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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, 1995
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: (214) 518-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock ($.01 par value) NASDAQ National Market
Preferred Share Purchase Rights NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 15, 1996, was $231,721,284. (This figure was computed
on the basis of the closing price of such stock on the NASDAQ National Market on
March 15, 1996 using the aggregate number of shares held on that date by, or in
nominee name for, shareholders who are not officers, directors or record holders
of 10% or more of the Registrant's outstanding voting stock. The
characterization of such officers, directors and 10% shareholders as affiliates
is for purposes of this computation only and should not be construed as an
admission for any other purpose that any of such persons are, in fact,
affiliates of the Registrant.)
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date:
8,657,421 shares of Common Stock, par value $.01 per share, were
outstanding on March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
shareholders to be held on May 23, 1996 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 carbohydrate-based therapeutics for
the treatment of major illnesses and the dressing and management of wounds. The
Company sells, using a network of distributors, nonprescription products through
its Wound and Skin Care Division, veterinary medical devices and pharmaceutical
through its Veterinary Medical Division and consumer products through its
consumer products subsidiary, Caraloe, Inc. The Company's research and product
portfolio are based primarily on complex carbohydrate technology derived from
the Aloe vera plant.
The Company was incorporated in Texas in 1973, as Ava Cosmetics, Inc. In
1986, the Company sold the direct sales business it was then operating and
changed its name to Carrington Laboratories, Inc.
Wound and Skin Care Division
Carrington's Wound and Skin Care Division markets a comprehensive line of
wound management products to hospitals, alternative care facilities and the home
health care market. The Company's products are designed to maintain a moist
wound environment which aids the healing process and to maintain the integrity
of contiguous healthy skin. Carrington products are used in a wide range of
acute and chronic wound and skin conditions and for incontinence and ostomy
care.
The Company is committing significant resources to its wound and skin care
business. Primary marketing emphasis is directed toward hospitals, managed care
organizations, alternate care facilities and home health care providers, with
wound and skin care products being promoted primarily to physicians and
specialty nurses, e.g. enterostomal therapists. Opportunities in the alternate
care and home health care markets are also addressed through a telemarketing
sales team and a National Accounts Department.
The Company's hospital field sales force currently employs 43 sales
representatives, each assigned to a specific geographic area in the United
States, five regional sales managers, a representative in Puerto Rico and a
managing director of the Wound and Skin Care Division. The Company also uses an
independent sales company employing four sales representatives to sell its
products on a commission basis and an independent sales representative in
Canada. In addition to this field sales force, the Wound and Skin Care Division
employs seven telemarketers who focus on alternative care facilities and the
home health care market, and three persons in its National Accounts Department.
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The Company's products are primarily sold through a network of
distributors. Two of the Company's largest distributors in the hospital market
for the last several years have been Baxter Healthcare Corporation ("Baxter")
and Owens & Minor. During fiscal 1993, 1994 and 1995, sales of wound and skin
care products to Baxter represented 10%, 11% and 10%, respectively, of the
Company's total net sales. Sales to Owens & Minor represented 8%, 7%, and 14%,
respectively, of total net sales over the same period.
Consumer Health
Caraloe, Inc., a separate subsidiary of the Company, markets or licenses
consumer products and bulk ingredients utilizing the Company's patented complex
carbohydrate technology. Attention has been focused on three goals, the first of
which is to sell Caraloe's Aloe Nutritional(TM) brand products through the
health food store market. The second goal has been to develop private label aloe
products for entrepreneurs seeking a high quality line of aloe products. The
third goal has been to become a supplier of bulk AVMP(TM) (Aloe vera
mucilaginous polysaccharide) to commercial companies incorporating aloe vera
mucilaginous polysaccharides into their established product lines. In May 1994,
an agreement was signed with Mannatech, Inc., formerly Emprise International,
Inc., to supply it bulk Manapol(R). In February 1996, an agreement was signed
with Mannatech granting it an exclusive license in the United States for
Manapol(R). During fiscal 1994 and 1995, sales of Manapol(R) to Mannatech
represented 4% and 10%, respectively, of the Company's total net sales.
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
will be removed upon completion of additional potency testing which is in the
final stages of development. The Company expects to complete these tests in
1996. There can be no assurance that these tests will result in the removal of
the conditional restriction on the USDA's approval of Acemannan Immunostimulant.
In September 1990, the Company granted Solvay Animal Health, Inc.
("Solvay") an exclusive, worldwide license to use and sell a bulk pharmaceutical
mannan adjuvant for poultry disease. In January 1992, Solvay received approval
from the USDA to market the bulk pharmaceutical mannan as an adjuvant to a
vaccine for Marek's disease, a virus infection that kills chickens or renders
them unfit for human consumption. Solvay sells the product under the trademark
ACM I.
In March 1996, the Company signed an agreement with Farnam Companies,
Inc., a leading veterinary marketing company, to promote and sell the
CarraVet(TM) product line, including Acemannan Immunostimulant.
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Research and Development
General
In 1984, the Company isolated and identified a polymeric compound with a
molecular weight between one and two million Daltons from the Aloe vera plant.
This compound has been given the generic name "acemannan" by the United States
Adopted Names Council. The Company intends to seek approval of the Food and Drug
Administration (the "FDA") and other regulatory agencies to sell products based
on complex carbohydrates in the United States and in foreign countries: (I) to
treat inflammatory bowel diseases, including ulcerative colitis, a widespread,
chronic, inflammatory disease of the colon; (ii) to treat various forms of
cancer; (iii) for use as an adjuvant to various vaccines; and (iv) to treat
non-healing and other wounds. For a more comprehensive listing of the type,
indication and status of products currently under development by the Company,
see "Research and Development--Summary" below. The regulatory approval process,
both domestically and internationally, can be protracted and expensive, and
there is no assurance that the Company will obtain approval to sell its products
for any treatment or use (see "Governmental Regulation" below).
The Company is marketing or developing several products which in the past
were given the general name of acemannan, suggesting the products were
identical. This is not correct because there are ten products in development or
being marketed that are derived from 3 basic extracts of the Aloe vera plant.
The basic freeze-dried aloe vera extract is reconstituted to produce Manapol(R)
and AVMP(TM) for both food grade and cosmetic grade products. Further refinement
produces Bulk Pharmaceutical Mannans that are used to produce hydrogels; the
Carrington(TM) Patch, an oral care product; Carra(TM)Sorb M, a freeze-dried
wound dressing; adjuvants, ACM I marketed by Solvay, and CARN 500 which is being
developed as an adjuvant for various vaccines; and Aliminase(TM) (formerly CARN
1000) capsules which are being developed for ulcerative colitis. Finally, Bulk
Injectable Mannans are marketed as Acemannan Immunostimulant (CARN 700), and a
product has been developed for the treatment of cancer, Alovex(TM) (formerly
CARN 750).
The Company expended approximately $5,397,000, $5,334,000, and $5,370,000
on research and development in fiscal, 1993, 1994, and 1995, respectively. The
Company estimates that in fiscal 1996 it will spend more on research and
development than in 1995. Currently, the Company's research staff comprises 13
full-time employees as compared to 21 full-time employees at the end of 1994.
Preclinical Research
The Company identified the characteristics of its complex carbohydrates by
a series of studies in the Company's laboratories and in several contract
laboratories. Based on toxicology tests sponsored by the Company on different
animal species with dosages up to 40 times the proposed intravenous human
dosage, in vitro and in vivo tests for mutagenicity, dermal sensitization tests,
results of a Phase I safety study of an oral product in humans and a Phase I
safety study of an intravenously administered preparation in humans, no
clinically significant toxicity of the
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Company's products has been noted. Further safety studies may be required by the
FDA prior to the approval of any applications of complex carbohydrates.
Other preclinical studies conducted in the Company's laboratories and in
outside laboratories have shown that certain of the Company's complex
carbohydrates stimulate macrophage and other white blood cells to produce
lymphokines, including interleukin-1 and tumor necrosis factor alpha, that
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 complex carbohydrates have both pro- and anti-inflammatory actions.
The Company believes that its products' pharmacological actions and lack
of toxicity make them excellent candidates for further development as
therapeutic agents for the treatments and uses for which the Company intends to
seek regulatory approvals (see "Research and Development --General" above).
There is no assurance, however, that the Company will be successful in its
efforts.
The Company operates a research and development laboratory at the Texas
A&M University Research Park to expand preclinical research in various wound
healing applications and mechanisms of action. Pursuant to this arrangement, the
Company has access to leading authorities in immunology, as well as facilities
and equipment to engage in experimentation and analysis at the basic research
level.
Animal Studies
The Company has pursued a strategy of developing products for certain
animal indications, clinical testing of which may have application to studies
for treatment of human diseases. Animal clinical testing necessary to obtain
eventual approval of a product for treatment of human diseases may also provide
data sufficient to obtain approval for the related veterinary indication. This
approach enables the Company to obtain revenues from its research efforts at an
earlier date and also expands data available from actual use of the product in
animals. The Company's clinical research efforts to date have focused on the
indications described below.
Vaccine Adjuvants. An adjuvant is a substance that enhances the antibody
response to an antigen. The ability to generate a vigorous immune response to an
antigen is critical to the effectiveness of a vaccine. The Company's studies
indicate that acetylated mannans, when used as a vaccine adjuvant, produce
marked stimulation of the immune system.
In 1990, the Company received approval from the USDA to sell an adjuvant
to licensed manufacturers for use in combination with animal vaccines. This use
as a vaccine adjuvant for certain poultry diseases was licensed to Solvay
pursuant to an agreement between Solvay and the Company entered into in
September 1990. In January 1992, Solvay received approval from the USDA to
market an adjuvant to its vaccine for Marek's disease (see "Veterinary Medical
Division" above).
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The Company has conducted or sponsored studies of CARN 500 adjuvants with
other vaccines for animals. Based on these studies, the Company, either directly
or through third party licensees, intends to pursue development of adjuvants for
other animal vaccines. In 1993, initiation of a program was begun to develop
adjuvants for mammalian vaccines and for vaccines for marine animals under
licenses with one European company. There can be no assurance however, that such
development will be successful or that the Company will be able to develop, or
to enter into any licensing agreements for the development of, any additional
adjuvants.
Evaluation of Anti-Tumor Activity. Acetylated mannans (CARN 750) are
immunomodulating agents that increase circulating levels of interleukin-1 and
tumor necrosis factor alpha. A series of studies conducted at Texas A&M
University in 1988 and 1989 on mice with highly malignant tumors indicated that
a single intraperitoneal dose caused significant tumor reduction in a
statistically significant percentage of mice. This effect in many instances was
dramatic, with complete regression of the tumor and with continuing immunity.
Recovered animals were resistant to syngeneic tumor reimplantation for up to six
months after initial tumor regression.
In 1991, the USDA granted the Company conditional approval to market an
injectable form of a complex carbohydrate as an aid in the treatment of canine
and feline fibrosarcoma, a form of soft tissue cancer, under the name Acemannan
Immunostimulant. The Company believes that the USDA's remaining requirements to
remove the conditional restriction can be completed in 1996 (see "Veterinary
Medical Division" above). Of course, there can be no assuarance as to whether or
when the USDA will remove the conditional restriction on its approval of this
product.
Human Studies
Evaluation of Aliminase(TM) (formerly CARN 1000) in the Treatment of
Inflammatory Bowel Diseases. In October 1991, the Company filed an
investigational new drug ("IND") application requesting approval to conduct
human clinical trials on the efficacy of Aliminase(TM) in the treatment of
ulcerative colitis. In November 1991, the Company received notice that the FDA
was withholding approval of the study, pending submission of additional
information. Additional studies requested by the FDA were completed, and the
results were submitted in October 1992. In December 1992, the Company received
authorization from the FDA to commence human clinical trials under the IND
application. In early 1993, the Company began a pilot safety and efficacy study
with oral Aliminase(TM) in the treatment of ulcerative colitis patients who are
experiencing an acute flare-up of the disease. This study was conducted by
treating 54 patients with 400 or 800 milligram doses twice daily for two or four
weeks. After four weeks, the disease activity index and the signs and symptoms
of the disease were significantly improved, and the safety of the oral product
continued to be confirmed. A large controlled trial of Aliminase(TM) in patients
with ulcerative colitis began in September 1995. A total of 288 patients will be
enrolled in four groups comparing a placebo with three doses of Aliminase(TM)
(150, 300 and 600 mg dosage levels, administered twice daily for six weeks).
Results are expected in 1996.
Evaluation of Alovex(TM) (formerly CARN 750) in the Treatment of Solid
Tumors in Humans. The Company believes that this intravenous product may be
broadly useful in cancer therapy, with potential application in the treatment of
major solid tumors, including melanoma, breast carcinoma,
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prostate carcinoma, colon carcinoma, hypernephroma and soft tissue sarcoma. The
Company initiated a Phase I human clinical trial of injectable Alovex(TM) in
certain solid tumor indications. The trial began in the United States in late
1995. As a result of the success of Acemannan Immunostimulant in dogs and cats,
the Company has reason to believe that injectable Alovex(TM) may play a
significant role in the treatment of cancer in humans.
