 1997 (incorporated by reference to
Exhibit 10.63 to Carrington's 1996 Annual Report on
Form 10-K).
10.64 Trademark License Agreement between Light Resources
Unlimited and Carrington Laboratories, Inc., dated
March 1, 1997 (incorporated by reference to Exhibit
10.64 to Carrington's 1996 Annual Report on Form
10-K).
10.65 Supply Agreement between Light Resources Unlimited
and Caraloe, Inc., dated February 13, 1997
(incorporated by reference to Exhibit 10.65 to
Carrington's 1996 Annual Report on Form 10-K).
10.66 Sales Distribution Agreement between Penta
Farmaceutica, S.A., and Carrington Laboratories,
Inc., dated December 27, 1996 (incorporated by
reference to Exhibit 10.66 to Carrington's 1996
Annual Report on Form 10-K).
10.67 Stock Subscription Offer of Aloe Commodities, Inc.,
and Caraloe, Inc., dated October 30, 1996
(incorporated by reference to Exhibit 10.67 to
Carrington's 1996 Annual Report on Form 10-K).
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
(incorporated by reference to Exhibit 10.68 to
Carrington's 1996 Annual Report on Form 10-K).
E - 11
Exhibit Sequentially
Number Exhibit Numbered Page
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
(incorporated by reference to Exhibit 10.69 to
Carrington's 1996 Annual Report on Form 10-K).
10.70 Sales Distribution Agreement between Laboratories
PiSA S.A. DE C.V., and Carrington Laboratories,
Inc., dated November 1, 1995 (incorporated by
reference to Exhibit 10.70 to Carrington's 1996
Annual Report on Form 10-K).
10.71 Termination Acknowledgment 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
(incorporated by reference to Exhibit 10.71 to
Carrington's 1996 Annual Report on Form 10-K).
10.72 Letter from Immucell Corporation to Carrington
Laboratories, Inc., dated February 7, 1996,
canceling the License Agreement listed as Exhibit
10.16 (incorporated by reference to Exhibit 10.72
to Carrington's 1996 Annual Report on Form 10-K).
10.73 Trademark License and Product Supply Agreement
dated July 22, 1997, between Caraloe, Inc., and Nu
Skin International, Inc. (incorporated herein by
reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended September
30 1997).
E - 12
Exhibit Sequentially
Number Exhibit Numbered Page
10.74 Supply Agreement dated August 14, 1997, between
Caraloe Inc., and Mannatech, Inc. (incorporated
herein by reference to Exhibit 10.2 to Carrington s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.75 Trademark License Agreement dated August 14, 1997,
between Carloe, Inc., and Mannatech, Inc.
(incorporated herein by reference to Exhibit 10.3
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997).
10.76*Supply Agreement between Met-Trim, LLC and Caraloe,
Inc., dated December 1, 1997.
10.77*Trademark License Agreement between Met-Trim, LLC
and Caraloe, Inc., dated December 1, 1997.
10.78*Amendment Number One to Sales Distribution
Agreement between Carrington Laboratories, Inc.,
and Faulding Pharmaceuticals/David Bull
Laboratories, dated January 12, 1998.
16.1 Letter dated March 21, 1997 from Arthur Andersen
LLP to the Securities and Exchange Commission
(incorporated herein by reference to Exhibit 16.1
to Carrington's Form 10-K/A amendment to its Form
10-K Annual Report for the year ended December 31,
1996, which amendment was filed on April 7, 1997).
21.1* Subsidiaries of Carrington.
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
* Filed herewith.
Management contract or compensatory plan.
E - 13