Evaluation of Carrington(TM) Patch in the Treatment of Aphthous Ulcers.
Carrington's efforts to broaden the claims for wound care products containing
Carrasyn(R) Hydrogel were expanded to include an application within the oral
health care field. Two studies were conducted at Baylor College of Dentistry to
examine the efficacy and safety of two formulations of Carrasyn(R) Hydrogel
wound dressing in the treatment of oral aphthous ulcers (canker sores). The
first study involved Carrasyn(R) Hydrogel wound dressing modified for intraoral
use versus a leading product. The second trial involved the modified oral
formulation of Carrasyn(R) Hydrogel that had been freeze-dried. This product,
Carrington(TM) Patch, reduced the pain of these ulcers. A 510(k) was submitted
to the FDA for permission to market the freeze-dried formulation for the
management of oral aphthous ulcers. This was granted by the FDA, and the product
will be marketed as Carrington(TM) Patch for the reduction of pain due to
aphthous ulcers.
Evaluation of Carrasyn(R) in Wound Healing. In 1993, a study was conducted
at M.D. Anderson Cancer Center to determine if Carrasyn(R) Hydrogel was of
benefit in treating radiation-induced skin reactions of mice. These studies
clearly showed that, when compared to controls, Carrasyn(R) Hydrogel could
significantly reduce radiation-induced inflammation and tissue damage in
animals. As a result of this work, a small clinical trial was performed in 1994,
studying the radiation-sparing effects of Carrasyn(R) Hydrogel wound dressing in
four oncology patients. Further trials will continue in 1996. Four new
indications (post-surgical incisions, sunburn, diabetic ulcers and radiation
dermatitis) for Carrasyn(R) were added in 1995.
Evaluation of Carrasyn(R) Freeze-Dried Gel (Carra(TM)Sorb M) in Wound
Healing. Following the submission of a 510(k) for a preservative-free
freeze-dried gel for wound care, the FDA allowed Carrington to market this
product, and it was launched in early 1996.
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Summary. The following table outlines the status of the products and
potential indications of the Company's complex carbohydrates developed, planned
or under development. There is no assurance of successful development,
completion or regulatory approval of any product not yet on the market.
PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED, PLANNED OR UNDER DEVELOPMENT
PRODUCT OR
POTENTIAL INDICATION POTENTIAL MARKET APPLICATIONS STATUS
- -------------------- ----------------------------- ------
Topical
Dressings Pressure and Vascular Ulcers Marketed
Cleansers Wounds Marketed
Antifungal Candida Marketed
Oral
Human
Anti-inflammatory Ulcerative Colitis Phase III
Clinical Trial
Injectable
Human
Anticancer Melanoma, Breast, Prostate, Colon, Phase I
Hypernephroma, and Soft Tissue Clinical Trial
Sarcoma
Veterinary
Anticancer Fibrosarcoma Marketed
Dental
Pain reduction Aphthous Ulcers Marketed
Vaccine Adjuvant
Veterinary
Poultry Vaccines Marek's Disease Marketed
Livestock Cattle, Sheep Clinical Trials
Marine (water treatment) Trout, Shrimp Clinical Trials
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Licensing Strategy
The Company expects that prescription pharmaceutical products containing
certain defined mannans will require a substantial degree of development effort
and expense. Before governmental approval to market any such product is
obtained, the Company may license these mannans for certain indications to other
pharmaceutical companies in the United States or foreign countries and require
such licensees to undertake the steps necessary to obtain marketing approval for
specific indications or in a particular country.
Similarly, the Company intends to license third parties to market
products containing defined mannans for certain human indications when it lacks
the expertise or financial resources to market effectively. If the Company is
unable to enter into such agreements, it may undertake to market the products
itself for such indications. The Company's ability to market these mannans for
specific indications will depend largely on its financial condition at the time
and the results of related clinical trials. There is no assurance that the
Company will be able to enter into any license agreements with third parties or
that, if such license agreements are concluded, they will contribute to the
Company's overall profits.
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 to advanced calcium
alginates products for North and South America and the People's Republic of
China. The Company will continue to seek opportunities to license products from
third parties that will enhance its product portfolio.
Raw Materials and Processing
The principal raw material used by the Company in its operations is the
leaf of the plant Aloe barbadensis Miller, popularly known as aloe vera. Through
a patented process, the Company produces bulk pharmaceutical and injectable
mannans and freeze-dried aloe vera extract from the central portion of the aloe
vera leaf known as the gel. Bulk pharmaceutical mannan, in the form of a
hydrogel, is used as an ingredient in certain of the Company's wound and skin
care products. Through additional processing, bulk mannans may be produced in
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 125 acres
planted with aloe vera. The Company plans to plant additional acreage as demand
for aloe vera leaves increases. The Company believes that the Costa Rica farm
will be capable of providing substantially all of the aloe vera leaves required
to meet the Company's presently anticipated needs (see "Properties--Costa Rica
Facility" below).
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Manufacturing
Prior to the second quarter of 1995, the Company produced substantially
all its wound and skin care products in a leased facility in Dallas, Texas.
During the first quarter of 1994, the Company completed an evaluation of the
production requirements that would be needed to meet all federal regulatory
requirements as a fully integrated pharmaceutical manufacturer, as well as the
production capacity that would be required to meet continued growth in the
Company's wound and skin care business. The Company decided to move its wound
and skin care manufacturing operation from its present location to an unused
portion of the Company's headquarters facility in Irving, Texas, and expand the
facility through higher capacity equipment. The moving, upgrading and expansion
of the manufacturing operation began in the fourth quarter of 1994, and the
project was completed and production began during the third quarter of 1995. At
the same location, the Company has upgraded its capabilities to produce
injectable grade pharmaceutical products. The Company believes that the new
plant's capacity will provide sufficient capacity for the present line of
products, and accommodate new products and sales growth. Final packaging of
certain of the Company's wound care products is completed by outside vendors.
The Company's calcium alginates, films and freeze-dried products are being
provided by third parties.
All of the Company's bulk pharmaceutical mannans, bulk injectable mannans
and freeze-dried aloe vera extracts are produced in its aloe vera processing
plant in Costa Rica. This facility has the ability to supply the bulk aloe vera
raw materials requirements of the Company's current product lines for the
foreseeable future. During the first quarter of 1994, the Company initiated a
project in Costa Rica to upgrade the production plant to meet regulatory
requirements for the production of bulk pharmaceutical oral and injectable
mannans as required for IND's. This project was completed in the fourth quarter
of 1994. Finished oral and injectable dosage forms will be produced by outside
vendors until in-house production becomes economically justified.
The production capacity of the Costa Rica plant is larger than the
Company's current usage level. Management believes, however, that the cost of
the Costa Rica facility will eventually be recovered through operations. The
larger production capacity will be required to conduct large scale clinical
trials with bulk pharmaceutical and injectable mannans.
Competition
Research and Development. The biopharmaceutical field is expected to
continue to undergo rapid and significant technological change. Potential
competitors in the United States are numerous and include pharmaceutical,
chemical and biotechnology companies. Many of these companies have substantially
greater capital resources, research and development staffs, facilities and
expertise (including in research and development, manufacturing, testing,
obtaining regulatory approvals and marketing) than the Company. This competition
can be expected to become more intense as commercial applications for
biotechnology and pharmaceutical products increase. Some of these companies may
be better able than the Company to develop, refine, manufacture and market
products which have application to the same indications as bulk pharmaceutical
mannans and bulk injectable mannans. The Company understands that certain of
these competitors are in the process
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of conducting human clinical trials of, or have filed applications with
government agencies for approval to market, certain products that will compete
with the Company's products.
Wound and Skin Care Division, Caraloe, Inc., and CVMD. The Company
competes against many companies that sell products which are competitive with
the Company's products, with many of its competitors using very aggressive
marketing efforts. Many of the Company's competitors are substantially larger
than the Company in terms of sales and distribution networks and have
substantially greater financial and other resources. The Company's ability to
compete against these companies will depend in part on the continued expansion
of the marketing network for its products. The Company believes that the
principal competitive factors in the marketing of its products is their quality,
and that they are naturally based and competitively priced.
Governmental Regulation
The production and marketing of the Company's products, and the Company's
research and development activities, are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, drugs for human use are subject to
rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended,
the regulations promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products. For marketing outside the United States,
the Company is subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement may vary widely from country to country.
Food and Drug Administration. The contents, labeling and advertising of
many of the Company's products are regulated by the FDA. The Company is required
to obtain FDA approval before it can study or market any proposed prescription
drugs and may be required to obtain such approval for proposed nonprescription
products. This procedure involves extensive clinical research, and separate FDA
approvals are required at various stages of product development. The approval
process requires, among other things, presentation of substantial evidence to
the FDA, based on clinical studies, as to the safety and efficacy of the
proposed product.
In order to initiate human clinical trials on a product, extensive basic
research and development information must be submitted to the FDA in an
investigational new drug ("IND") application. The IND application contains a
general investigational plan, a copy of the investigator's brochure (a
comprehensive document provided by the drug manufacturer), copies of the initial
protocol for the first study, a review of the chemistry, manufacturing and
controls information for the drug, pharmacology and toxicology information, any
previous human experience with the drug, results of preclinical studies and any
other information requested by the FDA.
If permission is obtained to proceed to clinical trials based on the IND
application, initial trials, usually categorized as Phase I, are instituted. The
initial or Phase I trials typically involve the
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administration of small, increasing doses of the investigational drug to healthy
volunteers, and sometimes patients, in order to determine the general overall
safety profile of the drug and how it is metabolized. Once the safety of the
drug has been established, Phase II efficacy trials are conducted in which the
expected therapeutic doses of the drug are administered to patients having the
disease for which the drug is indicated, and a therapeutic response is sought as
compared to the expected progression of the underlying disease or compared to a
competitive product or placebo. Information also is sought on any possible
short-term side effects of the drug. If efficacy and safety are observed in the
Phase II trials, Phase III trials are undertaken on an expanded group in which
the patients receiving the drug are compared to a different group receiving
either a placebo or some form of accepted therapy in order to establish the
relative safety and efficacy of the new drug compared with the control group.
Data are also collected to provide an adequate basis for future physician
prescribing information.
If Phases I through III are successfully completed, the data from these
trials are compiled into a new drug application ("NDA"), which is filed with the
FDA in an effort to obtain marketing approval. In general, an NDA will include a
summary of the components of the IND application, a clinical data section
reviewing in detail the studies from Phases I through III and the proposed
description of the benefits, risks and uses, or labeling, of the drug.
In general, a more comprehensive NDA and a more prolonged review process
are required for drugs not previously approved for marketing by the FDA. If a
second indication for an already approved product is sought, since many of the
components of the review process are the same, a shortened review process
generally can be anticipated. However, the FDA gives high priority to novel
drugs providing unique therapeutic benefits and a correspondingly lower priority
to drugs similar to or providing comparable benefits to others already on the
market.
In addition to submitting safety and efficacy data derived from clinical
trials for FDA approval, NDA approval requires the manufacturer of the drug to
demonstrate the identity, potency, quality and purity of the active ingredients
of the product involved, the stability of these ingredients and compliance of
the manufacturing facilities, processes and quality control with the FDA's
current Good Manufacturing Practices regulations. After approval, manufacturers
must continue to expend time, money and effort in production and quality control
to assure continual compliance with the current Good Manufacturing Practices
regulations.
Certain of the Company's wound and skin care products are registered with
the FDA as "devices" pursuant to the regulations under Section 510(k) of the
Federal Food, Drug and Cosmetic Act, as amended. A device is a product used for
a particular medical purpose, such as to cover a wound, with respect to which no
pharmacological claim can be made. A device which is "substantially equivalent"
to another device existing in the market prior to May 1976 can be registered
with the FDA under Section 510(k) and marketed without further testing. A device
which is not "substantially equivalent" is subject to an FDA approval process
similar to that required for a new drug, beginning with an Investigational
Device Exemption and culminating in a Premarket Approval. The Company has sought
and obtained all its device approvals under Section 510(k). With respect to
certain of its wound and skin care products, the Company intends to develop
claims for which IND and NDA submissions will be required.
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Department of Agriculture. Certain products being developed by the
Company for animal health indications must be approved by the USDA. The
procedure involves extensive clinical research, and USDA approvals are required
at various stages of product development. The approval process requires, among
other things, presentation of substantial evidence to the USDA as to the safety
and efficacy of the proposed product. Furthermore, even if approval to test a
product is obtained, there is no assurance that ultimate approval for marketing
the product will be granted. USDA approval procedures can be protracted.
Other Regulatory Authorities. The Company's advertising and sales
practices are subject to regulation by the Federal Trade Commission, the FDA and
state agencies. The Company's processing and manufacturing plants are subject to
federal, state and foreign laws and to regulation by the Bureau of Alcohol,
Tobacco and Firearms of the Department of the Treasury and by the Environmental
Protection Agency as well as the FDA.
The Company believes that it is in substantial compliance with all
applicable laws and regulations relating to its operations, but there is no
assurance that such laws and regulations will not be changed. Any such change
may have a material adverse effect on the Company's operations.
Patents and Proprietary Rights
As is industry practice, the Company has a policy of using patent,
trademark and trade secret protection with a view to preserving its right to
exploit the results of its research and development activities and, to the
extent it may be necessary or advisable, to exclude others from appropriating
the Company's proprietary technology. The Company's policy is to protect
aggressively its proprietary technology by seeking and enforcing patents in a
worldwide program.
The Company has obtained patents or filed patent applications in the
United States and approximately 24 other countries in three series regarding the
compositions of acetylated manna 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 manna 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 manna derivatives, matured into United States Patent No. 4,735,935
(the "935 Patent"), which was issued on April 5, 1988. United States Patent No.
4,917,890 (the "890 Patent") issued on April 17, 1990 from a divisional
application to the 935 Patent. This divisional application pertains to most of
the remaining claims in the original application not covered by the 935 Patent.
The 890 Patent generally relates to the basic processes of producing acetylated
manna derivatives, to certain specific examples of such processes and to certain
formulations of acetylated manna 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
I-12
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 manna 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 manna derivatives, was filed subsequent to the second series. Three
of them matured into United States Patent Nos. 5,106,616, issued on April 21,
1992, 5,118,673, issued on June 2, 1992, and 5,308,838, issued on May 3, 1994.
The Company intends to file a number of divisional applications to these
patents, each dealing with specific uses of acetylated manna derivatives. A
Patent Cooperation Treaty application based on the parent United States
application has been filed designating a number of foreign countries in which
the Company has the option to file specific applications.
In addition, the Company has also obtained a patent in the United States
relating to a wound cleanser, U.S. Patent No. 5,284,833, issued on February 8,
1994. This patent application is the subject of a Patent Cooperation Treaty
application designating a number of foreign countries in which the Company has
the option to file specific applications in the designated foreign countries.
The Company has obtained a patent in the United States relating to a
therapeutic device made from freeze-dried complex carbohydrate hydrogel (U.S.
Patent No. 5,409,703 issued on April 25, 1995).
The Company intends to file patent applications with respect to
subsequent developments and improvements when it believes such protection is in
the best interest of the Company. Although the scope of protection which
ultimately may be afforded by the patents and patent applications of the Company
is difficult to quantify, the Company believes its patents will afford adequate
protection to conduct the business operations of the Company. However, there can
be no assurance that (I) any additional patents will be issued to the Company in
any or all appropriate jurisdictions, (ii) litigation will not be commenced
seeking to challenge the Company's patent protection or such challenges will not
be successful, (iii) processes or products of the Company do not or will not
infringe upon the patents of third parties or (iv) the scope of patents issued
to the Company will successfully prevent third parties from developing similar
and competitive products. It is not possible to predict how any patent
litigation will affect the Company's efforts to develop, manufacture or market
its products.
The Company also relies upon, and intends to continue to rely upon, trade
secrets, unpatented proprietary know-how and continuing technological innovation
to develop and maintain its competitive position. The Company typically enters
into confidentiality agreements with its scientific consultants, and the
Company's key employees have entered into agreements with the Company requiring
that they forbear from disclosing confidential information of the Company and
assign to the Company all rights in any inventions made while in the Company's
employ relating to
I-13
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 manna derivatives do not infringe
any valid, enforceable, United States patents. A number of patents have been
issued to others with respect to various extracts of the Aloe vera plant and
their uses and formulations, particularly in respect of skin care and cosmetic
uses. While the Company is not aware of any existing patents which conflict with
its current and planned business activities, there can be no assurance that
holders of such other aloe vera based patents will not claim that particular
formulations and uses of acetylated manna derivatives in combination with other
ingredients or compounds infringe, in some respect, these other patents. In
addition, others may have filed patent applications and may have been issued
patents relating to products and technologies potentially useful to the Company
or necessary to commercialize its products or achieve their business goals.
There is no assurance that the Company will be able to obtain licenses of such
patents on terms acceptable to it.
The Company has given the trade name Carrisyn(R) to certain of its
products containing acetylated manna derivatives. A selected series of domestic
and foreign trademark applications exists for the marks Carrisyn(R), Manapol(R)
and Carrasyn(R) which are registered in the United States and several foreign
countries. Further, the Company has filed applications for the registration of a
number of other trademarks, including AVMP(TM), both in the United States and in
certain foreign countries. The Company believes that its trademarks and trade
names are valuable assets.
Employees
As of March 1, 1996, the Company employed 276 persons, of whom 26 were
engaged in the operation and maintenance of its Irving processing plant, 131
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, 102 were located in
Texas, 131 in Costa Rica and one in Puerto Rico. In addition, 45 sales personnel
were located in 26 other states. The Company considers relations with its
employees to be good. The employees are not represented by a labor union.
Financing
In January 1995, the Company entered into a financing arrangement with
NationsBank of Texas, N.A. The agreement is composed of a $2,000,000 line of
credit which expired one year from the date of the agreement and a $6,300,000
term loan that matures five years from the date of the agreement. The interest
rate on both credit facilities is prime plus one-half percent or the London
I-14
Interbank Offering Rate plus 200 basis points set for a period of thirty, sixty,
ninety or one hundred eighty days. The loans are collateralized by the Company's
assets and contain certain covenants. As of December 31, 1995, the Company was
not in compliance with the term loan's fixed charge ratio covenant. The Company
is in discussions with the Bank and is currently working toward a long-term
resolution to the non-compliance. As no binding amendments to the term-loan have
been agreed upon as of March 31, 1996, all outstanding debt under the term loan
has been presented as current for reporting purposes. Given the current cash
position, the Company's short- and long-term liquidity will not be significantly
affected. As of March 15, 1996, borrowings outstanding under the line of credit
and term loan were $0 and $2,977,073, respectively.
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 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
building, which are subject to a mortgage that secures the note assumed by the
Company in connection with its acquisition of the property and assigned to
NationsBank of Texas, N.A. During the fourth quarter of 1994, the Company began
a project to move its manufacturing operation from its Dallas Facility to the
unused space at this facility and expand the amount of office space. This
project was completed during the third quarter of 1995. The manufacturing
operations occupy approximately 19,000 square feet of the facility, and
administrative offices occupy approximately 16,000 square feet.
Laboratory Facility. The Company leases 24,000 square feet of office,
manufacturing and laboratory space (the "Laboratory Facility") in Irving, Texas
pursuant to a lease which expires in January 2000. The Company's in-house
research and development activities are conducted at the Laboratory Facility.
The Company maintains sterile production facilities (which occupy 4,000 square
feet of the total space) at the Laboratory Facility for the production of
injectable dosage forms of Acemannan Immunostimulant.
Dallas Facility. The Company leased a facility with 55,000 square feet of
office, manufacturing and warehouse space in Dallas, Texas (the "Dallas
Facility") pursuant to a lease that expired in June 1995. The Company did not
renew this lease. Until August of 1994, the Company's manufacturing facilities
occupied approximately 11,000 square feet, and its warehouse and distribution
center facilities occupied approximately 32,000 square feet, of the Dallas
Facility. In September 1994, the warehouse and distribution center was moved to
a new leased facility in Irving, Texas near the Walnut Hill Facility.
Substantially all the Company's wound and skin care products were produced at
the Dallas Facility. In the second quarter of 1995, the Company's manufacturing
operations were moved to the Walnut Hill Facility.
Warehouse and Distribution Facility. In August 1994, the Company leased a
35,050 square feet office and warehouse facility in Irving, Texas near the
Walnut Hill Facility. This lease expires in October 2001. The Company moved its
warehouse and distribution center from its Dallas Facility
I-15
to this facility in September 1994. The warehouse and distribution center occupy
approximately 27,000 square feet, and the remaining space is used for offices.
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 aloe vera processing plant was
completed during the second quarter of 1993, and the plant became operational in
June 1993. The Company believes that the Costa Rica farm will provide
substantially all the aloe vera leaves required to meet the Company's needs.
Development of this facility was partially financed with borrowings under a
five-year, U.S. dollar-denominated loan from Corporacion Privada de Inversiones
de Centroamerica, S.A. ("CPI"), 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 October 17, 1995, David L. Hinchey (the "Plaintiff")filed a lawsuit
styled David L. Hinchey v. Carrington Laboratories, Inc., Cause No. 95-11007-C
in the 68th Judicial District Court of Dallas County, Texas, alleging breach of
contract in connection with the termination of his employment by the Company.
The lawsuit alleged that the Plaintiff's damages were in excess of $50,000 but
did not allege a specific amount of damages. The Company filed an answer
generally denying the Plaintiff's allegations.
On March 25, 1996, the parties orally and informally agreed to a
settlement of the lawsuit that would, among other things, (i) change the date of
termination of the Plaintiff's employment from the original date to the date on
which the settlement agreement is signed, but without obligating the Company to
pay him any additional compensation, (ii) confirm that the option previously
granted to him under the Company's 1995 Stock Option Plan to purchase 10,000
shares of Common Stock of the Company at the original price of $18.625 per share
is still in effect, (iii) accelerate the vesting of that option so that it is
exercisable in full, (iv) confirm that in accordance with the terms of that
option he has a period of 30 days from the termination of his employment in
which to exercise the option, and (v) result in a dismissal of the lawsuit with
prejudice and release the Company from any liability to the Plaintiff arising
out of his employment or the termination thereof.
Inasmuch as the settlement agreement has not yet been reduced to writing
or signed by the parties, there can be no assurance as to whether or when the
lawsuit will be settled or, if settled, whether the terms of settlement will be
as described above.
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.
I-16
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 1994 High Low
----------- ---- ---
First Quarter $ 14 5/8 $ 11 3/4
Second Quarter 13 5/8 9 5/8
Third Quarter 11 7/8 8
Fourth Quarter 10 3/4 9 5/8
Fiscal 1995 High Low
----------- ---- ---
First Quarter $ 11 $ 13 1/8
Second Quarter 11 1/4 24 1/2
Third Quarter 25 1/2 40 3/4
Fourth Quarter 14 3/4 32 1/2
At March 15, 1996, there were 971 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. The Company's line of credit and term loan
agreements with NationsBank of Texas, N.A. prohibits the Company from declaring
or paying cash dividends on any of its capital stock.
II-1
ITEM 6. SELECTED FINANCIAL DATA.
- -------------------------------------------------------------------------------------------------------------
Selected Consolidated Financial Information
- -------------------------------------------------------------------------------------------------------------
Years Ended November 30, 1991, 1992, 1993,
1994 and Month Ended December 31, 1994 and
Year Ended December 31, 1995
November 30, December 31,
(Dollars and numbers of shares in thousands ---------------------------------------- ------------------
except per share amounts) 1991 1992 1993 1994 1994 1995
OPERATIONS STATEMENT INFORMATION:
Net Sales $15,420 $20,064 $21,184 $25,430 $ 1,781 $24,374
Cost and expenses:
Cost of sales 3,288 5,113 5,289 6,415 516 7,944
Selling, general and
administrative 7,748 9,687 9,371 11,968 985 12,442
Research and development 2,896 4,141 5,397 5,334 327 5,370
Cost of uncompleted public
offering -- 400 -- -- -- --
Interest, net 310 249 218 132 23 115
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,178 474 909 1,581 (70) (1,497)
Provision for income taxes 31 159 104 160 -- 131
Net income (loss) 1,147 315 805 1,421 (70) (1,628)
Net income (loss) per common
and common equivalent share: $.14 $.03 $.09 $.18 $(.01) $(.22)
- --------------------------------------------------------------------------------------------------------------
Weighted average shares
used in per share computations 6,482 6,801 7,324 7,341 7,344 7,933
- --------------------------------------------------------------------------------------------------------------
BALANCE SHEET INFORMATION:
Working capital $ 2,517 $ 5,702 $ 5,292 $ 4,720 $ 4,472 $ 8,962
Total assets 9,692 15,115 16,305 19,797 18,899 27,934
Long-term debt,
net of current portion 2,725 2,821 2,168 2,035 1,997 86
Total shareholders' investment $ 5,191 $10,062 $11,041 $12,509 $12,439 $22,399
- --------------------------------------------------------------------------------------------------------------
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
BACKGROUND
The Company is a research-based pharmaceutical and medical device company
engaged in the development, manufacturing and marketing of carbohydrate-based
therapeutics for the treatment of major illnesses and the dressing and
management of wounds and other skin conditions. The Company sells
nonprescription products through its wound and skin care division; veterinary
medical devices and pharmaceutical products through its veterinary medical
division; and consumer products through its consumer products subsidiary,
Caraloe, Inc. The Company's research and product portfolio is primarily based
on complex carbohydrate technology derived naturally from the Aloe vera plant.
In February 1995, the Company changed its fiscal year ending from November 30 to
December 31. Comparative financial statements reflect the single month of
December 1994, the fiscal year ended December 31, 1995, and the preceding fiscal
years ended November 30.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995 and November 30, 1994, the Company held cash and cash
equivalents of $6,222,000 and $1,805,000, respectively. The increase in cash of
$4,417,000 from November 30, 1994 to December 31, 1995 was attributable to the
issuance of common stock through a private placement and the exercise of options
and warrants (see Note 8 to the consolidated financial statements) that resulted
in an additional $11,602,000 cash. The cash raised through the sale of common
stock has been used for capital expenditures of $4,492,000, to increase
inventory by $468,000, to reduce debt by a net amount of $570,000, to reduce
trade accounts payable and accrued liabilities by $1,183,000 and to increase
prepaid expenses and other assets by $666,000. Prior to the private placement,
these expenditures were funded using the Company's line of credit. Subsequent to
the private placement, the line of credit was paid off and no additional
borrowings under the line have occurred. The capital expenditures related to
construction at the Company's headquarters in Irving, Texas and the relocation
of its manufacturing facility at a leased site to an unused portion of its
headquarters (see Note 3 to the Consolidated Financial Statements).
During the first quarter of 1994, the Company completed an evaluation of the
production requirements necessary to meet all federal regulatory requirements as
a fully-integrated pharmaceutical manufacturer and to provide the production
capacity needed to meet long-term sales growth. The Company has moved its wound
and skin care manufacturing operation from a leased location to an unused
portion of the Company's headquarters facility in Irving, Texas, and expanded
its production capability through the addition of higher capacity equipment. At
the same location, the Company has upgraded its capability to enable it to
produce injectable products that meet FDA standards.
An increase in inventory was planned during the first half of the year to meet
sales requirements during the period the manufacturing operations were
relocating. However, less than forecasted sales of the Company's bulk Aloe vera
products and less than projected sales in the Company's wound and skin care
products during the year has resulted in higher than expected inventory levels.
The Company regularly evaluates its inventory levels and adjusts production
levels at both its Costa Rica plant, where the bulk freeze-dried aloe vera
extract is manufactured, and at its U.S. plant to meet anticipated demand.
As a result of these evaluations, inventory levels were reduced by $910,000
during the second half of the year.
In January 1995, the Company entered into an agreement with NationsBank of
Texas, N.A. for a $2,000,000 line of credit and a $6,300,000 term loan (see Note
6 to the consolidated financial statements). This agreement increased the
Company's available borrowing capacity by over $3,000,000. As of December 31,
1995, the Company had available $2,000,000 under the line of credit and $823,000
under the term loan. In addition to increasing the Company's credit capacity,
the agreement lowered the interest rate that the Company has to pay on its
outstanding debt by over one percent. Proceeds from the term loan were used to
fund planned capital expenditures, a letter of credit required by a supplier, as
discussed below, and planned research projects. The line of credit will be used
for operating needs, as required. As of December 31, 1995, the Company was not
in compliance with
II-3
- --------------------------------------------------------------------------------
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
with the term loan's fixed charge ratio covenant. The Company is in discussions
with the Bank and is curently working toward a long-term resolution to the non-
compliance. As no binding amendments to the term-loan have been agreed upon as
of March 31, 1996, all outstanding debt under the term loan has been presented
as current for reporting purposes. Given the current cash position, the
Company's short- and long-term liquidity will not be significantly affected.
In February 1995, the Company entered into a supply agreement with its supplier
of freeze-dried products. The agreement required that the Company establish a
$1,500,000 letter of credit. The term loan with NationsBank was used to fund
this letter of credit. The funding of the letter of credit reduces the amount
that the Company can borrow under the term loan but does not increase the
Company's debt unless the letter of credit is utilized by the supplier. As of
March 21, 1996, the supplier has not made a presentation for payment under the
letter of credit. The contract also requires the Company to accept minimum
monthly shipments of $30,000 and to purchase a minimum of $2,500,000 worth of
product over a period of five years.
On April 5, 1995, the Company completed a self-directed private placement of
300,000 shares of common stock at a price of $10 per share (see Note 8 to the
consolidated financial statements). The net proceeds from this offering were
$2,956,000. Of these proceeds, $1,919,000 was used to pay off the outstanding
balance and related interest on the Company's line of credit with NationsBank.
Additionally, $150,000 was used to pay off debt related to the Company's Costa
Rica operations that bore an interest rate of 10.875%. Remaining proceeds are
being used to fund capital expenditures, research projects and other operating
needs.
From February 1995 through December 1995, 71 employees and 6 directors exercised
options for 580,951 shares of common stock. The option prices ranged from $6.25
to $29.00. A total of $7,349,000 was raised by the Company through the exercise
of these options. As part of registering for resale the shares issued in the
April 1995 private placement, the Company allowed certain warrant holders to
include the shares of common stock underlying their warrants in the
registration if they would exercise the warrants within 30 days of the effective
date of the registration statement. Warrants covering a total of 92,000 shares
were exercised at prices of $6.25 to $16.25 per share, resulting in the
Company's receipt of a total of $1,084,000.
The Company began a large scale clinical trial during the third quarter of 1995
for the testing of its Aliminase(TM) (formerly CARN 1000) oral capsules for the
treatment of acute flare-ups of ulcerative colitis. The Company estimates that
the cost of this clinical trial will be approximately $2,000,000, of which 20%
was required as an upfront payment. Payments made in advance to the clinical
research organization resulted in prepaid expenses increasing. In late 1995, the
Company began an initial Phase I study using an injectable Alovex(TM) (formerly
CARN 750) in cancer patients involving six cancer types. The estimated cost of
this study is $475,000. In the middle of 1996, the Company may begin 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 is expected to be
approximately the same as the one that began in the third quarter of 1995.
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. Per the agreement, the Company made an up-front payment to the supplier
of $500,000. This payment resulted in increasing the prepaid assets of the
Company. Additional payments totaling $500,000 will be made to the supplier as
new products are delivered.
The Company believes that its cash resources, including available cash, bank
line of credit and term loan agreement (see Note 6 to the consolidated financial
statements) and expected revenues from sales of wound and skin care, veterinary
and consumer products will provide the funds necessary to finance its current
operations. The Company does not expect that these cash resources will be
sufficient to finance the major clinical studies necessary to develop its
products to their full commercial potential. Additional funds, therefore, may
have to be raised through equity offerings, borrowings, licensing arrangements,
or other means.
II-4
- --------------------------------------------------------------------------------
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
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.
The production capacity of the Costa Rica plant is larger than the Company's
current usage level. Management believes, however, that the cost of the Costa
Rica facility will be recovered through operations. The upgraded facility will
provide for the production of products needed for large scale clinical trials.
At March 11, 1996, the Company had no material capital commitments other than
its promissory notes, leases, agreement with suppliers and clinical trials
described above.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations.
FISCAL 1994 COMPARED TO FISCAL 1995
Net sales decreased from $25,430,000 to $24,374,000, or 4%. The decrease of
$1,056,000 resulted from a $2,557,000, or 11%, decrease in the Company's wound
and skin care products. Sales of these products decreased from $23,703,000 to
$21,146,000. Fourth quarter sales of the wound and skin care products decreased
from $5,900,000 to $4,348,000, or 26%. The Company's wound and skin care
products have been marketed primarily to hospitals and select acute care
providers. This market has become increasing competitive as a result of
pressures to control health care costs. Hospital and distributors have reduced
their inventory levels and the number of suppliers used. Also, health care
providers have formed group purchasing consortia to leverage their buying power.
This environment has required the Company to offer greater discounts and
allowances throughout the year to maintain customer accounts. Discounts and
allowances increased from $1,267,000 to $3,063,000. They averaged 6.2% of gross
wound care sales in the fiscal fourth quarter of 1994, compared with a 18.3%
average during the fourth quarter of 1995. In February 1996, the Company revised
its price list to more accurately reflect current market conditions. Overall
wound care prices were lowered by an average of 19%. In addition to these cost
pressures, over the last several years the average hospital stay has decreased
over 50% resulting in more patients being treated at alternative care facilities
and at home by home health care providers. This also had a negative impact on
sales since the Company's sales force had been primarily focused on the hospital
market. To counter the market changes, the sales force is now also aggressively
pursuing the alternative care markets.
To continue to grow its wound care business, the Company realized that it had to
expand from the $38 million hydrogel market in which it currently competes to a
much larger segment of the billion dollar plus wound care market. To achieve
this objective, an aggressive program of new product development and licensing
was undertaken in 1995 with the goal to create 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 lines in late January 1996.
The Company expects to launch additional products in 1996. However, the Company
expects the first quarter of 1996 wound care sales to be over $1.5 million less
than the first quarter of 1995 as a result of the reduced prices and other
competitive market factors. The Company expects the new products to improve
sales during the second quarter.
The decrease in the Company's wound and skin care products was partially offset
by an increase in sales of Caraloe, Inc., the Company's consumer products
subsidiary. Caraloe's sales increased from $1,361,000 to $2,907,000, or 114%. Of
this, $1,513,000 is related to the sale of bulk Manapol(R) to one customer,
Mannatech. Sales of bulk Manapol(R) to Mannatech increased from $934,000 to
$2,447,000. Sales of the
II-5
- --------------------------------------------------------------------------------
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Company's veterinary products decreased from $366,000 to $321,000. In March
1996, the Company entered into an agreement with Farnam, Companies, Inc., a
leading marketer of veterinary products, to promote and sell its veterinary line
on a broader scale.
Cost of sales increased from $6,415,000 to $7,944,000, or 23.8%. As a percentage
of sales, cost of sales increased from 25.2% to 32.6%. This increase is
attributable to the increased sales of bulk Manapol(R), which has a
substantially lower profit margin, 33%, as compared to the Company's wound and
skin care products. In January 1996, the profit margin on Manapol(R) was reduced
to 8% as a result of current production levels and costs at the Company's Costa
Rica facility. Also, the increasing discounts, as discussed earlier, resulted in
the Company's wound and skin care product costs increasing by approximately 4%
as a percentage of sales.
Selling, general and administrative expenses increased from $11,968,000 to
$12,442,000, or 4%. To accelerate new product development and reduce overhead,
the Company was restructured. As a result of the restructuring, approximately
$1.4 million of one-time charges were taken during 1995. Of these charges,
approximately $700,000 were selling, general and administrative expenses,
$500,000 related to severance agreements, $130,000 in increased legal fees and
$70,000 to writing off refinancing costs that were incurred when the Company
refinanced its long term debt in 1993.
Research and development expenses increased from $5,334,000 to $5,370,000, or
1%. During the first half of 1995, $564,000 of cost associated with severance
agreements was charged to research and development. These charges reduced
internal salaries on an ongoing basis. However, this reduction was offset by
beginning the large scale clinical trial for the testing of Aliminase(TM)
(formerly CARN 1000) oral capsules for the treatment of acute flare-ups of
ulcerative colitis during the third quarter of 1995. The Company expects its
research and development costs to increase by over $2,000,000 in 1996 due to the
ulcerative colitis and cancer studies.
Interest expense increased from $171,000 to $251,000, or 47%, due to increased
borrowings during the first four months of 1995. Interest income increased from
$38,000 to $136,000, or 258%, due to having more excess cash to invest.
Net income for 1994 was $1,421,000, compared with a net loss of $1,628,000 for
1995. This change is a result a changing product mix, increased discounts and
one-time charges related to restructuring. Earnings per share were $.18 in
1994, compared to a loss per share of $.22 in 1995.
FISCAL 1993 COMPARED TO FISCAL 1994
Net sales increased from $21,184,000 to $25,430,000, or 20%. The increase of
$4,246,000 resulted from a $3,220,000, or 16%, increase in sales of the
Company's wound and skin products due to a price increase that went into effect
in January 1994. Actual unit sales of the wound and skin care products were
unchanged from 1993 to 1994. Also attributing to this increase is a $1,084,000,
or 393%, increase in sales of Caraloe, Inc., products, including bulk
Manapol(R). These increases were partially offset by a $58,000, or 13%, decline
in sales of veterinary products.
Cost of sales increased from $5,288,000 to $6,415,000, or 21%, due to increase
in net sales. As a percentage of net sales, cost of sales was 25% in 1993 and
1994.
Selling, general and administrative expenses increased from $9,371,000 to
$11,968,000, or 28%, representing a $1,904,000 volume-related increase in sales
and marketing expenses and a $693,000 increase in general and administrative
expenses attributable to increases in personnel-related costs and legal
expenses.
Research and development expenses decreased from $5,397,000 to $5,334,000, or
1%. Significant research and development expenditures were postponed in 1994
principally due to deferred clinical studies while the Company was upgrading its
manufacturing facilities to meet specification requirements for new products and
while it was obtaining the necessary FDA clearances to conduct the clinical
studies.
Interest expense decreased from $259,000 to $171,000. Interest income decreased
slightly from $40,000 to $38,000. Net income increased from $805,000 to
$1,421,000, or 77%, with earnings per share increasing from $.09 to $.18.
II-6
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Consolidated Financial Statements of the Company
and its subsidiaries listed on page F-1 of this Annual Report, which are hereby
incorporated by reference in this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting
and financial disclosure matters during any period covered by the financial
statements filed herein or any period subsequent thereto.
II-7
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) Compliance" in the Company's
definitive Proxy Statement relating to its 1996 annual meeting of shareholders,
which will be filed pursuant to Regulation 14A within 120 days after the
Company's fiscal year ended December 31, 1995.
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 1996
annual meeting of shareholders, which will be filed pursuant to Regulation 14A
within 120 days after the Company's fiscal year ended December 31, 1995.
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 "Voting Securities and Principal Shareholders" in the
Company's definitive Proxy Statement relating to its 1996 annual meeting of
shareholders, which will be filed pursuant to Regulation 14A within 120 days
after the Company's fiscal year ended December 31, 1995.
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 1996
annual meeting of shareholders, which will be filed pursuant to Regulation 14A
within 120 days after the Company's fiscal year ended December 31, 1995.
III-1
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.
(a)(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.
(a)(3) Exhibits.
Reference is made to the Index to Exhibits on pages E-1 through E-7 -- 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, 1995.
IV-1
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets -- November 30, 1994, December 31, 1994 and 1995 ....................... F - 2
Consolidated Statement of Operations -- years ended November 30, 1993 and
1994, month ended December 31, 1994
and year ended December 31, 1995 ................................................................. F - 3
Consolidated Statements of Shareholders' Investment --years ended November
30, 1993 and 1994, month ended December 31, 1994
and year ended December 31, 1995 ................................................................. F - 4
Consolidated Statements of Cash Flows -- years ended November 30, 1993 and
1994, month ended December 31, 1994
and year ended December 31, 1995 ................................................................. F - 5
Notes to Consolidated Financial Statements ......................................................... F - 6
Report of Independent Public Accountants .......................................................... F - 12
F-1
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------------------------
As of November 30, 1994 December 31, 1994 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,804,638 $ 464,367 $ 6,222,008
Accounts receivable, net of allowance
for doubtful accounts of $197,586, $204,905
and $226,884 at November 30, 1994, December 31,
1994 and December 31, 1995, respectively 2,891,375 2,884,911 2,226,651
Inventories 4,635,769 5,047,149 5,103,988
Prepaid expenses and other 641,184 538,650 858,506
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 9,972,966 8,935,077 14,411,153
- ----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, at cost 14,441,430 14,726,840 18,932,959
Less -- Accumulated depreciation (4,981,041) (5,070,401) (6,222,309)
- ----------------------------------------------------------------------------------------------------------------------------------
9,460,389 9,656,439 12,710,650
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 363,391 307,460 812,294
- ----------------------------------------------------------------------------------------------------------------------------------
$ 19,796,746 $ 18,898,977 $ 27,934,097
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $ 649,993 $ 450,395 $ 3,026,287
Accounts payable 1,217,511 1,557,946 589,607
Accrued liabilities 2,385,842 1,408,075 1,830,573
Short-term borrowings 1,000,000 1,046,532 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,253,346 4,462,948 5,446,467
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, net of current portion 2,034,563 1,997,261 88,506
- ----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Preferred stock, $100 par value, 1,000,000 shares
authorized, 10,572, 10,572 and 11,840 Series C shares
issued at November 30, 1994, December 31, 1994
and December 31, 1995, respectively 1,040,634 1,040,634 1,167,434
Common stock, $.01 par value, 30,000,000 shares
authorized, 7,344,390, 7,344,390 and 8,378,999 shares
issued and outstanding at November 30, 1994,
December 31, 1994 and December 31, 1995, respectively 73,444 73,444 83,790
Capital in excess of par value 33,074,508 33,074,508 44,666,112
Deficit (21,505,938) (21,576,007) (23,344,401)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (173,811) (173,811) (173,811)
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 12,508,837 12,438,768 22,399,124
$19,796,746 $ 18,898,977 $ 27,934,097
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these balance sheets.
F-2
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30, 1993, 1994, November 30, December 31,
and the Month Ended December 31, 1994 -------------------------- ------------------------
and the Year Ended December 31, 1995 1993 1994 1994 1995
- ---------------------------------------------------------------------------------------------------------------------------
NET SALES $21,183,774 $25,429,654 $1,781,017 $24,374,090
COST AND EXPENSES:
Cost of sales 5,288,450 6,414,757 516,247 7,944,271
Selling, general and administrative 9,370,946 11,968,200 984,535 12,441,972
Research and development 5,397,000 5,333,780 326,916 5,370,109
Interest expense 258,606 170,755 23,413 250,751
Interest income (39,860) (38,411) (25) (136,096)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 908,632 1,580,573 (70,069) (1,496,917)
Provision for income taxes 104,000 159,335 -- 131,350
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 804,632 $ 1,421,238 $ (70,069) $(1,628,267)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE: $.09 $.18 $(.01) $(.22)
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-3
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Investment
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended November 30, Foreign
1993 and 1994, and the Month Preferred Stock Common Stock Capital in Currency
Ended December 31, 1994, and the ----------------------------------------------------- Excess of Translation
Year Ended December 31, 1995, Shares Amount Shares Amount Par Value Deficit Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, November 30, 1992 8,429 $ 826,334 7,296,202 $72,962 $32,761,703 $(23,495,021) $(103,923)
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
upon exercise of stock
options and warrants -- -- 40,377 404 253,933 -- --
Dividends on preferred stock 1,011 101,100 -- -- -- (111,674) --
Net income for the year -- -- -- -- -- 804,632 --
Translation adjustment -- -- -- -- -- -- (69,888)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, November 30, 1993 9,440 927,434 7,336,579 73,366 33,015,636 (22,802,063) (173,811)
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
upon exercise of stock
options and warrants -- -- 7,811 78 58,872 -- --
Dividends on preferred stock 1,132 113,200 -- -- -- (125,113) --
Net income for the year -- -- -- -- -- 1,421,238 --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, November 30, 1994 10,572 $1,040,634 7,344,390 $73,444 $33,074,508 $(21,505,938) $(173,811)
- -------------------------------------------------------------------------------------------------------------------------------
Net loss for the month -- -- -- -- -- (70,069) --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 10,572 $1,040,634 7,344,390 $73,444 $33,074,508 $(21,576,007) $(173,811)
- -------------------------------------------------------------------------------------------------------------------------------
Sale of common stock at
$10 per share, net of
issuance
costs of $40,732 -- -- 300,000 3,000 2,956,268 -- --
Issuance of common stock
upon exercise of stock
options and warrants -- -- 710,536 7,105 8,426,340 -- --
Issuance of common stock for
management and directors'
compensation -- -- 24,073 241 208,996 -- --
Dividends on preferred stock 1,268 126,800 -- -- -- (140,127) --
Net loss for the year -- -- -- -- -- (1,628,267) --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 11,840 $1,167,434 8,378,999 $83,790 $44,666,112 $(23,344,401) $(173,811)
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-4
- ------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------
For the Years Ended November 30, 1993
and 1994 and the Month Ended November 30, December 31,
December 31, 1994 and the ------------------------- -------------------------
Year Ended December 31, 1995
1993 1994 1994 1995
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 804,632 $ 1,421,238 $ (70,069) $(1,628,267)
Adjustments to reconcile
income (loss)
to net cash provided
(used)
by operating activities:
Depreciation and
amortization 964,380 1,206,323 109,648 1,277,466
Changes in assets and
liabilities:
Decrease (increase) in
accounts receivable, net 483,691 (603,534) 6,464 658,260
(Increase) in inventories (230,018) (2,072,239) (411,380) (56,839)
Decrease (increase) in
prepaid expenses and
other 227,782 (427,752) 102,534 (319,856)
(Increase) decrease in
other assets (90,290) 7,535 35,642 (630,391)
Increase (decrease) in
accounts payable and
accrued liabilities.. 773,838 838,264 (637,332) (559,168)
- ------------------------------------------------------------------------------------------------
Net cash provided (used) by
operating activities.... 2,934,015 369,835 (864,493) (1,258,795)
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property,
plant and equipment (1,575,426) (3,014,053) (285,410) (4,206,119)
- ------------------------------------------------------------------------------------------------
Net cash used by
investing activities.... (1,575,426) (3,014,053) (285,410) (4,206,119)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuances of common stock 254,337 58,951 -- 11,392,713
Proceeds from short and
long-term borrowings -- 1,500,000 -- 5,741,569
Payments of short and
long-term debt (590,730) (385,224) (187,111) (5,847,644)
Principal payments of
capital lease obligations (69,819) (48,266) (3,257) (64,083)
- ------------------------------------------------------------------------------------------------
Net cash (used) provided by
financing activities (406,212) 1,125,461 (190,368) 11,222,555
- ------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (4,034) -- -- --
- ------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND
CASH EQUIVALENTS 948,343 (1,518,757) (1,340,271) 5,757,641
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,375,053 3,323,396 1,804,638 464,367
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,323,396 $ 1,804,639 $ 464,367 $ 6,222,008
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the
year for interest $ 283,938 $ 206,129 $ 20,386 $ 281,476
Cash paid during the
year for income taxes 166,210 124,120 -- 99,157
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCING
ACTIVITIES:
Equipment acquired
through capital leases -- 114,203 -- --
Issuances of common
stock and warrants -- -- -- 209,237
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-5
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
In February 1995, the Company changed its fiscal year ending from November 30 to
December 31. Comparative financial statements reflect the single month of
December 1994, the fiscal year ended December 31, 1995, and the preceding fiscal
years ended November 30.
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 1995 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.
DEPRECIATION AND AMORTIZATION Land improvements, buildings and improvements,
furniture and fixtures and machinery and equipment are depreciated on the
straight-line method over their estimated useful lives (3 - 40 years). Leasehold
improvements and equipment under capital leases are depreciated over the terms
of the respective leases (2 - 5 years).
TRANSLATION OF FOREIGN CURRENCIES Based on an evaluation of the activities
of its Costa Rica subsidiaries, as of September 1, 1993, the Company concluded
that the functional currency for these operations was the U.S. dollar.
Accordingly, such foreign entities translate monetary assets a nd 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
transl ated at historical rates. Translation adjustments and transaction gains
or losses are recognized in consolidated income in the year of occurrence.
Prior to September 1, 1993, all assets and liabilities of foreign subsidiaries
were translated into U.S. dollars at the exchange rates in effect at the balance
sheet date. Revenue and expense accounts were translated at weighted average
exchange rates. Translation gains and losses were reflected as a separate
component of shareholders' investment.
FEDERAL INCOME TAXES Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," was issued in February 1992. As permitted
under SFAS No. 109, the Company elected to adopt the new standard retroactively
to December 1, 1989. The adoption of SFAS No. 109 had no significant impact on
the financial condition and results of operations for any of the years
presented.
Deferred income taxes reflect the tax effect of temporary differences between
the amount of assets and liabilities recognized for financial reporting and tax
purposes. These deferred taxes are measured by applying currently enacted tax
laws. The effect on deferred income tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Certain of the Company's research and development expenditures qualify for tax
credits and such credits are accounted for as a reduction of the current
provision for income taxes in the year they are realized.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred. Certain laboratory and test equipment determined to have alternative
future uses in other research and development activities have been capitalized
and are depreciated as research and development expense over the life of the
equipment.
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS The Financial Accounting
Standards Board has issued SFAS No. 106, "Employers' Accounting for Post-
Retirement Benefits Other Than Pensions" and SFAS No. 112, "Employers'
Accounting for Post-Employment Benefits." The Company does not offer any post-
retirement or post-employment benefits; therefore, these statements have no
impact on the Company.
EARNINGS PER SHARE Earnings per share are based on the weighted average
number of common and common equivalent shares outstanding during each period.
Stock options and warrants are included as common stock equivalents if the
dilutive effect on net earnings per share is greater than 3%. The common stock
equivalents were either antidilutive, or represented dilution of less than 3%,
in 1993, 1994 and 1995. The weighted average number of common shares used in
computing earnings per share was 7,323,521, 7,340,982 and 7,932,675 for the
years ended November 30, 1993, 1994 and December 31, 1995.
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.
F-6
NOTE TWO. INVENTORIES:
Inventories are recorded at the lower of first-in, first-out cost or market. The
following summarizes the components of inventory at November 30, 1994 and
December 31, 1995:
1994 1995
- ----------------------------------------------------
Raw materials and supplies $ 577,475 $ 583,408
Work-in-process 2,615,090 2,725,399
Finished goods 1,443,204 1,795,181
- ----------------------------------------------------
$4,635,769 $5,103,988
- ----------------------------------------------------
Included in work-in-process is $2,495,021 and $2,537,546 of freeze-dried aloe
vera inventory as of November 30, 1994 and December 31, 1995, respectively.
Finished goods consist of materials, labor and manufacturing overhead.
NOTE THREE. PROPERTY, PLANT AND EQUIPMENT:
The Company has a 6.6 acre tract of land and a 35,000 square foot office and
manufacturing building situated thereon. This facility is located in Irving,
Texas, a suburb of Dallas, and is used as the Company's headquarters.
During July 1995, the Company completed the manufacturing and distribution
project started during the first quarter of 1994. The project involved the
physical relocation of its manufacturing operation from a leased facility in
Dallas to an unused portion at the Company's corporate headquarters facility in
Irving, Texas. The new facility is intended to meet all federal regulatory
requirements applicable to provide the production capacity needed to meet long-
term sales growth. At the same location, the Company has upgraded its capability
to enable it to produce FDA injectable products that meet FDA standards. The
total cost expended on the project was $4,469,000.
During the first quarter of 1994, the Company initiated a project in Costa Rica
to upgrade its production plant to meet regulatory requirements for the
production of bulk acetylated oral and injectable mannans as required for
investigational new drugs (INDs). This project was completed in the fourth
quarter of 1994 and cost approximately $1,200,000. Funding was provided by
existing cash on hand and cash flow from operations. The Company's net
investment in property, plant, equipment and other assets in Costa Rica at
November 30, 1994 and December 31, 1995 were $4,545,000 and $4,280,000,
respectively.
The production capacity of the Costa Rica plant is larger than the Company's
current usage level. Management believes, however, that the cost of the Costa
Rica facility will be recovered through operations. The upgraded facility will
provide for the production of products needed for large scale clinical trials.
Management will continue to assess the realizability of the Costa Rica plant
assets and will use the methodology described in SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
when it adopts that statement in 1996.
The following summarizes the components of property, plant and equipment at
November 30, 1994 and December 31, 1995:
1994 1995
- ----------------------------------------------------------------------------
Land and improvements $ 1,389,433 $ 1,389,334
Buildings and improvements 4,166,115 8,072,992
Furniture and fixtures 822,666 867,571
Machinery and equipment 7,314,440 7,825,667
Leasehold improvements 301,846 330,465
Equipment under capital leases 446,930 446,930
- ----------------------------------------------------------------------------
$14,441,430 $18,932,959
- ----------------------------------------------------------------------------
NOTE FOUR. ACCRUED LIABILITIES:
The following summarizes significant components of accrued liabilities at
November 30, 1994 and December 31, 1995:
1994 1995
- ----------------------------------------------------------------------------
Accrued payroll $ 587,038 $ 210,185
Accrued management
incentive compensation
386,533 -
Accrued sales commissions 199,622 251,511
Accrued taxes 133,055 165,249
Preferred dividends 111,168 124,495
Accrued severance liability 126,554 266,735
Other 841,872 812,398
- ----------------------------------------------------------------------------
$ 2,385,842 $ 1,830,573
- ----------------------------------------------------------------------------
F-7
- --------------------------------------------------------------------------------
Notes, continued
- --------------------------------------------------------------------------------
NOTE FIVE. SHORT-TERM BORROWINGS:
Short-term debt activity for each of the years ended November 30, 1994 and
December 31, 1995 was as follows:
1994 1995
- ------------------------------------------------------
Average amount
of short-term
debt outstanding
during the year $ 3,000 $ 467,667
Maximum amount
of short-term
debt outstanding
during the year 1,000,000 1,905,259
Average interest rate
at year end 9.25% -
Average interest rate
for the year - 8.9%
- ------------------------------------------------------
NOTE SIX. DEBT:
On January 30, 1995, the Company entered into an agreement with NationsBank of
Texas, N.A. (the "Bank"). The agreement is composed of a $2,000,000 line of
credit that expires one year from the date of the agreement and a $6,300,000
term loan that matures four years from the date of the agreement. The term loan
is payable in equal quarterly installments of $250,000 principal, plus accrued
interest beginning March 31, 1995 and ending January 30, 1999, when the unpaid
balance is due. The interest rate on both credit facilities is the Company's
option of prime plus .5% or 30, 60, 90, 180 day reserve adjusted LIBOR (London
Interbank Offering Rate) plus 2%. The Company paid a commitment fee of $31,500
on the closing date. In February, the Bank waived the requirement that the Costa
Rica assets be pledged to secure the term loan. The Company agreed to pay an
additional commitment fee of $31,500 at that time. $1,900,000 of the borrowings
from the Bank were used to pay off all of the outstanding balances on notes due
to Texas Commerce Bank Dallas, N.A. and $1,827,000 was used to pay off the
outstanding balance on the mortgage on the Company's headquarters building in
Irving, Texas. Of the term loan, $1,500,000 was carved out to provide a letter
of credit to a supplier. The letter of credit did not increase long-term debt
but reduced the amount available to borrow under the term loan. The remaining
proceeds will be used to fund planned capital expenditures, planned research
projects, and other operating needs. As of December 31, 1995, no amounts were
outstanding under the line of credit and $2,977,000 was outstanding under the
term loan. The interest rate on the borrowing ranged from 7.70% to 8.125%
between January 30, 1995 and December 31, 1995.
The borrowings under the agreement are secured by the Company's assets in the
United States. The Company is required to maintain a consolidated tangible net
worth of $12,000,000 through November 29, 1995; $13,750,000 thereafter through
November 29, 1996; $15,250, 000 thereafter through November 29, 1997; and
$16,750,000 thereafter. Also, the Company cannot permit the ratio of its
consolidated total liabilities to consolidated tangible net worth to exceed 1.0
to 1.0 at any time; the ratio of the sum of pretax net income plus unusual
charges (severance, extraordinary legal fees and debt refinancing costs related
to terminated debt agreements) plus interest expense plus lease expense to fixed
charges (interest expense and lease expense) to be less than 1.75 to 1.0; or
capital expenditures to exceed $6,500,000 from the date of the agreement to
December 31, 1995 or $2,000,000 per year for the calendar years thereafter. In
addition, the Company may not pay cash dividends. As of December 31, 1995, the
Company was not in compliance with the term loan's fixed charge ratio covenant.
The Company is in discussions with the Bank and is currently working toward a
long-term resolution to the non-compliance. As no binding amendments to the
term-loan have been agreed upon as of March 31, 1996, all outstanding debt under
the term loan has been presented as current for reporting purposes. Given the
current cash position, the Company's short- and long-term liquidity will not be
significantly affected.
In order to help finance the development of the Company's Costa Rica facilities,
the Company arranged a five-year U.S. dollar-denominated loan in the amount of
$600,000 from Corporacion Privada de Inversiones de CentroAmerica, S.A. In May
1995, the note was paid off using proceeds of the Company's private placement
(see Note 8.)
Long-term debt of the Company for the years ended November 30, 1994 and December
31, 1995 is summarized as follows:
1994 1995
- ----------------------------------------------------------
Note payable on land
and building $1,829,199 $
Note payable on Costa Rica
development costs 233,318 -
Term Loan 416,667 2,977,071
Obligations under capital leases 205,372 137,722
- ----------------------------------------------------------
2,684,556 3,114,793
Less - Current portion 649,993 3,026,287
- ----------------------------------------------------------
$2,034,563 $ 88,506
- ----------------------------------------------------------
F-8
The Company leases certain computer and other equipment under capital leases
expiring at various dates through 1998. The following is a schedule of future
minimum lease payments under the capital lease agreements together with the
present value of these payments as of December 31, 1995:
Fiscal Years Ending December 31,
- -----------------------------------------------
1996 $ 58,910
1997 51,164
1998 45,425
- -----------------------------------------------
Aggregate minimum lease payments 155,499
Less - Imputed interest included in
aggregate minimum lease payments 17,777
- -----------------------------------------------
Present value of aggregate minimum
lease payments $137,722
- -----------------------------------------------
NOTE SEVEN. PREFERRED STOCK:
SERIES C SHARES In June 1991, the Company completed a transaction whereby
the Company issued 7,909 shares of Series C 12% cumulative convertible preferred
stock (the "Series C Shares") in exchange for convertible debentures plus
interest accrued to the date of exchange to a private investor (the "Investor").
The Series C Shares have a par value of $100 per share, are convertible at par
into common stock of the Company at a price of $7.58 per share (subject to
certain adjustments), are callable by the Company after Ja nuary 14, 1996 and
provide for dividend payments to be made only through the issuance of additional
Series C Shares.
Subsequent to year end, all cumulative convertible preferred stock was converted
to 174,935 shares of the Company's common stock.
The Company had previously issued to the Investor a warrant to purchase 25,000
shares of common stock of the Company at $15 per share through February 1, 1996.
The Company also extended by three years, to February 1, 1996, the life of
certain warrants t hat had previously been issued to this Investor for the
purchase of 50,000 shares of common stock of the Company (20,000 of which are
now owned 10,000 shares each by two executives of the Investor, one of whom is a
director of the Company), and reduced the exercise price of such warrants from
$25 to $15 per share, which was above the market price of the common stock at
the date of adjustment.
In addition to issuing the Series C Shares to the Investor, the Company also
reduced the exercise price of warrants held by the Investor and one of its
executive officers to purchase 65,000 shares of the Company's common stock from
$15 per share to $12.75 per share, which was above the market price of the
common stock at the date of adjustment.
Subsequent to year end, the Investor exercised 25,000 warrants and the remaining
30,000 warrants at $12.75 per share.
NOTE EIGHT. COMMON STOCK:
PRIVATE PLACEMENT OF COMMON STOCK In April 1995, the Company completed a
self-directed private placement of 300,000 shares of unregistered common stock
at a price of $10.00 per share. The average of the high and low sale price of
the Company's common stock on the NASDAQ National Market on the day of the
placement was $10.69 per share. Total proceeds net of issuance cost was
$2,956,268. The Company agreed to use its best efforts to file a registration
statement with the Securities and Exchange Commission within 90 days after the
placement. Effective July 11, 1995, shares related to the private placement were
registered for resale with the Securities and Exchange Commission. Proceeds from
the placement were used for planned capital expenditures, payment of bank debt,
research and development expenditures and other operating needs.
STOCK OPTIONS The following summarizes stock option activity for each of the
three years ended November 30, 1993, 1994 and December 31, 1995:
Options Outstanding
Shares Price Per Share
- ------------------------------------------------------------
Balance, November 30, 1992 644,855 $6.25 to $29.00
Granted 240,205 $8.625 to $13.50
Lapsed or cancelled (114,320) $6.25 to $29.00
Exercised (17,025) $6.25 to $10.25
- ------------------------------------------------------------
Balance, November 30, 1993 753,715 $6.25 to $29.00
Granted 268,350 $8.25 to $12.75
Lapsed or cancelled (118,275) $6.25 to $21.725
Exercised (7,100) $6.25 to $10.25
- ------------------------------------------------------------
Balance, November 30, 1994 896,690 $6.25 to $29.00
Granted 575,475 $11.125 to $35.25
Lapsed or cancelled (72,036) $8.625 to $20.125
Exercised (580,951) $6.25 to $29.00
- ------------------------------------------------------------
Balance, December 31, 1995 819,178 $6.25 to $35.25
- -------------------------------------------------------------
Options exercisable at
December 31, 1995 175,424 $6.25 to $29.00
- -------------------------------------------------------------
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. 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, to
whom incentive options are granted at a price no less than
F-9
110% of the market value. 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, 1995 options to purchase 369,725 shares have
been granted under the option plan, of which no options for shares have been
exercised. The Company's 1985 Option Plan expired February 1995. The Company has
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 678,951 shares have been exercised.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued. The disclosure requirements of this statement are effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company intends to elect the option allowing it to continue to apply the
accounting provisions of APB Opinion 25, "Accounting for Stock Issued to
Employees." With the Company's plan of adoption, the impact will be limited to
additional footnote disclosure.
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 the
market price or in excess of the market price of the common stock at date of
issuance. The following summarizes warrant activity for each of the years ended
November 30, 1993, 1994 and December 31, 1995:
Warrants Outstanding
Shares Price Per Share
- -----------------------------------------------------------------------
Balance, November 30, 1992 330,376 $ 5.25 to $30.50
Granted 10,000 $13.00
Lapsed or cancelled (41,126) $19.75 to $30.50
Exercised (20,750) $ 5.25 to $ 6.25
- -----------------------------------------------------------------------
Balance, November 30, 1993 278,500 $ 6.25 to $26.00
Lapsed or cancelled (42,500) $18.00 to $26.00
- -----------------------------------------------------------------------
Balance, November 30, 1994 236,000 $ 6.25 to $20.125
Lapsed or cancelled (130,000) $11.25 to $26.00
Exercised (92,000) $ 6.25 to $16.25
- -----------------------------------------------------------------------
Balance, December 31, 1995 99,000 $12.125 to $20.125
- -----------------------------------------------------------------------
Warrants exercisable at
December 31, 1995 99,000 $12.125 to $20.125
- -----------------------------------------------------------------------
Warrants for 78,000 shares expire in 1996. The remaining warrants for 21,000
shares expire between 2000 and 2002.
EMPLOYEE STOCK PURCHASE PLAN On October 29, 1992, the Company adopted an
Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, employees may purchase common stock at a price equal to the
lesser of 85% of the market price of the Company's common stock on the last
business day preceding the enrollment date as defined as January 1, April 1,
July 1 or October 1 or any plan year or 85% of the market price on the last
business day of the month. If any employee elects to terminate participation in
the Stock Purchase Plan, the employee is not eligible to re-enroll until the
first enrollment date following six months from such election. The Stock
Purchase Plan provides for the grant of rights to employees to purchase a
maximum of 500,000 shares of common stock of the Company commencing on January
1, 1993. As of December 31, 1995, 48,731 shares had been purchased by employees
at prices ranging from $7.23 to $29.54 per share.
NOTE NINE. SHARE PURCHASE RIGHTS PLAN:
The Company's Board of Directors adopted a share purchase rights plan by
declaring a dividend distribution of one preferred share purchase right (a
"Right") on each outstanding share of the Company's common stock (the "Common
Shares"). The dividend distribution was made October 15, 1991, payable to
shareholders of record on that date. The Rights are subject to an agreement (the
"Rights Agreement") between the Company and the Company's stock transfer agent,
and will expire October 15, 2001, unless redeemed at an earlier date.
Pursuant to the Rights Agreement, each Right will entitle the holder thereof to
buy one one-hundredth of a share of the Company's Series D Preferred Stock (the
"Preferred Shares"), at an exercise price of $80, subject to certain
antidilution adjustments. The Rights will not be exercisable or transferable
apart from the Common Shares, until (i) the tenth day after a person or group
acquires 20% or more of the Common Shares or (ii) the tenth business day
following the commencement of, or the announcement of an intention to make, a
tender or exchange offer for 20% or more of the Common Shares. The Rights will
not have any voting rights or be entitled to dividends. If the Company is
acquired in a merger or other business combination, each Right will entitle its
holder to purchase, at the exercise price of the Right, a number of the
acquiring company's common shares having a current market value of twice such
F-10
price. Alternately, if a person or group acquires 20% or more of the Common
Shares, then each Right not owned by such acquiring person or group will entitle
the holder to purchase, for the exercise price, a number of Common Shares having
a market value of twice such price. The Rights are redeemable at the Company's
option for $.01 per Right at any time prior to the close of business on the
seventh day after the first date of public announcement that a person or group
has acquired beneficial ownership of 20% or more of the Common Shares. At any
time after a person or group acquires 20% or more of the Common Shares, but
prior to the time such acquiring person acquires 50% or more of the Common
Shares, the Company's Board of Directors may redeem the Rights (other than those
owned by the acquiring person or group), in whole or in part, by exchanging one
Common Share for each Right.
NOTE TEN. OPERATING LEASES:
The Company conducts a significant portion of its operations from an
office/warehouse/distribution facility and an office/laboratory facility under
operating leases that expire over the next seven years. In addition, the Company
leases certain office equipment under operating leases that expire over the next
four years.
The Company is committed under noncancellable operating leases, with minimum
lease payments as of December 31, 1995 as follows:
Fiscal Years Ending December 31,
- ----------------------------------------------
1996 $ 403,425
1997 410,130
1998 419,733
1999 394,128
2000 134,055
Thereafter 82,809
- ----------------------------------------------
Total minimum lease payments $1,844,280
- ----------------------------------------------
Total rental expense under operating leases was $422,337, $446,935 and $363,973
for the years ended November 30, 1993, 1994 and December 31, 1995, respectively.
NOTE ELEVEN. INCOME TAXES:
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at November 30, 1994 and December 31, 1995 are as
follows:
1994 1995
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Net operating loss carryforward $6,744,072 $ 9,834,875
Research and development
and other credits 860,509 839,189
Patent fees 287,450 308,110
Other, net 526,930 794,948
Less - Valuation allowance (8,418,961) (11,777,122)
- -----------------------------------------------------------------
Deferred income tax asset $ - $ -
- -----------------------------------------------------------------
Pursuant to the requirements to SFAS No. 109, a valuation allowance is provided
when it is more likely than not the deferred income tax asset will not be
realized. The Company has provided a valuation allowance against the entire
deferred tax asset at November 30, 1994 and December 31, 1995.
The provision for income taxes for the years ended November 30, 1993, 1994 and
December 31, 1995 consisted of the following:
1993 1994 1995
- -------------------------------------------------------
Current provision $104,000 $159,335 $131,350
Deferred provision, net - - -
- -------------------------------------------------------
Total provision $104,000 $159,335 $131,350
- -------------------------------------------------------
The differences (expressed as a percentage of pre-tax income) between the
statutory and effective federal income tax rates are as follows:
1993 1994 1995
- -----------------------------------------------------
Statutory tax rate 34.0% 34.0% (34.0%)
State income taxes 6.2 5.4 2.8
Recognition of previously
unrecognized deferred
tax benefits (36.6) (35.3) -
Unrecognized deferred tax
benefit - - 34.6
Expenses related to foreign
operations 6.2 4.7 4.1
Research and development
tax credit adjustment .7 .5 -
Other .9 .8 1.3
- -----------------------------------------------------
Effective tax rate 11.4% 10.1% 8.8%
- -----------------------------------------------------
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $28,926,000 for federal income tax purposes, which expire during
the period from 2000 to 2010, and investment and research and development tax
credit carryforwards of approximately $839,000, which expire during the period
from 1999 to 2008, all of which are available to offset federal income taxes due
in future periods.
F-11
NOTE TWELVE.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are not concentrated in any specific
geographic region but are concentrated in the health care industry. Significant
sales were made to two unaffiliated customers, Baxter Healthcare Corporation
accounted for $2,146,000, $2,775,000 and $3,347,768 and Owens & Minor accounted
for $1,780,308, $1,794,609 and $3,347,768 of the Company's net sales in 1993,
1994 and 1995, respectively. Sales by Caraloe, Inc. to an unaffiliated customer,
Mannatech, Inc., formerly Emprise, Inc., accounted for $0, $934,000 and
$2,488,000 of the Company's net sales in 1993, 1994 and 1995, respectively. The
Company performs ongoing credit evaluations of its customers' financial
condition and establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers and historical trends and
other information.
NOTE THIRTEEN. FAIR VALUES OF
FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of financial instruments. The following methods and
assumptions were used by the Company in estimating the fair value disclosures
for its financial instruments. For cash, trade receivables and payables, the
carrying amounts reported in the Consolidated Balance Sheets approximate fair
value. The carrying amounts for revolving notes and notes payable approximate
fair value based upon the borrowing rates currently available to the Company for
similar bank loans.
Note Fourteen. Unaudited Selected Quarterly Financial Data:
The unaudited selected quarterly financial data below reflect the fiscal years
ended November 30, 1994 and December 31, 1995, respectively.
1994 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------
Net sales $6,414,153 $5,969,416 $6,303,426 $ 6,742,659
Gross profit 5,092,901 4,508,094 4,682,973 4,730,929
Net income 402,795 403,752 391,750 222,941
Income per
share .05 .05 .05 .03
Weighted
average shares 7,337,458 7,339,148 7,342,932 7,344,390
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------
Net sales $6,275,759 $6,407,881 $6,621,396 $ 5,069,054
Gross profit 4,636,540 4,331,661 4,351,009 3,110,609
Net income (496,782) (286,555) 162,522 (1,007,452)
Income
per share (.07) (.04) .02 (.12)
Weighted
average shares 7,359,387 7,812,878 8,213,508 8,344,929
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Report of Independent Public Accountants
- -------------------------------------------------------------------------
To the Shareholders and Board of Directors
of Carrington Laboratories, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Carrington
Laboratories, Inc. (a Texas corporation), and subsidiaries as of November 30,
1994, December 31, 1994, and December 31, 1995, and the related consolidated
statements of operations, shareholders' investment, and cash flows for each of
the two years in the period ended November 30, 1994, the month ended December
31, 1994, and the year ended December 31, 1995. 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
mis-statement. 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 November 30, 1994, December 31, 1994
and December 31, 1995, and the results of their operations and their cash flows
for the two years ended November 30, 1994, the month ended December 31, 1994 and
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Dallas, Texas
February 9, 1996
F-12
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: April 1, 1996 By: /s/ Carlton E. Turner
-----------------------
Carlton E. Turner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Carlton E. Turner President, Chief Executive April 1, 1996
- ----------------------------- Officer and Director
Carlton E. Turner
/s/ Sheri L. Pantermuehl Chief Financial Officer April 1, 1996
- ----------------------------- (principal financial and
Sheri L Pantermuehl accounting officer)
/s/ R. Dale Bowerman Director April 1, 1996
- -----------------------------
R. Dale Bowerman
/s/ George DeMott Director April 1, 1996
- -----------------------------
George DeMott
/s/ Robert A. Fildes, Ph.D. Director April 1, 1996
- -----------------------------
Robert A. Fildes, Ph.D.
/s/ Thomas J. Marquez Director April 1, 1996
- -----------------------------
Thomas J. Marquez
/s/ James T. O'Brien Director April 1, 1996
- -----------------------------
James T. O'Brien
/s/ Selvi Vescovi Director April 1, 1996
- -----------------------------
Selvi Vescovi
S - 1
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARRINGTON LABORATORIES, INC.
Date: April 1, 1996 By:
------------------------------
Carlton E. Turner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
- ----------------------------- President, Chief Executive April 1, 1996
Carlton E. Turner Officer and Director
- ----------------------------- Chief Financial Officer April 1, 1996
Sheri L. Pantermuehl (principal financial and
accounting officer)
- ----------------------------- Director April 1, 1996
R. Dale Bowerman
- ----------------------------- Director April 1, 1996
George DeMott
- ----------------------------- Director April 1, 1996
Robert A. Fildes, Ph.D.
- ----------------------------- Director April 1, 1996
Thomas J. Marquez
- ----------------------------- Director April 1, 1996
James T. O'Brien
- ----------------------------- Director April 1, 1996
Selvi Vescovi
S - 2
INDEX TO EXHIBITS
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
3.1 Restated Articles of Incorporation of Carrington
(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 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 (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 (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* Bylaws of Carrington, as amended through April 27,
1995.
4.1 Form of certificate for Common Stock of Carrington
(incorporated herein by reference to Exhibit 4.5 to
Carrington's Registration Statement on Form S-3 (No.
33-57360) filed with the Securities and Exchange
Commission on January 25, 1993).
4.23 Rights Agreement dated as of September 19, 1991,
between Carrington 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 (incorporated
herein by reference to Exhibit 10.2 to Carrington's 1993
Annual Report on Form 10-K).
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).
E - 1
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.3+ Form of Nonqualified Stock Option Agreement for
nonemployee directors, 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. 33-50430) filed with the Securities and
Exchange Commission on August 4, 1992).
10.4 Continuing Guaranty dated June 30, 1987, by Carrington
in favor of American Hospital Supply Corporation
(incorporated herein by reference to Exhibit 10.88 to
Carrington's 1987 Annual Report on Form 10-K).
10.5 Lease agreement dated as of July 28, 1988, between
Carrington and ESBO Holdings, Inc. (incorporated herein
by reference to Exhibit 10.71 to Carrington's 1988 Annual
Report on Form 10-K).
10.6 Assumption Agreement dated August 2, 1989, between
Resource Savings Association, E. Don Lovelace, Jerry L.
Lovelace and Carrington (relating to the assumption by
Carrington of obligations under the Promissory Note
listed as Exhibit 10.9 and the Deed of Trust, Security
Agreement and Assignment of Rents listed as Exhibit
10.10) (incorporated herein by reference to Exhibit 10.62
to Carrington's 1991 Annual Report on Form 10-K).
10.7 Promissory Note in the principal amount of $2,350,000,
dated May 9, 1985, made by E. Don Lovelace and Jerry
L. Lovelace and payable to Resource Savings Association
(assumed by Carrington pursuant to the Assumption
Agreement listed as Exhibit 10.8) (incorporated herein by
reference to Exhibit 10.63 to Carrington's 1991 Annual
Report on Form 10-K).
10.8 Deed of Trust, Security Agreement and Assignment of
Rents dated May 9, 1985, made by E. Don Lovelace and
Jerry L. Lovelace in favor of William B. Sechrest for the
benefit of Resource Savings Association (assumed by
Carrington pursuant to the Assumption Agreement listed
as Exhibit 10.8)
10.9 First Amendment to Lease dated October 6, 1989,
amending Lease listed as Exhibit 10.5 (incorporated
herein by reference to Exhibit 10.58 to Carrington's 1990
Annual Report on Form 10-K).
E - 2
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.10 Common Stock Purchase Warrant (amended and
restated) dated June 28, 1991, issued by Carrington to
High Plains Baptist Hospital (incorporated herein by
reference to Exhibit 10.12 to Carrington's 1993 Annual
Report on Form 10-K).
10.11 Form of Common Stock Purchase Warrant issued by
Carrington to certain persons in February 1990
(incorporated herein by reference to Exhibit 10.52 to
Carrington's 1989 Annual Report on Form 10-K).
10.12 Common Stock Purchase Warrant dated March 27, 1990,
issued by Carrington to Barry Kitt (incorporated herein
by reference to Exhibit 10.45 to Carrington's 1990 Annual
Report on Form 10-K).
10.13 Common Stock Purchase Warrant dated July 19, 1990,
issued by Carrington to H. Reginald McDaniel, M.D.
(incorporated herein by reference to Exhibit 10.46 to
Carrington's 1990 Annual Report on Form 10-K).
10.14 License Agreement dated September 20, 1990, between
Carrington 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).
10.15+ Employment Agreement dated as of December 11, 1990,
between Carrington and Karl H. Meister (incorporated
herein by reference to Exhibit 10.54 to Carrington's 1990
Annual Report on Form 10-K).
10.16 English translation of Loan Agreement dated as of
December 14, 1990, between Finca Savila, S.A. and
Corporacion Privada de Inversiones de Centroamerica,
S.A., together with Carrington's continuing guarantee
dated as of December 17, 1990 in favor of lender
(incorporated herein by reference to Exhibit 19.1 to
Carrington's 1991 Annual Report on Form 10-K).
10.17 Form of Common Stock Purchase Warrant (amended and
restated) dated June 28, 1991, issued by Carrington to
High Plains Baptist Hospital (incorporated herein by
reference to Exhibit 10.19 to Carrington's 1993 Annual
Report on Form 10-K).
E - 3
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.18 Form of Common Stock Purchase Warrant dated January
11, 1991, issued by Carrington to R. Dale Bowerman
(incorporated herein by reference to Exhibit 10.49 to
Carrington's 1990 Annual Report on Form 10-K).
10.19 Form of Common Stock Purchase Warrant (amended and
restated) dated June 28, 1991, issued by Carrington to
T.H. Holloway, Jr. (incorporated herein by reference to
Exhibit 10.21 to Carrington's 1993 Annual Report on
Form 10-K).
10.20 Contract Research Agreement dated as of August 8,
1991, between Carrington 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).
10.21 Lease Agreement dated as of August 30, 1991, between
Carrington and Western Atlas International, Inc.
(incorporated herein by reference to Exhibit 10.59 to
Carrington's 1991 Annual Report on Form 10-K).
10.22 Form of Common Stock Purchase Warrant dated
September 19, 1991, issued by Carrington to each of Ian
R. Tizard, Ph.D., J. Harold Helderman, M.D., Maurice C.
Kemp, David L. Busbee and Gerald R. Bratton
(incorporated herein by reference to Exhibit 10.34 to
Carrington's 1991 Annual Report on Form 10-K).
10.23 Second Amendment to Lease dated November 14, 1991,
amending Lease listed as Exhibit 10.5 (incorporated
herein by reference to Exhibit 10.58 to Carrington's 1991
Annual Report on Form 10-K).
10.24 Form of Common Stock Purchase Warrant dated March
19, 1992, issued by Carrington to Hedgemoor
Consultants, Inc. (incorporated herein by reference to
Exhibit 10.65 to Carrington's 1992 Annual Report on
Form 10-K).
10.25 Form of Common Stock Purchase Warrant dated April
29, 1992, issued by Carrington to Haskell and Joyce Sells
(incorporated herein by reference to Exhibit 10.66 to
Carrington's 1992 Annual Report on Form 10-K).
E - 4
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.26 Form of Common Stock Purchase Warrant dated April
29, 1992, issued by Carrington to Vance Kirkland Meares
(incorporated herein by reference to Exhibit 10.67 to
Carrington's 1992 Annual Report on Form 10-K).
10.27 Form of Common Stock Purchase Warrant dated April
29, 1992, issued by Carrington to Patrice M. Carroll
(incorporated herein by reference to Exhibit 10.68 to
Carrington's 1992 Annual Report on Form 10-K).
10.28 Form of Common Stock Purchase Warrant dated April
29, 1992, issued by Carrington to Michael A. Carroll
(incorporated herein by reference to Exhibit 10.69 to
Carrington's 1992 Annual Report on Form 10-K).
10.29+* Employee Stock Purchase Plan of Carrington as amended
through June 15, 1995.
10.30 Stock Purchase Agreement dated October 27, 1992,
between Carrington and the investors named therein
(incorporated herein by reference to Exhibit 2.1 to
Carrington's Registration Statement Form S-3 (No. 33-
57360) filed with the Securities and Exchange
Commission on January 25, 1993).
10.31 Registration Rights Agreement between Carrington and
Leslie B. Clements and related letter from Carrington to
Mr. Clements dated January 21, 1993 (incorporated
herein by reference to Exhibit 2.3 to Carrington's
Registration Statement on Form S-3 (No. 33-57360) filed
with the Securities and Exchange Commission on January
25, 1993).
10.32 Registration Rights Agreement between Carrington and
Dr. Robert H. Carpenter and related letter from
Carrington to Dr. Carpenter dated January 21, 1993
(incorporated herein by reference to Exhibit 2.4 to
Carrington's Registration Statement on Form S-3 (No.
33-57360) filed with the Securities and Exchange
Commission on January 25, 1993).
10.33 Registration Rights Agreement between Carrington and
Charles F. May and related letter from Carrington to Mr.
May dated January 21, 1993 (incorporated herein by
reference to Exhibit 2.5 to Carrington's Registration
Statement on Form S-3 (No. 33-57360) filed with the
Securities and Exchange Commission on January 25,
1993).
E - 5
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.34 Registration Rights Agreement between Carrington and
Bertram D. Siegel and related letter from Carrington to
Mr. Siegel dated January 21, 1993 (incorporated herein
by reference to Exhibit 2.6 to Carrington's Registration
Statement on Form S-3 (No. 33-57360) filed with the
Securities and Exchange Commission on January 25,
1993).
10.35+ Employment Agreement dated as of August 11, 1992,
between Carrington and Stephen G. Madison
(incorporated herein by reference to Exhibit 10.76 to
Carrington's 1992 Annual Report on Form 10-K).
10.36 Common Stock Purchase Warrant dated September 14,
1993, issued by Carrington to E. Don Lovelace
(incorporated herein by reference to Exhibit 10.44 to
Carrington's 1993 Annual Report on Form 10-K).
10.37 Common Stock Purchase Warrant dated September 14,
1993, issued by Carrington to Jerry L. Lovelace
(incorporated herein by reference to Exhibit 10.45 to
Carrington's 1993 Annual Report on Form 10-K).
10.38 Modification and Extension Agreement dated as of
September 15, 1993, relating to Assumption Agreement
listed as Exhibit 10.8, Promissory Note listed as Exhibit
10.9 and Deed of Trust, Security Agreement and
Assignment of Rents listed as Exhibit 10.10 (incorporated
herein by reference to Exhibit 10.46 to Carrington's 1993
Annual Report on Form 10-K).
10.39 Non-Exclusive Supply Agreement dated as of January 26,
1994, between Carrington and Cambrex Hydrogels, Inc.
(incorporated herein by reference to Exhibit 10.47 to
Carrington's 1993 Annual Report on Form 10-K).
10.40 Third Amendment to Lease dated as of February 15,
1994, amending Lease listed as Exhibit 10.5
(incorporated herein by reference to Exhibit 10.48 to
Carrington's 1993 Annual Report on Form 10-K).
10.41 Agreement Regarding Termination of Employment and
Full and Final Release dated February 16, 1994, between
Carrington and David A. Hotchkiss (incorporated herein
by reference to Exhibit 10.49 to Carrington's 1993 Annual
Report on Form 10-K).
E - 6
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.42+ 1995 Stock Option Plan (incorporated herein by reference
to Exhibit 10.50 to Carrington's 1994 Annual Report on
Form 10-K).
10.43 Supply Agreement dated May 16, 1994, between Caraloe,
Inc. and Emprise International, Inc. (incorporated herein
by reference to Exhibit 10.51 to Carrington's 1994 Annual
Report on Form 10-K).
10.44 Trademark License Agreement dated May 16, 1994,
between Caraloe, Inc. and Emprise International, Inc.
(incorporated herein by reference to Exhibit 10.52 to
Carrington's 1994 Annual Report on Form 10-K).
10.45 License Agreement dated March 18, 1994, between
Carrington and Societe Europeenne de Biotechnologie
(incorporated herein by reference to Exhibit 10.53 to
Carrington's 1994 Annual Report on Form 10-K).
10.46 Agreement dated March 28, 1994, between Carrington
and Keun Wha Pharmaceutical Co., Ltd., (incorporated
herein by reference to Exhibit 10.54 to Carrington's 1994
Annual Report on Form 10-K).
10.47 Lease Agreement dated June 15, 1994, between DFW
Nine, a California limited partnership, and Carrington
(incorporated herein by reference to Exhibit 10.55 to
Carrington's 1994 Annual Report on Form 10-K).
10.48+ Agreement Regarding Termination of Employment and
Full and Final Release dated August 17, 1994, between
Carrington and Stephen G. Madison (incorporated herein
by reference to Exhibit 10.56 to Carrington's 1994 Annual
Report on Form 10-K).
10.49 Lease Amendment dated August 23, 1994, amending
Lease Agreement listed as Exhibit 10.54 (incorporated
herein by reference to Exhibit 10.57 to Carrington's 1994
Annual Report on Form 10-K).
10.50 License Agreement dated September 29, 1994, between
Carrington and Immucell Corporation (incorporated
herein by reference to Exhibit 10.58 to Carrington's 1994
Annual Report on Form 10-K).
10.51 Consulting Agreement dated November 17, 1994,
between Carrington and R. Dale Bowerman (incorporated
herein by reference to Exhibit 10.59 to Carrington's 1994
Annual Report on Form 10-K).
E - 7
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.52 Third Lease Amendment dated December 1, 1994,
amending Lease Agreement listed as Exhibit 10.21
(incorporated herein by reference to Exhibit 10.60 to
Carrington's 1994 Annual Report on Form 10-K).
10.53 Credit Agreement dated January 30, 1995, between
Carrington and NationsBank of Texas, N.A.
(incorporated herein by reference to Exhibit 10.61 to
Carrington's 1994 Annual Report on Form 10-K).
10.54 Settlement Agreement dated February 7, 1995, between
Carrington, Bill H. McAnalley, Clinton H. Howard and
Royal Bodycare, Inc. (incorporated herein by reference to
Exhibit 10.62 to Carrington's 1994 Annual Report on
Form 10-K).
10.55 Production Contract dated February 13, 1995, between
Carrington and Oregon Freeze Dry, Inc. (incorporated
herein by reference to Exhibit 10.63 to Carrington's 1994
Annual Report on Form 10-K).
10.56 Management Compensation Plan (incorporated herein by
reference to Exhibit 10.64 to Carrington's 1994 Annual
Report on Form 10-K).
10.57 Research Agreements dated June 24, 1994, September
16, 1994, and February 2, 1995, between Southern
Research Institute and Carrington (incorporated herein by
reference to Exhibit 10.65 to Carrington's 1994 Annual
Report on Form 10-K).
10.58 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).
10.59 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).
10.60 Sales Distribution Agreement between the Chinese
Academy of Sciences and Carrington Laboratories, Inc.
dated August 16, 1995 (incorporated herein by reference
to Exhibit 10.1 to Carrington's Third Quarter 1995
Report on Form 10-Q).
E - 8
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.61 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).
10.62 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).
10.63 Supply and Distribution Agreement between Medical
Polymers, Inc., and Carrington Laboratories, Inc., dated
September 15, 1995 (incorporated herein by reference to
Exhibit 10.4 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.64 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).
10.65 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).
10.66 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).
10.67 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).
10.68+* Resignation Agreement and Full and Final Release dated
February 24, 1995, between Carrington and Bill H.
McAnalley.
E - 9
Sequentially
Exhibit Number Exhibit Numbered Page
-------------- ------- -------------
10.69+* Revised and Restated Resignation Agreement dated March
14, 1995, between Carrington and Karl H.
Meister.
10.70* Common Stock Purchase Warrant dated August 4, 1995,
issued by Carrington to Clifford T. Kalista.
10.71* Consulting Agreement dated May 5, 1995, between
Carrington and Clifford T. Kalista.
10.72+* Form of Nonqualified Stock Option Agreement for
employees relating to Carrington's 1995 Stock Option
Plan (incorporated herein by reference to Exhibit 10.50 to
Carrington's 1994 Annual Report on Form 10-K.)
10.73+* Form of Nonqualified Stock Option Agreement for
nonemployee directors relating to Carrington's 1995
Stock Option Plan.
10.74 Form of Stock Purchase dated April 5, 1995 between
Carrington and persons named in Annex I thereto
(incorporated herein by reference to Exhibit 2.1 to
Carrington's Registration Statement 33-60833 on Form
S-3).
10.75 Form of Registration Rights Agreement dated June 20,
1995 between Carrington 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).
10.76* Supply and Distribution Agreement between Farnam
Companies, Inc. and Carrington Laboratories, Inc. dated
March 22, 1996.
10.77+* Termination Agreement and Full and Final Release dated
August 18, 1995, between Carrington and Terry M. Nida.
11.1* Computation of Net Income (Loss) Per Common and
Common Equivalent Share.
21.1* Subsidiaries of Carrington.
23.1* Consent of Arthur Andersen LLP
27.1* Financial Data Schedule
- ----------
* Filed herewith.
+ Management contract or compensatory plan.
E - 10